Nonprofit Law Prof Blog

Finley, Hall & Harrison, An Examination of Board Designated Endowments in Nonprofit Organizations

Andrew Finley (Claremont McKenna College), Curtis Hall (Drexel University), and Teresa D. Harrison (Drexel University) have published No Strings Attached: An Examination of Board Designated Endowments in Nonprofit Organizations, 2024 Academy of Management Proceedings (2024). Here is the abstract:

We examine whether board-designated endowments (“BDEs”) alleviate agency problems associated with a nonprofit organization’s (“NPOs”) unrestricted net assets and whether these endowments are associated with different spending outcomes than donor-restricted endowments. Our results provide little evidence that BDEs ameliorate agency conflicts. Specifically, NPOs with a BDE exhibit the same negative (positive) relation between unrestricted net assets and program spending (CEO compensation) as comparable NPOs without a BDE. Further, the size of a BDE exhibits a stronger association with CEO compensation than the size of the donor-restricted endowment. In additional analysis, we find no evidence that having a BDE stabilizes an NPO’s program spending in the face of revenue declines, suggesting these resources fail to achieve one of the primary objectives of an endowment. Overall, our results suggest BDEs are not particularly effective in serving the mission of NPOs and raise questions as to the efficacy of boards in their oversight of this asset base.

Lloyd Mayer

Rogal, NIMBY Charities

Lauren Rogal (Vanderbilt) has published NIMBY Charities, 56 Conn. L. Rev. 749 (2024). Here is the abstract:

Neighborhood organizations often advocate for land use policies and decisions that curtail development and entry into the neighborhood. This “not in my backyard” (NIMBY) disposition echoes a long history of exclusionary activity by these organizations and reflects a broader tendency to operate in furtherance of property values and other private interests. Due to substantive and procedural deficiencies in federal tax policy, these organizations often operate as 501(c)(3) tax-exempt charities, a status rightly reserved for organizations that generate broad public benefits. This Article argues for the adoption of clear substantive and procedural rules that restrict charitable status to organizations that either provide tangible benefits to the general public or target their benefits to a materially distressed community

Lloyd Mayer

Siener, Possible Solutions for NIL Collectives Seeking Tax-Exempt Status

Austin Siemer (a student a University of Missouri School of Law) has published Time for an Audible: Possible Solutions for NIL Collectives Seeking Tax-Exempt Status Following IRS Memo, 89 Mo. L. Rev. 741 (2024). Here is the abstract:

The United States Supreme Court’s decision in NCAA v. Alston sent shockwaves throughout the world of college sports. The Court’s recognition of student athletes’ abilities to profit from their name, image, and likeness (“NIL”) revolutionized the landscape of collegiate athletics. Shortly thereafter, the National Collegiate Athletic Association (the “NCAA”) adopted its Interim NIL Policy, explicitly allowing opportunities for companies, entities, or individuals to pay student athletes for use of their NIL. Unsurprisingly, athletes capitalized on the opportunities immediately. For example, Hanna and Haley Cavinder, former women’s college basketball players with millions of followers on social media, completed an NIL deal with Boost Mobile, a wireless service provider, within hours of the NCAA policy’s enactment. Despite the almost instant onset of NIL-related activities, questions remained as to the permissible scope of parties’ involvement with these deals. Specifically, should student athletes individually procure their own NIL deals, or can organizations assist student athletes in the process?

Lloyd Mayer

COF & Commonfund Find Higher Foundation Returns in 2023

Last month the Council on Foundations and Commonfund released the version of their annual Study of Investment of Endowments for Private and Community Foundations, with data form 2023. From the press release:

The average 2023 calendar year return on endowed funds for the 182 private foundations participating in the Study was 12.6 percent, a marked increase from the -12.0 percent return reported for 2022. Similarly, for the 109 participating community foundations, the average 2023 return was 14.1 percent compared with -13.3 percent in 2022. Returns for both foundation segments swung more than 20 percentage points for the second year in a row (all return data reported net of fees).

The rebounded 2023 returns bolstered longer-term returns, which reflect foundations’ ability to finance their missions and program commitments going forward. Ten-year average annual returns remained steady at 7.1 percent (from 7.3 percent) for private foundations and 6.2 percent for community foundations (from 6.4 percent) in 2023.

Lloyd Mayer

World Giving Index 2024

The Charities Aid Foundation released the 2024 version of its annual World Giving Index in late August. From the introduction:

Surveying over 145,000 people across over 140 countries last year, the fourteenth edition of the World Giving Index demonstrates how people have not only maintained the time they spend volunteering, but also that increasing numbers are donating money and providing help to strangers. The global index score is at its joint-highest level, only previously matched during the pandemic.

Indonesia once more tops our World Giving Index rankings, alongside a top 10 drawn from nations throughout Africa, Oceania, Asia, Europe, the Middle East, and North America – with 73% of the world’s population giving time, money, or helping a stranger last year.

By looking at Singapore, we can see how government efforts may be helping to increase charitable activity. The country has significantly increased its rates of volunteering and giving, rising 19 places to third place in this year’s index. Recent government initiatives include new schemes to encourage deeper partnerships between charities and businesses on volunteering, as well as tax relief and government matching on charitable donations.

For these success stories to be replicated globally, governments should make it easy to give and support efforts to build resilient civil society organisations. By making sure the right building blocks are in place, we can grow giving and community engagement to work towards a vibrant civil society in every country. 

Lloyd Mayer

Joel Fleishman, 1934 - 2024

From the NY Times yesterday:

Joel Fleishman, whose prominence as an expert on philanthropy was only the most public side of a man whose wide network of friends in high places, immense fund-raising talents and deep knowledge of subjects like classical music and fine wine made him an unparalleled influencer among the nation’s wealthy and powerful, died on Monday in Chapel Hill, N.C. He was 90.  A close friend, Adam Abram, said he died in a hospital of complications of a fall.

Mr. Fleishman was perhaps best known as a groundbreaking scholar in the field of philanthropy studies; he was among the first to insist that foundations can and should measure the impact of their giving, and that they should be measured by it. His 2007 book, “The Foundation: A Great American Secret,” helped catalyze a wave of changes in the way private philanthropies operate. It showed both that they were integral to progress and that they often failed to achieve their promise.  “I consider foundations a major force for good in American society,” he wrote. Yet, he continued, “they operate within an insulated culture that tolerates an inappropriate level of secrecy and even arrogance in their treatment of grant-seekers, grant-receivers, the wider civic sector and the public officials charged with oversight. This needs to change.”

After arriving at Duke University in 1971 at the behest of its president, the former North Carolina governor Terry Sanford, Mr. Fleishman helped build its school of public policy, one of the first in the nation. He later became a senior vice president of the university. For decades he taught a class on philanthropy and the law, to which he invited presidents of the country’s top foundations to speak.

. . . 

After being lured back to North Carolina by Mr. Sanford, who took over as Duke’s president in 1970, Mr. Fleishman set out to build a program melding the law, social policy and public management. That was a novel idea at the time, but it has become a standard feature at many of the nation’s top universities.

 

darryll k. jones

 

OpenAI Public Benefit Plus Investor Private Profit Can Still Equal Tax Exemption

 

OpenAI's latest announcement, reprinted below, leaves me almost speechless regarding tax exemption jurisprudence.  Almost.  When we speak of "OpenAI," by the way we might be referring to OpenAI (c)(3), not taxed at all, OpenAI LLC, taxed as a partnership, or OpenAI Public Benefit Corporation, soon to be taxed as a corporation.  Or all three at the same time.  We would be correct whichever we select because the triplets are really one single freak of tax and nonprofit nature.  That's my only point, that charity sometimes looks like public benefit and private profit all at once.

As an aside, though, take a look at the announcement and behold the way these IT Vikings seep into our brains in their quest to take over the world.  There is singular subliminal messaging in the first sentence of each paragraph: (1) "We are making progress on our mission to ensure artificial general intelligence benefits all of humanity, (2) "We've raised $6.6B in new funding at a $157B post-money valuation to accelerate progress on our mission, and (3) "We aim to make advanced intelligence a widely accessible resource."  By which OpenAI -- whichever one we refer to -- asserts three times, "we are a charity, we are a charity, and we are a charity." Is it Orwellian doublespeak, that profit is really charity?  

I'm still thinking it through but now I am back on the other side.  In a new essay I argue that public benefit and private profit are coterminous and mutually dependent.  In this case, public benefit cannot be achieved without private profit, and private profit does not preclude public benefit.  We have seen public benefit and private profit occupy the exact same space before on an even more massive scale.  It was during Covid-19, when government subsidized private profit-making in search of world wide public benefit.  We spent nearly $5 trillion (and counting) much of it to subsidize profit-makers whose goals were otherwise entirely consistent with public benefit.  Even despite all the money pouring in, my current thinking is that OpenAI (c)(3) could still be a tax exempt charity if profit-seekers would allow it. OpenAI needs their money and their cooperation.  But profit seekers apparently won't allow it.

Profit makers just want profit; they want to get rich or die trying.  But OpenAI (c)(3)'s public benefit mission is inconsistent and mutually exclusive only as a theoretical matter. Nor is the 10,000% limitation on OpenAI LLC investor returns inconsistent with investor instincts for unlimited profit. Not unless the market routinely produces returns like that.  I doubt it, but I am not an economic analyst.  The real barrier to our being sanguine about OpenAI the tax exempt organization is a psychological one.  Investors will not accept "mission first" or limited profit-taking, not even when those qualifiers are only theoretical limits on their greed.     

October 2, 2024

New funding to scale the benefits of AI

We are making progress on our mission to ensure that artificial general intelligence benefits all of humanity. Every week, over 250 million people around the world use ChatGPT to enhance their work, creativity, and learning. Across industries, businesses are improving productivity and operations, and developers are leveraging our platform to create a new generation of applications. And we’re only getting started.

We’ve raised $6.6B in new funding at a $157B post-money valuation to accelerate progress on our mission. The new funding will allow us to double down on our leadership in frontier AI research, increase compute capacity, and continue building tools that help people solve hard problems.

We aim to make advanced intelligence a widely accessible resource. We’re grateful to our investors for their trust in us, and we look forward to working with our partners, developers, and the broader community to shape an AI-powered ecosystem and future that benefits everyone. By collaborating with key partners, including the U.S. and allied governments, we can unlock this technology's full potential.

 

darryll k. jones

 

 

Mayer, an Associational Definition of Churches

Lloyd Hitoshi Mayer has some interesting commentary in the Chronicle of Philanthropy regarding how tax law defines organized worshippers, groups referred to as "churches" in tax law.  The first reaction to government deciding which groups worship and which do not is to recoil because the First Amendment prohibits government from making and then acting on religious distinctions.  But, well, once we decide to give tax concessions to "churches" we necessarily require a definition.  Even using the word "churches" is problematic but there is no way around a definition (and a shorthand label) except to withdraw religious tax exemption altogether.  That would eliminate the need for otherwise unconstitutional distinctions. So if we still want to give tax breaks to organized worshippers, we need a definition.  The best we can hope for is a neutral one and current law tries.  Mayer and Ellen Aprill, Mayer's co-author in recent scholarship, seek even more neutrality, particularly in response to the changing way we gather to worship in cyberspace.  Here is part of his commentary:  

Proposed Solutions

Aprill and I recommend that the IRS change its definition for churches to the associational one adopted by some courts in rulings as early as 1980. As the U.S. Court of Federal Claims explained in that 2009 ruling, this test focuses on whether a body of believers assembles regularly to worship. Given technological advances, the IRS should also make it clear that this test can be satisfied through remote participation in religious services using interactive, teleconferencing apps such as Zoom.

This definition would be also better suited for congregations of all faiths because some faiths do not prioritize many of the factors included in the IRS test, such as having a formal code of doctrine or requiring members to not be associated with other houses of worship or faiths. And it would better reflect how some Americans participate in religious services today. We recommend that the IRS revisit its test for being a church and that Congress pass a law that would change the definition of church associations. The new law could limit associations of churches to organizations that represent a single denomination, as Congress likely initially intended.

This latter change would make it harder for religious organizations that are primarily involved in bringing churches from multiple faiths together to engage in advocacy or other activities to obtain this status and the lack of transparency and accountability that come with it. We believe Congress, not the IRS, should make this change because of the potential political tensions that narrowing the definition could create. We don’t think the changes would impinge upon the special role that churches have in our society. Indeed, the revised test for qualifying as a church would better fit with both the increasing variety of faiths in our country and technological advancements.

darryll k. jones

Government $ + Nonprofit Lax Internal Controls = Theft Waiting to Happen

This hypothesis is based only on anecdotes, but it appears that there are an increasing number of reported high-dollar thefts from charities that involve a mix of government funding - and so potentially lots of money - and lax internal controls that unfortunately are all too common at nonprofits. In this space we have reported on perhaps the largest such instance, which is the Feeding Our Future scandal in Minnesota that allegedly added up to at least $250 million. But there have been a number of other, alleged multi-million dollar scandals that involve similar fact patterns, including:

• The FBI is investigating an Orange County, California nonprofit that the County is suing based on claims that it misused more than $13 million in COVID-19 relief funds. The daughter of a County Supervisor works for the nonprofit, Viet America Society, and has also been named in the lawsuit. Additional coverage: L.A. Times (subscription required); N.Y. Times (subscription required); Orange County Register.

• The U.S. Attorney's Office in the Eastern District of Missouri announced late last month the indictment of a St. Louis nonprofit executive who allegedly fraudulently obtained "more than $2 million in funds intended to feed low-income Missouri children, both before and during the coronavirus pandemic." Coverage: St. Louis Post-Dispatch (subscription required).

• The CFO of the Detroit Riverfront Conservancy pled guilty late last month to stealing nearly $15 million from the nonprofit. As an earlier Detroit Free Press article detailed, the theft raised serious questions about the nonprofit's internal controls, including not only with respect to its privately provided funds but also the at least $15 million in direct government grants received over the past decade and the $3 million per year provided by the city of Detroit for operating costs.

• In August the U.S. Attorney for the Southern District of New York announced the conviction of the "shadow executive director" of a nonprofit for stealing millions of dollars from the federal Head Start Program. Apparently the defendant lied to the U.S. Department of Health and Human Services when forms he submitted claimed the nonprofit had an independent board of directors and controls in place to guard against fraud, waste, and abuse.

And I could keep going, especially if I included smaller dollar amount cases that state and local authorities are investigating or prosecuting. As Professor Nicolas Duquette (USC) commented for the Detroit Free Press article about the Detroit Riverfront Conservancy, reliance on nonprofits to handle public business can present a “fundamental problem” for accountability. These examples raise the concern that a perhaps not sufficiently appreciated downside of governments farming out the provision of public services to nonprofit organizations is that this farming out often comes with substantial funds but not sufficient internal control requirements.

Lloyd Mayer

NAAG/NASCO Charities Conference Public Day Agenda

The National Association of Attorneys General (NAAG) and the National Association of State Charity Officials (NASCO) will hold their annual conference in Baltimore and online next week. Here are the highlights from the draft agenda for the public day (Tuesday, October 8th):

9:00 am – 9:30 am Welcome & Introductory Remarks

9:35 am – 10:35 am Partnering for Public Good: This panel will examine graduated approaches to enforcement to help charitable organizations and their advisors understand the challenges faced by regulators and to help regulators understand the impact enforcement efforts have on charitable organizations. Two regulators will engage in a moderated conversation with a nonprofit practitioner and in-house counsel.

10:50 am – 11:50 am AI’S Role in Charities: This program will be a fireside chat between a state regulator and Heather Iliff, President and CEO of Maryland Nonprofits, discussing the role of artificial intelligence in the nonprofit sector.

12:20 pm – 1:35 pm Lunch/State Update: State regulators share brief updates on recent enforcement actions, outreach activities, and regulatory and legislative changes based on information in NASCO’s Annual Report. 

1:50 pm – 2:50 pm Fraud Resiliency In The Charitable Sector: Charitable fiduciaries are responsible for protecting their organizations from fraud. This session will focus on the research of the National Association of Certified Fraud Examiners, highlighting trends and issues relevant to regulators and charitable fiduciaries.

2:55 pm – 3:50 pm Boards Facing Crisis: This panel will include regulators, former regulators, and practitioners who will discuss how boards facing an organizational crisis can help shepherd their organization through the crisis, including governance and communications strategies to weather the storm.

4:05 pm – 5:00 pm Fiscal Sponsorship Roundtable: Fiscal sponsorship relationships have propagated throughout the country. This panel, which includes a lawyer who advises fiscal sponsors, a leader in a large fiscal sponsoring organization, and a regulator, will discuss what a fiscal sponsorship relationship is, how they interact with existing legal frameworks, and some of the benefits and pitfalls associated with them.

5:05 pm – 5:55 pm Government Oversight of Charities And Fundraising In 2024 And Beyond: A group of ten state and federal government regulators with more than 250 years of collective experience in charities oversight recently co-authored a paper, “Charitable Oversight: Insight from Regulators and Enforcers” that was presented at an April 2024 Symposium on the Future of Nonprofit Regulation. The Symposium was a collaboration of the Center on Nonprofits and Philanthropy at the Urban Institute and the Lilly Family School of Philanthropy at Indiana University. Three authors of that paper join one of the academic architects of the Symposium to discuss some of the insights on nonprofit regulation, including future challenges, identified by the paper and some of the other perspectives shared at the symposium. We will also share the results of a survey of conference participants about past changes and challenges in nonprofit regulation as well as prognostications about future such changes and challenges.

6:00 pm - 6:05 pm Closing Remarks

Lloyd Mayer

 

NASCO Issues Guidance Regarding Scam PACs

We have previously discussed in this space the emergence of "Scam PACs" that fraudsters use to avoid charitable solicitation rules and often to take advantage of the current sharp political divisions, including as recently as this past June and as long ago as at least 2019. Despite federal indictments and convictions, it appears that they still remain a common vehicle for fraud. 

Now the National Association of State Charity Officials (NASCO) has issued guidance specifically relating to this development. The guidance states "While many PACs serve an important role in political discourse, scam PACs are out to exploit legal loopholes and deceive donors by fundraising under the pretext that they are supporting an issue-based cause. Instead, a scam PAC diverts almost all of its donor’s money back into fundraising and the PAC organizer’s pockets. Scam PACs often target elderly constituents through telemarketing." The guidance then recommends taking specific steps to research a PAC before donating and how to be cautious when receiving telephone or text donation requests.

Lloyd Mayer

California Bans Legacy Admissions

The ink was barely dry on the Supreme Court's 2023 affirmative action decision when both the U.S. Department Education and a prominent civil rights nonprofit started questioning legacy admissions at Harvard because of their racial impact. And Lauren Rogal (Vanderbilt) has written an article highlighting federal tax issues raised by legacy admissions (Legacy and Largesse: The Tax Law of College Admissions, 43 Va. Tax Rev. 169 (2023).

Now California has moved to prohibit legacy and donor preferences in admissions by private higher education institutions that are formed as nonprofit corporations in California, accredited by the U.S. Department of Education, and receive or benefit from state-funded student financial assistance or enrolls students who receive such assistance.  (The public University of California system eliminated legacy preferences more than 25 years ago.) This category apparently includes schools such as Stanford (pictured), USC, Claremont McKenna College, and Santa Clara University, The Governor approved Assembly Bill No. 1780 this week, which is effective as of September 1, 2025. The law also requires covered institutions to report on their compliance to the Legislature and the California Department of Justice.Coverage: AP; L.A. Times (subscription required).

See also: Politico, Why Legacy Admissions Have Exploded in the US (hat tip: EO Tax Journal). The article notes that four other states also currently ban legacy admissions, three only for public institutions (Colorado, Illinois, and Virginia) and one for private institutions as well (Maryland).

Lloyd Mayer

Donors: You Can't Live With Them, You Can't Live Without Them

Two recent lawsuits involving multi-million donations and donor demands for their return highlight the difficulty charities face when large donors become upset with how their donations allegedly have, or have not, been spent.

As reported by the Boston Globe, one lawsuit has been brought by an alum of the College of Holy Cross, who pledged $25 million for a performing arts center (named after the donor and pictured here) but now wants $18 million back plus another $3 million he donated for new athletic facilities. He accuses the College of refusing to account for the use of the donated funds. In response, the College has asserted that the donor reneged on the remaining $7 million he pledged for the center in a 2014 written agreement. A federal magistrate judge is now considering whether to compel mediation and arbitration, which the college asserts are required under the agreement.  The case is Prior, Jr. v. Trustees of the College of the Holy Cross.  (Full disclosure: My former colleague, Vincent Rougeau, is the current President of Holly Cross College..) Additional coverage: Inside Higher Ed.

As reported by the Gothamist and previously blogged about in this space (with a link to the complaint), the other lawsuit has been brought by the Stella and Charles Guttman Foundation against City University of New York (CUNY) relating to a $25 million donation made more than 10 years ago. The Foundation alleges that CUNY failed to fulfill a commitment to build a new campus for CUNY's New Community College in Midtown, now named the Stella and Charles Guttman Community College. The Foundation is asking for $15 million that was committed to an endowment to benefit the new campus, plus interest, for a total of $21 million.

Lloyd Mayer

 

 

Indiana Court Approves Valparaiso University's Controversial Art Sale Plan

Artnet reports that a trial court in Indiana has approved the proposed sale by Valparaiso University of three artworks, concluding that "it is no longer economically or practically feasible to display those three paintings, and that keeping those three paintings in storage would only impair, not enhance, the original purpose of the Trust." The Trust referred to is the Percy Sloan Trust, the donor of the funds used to purchase the art at issue.  The three artworks (one of which is pictured here) are estimated to be worth $20 million. The court's actual order does not appear to be available publicly.

The university's plan has been opposed by the namesake founding director of the Brauer Museum of Art at the University, and by the leadership of several national museum organizations. It appears, however, that no party was willing to fund a legal challenge to the University's petition in court, and the Indiana Attorney General did not object to the petition. The Museum itself has been closed since June 2024, with no re-opening date announced.

Additional coverage: Chicago Tribune (subscription required).

Lloyd Mayer

Leff on the Johnson Amendment and Safe Space

From the West Virginia Nonprofit Association

Ben Leff has some interesting commentary in Tax Notes (subscription required) regarding the prohibition against campaign intervention and the SAFE SPACE petition for declaratory relief.  His current piece elaborates on some ideas he shared earlier this year.  Here is an excerpt:

            . . . 

A Constitutionally Sound Strategy

As discussed earlier, the argument that the Johnson Amendment (or its current interpretation) violates constitutionally protected speech rights must be balanced against the government’s legitimate interest in the fairness and integrity of the campaign-finance system and the charitable sector. Challenges to the Johnson Amendment using a no-additional-expense theory, like SAFE SPACE’s, dramatically alter that balance. A court hearing the SAFE SPACE case might undervalue the government’s nonsubvention interest and repeal the Johnson Amendment or create an overly broad exception that fundamentally alters the campaign finance tax system, creating a loophole that would deeply distort and harm the nonprofit sector. So how should a charity’s right to make known its views on candidates be vindicated while preserving to the fullest extent possible the government’s interest in nonsubvention?

I have a solution that vindicates the core speech rights of charities while simultaneously maximizing the government’s interest in nonsubvention. Instead of just writing about it, I considered actually creating organizations that use, and therefore illustrate the use of, the alternate means structure referenced in Taxation With Representation and Branch Ministries. That structure involves pairing a section 501(c)(3) charity with an affiliated social welfare organization exempt under 501(c)(4). As described above, I believe that the Constitution requires that the charity be permitted to (1) deliberate and formulate a formal opinion about the candidates, endorsing one if it chooses; (2) communicate that endorsement to its affiliated non-charity; (3) control the affiliated non-charity to ensure that it properly communicates the charity’s views; and (4) have the non-charity attribute the endorsement to the charity (rather than to itself). So I planned to create organizations to do those things without destroying the Johnson Amendment. However, my friends and colleagues made a strong case that actually creating the organizations and applying for tax-exempt status could be perceived as a stunt that puts an unnecessary strain on the IRS and even conceivably the court system. So instead of actually creating the organizations, I am describing what I would have done here.

. . . 

darryll k. jones

Church Denied Exemption for Spiritual Retreat Center because "Religious Activity" Requires Proselytizing

 

On Tuesday, the Michigan Court of Appeals upheld a Tax Tribunal decision denying religious and charitable property tax exemption to the Woodside Bible Church's Retreat Center.  The property's assessed value was $1.1 million and is located in a sparsely populated township (where its exemption probably has noticeable effect).  During the tax years in issue, the Church rarely used the Center itself.  Instead, it rented the Center to unaffiliated  groups or individuals.  Church advertising describes the Center as a place for marriage retreats, spiritual reflection and renewal but the Church does not hold stereotypical worship services at the Center. The Center is also available for weddings and other ceremonies.  

A Michigan statute exempts from property tax "houses of public worship, including buildings or other facilities owned by a religious society and used predominantly for religious services or for teaching the religious truths and beliefs of the society."  Woodside asserted that it rents the property solely to Christian and nonprofit organizations that conform to its specific beliefs and that renters must "respect" the Church's belief. During the tax years in issue, the Church rarely used the Center itself. The Court ruled that exemption is for property actually used for teaching or preaching and since neither occurred at the Center, exemption should be denied. 

The Court's rationale is similar to that articulated by the Wisconsin Supreme Court in the Catholic Charities Bureau, perhaps suggesting an emerging, if not troubling, state law trend to limit religious exemptions to proselytizing activities.  In this case, though, the Michigan Court of Appeals had more statutory support than the Wisconsin Supreme Court in Catholic Charities Bureau. In Wisconsin, a state statute limited exemption to "religious activities," which the Wisconsin Supremes interpreted to require preaching and teaching. Here, the statute contains the requirement explicitly.  Still, Catholic Charities Bureau argues (the case is pending a decision on a cert petition before the U.S. Supreme Court) that a government may not make distinctions amongst religious activities to which it grants tax concessions.

The Michigan Court essentially found that since the Center was not used for stereotypical preaching or teaching, it was not "used predominantly for religious services or teaching."  It is interesting to note the Church's argument that all of its activities, including the rental of the Center, were parts of its religious mission to "help people belong to and grow in Christ."  The Michigan Court thought that way too broad, noting that it would render the Church's simple maintenance on any property a religious activity.  I am not so sure that is a convincing way to look at things.  It bothers me somehow, but I can't articulate the reason.  The Church's claim may be too broad, but limiting religious exemption to explicit proselytizing seems too narrow and fraught with constitutional problems.  Here is part of the Court's opinion:

In 2016, petitioner purchased the subject property, a large residence located on the shores of Lake Huron in Forester Township. The property includes a large house that now has 12 bedrooms, a large dining room, and a great room, along with a pole barn and a garage. Petitioner’s hope for the property was to create “a place of retreat where people could have extended periods of time away from the busyness of life. In this place, marriages would be strengthened, leaders developed, and pastors encouraged.” Petitioner refers to the property as “The Lodge,” and markets it to other groups and organizations. It has created a brochure detailing the facilities available and highlighting its availability as a place of retreat and rest. Petitioner’s senior executive director of operations, Mike Fisk, asserted generally by affidavit that from “2017 through 2020, the ministry retreat center [The Lodge] was used as an extension of Woodside, with missions to strengthen marriages, develop leaders, and encourage and counsel pastors, consistently taught from a biblical and prayerful perspective.” Because of the COVID-19 pandemic and its attendant “lockdown” restrictions, from March 2020 through May 2021, the property sat unused.

In its decision, the Tax Tribunal noted that there was no dispute about petitioner’s status as a religious society, and identified the controlling issue as whether petitioner used the subject property predominantly for religious services or for teaching its religious beliefs or truths. Citing the itineraries petitioner provided as discovery responses, the tribunal concluded that the predominant use of the property was by organizations other than petitioner for “leadership development and marriage renewal with an emphasis on rest and recreation,” and that most of the activities were “recreational activities such as golf, crafting, games, and general free time,” with “little time devoted to teaching religious truths and beliefs.” The tribunal concluded that petitioner had not met its burden of establishing that it was entitled to an exemption, and denied petitioner’s motion for summary disposition. It further ruled that, under MCR 2.116(I)(2), respondent was entitled to summary disposition instead.

The evidence submitted with the motions showed that the property was predominately used by third parties, not petitioner, and appeared to be predominately used for recreational and other nonreligious purposes. And because there was evidence of neither petitioner’s, nor the third parties’, religious beliefs and truths, even if the third parties’ use of the property were primarily for teaching religious beliefs, there was no evidence that those third parties’ beliefs were also petitioners’ beliefs. The record evidence indicates only that petitioner predominately used the property as a rental venue for other Christian organizations, which itself constituted neither conducting religious services nor teaching religious beliefs.

. . . 

The marketing brochure actually supported the tribunal’s conclusion that the property served as a primary place for recreation and retreat, because it reads much like flier from a secular hotel or vacation venue, speaking of only retreats, recreation, rest, and escaping “the busyness” of everyday life. And, contrary to the assertion that the property was intended to serve petitioner’s purposes of teaching its religious beliefs, the pamphlet made clear that organizations renting The Lodge were responsible for planning the itineraries for the events they held.

darryll k. jones

 

 

 

 

 

Campaign Intervention Olympics: Billy Graham Evangelistic Association

I don't know how I ever made it through law school without all the "show and  tell" we have today.  I need pictures.  Here is a nice classroom exhibit for prohibited campaign intervention.  The Billy Graham Evangelistic Association puts out an election related magazine called Decision - The Evangelical Voice for Today.  That's the cover of the latest issue above.  The Association might have avoided a campaign intervention complaint had it used the subtitle "socialism vs. capitalism" maybe.  They didn't and now Ron Reagan and his burn in hell friends have filed a slam dunk complaint.  Nothing can or will be done about it, though, so there is no need to worry.  The IRS and the Association both know it.  We all do.  Here is part of the Freedom From Religion Foundation complaint:

The Billy Graham Evangelistic Association recently distributed a special election issue of its Decision magazine focused on the 2024 election. Please see a copy enclosed. The cover page of this election guide issue says, “SOCIALISM VS. FREEDOM” with corresponding photos of Kamala Harris and Donald Trump.

In an opening letter, Franklin Graham denigrates the Democratic party’s platform:

Progressive, liberal thought and activism have so contaminated the mainstream of American life and culture that once-unthinkable abominations such as same-sex marriage, abortion on demand and transgender advocacy have become dogma in one major party’s platform. He then tells readers to “vote for candidates who best align with and stand for Biblical principles.” This is followed by a cherry-picked comparison between Kamala Harris and Donald Trump intended to encourage readers to vote for Donald Trump over Kamala Harris.

Outside of the comparison, the election guide includes a quote from Donald Trump from a Moms for Liberty event in June 2023:

Our enemies are waging a war on freedom and faith, on science and religion, on history and tradition, on law and democracy, on the family, on children, on America itself.

Funny how FFRF points out the apparent pictorial correspondence of good and bad with the Harris and Trump.  An idiot might not have seen the correspondence otherwise and that's why the Association could pass the straight face test. 

darryll k. jones

Does Naomi Campbell Have a Private Inurement/Excess Benefit Problem?

I had to think real hard to come up with a legitimate reason to post about Naomi Campbell.  There is plenty of motivation, trust me.  Just don’t tell my wife I said so.  You’ve heard already that the Charity Commission recently banned Campbell from serving as a nonprofit fiduciary for five years over what amounts to some fairly penny-ante private inurement and excess benefit.  I read The Commission’s Report.  There were no pictures so I picked one out. The Commission complained that of Fashion for Relief’s $5,000,000 in revenues during the examination period, Trustee Campbell spent maybe $25,000 on luxury hotels at the Cannes Film Festival and other swanky venues at which she enjoyed a spa, some smokes and “hotel products.” All while on FFR business, Campbell says.  And that the only other trustee received a salary of about $270,000, not previously approved but only justified after the fact by the assertion that she earned it by all the work she did. 

Obviously Campbell is not well-advised.  After-the-fact justifications don’t preclude private inurement or excess benefit.  That point might have been enough to justify a blog post.  But I also wondered whether the Charity Commission’s findings might suggest Campbell’s liability for excise taxes here in America.  Campbell and the other Fashion for Relief trustee run a U.S. counterpart called Fashion Relief USA.  Same trustees, same exact mission statement.  Fashion Relief USA’s latest available 990 shows it spent about $180,000, all on grants in Europe.  It’s a pretty good bet that the two  organizations are really one. 

Treasury Regulation 53.4958-4 covers excess benefit accomplished through a controlled or intermediary organization so it is not an entirely unreasonable line of inquiry.  We wouldn’t hesitate to ask if the circumstances involved two separate domestic charities operated by the same board and with the same (verbatim) charitable purpose.  On the other hand, Treasury Regulation 53.4958-2(b)(2) states that foreign organizations that receive substantially all their support from foreign sources are not subject to IRC 4958. 

Campbell denies any impropriety either way and I believe her.  You can just look at her and know she's telling the truth.  And she's even ordered a full-on investigation.  But if the Charity Commission is correct, maybe the Service should look into it on this side of the Atlantic. It's penny-ante stuff, like I said, but it might be worth sending an examiner to sit a spell with the trustees. I'm available pro bono.

 

 

darryll k. jones

TIGTA Report on TEGE Compliance Checks

In August the Treasury Inspector General for Tax Administration (TIGTA) issued a report titled Improvements to the Tax-Exempt Compliance Unit Could Reduce Mistakes and Unproductive Examination Referrals. While I doubt anyone is surprised that TIGTA found room for improvement, what I found most interesting about the report is its window into details of the compliance check program.

According to the report: "A compliance check is a review to determine whether a TE/GE taxpayer is compliant with their Federal tax return filing(s), reporting, and payment requirements. A compliance check is not an examination, and the taxpayer may legally choose not to participate. A compliance check does not directly relate to determining a tax liability for any period. It is instead a tool intended to help educate TE/GE taxpayers, practitioners, plan sponsors, and participants as well as encourage voluntary compliance. In addition, a compliance check is not a discussion, inspection, or a request/review of books and records."

With respect to exempt organizations, workstreams of particular interest include ones focused on:

• hospital financial assistance policies (as required by section 501(r)(4);
• the section 4960 excise tax on excess executive compensation;
• the Form 990-T; and
• the Form 1023-EZ streamlined application under section 501(c)(3).

Lloyd Mayer

TCJA Excise Taxes Hit Their Stride: $244 Million from University Investment Income & $671 Million from Excess Exec Comp (for 2022)

Last month the IRS released the 2022 excise tax collections from charities, private foundations, and split-interest trusts. The tax on net investment income of private colleges and universities (section 4968) hit 58 institutions (up from 33 in 2021) and collected $248 million (up from $68 million in COVID pandemic year 2021). This matches the $0.2 billion per year revenue estimate from the Joint Committee on Taxation in December 2017.

And the tax on excess executive compensation (section 4960) saw an even more dramatic jump. In 2021 only 516 organizations paid the tax, for a total of $210 million. But in 2022, those figures jumped to 1,710 organizations paying almost $671 million.  That greatly exceeded the JCT's revenue estimate, which had been for $0.2 billion per year.

Lloyd Mayer