Thursday, June 20, 2024

BAM Is Back(?)

512px-Brooklyn_Academy_of_Music_(BAM)_(48228024996)Covid marked a real inflection point for performing art nonprofits. Without the ability to perform to live audiences, they struggled to keep their doors open and to pay their artists. There was significant turnover among the managerial ranks. And even when various lockdown orders were lifted and people got comfortable in crowds again, the sector has bounced back slowly, if at all.

Case in point: the Brooklyn Academy of Music. Last I had heard, it was struggling with layoffs and reduced audiences.

Now, a confession: I've never been to BAM, even when I lived in New York. The closest I came was in 2003, when Merce Cunningham celebrated his 50th anniversary with a dance concert featuring live music by Radiohead and Sigur Ros. Cunningham was one of my wife's favorite choreographers, and the piece seemed intriguing. At this point, I don't remember if we didn't go because tickets went quickly, because we had other plans, because it was all the way out somewhere in Brooklyn, or because we were both still students, with the cash flow constraints being students entails.

So this morning I saw a New York Times piece about BAM's upcoming season. Its Next Wave Festival this year will be larger than the last couple years (though not quite as extensive as it was pre-Covid). Its interim artistic director has become its artistic director. And it looks like it's in a stronger position than it was.

Is this indicative that performing arts nonprofits in general are getting back to where they were? Probably not. BAM is unique in many ways. But with luck, it's at least a signal that some of the clouds are starting to lift.

Samuel D. Brunson


Photo by Ajay Suresh from New York, NY, USA, CC BY 2.0, via Wikimedia Commons

June 20, 2024 in Current Affairs, Music | Permalink | Comments (0)

Lee Health: A Primer for Converting from Public to Private Nonprofit Healthcare

Lee Health, down in southwest Florida, is the largest public hospital system in Florida.  It is converting from public hospital status to a private nonprofit hospital.  That seems kinda pointless at first. Converting from one nonprofit to another.  But some of the reasons given for the conversion include competitive pressures from other healthcare systems of all kinds -- competition is not so much kryptonite to private nonprofit hospitals as it is to public hospitals, I guess -- the associated need for flexibility and nimbleness in responding to changes in the healthcare market, and getting out from under public record and open meeting requirements.  Lee Health was already able to solicit deductible donations so it really must have been all the government red tape that was the motivation.   

The conversion is almost complete and fortunately there has been 100 miles of transparency throughout.  Of course, we can't know whether it will have been worth the trouble for a long time. Will a private nonprofit hospital be less accountable to stakeholders and less providing of charity care than a public hospital?  There is a good chance of the latter, let's just keep it real.  So anyway, all that remains to be seen.  But if you are writing about or involved in a similar public to private nonprofit hospital conversion, bookmark and download Lee Healthcare's conversion files.  Lee Healthcare's webpage has everything from the enabling legislation, the conversion agreement, board presentations and minutes, resolutions, consultant reports, and audited financials.  There are even projections about future charity care and community benefit.  Due diligence has certainly been done and the files makes for a good case study and checklist.

darryll k. jones

June 20, 2024 | Permalink | Comments (0)

Boofing as a Tax Exempt Purpose

Boofing: What it is, and Why it's Dangerous

Maine Access Points,  a tax-exempt organization way up in Portland, is teaching addicts how to Boof.  Boofing, I have learned, is the term used to describe consuming fentanyl, heroin, or other illegal drugs by injecting those substances up your butt with a lubricated plastic needleless syringe. Apparently, the jury is still out on whether boofing -- aka "booty dumping" -- is safe, or just safer than needles.  Addiction is one of the worst kinds of sadness and tragedy.  But I find the boofing part hilarious in a juvenile, Saturday Night Live kinda way.  And intriguing too.  That's gotta be a pretty intense high, come to think of it.  Here's a bit from the Maine Wire:

Maine’s taxpayer-funded “harm reduction” specialists call it “boofing” or “booty dumping,” but those are just pleasant euphemisms referring to the practice of sticking heroin, fentanyl, or meth up your butt.  Maine Access Points, a taxpayer-funded nonprofit based in Bangor, as well as the city of Portland’s city-run needle distribution center are both offering extensive how-to guides and — even anal injection kits — to help drug users squirt narcotics into their anuses. In Portland, the “Portland Public Health Boofing Kit” comes with a needleless syringe and an informational flyer explaining the proper technique for putting drugs up your butt.

The article contains a picture of the boofing flyer in case you are interested.  I have spoken often on these pages about safe injection sites, all to no avail because federal law still precludes tax exemption for Safehouse, a Philadelphia organization that’s been trying to open and operate clinical space where junkies can safely consume illegal drugs.  Rather than in Kensington, a working-class neighborhood that is also a notorious open air drug market. People inject drugs or nod off with needles sticking out of their arms there all the time.  As kids walk to school or play outside nearby, and the cops avert their eyes. 

Our approach to illegal drug use has never made any sense. The thing stopping Safehouse is a federal law designed to keep trap houses from springing up in neglected neighborhoods, hastening inner city blight. Yet the law is relied upon to prevent Safehouse from bringing junkies closer to treatment and recovery. So instead, junkies set up and cops tolerate outdoor drug camps near working class neighborhoods filled mostly with the politically disenfranchised.  Because trust me, nobody will ever see an unmitigated open air drug market near a middle- or upper-class neighborhood.  If one persisted despite law enforcement’s best efforts, you better believe Safehouse would be a welcomed alternative.  It’s not always racial but it’s definitely about the Benjamins.

The post is about using the nonprofit sector to effectuate positive societal change and giving nonprofits the legal space in which to experiment with safe or safer alternatives. The approach to safe injection sites proves the point.  Nothing else has worked to stop drug abuse despite trillions of dollars. People are going to use, and some will get addicted. And all that use and addiction is generating an expensive criminal-industrial complex, parts of which would disappear by decriminalizing certain interventions.  And allowing tax exemption for organizations experimenting with nontraditional interventions.  Why not cut nonprofits some slack when they are desperately seeking solutions?   

Let nonprofits teach proper boofing if that might help. Things can't get no worse.

darryll k. jones

June 20, 2024 | Permalink | Comments (0)

Wednesday, June 19, 2024

How W.E.B. DuBois Might Have Felt About DEI in the Nonprofit C-Suite

W.E.B. Du Bois | Biography, Education, Books, & Facts | Britannica

William Edward Burghardt Du Bois

In Springfield, Illinois last week the legislature passed and sent SB 2930 to the Governor.  The bill requires larger nonprofits -- private foundations mostly -- to report the demographics of their directors and officers. Apparently to shame charities into doing what cannot be mandated.  Local news says the Governor might sign it this week if he hasn’t already. Here is the text:

Within 30 days after filing its annual AG990-IL Charitable Organization Annual Report, a corporation that reports grants of $1,000,000 or more to other charitable organizations shall post on its publicly available website, if one exists, the aggregated demographic information of the corporation’s directors and officers, including race, ethnicity, gender, disability status, veteran status, sexual orientation, and gender identity.  The aggregate information shall be accessible on the corporation’s publicly available website for at least 3 years after it is posted.

It's a response to a growing sense that charitable governance is increasingly in the hands of a single demographic. And that DEI in charitable board rooms generates more public benefit. One has to wonder about indirect DEI measures after Students for Fair Admissions.  The Supreme Court’s demand that we pretend to live in a post-racial society might be inconsistent even with disclosure mandates.  If the government can neither mandate nor explicitly encourage DEI what business does it have asking about it? 

“This law is a prime example of the fundamental incoherence of leftist identity politics,” America First Legal Senior Vice President Reed D. Rubinstein told the DCNF. “Demanding that only non-profit corporations reporting grants of $1,000,000 or more to other charitable organizations post ‘demographic’ information on their directors and officers is almost certainly illegal and unconstitutional.”

I prefer not to pretend racism doesn’t exist nor beg  for my inclusion. I felt that way long before SFFA. I like W.E.B. Du Bois’ 1934 sentiment instead:

"Surely then, in this period of frustration and disappointment, we must turn from negation to affirmation, from the ever-lasting 'No' to the ever-lasting 'Yes.' Instead of sitting, sapped of all initiative and independence; instead of drowning our originality in imitation of mediocre white folks; instead of being afraid of ourselves and cultivating the art of skulking to escape the Color Line; we have got to renounce a program that always involves humiliating self-stultifying scrambling to crawl somewhere where we are not wanted; where we crouch panting like a whipped dog. We have got to stop this and learn that on such a program they cannot build manhood. No, by God, stand erect in a mud-puddle and tell the white world to go to hell, rather than lick boots in a parlor."

That’s all I have to say about that.

darryll k. jones

June 19, 2024 | Permalink | Comments (0)

Physician Recruitment and The FTC's Ban on Non-Compete Clauses

Physician Recruitment | Lawrence General Hospital

The last time tax law had something to say about nonprofit hospital physician employment practices, the IRS issued physician recruitment guidelines in Revenue Ruling 97-21.  I was always perplexed by those guidelines.  The Ruling uses five examples just to say, “pay physicians what your market demands and don’t do anything illegal.”  I never got the point of the ruling because it only expresses what must happen anyway. At least exempt hospitals knew they could compete for physician services by the same rules regulating for-profit hospitals.  It seemed a waste of time otherwise.  But the FTC's new rule banning non-compete clauses gives new importance to the Revenue Ruling 97-21.  Here's how.

It seems that nonprofit hospitals retain at least one advantage – maybe even an unfair advantage -- over for-profit hospitals in the competition for physician services.  Because nonprofit hospitals are immune from the FTC’s new rule prohibiting the use of noncompete clauses.  For-profit hospitals don't like that and complain bitterly about the unfair competition the immunity enables.  Nonprofit hospitals could raid for-profit hospitals for physicians undeterred by a  non-compete, but for-profits would not be able to do the same if nonprofit hospital physicians remain subject to non-compete clauses.  Here is some interesting commentary:

Many physicians and nurses are happy about the Federal Trade Commission's new rule banning the use of noncompete agreements in employment contracts. But they are disappointed that it may not protect those who work for nonprofit hospitals and health care facilities, which provide most of the nation's care and employ the largest number of medical professionals. 

In April, in a 3-2 vote, the FTC approved a final rule prohibiting contracts that prevent an employee from taking a job with a competitor. Calling the noncompete agreements "a widespread and often exploitative practice," an agency announcement described them as an unfair method of competition that depresses wages and hinders new business formation.

The rule bars employers in most industries, including health care, from using contract clauses that block employees from leaving for other jobs or starting a competing business in the same geographic area for a fixed period of time. But that doesn't help many health professionals, because the FTC Act gives the agency authority over companies organized to operate for profit but not over nonprofit, charitable organizations, which are also tax-exempt.

Still, the agency noted some nonprofits could be bound by the rule if they do not operate as true charities. The rule establishes a two-part test to determine if the FTC has jurisdiction over a nonprofit—whether the organization is carrying on business for only charitable purposes, and whether its income goes to public rather than private interests.

Noncompete contract terms have become increasingly common for physicians, nurse practitioners, and other medical professionals in hospitals and various health care facilities. Some providers say these agreements have forced them to leave their communities and patients behind if they wanted to exit unethical or unsafe workplace conditions.

Nearly 64% of U.S. community hospitals are nonprofits or government-owned, and they employ many of the nation's medical professionals. As of 2022, nearly three-quarters of U.S. physicians were employed by hospital systems or other companies, both nonprofit and for-profit.

Hospital executives argue that the noncompete rule will force them to compete against each other to hire physicians and other providers and ultimately cost them more, and that it advantages nonprofits over for-profits. "All it would do is increase the price of labor in a field that already has labor shortages and thin margins," Golder said.  "The nonprofit hospital across the street could pursue our employees, while their employees would be protected, and that's a basic fairness issue," Kahn said.

The FTC indicates that it will look for any excuse, including private benefit, to apply the ban to nonprofit health care.  So the FTC’s new rule gives new importance to the Physician Recruitment Guidelines because those guidelines are based on avoiding private benefit.  Although they merely express an economic truism – market demands must be met – they provide explicit notice that physician compensation can lead to private benefit.  Maybe even just occasionally.  And if there is private benefit, according to the FTC, the exempt healthcare organization is no longer outside FTC jurisdiction.  The FTC went out of its way to make that point, and that it can determine the existence of private benefit independently of the IRS, in the preamble to the new rule (starting at page 50):

The Commission stresses, however, that both judicial decisions and Commission precedent recognize that not all entities claiming tax-exempt status as nonprofits fall outside the Commission’s jurisdiction. As the Eighth Circuit has explained, “Congress took pains in drafting §4 [15 U.S.C. 44] to authorize the Commission to regulate so-called nonprofit corporations, associations and all other entities if they are in fact profit-making enterprises.” The Commission applies a two-part test to determine whether a corporation is organized for profit and thus within the Commission’s jurisdiction. As the Commission has explained, “[t]he not-for profit jurisdictional exemption under Section 4 requires both that there be an adequate nexus between an organization’s activities and its alleged public purposes and that its net proceeds be properly devoted to recognized public, rather than private, interests.” Alternatively stated, the Commission looks to both “the source of the income, i.e., to whether the corporation is organized for and actually engaged in business for only charitable purposes, and to the destination of the income, i.e., to whether either the corporation or its members derive a profit.”

This test reflects the Eighth Circuit’s analysis in Community Blood Bank of Kansas City Area, Inc. v. FTC and “the analogous body of federal law which governs treatment of not-for-profit organizations under the Internal Revenue Code.” Under this test, a corporation’s “tax-exempt status is certainly one factor to be considered,” but that status “does not obviate the relevance of further inquiry into a [corporation’s] operations and goals.” Merely claiming tax-exempt status in tax filings is not dispositive. At the same time, if the Internal Revenue Service (“IRS”) concludes that an entity does not qualify for tax-exempt status, such a finding would be meaningful to the Commission’s analysis of whether the same entity is a corporation under the FTC Act.

Administrative proceedings and judicial decisions involving the Commission or the IRS have identified numerous private benefits that, if offered, could render an entity a corporation organized for its own profit or that of its members under the FTC Act, bringing it within the Commission’s jurisdiction. For instance, the Commission has exercised jurisdiction in a section 5 enforcement action over a physician hospital organization because the organization engaged in business on behalf of for-profit physician members. That organization, which consisted of over 100 private physicians and one non-profit hospital, claimed tax-exempt status as a nonprofit.

Similarly, the Commission has exercised jurisdiction over an independent physician association claiming tax-exempt status as a nonprofit. The association consisted of private, independent physicians and private, small group practices. That association was organized for the pecuniary benefit of its for-profit members because it “contract[ed] with payers, on behalf of its [for-profit] physician members, for the provision of physician services for a fee.” Under IRS precedent in the context of purportedly tax-exempt nonprofit hospitals and other related entities that partner with for-profit entities, where the purportedly nonprofit entity “has ceded effective control” to a for-profit partner, “conferring impermissible private benefit,” the entity loses tax-exempt status. The IRS has also rejected claims of nonprofit tax-exempt status for entities that pay unreasonable compensation, including percentage-based compensation, to founders, board members, their families, or other insiders.

darryll k. jones

June 19, 2024 | Permalink | Comments (0)

Tuesday, June 18, 2024

Nonprofit or For-Profit Jazz?

Chris-bair-A10y2Eq7OHY-unsplashFor the last week or so, Spotify has been pushing me to listen to Jazz at Lincoln Center's new record "Freedom, Justice, & Hope." So last night, as I did dishes, I finally did. (If you're not subscribed to any of the music streaming services there, you can watch one piece on YouTube.)

It's excellent, of course. And it follows up on some things I wrote about yesterday. In particular, Jazz at Lincoln Center is a tax-exempt jazz band. And on this record, it's doing some version of what the Tony-award-winning nonprofit theaters did. Some of the music is new. In a reversal of the theaters, though, other music was created by, well, "for-profit jazz musician" may not really be a thing, but were written by individual jazz musicians and then adapted by JLCO. And the through-line of the concert is the idea of marginalized communities in the US claiming the freedom and justice that underlie our society, but that we have deprived so many groups of.

Continue reading

June 18, 2024 in Music | Permalink | Comments (0)

Yellow Journalism and Civil Society: Patagonia Outdoor Clothing and Gear

Did Yellow Journalism Fuel the Outbreak of the Spanish American War? |  HISTORY

I am probably one-third amateur nonprofit and tax exemption reporter and two-thirds curator of news on the same topics.  Most of my original reports are about cases, statutes and regulations.  Otherwise, I just gather news stories from media and sometimes add editorial content.  I try to avoid explicitly partisan stuff, though I admit that I am a partisan.  I don’t often rely on Fox News or MSNBC.  The news in the Wall Street Journal is nonpartisan even if the editorial side has swallowed the MAGA Kool-aide.  The editors pretend to be logical, but they can’t help repudiating the decency Reagan or John McCain ever stood for.  Honestly, I don’t know how they can look at themselves in the mirror without laughing at their political clown noses.  Even CNN is not too partisan, though it struggles at times to maintain its center-left look.  Everybody has biases. Only in this blog, dear friends, will you find completely objective unbiased news about nonprofit and tax exempt organizations. 

The Washington Examiner and the New York Post are two explicitly partisan sources.  Partisan enough that they might be described as yellow journalistic.  But, as my father used to say, “even a fool can teach you something.”  The Washington Times ran a story last week about Patagonia’s “funneling” of financial support for terrorists.  “Funneling” suggests a mens rea that is about as likely as the moon is made of cheese.  Still, the story is useful to my sermonizing about war hysteria driving attacks on Civil Society.  It seems like partisans in our never-ending social wars are scouring 990s and other documents in an effort to tie donations made long before October 7th to terrorism. In pursuit of some other cultural war or political aim. In this case, the cultural war involves the fight against climate change, which is often characterized as a Chinese inspired effort to undermine America. Here are excerpts from the Washington Times exclusive:

Patagonia, the outdoor apparel brand with offices across the world, granted tens of thousands of dollars to a group connected to Palestinian terrorism. Now the company says it has launched an internal review into the funding.  Through its tax-exempt private foundation in California, Patagonia has sent more than $139,000 since 2016 to Alliance for Global Justice, tax records show. That same progressive Arizona-based organization, a recent Washington Examiner investigation found, is linked to the Popular Front for the Liberation of Palestine terrorist group — a fact that prompted donors and payment processors such as PayPal to cut ties with AFGJ amid mounting scrutiny from Congress.

Patagonia’s funding of AFGJ is a window into how major corporations operating in the United States financially boost groups taking aim at the Jewish state of Israel, including AFGJ, which has said it sponsors 140 projects and reported holding $11 million in assets on its most recent tax forms filed with the IRS. One project under AFGJ is Samidoun, an Israeli-designated terrorist coalition that has shared staffers with the PFLP. AFGJ also fundraised in the past for the France-based Collectif Palestine Vaincra, a partner of the PFLP that, along with Samidoun, is protesting in support of Hamas after it killed 1,200 people last year in Israel on Oct. 7.

Patagonia’s 2023 grants to AFGJ, which totaled $30,000 combined, were to climate-focused projects under the charity working on “community cleanup around a defunct oil refinery site” and “building activism among Black TLGBQIA+ individuals through climate advocacy and community gardening,” Hans Cole, Patagonia’s vice president of environmental activism, said in a statement.  “Patagonia remains committed to rigorous stewardship of our philanthropic efforts and is evaluating continued funding of local efforts through AFGJ,” Cole told the Washington Examiner.

Patagonia is not a private foundation, by the way, though its nonvoting stock is held by a (c)(4). It is a charitable purpose trust; basically a tree hugger organization hardly concerned  with the war in Gaza except maybe for its environmental destruction.  The article evenB acknowledges that Patagonia’s grants were made to an organization involved in climate change. But never mind that.  The recipient organization knew – is “linked” to -- another organization that “is linked to” an organization that said something not so nice about the war in Gaza.  You get the point.  Like the strategy used in the Army-McCarthy hearings, the Washington Times seeks to condemn one organization by its attenuated third or fourth level “linked to” connections.  We should be concerned that it’s not just yellow journalists having limited success in efforts to shut down Civil Society for not adhering to party line politics.  Otherwise, I wouldn’t even bother saying anything about any of this. 

darryll k. jones

June 18, 2024 | Permalink | Comments (0)

Mark Hall's Preliminary Report on HCA's Acquisition of Tax Exempt Mission Health

photo of Mission Hospital taken from the air (or perhaps a hillside) showing the hospital complex in the distance, surrounded by mountains, trees

Asheville's Mission Hospital

Mark Hall has completed another chapter of his case study regarding PE acquisition of nonprofit hospitals. The latest update concerns the decision making process.  When all is said and done, this encyclopedic project will likely weigh in as the most detailed and comprehensive study of its kind, useful to state and federal policy makers, as well as for-profit and nonprofit healthcare stakeholders.  Here is the Background and Summary from Mission Hospital’s Decision to Sell to HCA:  A Preliminary Report:

This preliminary report is one part of a larger study examining what lessons can be learned from the events leading up to, and following, HCA Healthcare’s 2019 purchase of the Mission Health system based in Asheville, North Carolina (NC). Other portions will address what has transpired following the sale, as well as recommendations for how other institutions and communities might address similar issues that may arise elsewhere. This portion of the report provides a brief introduction and then focuses on events leading up to the decision to sell.

As a summary of this report’s key points:

• HCA’s management of the Mission Hospital system has proven to be much more controversial and contentious than anyone imagined. Concerns related to Mission’s quality of care, scope of services, patient access to services, corporate profits, inadequate staffing, excessive physician turnover, and questionable charitable care policies have produced an avalanche of negative publicity, both locally and nationally, as well as several high-profile lawsuits and a major federal enforcement action.

• A key event that paved the way for the HCA sale was the state’s decision in 2015 (effective in 2016) to terminate the antitrust oversight that had been in place for two decades as a condition for allowing Mission Hospital to merger in 1995 with its former Asheville competitor, St. Joseph’s. No convincing reason can be found for why the state, having conferred monopoly power, then permitted Mission to become an unregulated monopoly. It does appear, however, that state officials and involved community members at the time failed to foresee that lifting regulatory oversight might lead to the hospital’s sale to a large, out-of-state profit-driven owner.

• Key elements of Mission’s decision to sell to HCA have been covered extensively by others. This report pulls together that body of work and adds additional insights from interviews with former board members and informed sources. In sum, despite the hospital’s strong financial condition at the time, Mission’s leaders believed that, over time, Mission would struggle to maintain its quality and scope of services as a stand-alone system. A substantial driver of this belief was Mission’s failed negotiation with Blue Cross in 2017 to increase payment rates. Because Mission’s leaders had already been exploring a potential sale, its board was able to approve a sale to HCA within just a few months after the failed Blue Cross negotiations.

Mission’s selection of HCA rather than an in-state nonprofit system that offered similar terms has been extensively critiqued, based on concerns that its board was not fully informed or that its CEO had a conflict of interest. Key leaders involved at the time, however, explain that HCA was selected because it appeared better able to achieve operating cost efficiencies without compromising quality or service. Also, a major draw was that HCA’s purchase price would be used to create a large foundation that would broadly address regional health problems. It does not appear, however, that the board anticipated HCA would pursue cost savings by making aggressive cuts in patient care staffing.

June 18, 2024 | Permalink | Comments (0)

Monday, June 17, 2024

Nonprofit Theater and the Tonys

24533631708_45dd5cc5cb_cLast week, Darryll mentioned a Wall Street Journal article about the outsized representation of plays created or produced by nonprofit theaters in the Tony nominations this year.

Last night the Tonys happened. (Full disclosure: I didn't watch, though this morning I did watch the Alicia Keys/Jay-Z performance from the show.) As Darryll underscored, financially, nonprofit theater is struggling. Artistically, though? By my (quick, casual count), at least 19 of the 26 awards went to the shows with their roots in the nonprofit world.

I've been thinking about why and how we differentiate tax-exempt art from for-profit art (especially in the world of jazz and classical music vs. popular music). I don't have any firm conclusions--I'm still trying to decide how to think about it--but I will say that I think losing the art produced in the nonprofit world would be a net loss to society.

But can it only be produced by the nonprofit sector? Or can it best be produced by the nonprofit sector? That's a fair question.

Samuel D. Brunson

Photo by David. CC BY 2.0

June 17, 2024 in Current Affairs, In the News | Permalink | Comments (0)

AHA Responds to CRFB's Call to Repeal Hospital Tax Exemption

Rick Pollack, American Hospital Association CEO and President standing in front of United States flag and the AHA seal.

                                    Rick Pollack, President and CEO, American Hospital Association

Not surprisingly, the American Hospital Association responded to the Committee for a Responsible Federal Budget’s report recommending that tax exemption for hospitals be “reformed or repealed.”  I have complained in the past that AHA responds in kneejerk fashion whenever a scholar or group criticizes tax exempt hospitals.  But, well, in this instance the response might be justified once you sift out the hyperbole and name-calling.  CRFB’s report is more an advocacy piece than an objective report.  Which is ok, there is nothing wrong with advocacy. But the report is too full of speculation to support the action CRFB calls for.  The authors admit, for example, that the estimated cost of hospital tax exemption -- $260 billion over ten years – is highly speculative.  Nevertheless, the report argues that the cost might be even higher than that.  The AHA calls the report “irresponsible” and a “drastic oversimplification” of a complex issue.  I feel like agreeing.  Here is some of AHA’s response:

The Committee for a Responsible Federal Budget is supposedly committed to being “an authoritative voice for fiscal responsibility.” That’s why it’s so disappointing that they would propose something so irresponsible in a new report — repealing nonprofit hospitals’ tax exemption. In reality, eliminating that exemption could result in more burden being placed on taxpayers to cover the cost of all the benefits and services these hospitals provide to their patients and communities. Worse than that, eliminating the longstanding exemption would cause hospitals across the country to close their doors, which would be the epitome of fiscal recklessness.

AHA’s response would be more persuasive if it didn’t attack the messengers. Hospital tax exemption might still be justified, or not, but nobody can argue that it cannot be improved.  AHA always finds a way to inject some sinister music into anything questioning hospital tax exemption.  And then the second thing about AHA’s response – and I am not trying to be mean here, I’m just trying to help – is that the President’s picture always accompanies AHA’s response.  And . . . well . . . the picture makes him look like a used car salesman trying to unload a clunker, ok. Way too much smiling.  I’m just trying help is all.  Here is a little more from AHA:

Drastically oversimplifying these complex hospital-community relationships by boiling them down to a single metric — charity care — serves no one except those committed to smearing hospitals at every opportunity. Yet that is exactly what the Committee for a Responsible Federal Budget has done in its report. This position would be surprising if not for the fact that this report was produced in conjunction with the well-known anti-hospital, billionaire-backed Arnold Ventures and in large part relies on prior studies also funded by Arnold Ventures that the AHA has debunked time and again.

"Smearing hospitals at every opportunity," as if there is nothing at all troubling about hospital tax exemption.  I might give that assertion more thought if AHA used a contemplative photo without that off-putting Cheshire grin.  And less name-calling when addressing legitimate and substantive questions about hospital tax exemption.  Leave the name-calling for politics.  


darryll k. jones 

June 17, 2024 | Permalink | Comments (0)

OpenAI's Tax Exemption: It's All Over But The Profiteering

Annual Recurring Revenue

It’s becoming increasingly clear that the joint venture involving OpenAI and Microsoft is doomed to fail. Not as a matter of profit making -- there is plenty of that -- but as a matter of tax exemption law.  Elon Musk might have been right all along.  Last week, he dismissed his suit alleging that Sam Altman and OpenAI breached a contract by morphing into a for-profit entity.  Not because he was wrong about the profiteering going on.  Its just that there never was a contract between those parties.  OpenAI's contract is with the rest of us. It promised to  remain charitable.  Instead, it's looking like a company on the verge of an IPO.  Maybe Musk thinks OpenAI is proving the allegations without the need for judicial intervention.   

We have followed OpenAI since it first announced a “whole hospital joint venture” with Microsoft. A joint venture that explicitly allows an ROI for Microsoft and other private investors capped at 100 times capital investment.  Given that it takes gazillions to pursue OpenAI’s scientific research, and that the market is valuing the JV at nearly $100 billion as of last week, the return to investors from the tax-exempt venture promises to be very handsome.  The Wall Street Journal reports that Microsoft's capital account is about $13 billion.  That means Microsoft could walk away with as much as $1.3 trillion from its partnership with OpenAI.  Seemingly too much to justify tax exemption though I have tried each time some new profit-making happens.  In my pathetic defense, I started out saying it could never work.

The first sign of profiteering  came when the JV granted stock options to many of its employees.  That seemed a literal violation of the prohibition against private inurement, though the uncertainty regarding revenue sharing gives OpenAI the ability to justify the move.  The employees aren't necessarily insiders either. But even then, revenue sharing creates private benefit concerns.

Then the Board fired CEO Sam Altman because he was not adhering to the Board’s conception of charity.  It seems he was too quick to monetize the very profitable technology.  The joint venture follows the prescription in Revenue Ruling 98-15, but Microsoft nevertheless engineered a reverse coup that purged charitably minded board members and reinstalled Altman. Even the CIA must have envied Microsoft's skill.  Despite what the governing structure looked like on paper, it was beginning to seem like Microsoft was running the show.  In hindsight, this thing has been for-profit as a practical matter for more than just a minute. 

And then news broke early last week that OpenAI has entered into some sort of agreement, presumably on an exclusive basis, with Apple:

Apple is integrating ChatGPT into experiences within iOS, iPadOS, and macOS, allowing users to access ChatGPT’s capabilities—including image and document understanding—without needing to jump between tools. Siri can also tap into ChatGPT’s intelligence when helpful. Apple users are asked before any questions are sent to ChatGPT, along with any documents or photos, and Siri then presents the answer directly. Additionally, ChatGPT will be available in Apple’s systemwide Writing Tools, to help users generate content for anything they are writing about. Users can also tap into ChatGPT image tools to generate images in a wide variety of styles to complement what they are writing.

Look, I hate to be a scrooge about all this, but an exempt scientific research organization is not supposed to grant exclusive license to its work product unless that is the only “practicable” way to get the research into public use. Treas. Reg. 1.501(c)(3)-1(d)(5)(iv)(b).  “Open” in OpenAI means open source not exclusive license to the highest bidder.  OpenAI didn’t say a word about partnering with Samsung, by the way.  The license gives Apple a competitive advantage, meaning private benefit.  I swear these guys don't know when to stop pushing envelopes.  

And then late last Friday, The Information – an IT industry newspaper – reported overhearing Sam Altman talking about converting OpenAI to a B corporation. Apparently, OpenAI needs even greater access to capital and is fending off stiff competition from Anthropic and xAI, two B corporations.  None of that sounds like justification for tax exemption anymore.  Here are excerpts from one of the better subscription free reports:

OpenAI CEO Sam Altman has informed some shareholders that the company is evaluating a shift in its governance model, according to a report by The Information on Friday. Sam Altman says OpenAI could become a for-profit corporation to increase its financial flexibility. Altman mentioned that the nonprofit board may relinquish control to a for-profit business structure. One option under consideration is transitioning to a for-profit benefit corporation, similar to competitors Anthropic and xAI, as reported by an insider. This change is part of ongoing discussions, which are still in a fluid state. OpenAI’s leadership, including Altman, might eventually decide on a different path.

OpenAI’s potential shift from a nonprofit to a for-profit structure raises important questions about the balance between profit and purpose. On one hand, transitioning to a for-profit benefit corporation could provide greater access to capital, allowing OpenAI to scale its operations, invest in advanced research, and compete with other leading AI companies like Anthropic and xAI. This structure might also offer flexibility in attracting top talent through competitive salaries and stock options.

However, this move could spark concerns about the company’s commitment to its original mission of developing AI that benefits everyone. A for-profit model might prioritize shareholder returns, which could lead to decisions that compromise ethical considerations and societal impact. The core values that have guided OpenAI’s work might be challenged if financial pressures take precedence.

The important difference between a B corporation and a nonprofit/for-profit joint venture is that a B corporation may elevate charity to the same or higher level of importance as profit-making.  A joint venture must elevate charity to a higher level than profit.  It appears, then, that OpenAI is succumbing to inexorable market forces.  The market doesn’t care about charity and OpenAI’s consideration of B corporation status might be its way of saying “uncle.”  The joint venture is all but dead for tax exemption purposes.

A conversion won’t be cheap though. OpenAI’s know-how and other intellectual properties are owned by an exempt organization that can’t just give that stuff to a for-profit entity.  OpenAI would have to sell the company for its fair market value and then utilize all that tax-exempt gain for charitable purposes.  That’s not nickels and dimes; remember, the JV is worth nearly $100 billion, most of which is probably attributable to OpenAI’s contributions.  Google, Microsoft, Apple or some other big tech money bags would have to be the purchaser.  In hindsight, that might have been what was intended all along.  The silver lining in this failing experiment is that OpenAI can endow an institute to study the ethical deployment and use of artificial intelligence. Maybe at a law school.  Maybe at my law school.  Maybe with me as the well-paid tax guy in residence.   

darryll k. jones

June 17, 2024 | Permalink | Comments (0)

Friday, June 14, 2024

The Chamber of Commerce Foundation and the Futility of Regulating Campaign Intervention


Incumbent Peter Meijer was ousted because he was one of the few Republicans voting in favor of Trump's Impeachment. 

The Hill has some interesting investigative reporting out this week.  Here’s the hook:

The U.S. Chamber of Commerce received a $800,000 wire transfer from billionaire donor Hank Meijer days after it endorsed his son, then-Rep. Peter Meijer (R-Mich.), in a contentious 2022 primary, according to previously unreported internal emails reviewed by The Hill. Within days of the transfer, the Chamber spent $381,000 on “Media Advertisement – Energy and Taxes – Mentioning Rep. Peter Meijer,” according to a report filed with the Federal Election Commission (FEC). 

The report does not address the prohibition against campaign intervention in 501(c)(3) because it accepts that the political ad posted above was paid for by the U.S. Chamber of Commerce.  The Chamber is (c)(6) not subject to the prohibition.  But Daddy Warbucks could also not take a charitable deduction for the contribution to the 501(c)(6).  On the other hand, the Chamber of Commerce Foundation is a (c)(3).  Donations to the Foundation generate a charitable contribution deduction and those donations can be funneled or sifted or laundered, whatever, into the Chamber to pay for campaign intervention. Don't look at me like that.  Who among us would really not be tempted to donate the money to the Foundation, take the tax deduction, and then expect that "coincidentally" the Chamber will endorse our candidate? And that before, during, or after, the Foundation will grant money to the Chamber for other things the Chamber does.  Moral hazard much? Besides, the law ultimately soothes my qualms. Your qualms are your business.  Lloyd even talks about those  legal rules in a recent article.  

So come on.  Was the donation really made to the Chamber, a (c)(6) generating no deduction?  Really?! Or was it made to the Foundation, a (c)(3)? I'm just asking and given the law it might even be malpractice to not advise that path.  Regardless, the public never perceives a distinction between the Chamber and the Foundation.  I didn't at first.  I wrote to the reporter, with an air of knowing superiority, saying it all looks like campaign intervention not just an FEC violation.  Instructively, she pointed out that these are two different organizations, one a (c)(6) the other a (c)(3).  I didn't note the distinction at first.  The public is not supposed to ever perceive the distinction.  That's the whole point.

By the way, it is scientifically impossible to trace the donation to any particular use within the Chamber family even if the donation went to the Foundation.  Oh sure, the two organizations have separate books with plenty of line item entries showing the Foundation received the donation and made grants for the Chamber's nonpolitical activities.  And the Chamber has line items showing that donation's use for nonpolitical activities.  But look.  It's scientifically impossible to segregate money.  Money is fungible.  A dollar granted to the Chamber from the Foundation for nonpolitical activities, frees up the Chamber's other dollars for campaign intervention.  The Foundation will deny involvement in Warbucks' son's campaign, of course.  And with lots of cover provided by byzantine rules in tax law allowing for campaign intervention through affiliated organizations.  

And another thing.  The report explains in pretty good detail the nuances and loopholes of campaign finance laws, about which I know about as much as I know about building rockets.  I am not a rocket scientist.  Apparently, you can’t explicitly endorse a candidate under federal campaign finance laws, at least not without some disclosures.  But you can say a lot of things that amount to an implicit endorsement.  As if there can be such distinctions in the English language.  The whole thing, and the prohibition against campaign intervention in IRC 501(c)(3), is absurdly silly if you ask me.  The inherent ambiguity in any language precludes regulating the conveyance of political endorsements. 

But because the ad — entitled “Thank you, Rep. Peter Meijer” — does not explicitly advocate for his election or defeat, the pro-business lobbying giant did not have to legally disclose the donation from Hank Meijer, the co-chair and CEO of the Meijer chain of superstores. It also did not have to disclose any other potential contributions behind the $1.8 million it told the FEC it spent on “electioneering communications” that cycle. 

Not explicitly?  What is explicit and how can we ever distinguish it from implicit or not at all?  If we say it’s a matter of degree we are essentially admitting the futility of the effort.  Add to that the First Amendment-based right to donor anonymity – dark money – and the futility of regulating campaign speech becomes even more apparent:

Nonprofits such as the Chamber are not legally required to publicly disclose their donors. The Supreme Court recently ruled nonprofit disclosure requirements violated donors’ First Amendment rights and risks deterring donors who don’t want their names to be public. Under federal campaign finance law, however, it is illegal for a campaign and spender to coordinate on so-called “independent expenditures” — election communications such as an ad. But the involvement of a candidate’s family member is not de facto coordination, campaign finance experts told The Hill, and so long as the group does not coordinate with the candidate, campaign or its agents on an endorsement, or spending touting that endorsement, they would legally be in the clear. 

Coordination and coordinate.  More wiggly and hopelessly ambiguous terms.   

The ad praises Peter Meijer but stops short of using the eight specific words and phrases established in the Supreme Court’s 1976 decision in Buckley v. Valeo that would require the Chamber to report the ad as an independent expenditure, and thus disclose the source of the funds: “vote for,” “vote against,” “elect,” “defeat,” “support,” “reject,” “cast your ballot for” or “Smith for Congress.”

The report's ignoring the tax law campaign intervention issue is appropriate if we believe the Chamber and the Foundation really are two different entities.  I just don't believe it and I am not even an economist. Why do we call something that is not factually true a legal fiction? There is something oxymoronic about the phrase.  Anyway, that we should ignore the issue is precisely the point when any endorsing organization creates a related (c)(3) that generates charitable contribution deductions.  The prohibition is such a waste of time and money.

darryll k. jones

June 14, 2024 | Permalink | Comments (0)

CRFB: Reform or Repeal Hospital Tax Exemption

An outfit called the Committee for a Responsible Federal Budget is out with a new report -- a literature review, actually --  that makes the surprising and counterintuitive conclusion that for-profit hospitals provide more charity care than nonprofit hospitals.  Not just in absolute numbers but as a percentage of operating expenses.  The nearly 50-year-old organization concludes that lawmakers should reform or repeal tax exemption for hospitals.  There are excerpts from the easy to read and well-footnoted report below.  Maybe it is too easy to read though.  Teaching hospitals, for example, probably fare poorly by comparison because they charge most patients to fund very expensive medical research and training on very rare diseases.  The report sure makes it seem that repealing hospital tax exemption is an easy call.

Both studies also found that nonprofit hospitals generally provide less charity care than their for-profit counterparts, likely because for-profit hospitals can deduct charity care costs from taxes and have a vested interest in building their reputations in local communities, particularly in areas where they directly compete with nonprofit hospitals.

The Cost of the Nonprofit Hospital Tax Benefit

The cost to the federal government from allowing hospitals to claim nonprofit status, in the form of lost tax revenue, is substantial. There is an abundance of evidence that the tax benefits to those hospitals exceed tangible community benefits that are supposed to be tied to nonprofit status.  

By our rough estimate, the existence of nonprofit hospital status will cost the federal government $260 billion over a decade in lost revenue. This includes forgone corporate tax revenue, the benefit associated with being able to issue tax-exempt bonds, and lost individual income tax revenue related to the deductible charitable contributions from donors.

Importantly, this estimate is rough and comes with a high degree of uncertainty. Challenges arise from the limited availability of comprehensive data on hospital income, tax rates, and the scope of revenue implications, spanning federal, state, and local levels. Our estimate is derived from two calculations by KFF of the cost of the federal tax breaks in 2020. They estimated the cost at $14.4 billion using their own methodology and $18 billion using the methodology of the Johns Hopkins Bloomberg School of Public Health.

Notably, our estimate is based on current tax rates and deducted charitable contributions and thus effectively assumes full extension of the expiring parts of the 2017 Tax Cuts and Jobs Act (TCJA). The cost would likely be higher under current law and could differ in other ways depending on the tax reforms and modifications enacted as part of a possible 2025 tax bill.


Given its large cost and questionable value, policymakers should work to reform or repeal the tax advantages for nonprofit hospitals and should also improve the regulatory regime to ensure transparency, accountability, and provision of community benefits.

darryll k. jones

June 14, 2024 | Permalink | Comments (0)

Colinvaux: Eleventh Circuit Gets Fearless Fund All Wrong

Illustration of Supreme Court associate justices Sotomayor and jackson

Justices Ketanji Brown Jackson and Sonia M. Sotomayor wrote scathing dissents in Students For Fair Admission.  

When you hear commentators label a dissent "scathing," what they mean is that the dissent effectively and with surgical logic dismantles the majority argument.  It exposes illogic and in some cases it exposes hidden privilege or bias.  I am not sure Roger Colinvaux's latest on Fearless Fund exposes privilege or bias but it is scathing anyway.  He dismantles the reasoning behind the Eleventh Circuit's opinion and shows why charity is necessarily remedial in a Constitutionally appropriate sense. 

The problem is the argument that Fearless Foundation has a First Amendment right. That's not necessarily Roger's argument just one he slightly endorses, it seems to me. I think the First Amendment argument is a bridge way too far, as I have said before.  It's an all or nothing argument when one isn't necessary.  If the Fearless Fund has a First Amendment right to discriminate, then so does Bob Jones University and everybody else.  Fearless Foundation will be left with nothing if it insists on that argument.  Colinvaux's argument -- one I endorse not just slightly -- does not require the First Amendment to prevail.  His logic is irrefutable by itself.  Here is an excerpt:

The logic used in this case could have far-reaching implications for how charities operate, particularly those formed to remedy structural inequities resulting from past discriminatory practices. It could, for example, extend to identity-based scholarships, remedial programs that take race, gender, or even religion into account, and virtually any charitable support that has contract-like features, such as grants, loans, or investments in charitable programs.

. . . 

As I explained in an amicus brief filed on the side of the Fearless Fund, by construing a civil rights law to prohibit certain types of philanthropic funding, the case indirectly attacks charitable organizations’ ability to fulfill their missions. In doing so, it attacks the missions themselves.

The ruling is as disappointing as it is fundamentally flawed. The court’s cursory analysis ignores the most important feature of the case: the Fearless Foundation is a charity doing what charities do. While noting that the plaintiff, the American Alliance for Equal Rights, is a 501(c)(3) organization, the court never acknowledges that the foundation operated by the Fearless Fund is also a 501(c)(3) charity and that the contest is how it provides charitable support. 

Ignoring the Fearless Foundation’s charitable status, however, allowed the court to conclude that the grant contest was no different than any other contest, or sweepstakes, held by a noncharitable institution — except that it was exclusively for Black women-owned businesses. While this appeals to the notion that everyone should get a shot at some generic winnings, it’s an unfair characterization of the organization’s charitable activity or, for that matter, any charitable activity. 

Charity is, by definition, exclusive: Not everyone is eligible for it. But instead of considering the context of the Fearless Foundation program, the court likens the organization’s conduct to regular commercial activity, such as hiring employees, which it is not.


darryll k. jones


June 14, 2024 | Permalink | Comments (0)

Thursday, June 13, 2024

Victoria Litman on Ayahuasca and Other Psychedelics in Organized Worship

The Ayahuasca Religions: The Sacrament, the Traditions and the Science  (Montreal, Canada) - Multidisciplinary Association for Psychedelic Studies  - MAPS

From the Multidisciplinary Association for Psychedelic Studies

Victoria Litman took a moment to respond to our story about the Iowaska Church's years-long quest for tax exemption and vindication of its right to use "huasca" in its religious services.  She refers us to her excellent article on the topic. "Psychedelic Policy, Religious Freedom, and Public Safety: An Overview" contains some excellent historical and contemporary context.  Here is the abstract:    


Psychedelics are psychoactive sacraments (also known as entheogens) as well as medicines and recreational drugs. In the last few years, these substances have begun to be deprioritized, decriminalized, and legalized at the state and local levels. Some are also in the process of becoming FDA approved to be prescribed as part of psychedelic assisted psychotherapies. At the same time, the religious use of these substances, rooted in history, is becoming more destigmatized and religious organizations are increasingly willing to out themselves and engage with federal agencies related to their use of illegal drugs in a variety of ways. As a Graduate Tax Scholar at Georgetown University Law Center, I conducted research on approaches that these religious communities are taking with respect to their federal tax status. The key takeaway from that preliminary research was that due to these legal and cultural shifts, the number of religious communities utilizing psychedelics is significant and growing. From the perspective of the Drug Enforcement Administration (DEA), and the federal government, the religious use of psychedelics remains criminal absent a religious exemption. In response to a Supreme Court case in 2006, the DEA developed a constitutionally questionable religious exemption application process but has never voluntarily granted an exemption. Although there are a growing number of communities, many of which the government is fully aware of, only three communities currently have court ordered federal exemptions. The result of this is a lack of criminal law enforcement further frustrated by the religious freedom protections granted in the U.S. Constitution. This Article describes this current legal landscape at federal, state, and local levels, how we got here, and importantly, the impact of the current policy of nonenforcement on public safety. In conclusion, this Article proposes two possible policy solutions to shift the legal landscape from legal defensibility into legal protection, increasing safety for all involved and reducing unnecessary burdens on government agencies.


darryll k. jones

June 13, 2024 | Permalink | Comments (0)

Wayward Nonprofit Fiduciaries Come in Bunches. The Heinz Endowments Sues One of Them

The most intriguing check box on a nonprofit's disclosure form - The  Washington Post

The Heinz Endowments sued its former IT Director on Monday seeking to recover about $1 million embezzled over a ten year period.  We sometimes blog about nonprofit fiduciary theft and embezzlement on this blog.  These cases come in bunches, it seems. Last week we reported on the allegation that an insider embezzled $40 million from the Detroit Riverfront Conservancy.  Yesterday, the Washington Post reported on a case where a fiduciary stole $2.5 million from his nonprofit clients:

After a client confronted Graham Hauck about missing funds in 2019, the management executive who lived in Washington’s comfortable suburbs paid the money back — then kept stealing. In 2021, after FBI agents warned Hauck that he was under investigation for embezzling funds, he kept stealing. Two years later, after federal prosecutors laid out all of the evidence against him, Hauck kept stealing. And in March, after being offered a deal to plead to wire fraud, Hauck kept stealing. Before pleading guilty, he took his family on a vacation to Hawaii. Then he stole some more. On Wednesday, Hauck, 51, was sentenced to 5½ years in prison and ordered to repay his victims, which include a cancer-research nonprofit, a museum association and an international trade lobbying group.

There is a recent case in Oklahoma involving a couple that embezzled from an addiction nonprofit. And another reported this week in Tacoma, Washington. That case involved an insider siphoning funds intended for job training for native Americans.

People are flawed, some deeply, so nonprofits will occasionally experience a betrayal at the hands of a once well-meaning fiduciary.  There is a slew of public domain advice about how to guard against the inevitable and also how to manage the crisis when it happens anyway.  But reactive remedies don't entirely absolve the people responsible for safeguarding charitable assets, not even under the Volunteer Protection Act and similar state statutes in all 50 states.  Those statutes are surprisingly detailed and contain enough exceptions and hoops to jump through that the possibility of personal liability can’t be easily dismissed.   

I’m sure the folks at The Heinz Endowments don’t need this blog to tell them what they already know.  General advice can only be a guide anyway.  Specific responses must be tailored to specific circumstances.  Probably the only constant is that keeping things quiet and hoping the problem goes away is the riskiest response. Can a board just have the wrongdoer sign a promissory note and await repayment? As much as it would like to rehabilitate and welcome home a once loved prodigal fiduciary -- and avoid reputational damage -- that approach is hardly ever a good one.  Said the Attorney General on cross examination, “So after you learned that he misappropriated funds and you couldn’t trust him, you had him sign a promissory note and kept it quiet, is that right Trustee Jones?”    

Still, it’s gotta be a sad and disappointing task cleaning up the mess.  Especially when cleaning it all up requires resort to civil and criminal courts.  Right before Christmas last year, the Heinz Endowments discovered that its long term trusted IT guy, a ten year employee, may have embezzled or stolen nearly $1 million.  Far less than the amount allegedly stolen from the Detroit Riverfront Conservancy, but enough to require a surgical response and some introspection anyway.  Introspection because the embezzlement inevitably causes stakeholders to wonder about the Board’s performance of its oversight obligations, never mind any legal liability.  Not only must the Board exercise diligence in mitigating the loss, it must also look backwards to determine the extent to which it met its fiduciary oversight obligations. In big outfits like The Heinz Endowments or the Detroit Riverfront Conservancy, the Board has to incur the expense of forensic accountants and law firms to determine the depth of it all, plus the structural flaws, if any, that allowed the theft to go unnoticed usually for years. And what about the outside accountants?  In Detroit, the accounting firm has declined comment, but its gotta be sweating bullets right now.  These things are uncomfortable and costly for everybody.

Here is what the Times reported about the Detroit Conservancy's oversight:

The case highlights an enduring problem among nonprofits. A lax or informal approach to financial management can leave groups that handle millions of dollars in public and private funds vulnerable to waste, runaway costs or, in the worst cases, insider theft. When this happens, it’s often hard to catch. While the Internal Revenue Service has oversight over nonprofits, the average annual audit rate by the agency is less than 1 percent.  Brian Mittendorf, a professor who studies nonprofit accounting at Ohio State University, said that the conservancy’s official documents show that it took steps to safeguard its finances — including oversight from its board of directors and annual audits. “All these things sound as if it’s an organization with a pretty robust review in place. On the other hand, only one person can access the money, and provides paper copies in a Honey Baked Ham parking lot?” Mr. Mittendorf said. “Those sound like the opposite of a robust governance mechanism.” “It’s a story we’ve seen over and over again” in the nonprofit world, he said. “We don’t enter financial circumstances with enough skepticism.”

No doubt Heinz and the Detroit Conservancy are doing some navel gazing right now, even as they pursue recovery of the stolen charitable assets.  It might be a day late and a dollar short for the Conservancy trustees and their accountants.  Six months into its investigation, and no doubt after many costly meetings with legal counsel and accountants, Heinz decided to go public with a civil suit while simultaneously referring the matter to criminal authorities.  So these things create distractions from the charitable mission for as many years, at least, as the time it took the wrongdoer to siphon charitable assets.  You can read an extended excerpt from Heinz's federal complaint below the fold. 

darryll k. jones

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June 13, 2024 | Permalink | Comments (0)

CRS Reports on Suspending Tax Exemption for Supporting Terrorism

Congressional Research Service wordmark and logo

The Congressional Research Service has a new report out called "Suspending the Tax-Exempt Status of Terrorist and Terrorist Supporting Organizations: H.R. 6408 in Context".  Here is the introduction:

H.R. 6408 would establish a process for suspending the tax-exempt status of organizations if the Secretary of the Treasury designates them as “terrorist supporting organizations.” The suspended organizations would then be subject to income tax and unable to receive tax-deductible contributions. The House Ways and Means Committee reported on the bill on December 19, 2023, and it passed the House on April 15, 2024. The Senate is currently considering the bill, which has been referred to the Senate Committee on Finance. An identical bill was introduced in the Senate on April 17, 2024, as S. 4136. H.R. 6408 seeks to amend Section 501(p) of the Internal Revenue Code (IRC), which currently suspends the tax-exempt status of “terrorist organizations.” H.R. 6408 would create a separate category of “terrorist supporting organizations” with different suspension and review procedures than those currently in place for terrorist organizations.

This Legal Sidebar describes the Section 501(p) procedure for suspending the tax-exempt status of terrorist organizations, explains how H.R. 6408 would create a different process to suspend the tax-exempt status of terrorist supporting organizations, identifies existing legal authority under which the Internal Revenue Service (IRS) already can revoke the tax-exempt status of organizations that materially support terrorist organizations, and summarizes the debate over H.R. 6408.

. . . 

darryll k. jones

June 13, 2024 | Permalink | Comments (0)

Wednesday, June 12, 2024

Excellence and Financial Crisis in Nonprofit Theatre

Maleah Joi Moon (foreground) and the company of ‘Hell’s Kitchen.’

Nonprofit theatre is so financially sick that a group of Senators have proposed a $1 billion cure called the "Stage Act."  I am not completely unsympathetic, mind you, but I am not sure about spending $1 billion annually on it either.  Only people sufficiently well off to have disposable income can spend a week or a four days in New York to see a Broadway play anyway.  I took my daughter years ago when she thought she wanted to be an actress. We saw Chicago, The Musical. The seats alone set me back about $400.  A Broadway tax exempt nonprofit theatre can legitimately charge as much, but that can't possibly be charitable.  Its a good thing the University paid for my flight and hotel.  Official business, you know. 

It's not that people in nonprofit theatre are getting rich or anything.  It's just that commercial nonprofit theatres have to charge so much to stay afloat that they necessarily exclude poor and most middle income people most of the time. But Broadway is not really an accurate exemplar.  Noncommercial community playhouses, the kind in Nebraska for example, are accessible and great for communities.  Even in big cities but especially in small towns where they often conduct classes and host children's performances.  I think they would survive even if we let the Broadway nonprofits -- the commercial ones, I mean -- die peacefully.  Anyway, by the sound of things below, nonprofit theatre generates higher performance art than anything else.  So I suppose nonprofit theatre is worth saving.  The bill also calls for a study designed to find long-term solutions:

The Wall Street Journal has an interesting story about how nonprofit theatre has produced the best plays this year:  

Although it has been little remarked-upon, what’s most notable about this season’s crop of Tony Award contenders in major categories is their provenance. All five best-play nominees and all five for best musical were produced or initially produced (or both) at nonprofit theaters—an unusual occurrence.  Remarkably, Manhattan Theatre Club presented three of the five candidates for best play: “Prayer for the French Republic,” “Jaja’s African Hair Braiding” and “Mary Jane”—the last of which was originally produced at another nonprofit, New York Theatre Workshop, which also first presented this season’s front-runner, by a mile, for best musical revival: “Merrily We Roll Along.” “Mother Play” came from Second Stage, while “Stereophonic,” the category’s lone commercial production, began life at Playwrights Horizons.

There are now four nonprofit theaters in the city with Broadway venues. The Roundabout Theatre Company and Lincoln Center Theater have had theirs for decades, with MTC and Second Stage more recently acquiring Broadway spaces. The generally fine quality of this year’s best-play contenders suggests that these companies are an important bulwark keeping Broadway from becoming a shop window for splashy, crowd-seducing musicals. As for the new musicals in the Tony sweepstakes, “Suffs” and “Hell’s Kitchen” started at the Public Theater, while “Illinoise,” “The Outsiders” and “Water for Elephants” were first staged at regional nonprofits. This phenomenon, increasingly pronounced, illustrates how intertwined the nonprofits and Broadway have become—and points to a potential danger sign. The most troubling development in the theater ecosystem since the Covid-19 pandemic has been the financial turmoil faced by nonprofit institutions, which in turn threatens the future pool of potential Broadway productions.

Among the more notable headline-makers in this regard have been the tumult at the Center Theatre Group in Los Angeles, which laid off roughly 10% of its staff and halted all programming at its major incubator of new work, the Mark Taper Forum (it recently announced plans for a resumption); the reduction of the Public Theater’s staff by an astonishing 19%; and, most recently, the nearly $4 million deficit in one season at the prestigious Guthrie Theater in Minneapolis. The announcement that New York’s Second Stage would be giving up its off-Broadway space—where such notable Tony winners as “Dear Evan Hansen” and “Next to Normal” were first seen in New York—was also disheartening. And the problem is likely to get worse before it gets better. If it gets better.

. . . 

darryll k. jones

June 12, 2024 | Permalink | Comments (0)

DEA Nullification of Religious Drug Use and Tax Exemption


We have previously complained that the Iowaska Church of Healing was suing the wrong agency.  That's the Church that has an absolute right to tax exemption even though it uses the Ayahuasca -- "huasca" -- plant in its religious sacraments.  The Supreme Court confirmed a few years back that the government may not prohibit organized worshippers from using huasca in their sacraments.  So the illegality doctrine cannot be used to deny it tax exemption. 

The Church filed a 1023. The IRS rejected it but the told the Church it would be tax exempt as soon as DEA issued a license.  A license DEA is absolutely required to issue.  Well, the Church had previously filed an application for a license but DEA is dragging its feet.  The application has sat on someone's desk over at DEA for at least five years now.  Its hard to get a "yes" from people trained to say "no," I'm just saying.  So Iowaska sued the IRS, inexplicitly omitting DEA as a defendant.  And now the case is pending before the 7th Circuit, not over the substantive issue, but whether Iowaska has standing to sue the IRS.  It doesn't because whatever relief granted against the IRS will not resolve the case.  Iowaska will still need to get a permit from DEA.  That's the part I have complained about. Iowaska should have sued DEA years ago instead of chasing the IRS down a rabbit hole.  

As it turns out, GAO confirms that DEA is literally dragging its feet.  And that Iowaska should have sued DEA in the first place.  GAO found that although there have been 24 applications for licenses to use controlled substances in religious sacraments, not a single one has been granted. Ever. These guys are trained to say "no."  And if "no" is not interposition and nullification, I don't know what could be.  GAO made a number of polite suggestions, all of which amount to "stop dragging your feet." 

Iowaska would sooner vindicate its religious freedom -- even after five or six years chasing the IRS -- if it filed an action against DEA today.


darryll k. jones

June 12, 2024 | Permalink | Comments (1)

Tuesday, June 11, 2024

Should Charities Return Tainted Donations?

Filthy Lucre: How do Nonprofits Handle Tainted Gifts?

Filthy Lucre: How do Nonprofits Handle Tainted Gifts?

You have probably seen the video of that lying bastard Sean Combs beating up his former girlfriend. I won't link to the video.  Google it if you want to be thoroughly disgusted.  As bad as it looks, I still don't think Howard University should let his punk ass off the hook for donations he's made or has pledged to make pursuant to a gift agreement.  If the gift agreement is enforceable I would enforce it.  Howard is giving it back because it's sickened by it, I understand that. From the Howard University Board of Trustees:

The Howard University Board of Trustees voted unanimously today to accept the return by Mr. Sean Combs of the honorary degree conferred upon him in 2014. This acceptance revokes all honors and privileges associated with the degree. Accordingly, the Board has directed that his name be removed from all documents listing honorary degree recipients of Howard University. Mr. Combs’ behavior as captured in a recently released video is so fundamentally incompatible with Howard University’s core values and beliefs that he is deemed no longer worthy to hold the institution’s highest honor. 

The University is unwavering in its opposition to all acts of interpersonal violence. The Board has also directed the University administration to immediately take the following actions: terminate a 2016 gift agreement with Mr. Combs, disband the scholarship program in his name, return his $1 million contribution, and terminate a 2023 pledge agreement with the Sean Combs Foundation.  

No payments toward the $1 million pledge have been due or made by the Sean Combs Foundation as of this date, therefore no funds are due to be returned under the 2023 pledge agreement.” 

If the donations are conditioned on the honorary degree I suppose I would advise the University to yank the degree and return the donations. I would definitely not want him to be an honorary anything. If not, why not hold him to the agreement and announce that it will be directed exclusively to establish a center for the prevention of intimate partner violence? I have four daughters and Howard keeping the gift would more likely prevent a future Combs than returning the gift.  Pragmatism would generate more benefit to the prevention of interpersonal violence than indignation in this instance, it seems to me. But I could be wrong. Here is the abstract to "When tainted money should fund public goods: fundraising professional and public moral preferences, published late last year:

Philanthropy is essential to public goods such as education and research, arts and culture, and the provision of services to those in need. Providers of public goods commonly struggle with the dilemma of whether to accept donations from morally tainted donors. Ethicists also disagree on how to manage tainted donations. Forgoing such donations reduces opportunities for societal well-being and advancement; however, accepting them can damage institutional and individual reputations. Half of professional fundraisers have faced tainted donors, but only around a third of their institutions had relevant policies (n = 52). Here, we draw on two large samples of US laypeople (ns = 2,019; 2,566) and a unique sample of experts (professional fundraisers, n = 694) to provide empirical insights into various aspects of tainted donations that affect moral acceptability: the nature of the moral taint (criminal or morally ambiguous behavior), donation size, anonymity, and institution type. We find interesting patterns of convergence (rejecting criminal donations), divergence (professionals’ aversion to large tainted donations), and indifference (marginal role of anonymity) across the samples. Laypeople also applied slightly higher standards to universities and museums than to charities. Our results provide evidence of how complex moral trade-offs are resolved differentially, and can thus motivate and inform policy development for institutions dealing with controversial donors.

darryll k. jones

June 11, 2024 | Permalink | Comments (0)