Nonprofit Law Prof Blog

Taxing Religion in South Africa

The cover story for this week's edition of the South African "Financial Mail" is entitled "The Business of God."  Many of the stories, such as Guarding the Guardians involve religious finances and tax exemptions.  The cover story, for example, describes the lack of transparency with regard to church finances and wealth, comparing that lack of transparency to the supposed transparency that exists in the U.S. and UK.  All nine stories -- dealing with the taxation and finances of different religions in South Africa -- can be obtained through either of the last two links.  It is interesting to see that other countries are struggling with the same issues that we struggle with. 

dkj

Australian charity sets up appeal for house fire family

According to a report from the Australian Broadcasting Corporation, an Australian charity has received up to $20,000 for a family who lost two children in a house fire yesterday.  Will Australian authorities bend to sentiment to define this fund as legally charitable, even though the fund's beneficiaries are too definite and few to qualify as a charitable class? See Jack Siegel's and Rob Katz's  discussion of this recurring issue in other contexts.  Katz argues (at pp. 274-275) that in such cases, donated funds should be deposited in a private trust for the family's benefit.

rak

Democratic Candidates squabble over the role of a 527 in Iowa campaign

An article in today's LA Times headlines that "Obama slams Edwards over nonprofits' use: The ex-N.C. senator, who had earlier decried their spending, then urges a '527' group to cancel its ads for him in Iowa."  Obama is charging that John Edwards, a rival for the Democratic nomination for president, committed campaign hypocrisy by deriding political organizations called 527s at the same time he allegedly will benefit from their spending. (The Federal Election Commission explains that "Entities organized under section 527 of the tax code are considered "political organizations," defined generally as a party, committee or association that is organized and operated primarily for the purpose of influencing the selection, nomination or appointment of any individual to any federal, state or local public office, or office in a political organization.")  In Iowa, a group called "The Alliance for a New America," seemingly funded by the Service Employees International Union (SEIU), appears poised to spend $750,000 on television ads in support of Edward's campaign.  Edwards subsequently called on the group "not to run the ads," and stated that "I would prefer if all the 527s, not just this one, that all 527s stay out of Iowa."

According to web-blog Campaign Diaries, Obama's attack on 527 support for Edwards may be related to the fact that no 527 has jumped in on Obama's behalf. This fact, says the blog,

"has led Obama to boast that he is pure and unhelped by opaque 527 money. But this is a very weak argument from Barack: The main 527s that are helping Hillary and Edwards are not shady organizations (like the Swift Boat Veterans for Truth were) -- they are some of the most important unions and core constituencies of the Democratic Party. Hillary and Edwards receiving so much help because they were endorsed by big unions like the AFSCME, AFT, and SEIU. You bet that Obama would have loved to receive any of their endorsement and the 527 help that would have gone with it. Obama failed to clinch endorsements from big Iowa players, and he is thus left out of the independent expenditure ground game. And in a contest in which everything is based on turnout, that could very well cost Obama a few points."

rak


 

Canadian charity regulation "beefed up"

Canadian charity regulators intend to publicize more widely their enforcement actions against wayward charities, a departure from their past practice of handling such actions discretely, according to an article in the Toronto Star (Dec. 21, 2007).  It also seems that Canadian regulators are hostile to the idea that a charity's soliciations, which can impart information about the problems it addresses and its activities, can be counted as part of the charity's good works. 

rak

Differences in Uncompensated Care Provided by For-Profit and Nonprofit Hospitals Called "Insignificant"

In a report released yesterday, the California State Auditor found no significant difference between the amount of uncompensated care provided by nonprofit and for-profit hospitals.  The report concluded, however, that nonprofit hospitals provide other community benefits not provided by for-profit hospitals.  The report further concluded that it was difficult to quantify those other benefits because of the manner in which nonprofit and for-profit hospital financials are reported.  Here is an excerpt from the report's summaries:

Our review of tax-exempt hospitals revealed the following:

• About 223 of California's 344 hospitals are eligible for income and property tax exemptions because they are organized and operated for nonprofit purposes.
• Comparing financial data reported by nonprofit and for-profit hospitals indicated the uncompensated care provided by the two types of hospitals was not significantly different.
• Benefits provided to the community, which only nonprofit hospitals are required to report, differentiate nonprofit hospitals from for-profit hospitals, but the categories of services and the associated economic value are not consistently reported among nonprofit hospitals.
• The values of tax-exempt buildings and contents owned by nonprofit hospitals are frequently misreported by county assessors.
• Lacking more reliable data, we used the reported economic values of community benefits and tax-exempt property to estimate that reported community benefits of $656 million for 2005 were roughly 2.7 times the estimated $242 million in state corporation income taxes and property taxes not collected from nonprofit hospitals.
• The Franchise Tax Board, which administers state income tax exemptions, could better use available tools, such as annual filings and audits, to monitor the continuing eligibility of nonprofit hospitals for their tax exemption.

dkj

Technical Corrections Act of 2007 Has Exempt Org. Provisions

The Technical Corrections Act of 2007 (HR 4839) passed by Senate on December 20, 2007 (and previously passed by the House), has about 8 provisions related to charitable contributions or the taxation of exempt organizations, including:

• Contribution of Appreciated Property by S Corporations
• Recapture of Tax Benefit for Charitable Contributions of Exempt Use Property Not Used for Exempt Purposes
• Contributions of fractional Interests in Tangible Personal Property
• Clarification of the Time for assessment of penalties relating to substantial and gross valuation misstatements attributable to incorrect appraisals
• Expansion of the Base of Tax on Private Foundation net Investment Income
• Public Disclosure of information relating to unrelated business income tax returns
• Donor Advised Funds
• Excess Benefit Transactions Involving Supporting Organizations

For the Joint Committee on Taxation Explanation, see here.

dkj

Does Size Matter? More Ideas about Efficiency

The goal of a new fund is to make successful charities self-sustaining, using large infusions of money to improve efficiency.  The Edna McConnell Clark Foundation has operated for over 30 years, making grants to help people living in poverty.  In recent years the Foundation has focused on programs that aid low-income youth.  Now the Foundation is undertaking a pilot project, the Growth Capital Aggregation Pilot, to help some of its most successful grantees "achieve their growth potential and become financially sustainable."  Stephanie Strom reports today in the NYT that the fund has received contributions from other foundations, including the Robert Wood Johnson Foundation and the Bill and Melinda Gates Foundation.

The idea of pooling money to make significantly large grants is new and could have quite an impact.

One of the first charities to benefit from the new fund, the Nurse-Family Partnership, will receive $50 million to enable it to grow from 96 sites serving 13,000 families to 950 sites serving 100,000 families by 2017.  The money will enable the charity to focus on attracting public funding.  The goals is to increase financing through fees paid for services.  The charity will make progress report to the Foundation, and the Foundation will keep other donors advised of the charity's progress.

sng

Minnesota Nonprofits Worried after Minnesota Supreme Court's Definition of "Charity"

Two weeks ago, we BLOGGed the Minnesota Suprem Court's decision in Under the Rainbow Childcare Center, Inc.  In that case, a 4-3 majority ruled that a nonprofit could not be deemed "charitable" for purposes of the state's constitutional exemption from taxes (including property taxes) unless the nonprofit provided its goods or services free or at reduced charges.  Minnesota Public Radio today reports (real player audio file) on reaction within the Minnesota nonprofit community.  The report notes that one nonprofit is now worried that it will have to come up with at least $100,000 to pay property taxes. 

dkj

IRS Releases Newly Designed Form 990

On December 20, 2007, the IRS announced the release of its newly designed IRS Form 990.  We previously blogged the IRS's call for comments on the new form.

DAB

Politics and Charity - Mr. and Mrs. Clinton

Presidential politics is everywhere these days and even charitable foundations come under scrutiny - especially a foundation created by a former president and husband of a presidential contender.  Bill Clinton created the William J. Clinton Foundation "to strengthen the capacity of people in the United State and throughout the world to meet the challenges of global independence." (from the mission statement) The Foundation has raised over $500 million since its inception.  The donors' identities have been kept secret, more or less, but Mr. Clinton has indicated that he will make public the names of future donors if Mrs. Clinton becomes president.  It's possible that a donor might contribute to Mr. Clinton's foundation in an attempt to curry favor with Mrs. Clinton, in violation of the spirit of the campaign finance laws.  To avoid those questions, the donors identities will be revealed.  For those who can't wait, an article in today's NYT reveals a number of the major donors - and the links between those donors and the current campaign.

sng

More Effective Charitable Giving - GiveWell

On Dec. 17 I wrote about effective charitable giving and the difficulty of evaluating charities.  An article in today's New York Times, describes a new organization that seeks better - or different - information about charities.  Two young hedge fund analysts, Holden Karnofsky and Elie Hassenfeld left the investment management company where they met to work full-time for the organization they created, GiveWell.  The organization seeks data on charities in a particular sector and then analyzes the data to determine effectiveness.  GiveWell's website says its goal is not to evaluate accounting data (money spent) but to evaluate results (lives changed).  Another charity created by Karnofsky and Hassenfeld, the Clear Fund, supplies funding for GiveWell and also contributes to charities GiveWell identifies as effective.

Karnofsky and Hassenfeld say that they started GiveWell out of frustration with existing information.  They worry that charities can manipulate data presented on 990s, the usual tool for evaluating charities, and that charities' own materials often don't provide the information the researchers want to find.  Getting the data they want is difficult and time consuming, but this year they've already made recommendations in two areas: employment assistance for disadvantaged adults in NYC and saving lives in Africa.  For the NYC research they examined information provided by 19 charities and recommended 5.  For the Africa/health research they contacted 197 charities, received information from 59 and selected 12 finalists.  The slow and intensive research process will limit the number of areas discussed, but for those areas selected for review by Givewell, the resulting information should be most helpful.

sng

Boozang on Independent Boards

Kathleen Boozang, Seton Hall University, has posted Does An Independent Board Improve Nonprofit Corporate Governance?  Here is the abstract:

A variety of forces have converged to pressure nonprofit boards to follow the lead of the for-profit sector to become independent, even while empirical evidence from the business sector suggests that board independence from management is not fulfilling expectations, and may be related to weakened firm performance. This background, and the paucity of governance studies in the nonprofit sector, suggests that nonprofits are prematurely jumping onto the independent board bandwagon. There is no convincing articulation of why nonprofit boards should be independent – what is it that independent boards are supposed to be able to uniquely accomplish, how many independent directors are required to ensure board independence, what evidence exists that independent boards are effective at achieving the articulated goals, not to mention whether such goals are quantifiable and measurable.

Early results of governance reform suggest that corporate compliance supersedes preservation and pursuit of mission in many of today's nonprofit board rooms. No question exists that nonprofit directors can and do act in their self-interest, behave illegally (if often naively), or mishandle the assets entrusted to their stewardship. But a disproportionate focus on legal and financial accountability, with the attendant pressure to appoint directors qualified for performance of compliance activities, can divert attention from the more important question of what kind of board will serve as the best steward of the entity's resources as it pursues its mission and serves its constituencies.

The goals of current governance reform might just as effectively be served by encouraging nonprofit boards to become more diverse in the skill sets of their directors; closing the gaps in current nonprofit statutes that permit weak governance structures; statutorily requiring financial audits by nonprofits over a certain size; recommending the presence of monitoring directors; and legally imposing an aggressively expanded conception of transparency.

I haven't had time to read more than the abstract, but the current trend (since Sarbox) seems to be one characterized by nonprofits looking and acting more like for-profits in terms of governance and maintenance of "market share."  I wonder if this is a good thing or a bad thing.  Certainly, nonprofits ought to be "efficient" but efficiency in the nonprofit world has to mean something altogether different than the meaning in the for-profit world.

dkj

Nonprofit Congress' Call for Papers

The Nonprofit Congress has issued a call for papers:

From June 1 - 4, 2008, over 800 nonprofit professionals will join together in Washington, DC for four days of celebration, learning, and action. Nonprofit Congress 2008 - Convene • Connect • Commit is designed to build on the accomplishments of nonprofits across the country that are committed to positive change for our sector and our communities.

An important aspect of this meeting will be a series of educational sessions for attendees. The goals of the sessions are to share effective and innovative approaches that will advance the nonprofit sector. Your expertise and innovative ideas in areas of nonprofit operations, from communications to fundraising to advocacy to governance, can help advance the sector. We invite you to submit a proposal to share your knowledge and vision with attendees at this groundbreaking event.

Get more infomation fron the Nonprofit Congress Website.

dkj

How Much Is Too Much: Executive Comp in the News Again

The Atlanta Journal-Constitution reports today that the chief executive of the Atlanta United Way, Mark O'Donnell, received a supplemental retirement payment of nearly $1.6 million.  This amount is in addition to his annual pension payment of $106,000.  In addition, O'Connell's salary nearly doubled in the last decade, and he earned bout $466,700 in his final year before retirement.  O'Connell's salary and the supplemental payment are legal, but the amounts raise a number of questions.

Should a nonprofit pay that much to retain an executive who's doing a good job?  The board chair says the money was needed to make sure that O'Connell didn't leave.  The CEO had overseen a substantial increase in fundraising for the United Way and had many supporters.  But in 2003, one of the years in which a committee increased the value of the retirement supplement, the Atlanta United Way laid off 24 workers and reduced grants by as much as 30%.

Who should make decisions about executive compensation?  The full board approved setting up the retirement supplement in 1995, but increases in 2000 and 2003 were approved by committees.  The increases were reported to the board, but six directors said they didn't realize that O'Connell was due to receive more than $1,000,000 in the supplemental payment.  The Panel on the Nonprofit Sector advocates board approval for decisions on executive compensation.

Does a board's private sector experience affect their thoughts about nonprofit compensation?  The article quotes Aaron Dorfman of the National Committee for Responsive Philanthropy in connection with this point.  Private sector directors may assume that a CEO of a nonprofit will expect compensation comparable to private sector compensation, but in Dorfman's view good people will be willing to work for less because they care about the nonprofit's mission.  A director who is a senior executive at a major corporation (and many are) may have a skewed view of "reasonable compensation."

IRS probes and its assessment of penalties in the area of executive compensation are likely to continue.  It behooves charities to be careful - and to be mindful of their donors and those they serve.

sng

Charity for Retired NFL Players

These days many NFL players have significant paychecks, but in the not-too-distant past football players played for a lot less.  That combined with the usual vicissitudes of old age mean that some retired football players face health and financial problems.  The Gridiron Greats Assistance Fund helps out, and the L.A. Times reports that the Fund itself is being helped by donations from a number of current players.  Kyle Turley of the Chiefs pledged his Dec. 23 game check of $43,000, and has been encouraging others to do the same.  The effort has raised about $400,000 in pledges so far.

sng

College Cost Reduction Act - AALS Session Planned

The College Cost Reduction Act should be a huge help to our public interest students.  A graduate  who takes a public service job (as defined in Sec. 401) may be eligible for reduced loan payments based on income, Sec. 203, and eventual loan forgiveness. Sec. 401.

A special program has been scheduled during the AALS Annual Meeting to discuss the new act. "Hot Topics Program on Loan Forgiveness for College Graduates Who Work for Government or 501(c)(3) Organizations" will take place on Saturday, January 5, 2008, 10:30-12:15, in the Trianon Ballroom, third floor of the Hilton.  The program description can be found on the AALS website.

sng

Pakistani Organization - Charity, Terrorist Group, or a Little of Each?

A Dec. 18, 2007  Los Angeles Times article describes growing U.S. concern about a Pakistani charity that may be supporting terrorists.  Shortly after being declared a terrorist organization in Dec. 2001, Lashkar-e-Taiba disbanded.  The founders of the disbanded organization created a new organization, Jamaat ud-Dawa (which translates roughly as the Islamic Missionary Organization).  The new organization operates as a humanitarian organization, helping Pakistanis recover from the 2005 earthquake and providing a variety of social services.  The U.S. says that the organization also operates training camps for terrorists and supports terrorists, including the Taliban and Al Qaeda.  The U.S. designated Jamaat ud-Dawa a terrorist organization in April 2006, and fears that the organization is becoming more directly involved in terrorist activities.  At the same time the charity continues to raise money for its humanitarian projects.  The question is how much of the money is diverted to terrorist support and whether anything can be done about it.

sng

Ski Season - Are Volunteers Employees?

Ski season is underway in Oregon, with Mt. Bachelor already open and Willamette Pass (my family's favorite) due to open soon, maybe this weekend.  Volunteers may be in shorter supply this season, due to a case decided by the Oregon Court of Appeals.  In Mt. Bachelor Ski Education Foundation v. Employment Dept., 215 Or. App. 607, 170 P.3d 1106 (Oct. 31, 2007), the court held that a "volunteer" who received an annual ski pass was, in fact, an employee.

The Foundation provides volunteers to help with ski training and races.  The volunteer form states, "I am aware that I am NOT an employee."  Each volunteer is given an annual pass to Mt. Bachelor, valued at $910 for the year in question (2004-05)  After a volunteer filed for unemployment compensation, the Employment Department assessed unpaid employment taxes against the "employer."  The Foundation challenged the assessment, arguing that the ski pass was necessary for the volunteer to have access to the slopes and do carry out her volunteer work.  The ALJ agreed with the Employment Dept. and so did the Court of Appeals.

If a ski pass makes a volunteer an employee for purposes of an unemployment claim, then it presumably carries income tax consequences as well.  The fallout is significant for ski areas that count on volunteers for ski patrols as well as for race supervision and ski education.  The Foundation has decided not to appeal the ruling, and is hoping for a legislative solution.  A House committee has authorized the drafting of a bill that would say that volunteers are not employees, even when they are compensated in some (presumably de minimis) way.  Churck Burley, R-Bend, the State Representative who requested the bill is a longtime ski patrol volunteer and understands the need for volunteers to keep ski slopes safe.  Colorado has a statute that exempts ski volunteers from employment status, and presumably Oregon will soon have a similar statute.  This story was reported by Mike Stahberg, The Register Guard, Eugene, Oregon, Dec. 18, 2007.

sng

Mitt Romney Linked to "Blocker" Corporations Used to avoid Unrelated Debt Financed Income

A Los Angeles Times article yesterday briefly describes Mitt Romney's investments in offshore hedge funds that used "blocker corporations" to shield tax exempt investors (hospitals, pension plans and universities, primarily) from unrelated debt financed income imposed by IRC 514.  A blocker corporation is essentially a foreign organized corporation inserted between an exempt investor and a hedge fund usually organized and taxed as a pass-through entity (i.e., a partnership).  Oftentimes, the exempt organization will use borrowed money to invest in the hedge fund, thus creating the potential for unrelated debt financed income (taxable at normal corporate rates).  That happens  when the yield from the hedge fund is allocated directly to the exempt partner whose ownership in the partnership is debt-financed.  Briefly described, if the debt is incurred by the exempt organization indirectly via the foreign corporation, and the hedge fund yield is allocated to that corporation and then paid out to the corporation's exempt parent, it is characterized as a dividend not financed by the exempt parent's debt and thus not subject to the unrelated debt financed rules.  The UDFI taint has been successfully "blocked."  The IRS has blessed these conclusions.  The House Ways and Means Committee held hearings on this matter last fall.  Janne G. Gallagher, Vice President & General Counsel, Council on Foundations testified on the use of blocker corporations by colleges and universities.  So did Suzanne Ross McDowell, Partner, Steptoe & Johnson LLP.  The Council on Foundations also has a nice primer on blocker corporations.  I attended the hearing and it seemed to me that the House, at least, was favorably disposed to changing the UDFI laws to make it unnecessary that exempt organizations incur the transaction costs incurred by the use of blocker corporations to avoid UDFI. 

dkj

More on Veteran Organization's Lack of Charitable Spending

An editorial in last Sunday's Washington Post called the fundraising and charitable spending activities of certain veteran's organizations an "intolerable fraud" and called on Congress to enact tax laws requiring charities to disclose their fundraising and spending practices:

At the very least, charities should be required to give a good, public accounting of how much of each dollar actually benefits the ostensible beneficiaries. As Congress studies what laws are needed, it also should clean up the government's house. The Combined Federal Campaign, which raises tens of millions of dollars from federal workers, should require any charity receiving those funds to meet high standards.

Notorious cases like this remind us of Justice Posner's statement regarding private benefit in United Cancer Council v. Commissiner, 165 F.3d 1173 (7th Cir. 1999).  Get the Closing Agreement in United Cancer Council here.  In that case, the government argued that the organization violated the private inurement prohibition when it spent over 92% of its raised funds on the fundraiser's overhead -- about $27 million of the nearly $29 million raised for cancer prevention went to the fundriaser.  Posner rejected the application of the private inurement prohibition, but suggested that the private benefit doctrine might be grounds to revoke tax exemption:

Suppose that UCC was so irresponsibly managed that it paid W&H twice as much for fundraising services as W&H would have been happy to accept for those services, so that of UCC's $ 26 million in fundraising expense $ 13 million was the equivalent of a gift to the fundraiser. Then it could be argued that UCC was in fact being operated to a significant degree for the private benefit of W&H, though not because it was the latter's creature. That then would be a route for using tax law to deal with the problem of improvident or extravagant expenditures by a charitable organization that do not, however, inure to the benefit of insiders.  Suppose that UCC was so irresponsibly managed that it paid W&H twice as much for fundraising services as W&H would have been happy to accept for those services, so that of UCC's $ 26 million in fundraising expense $ 13 million was the equivalent of a gift to the fundraiser. Then it could be argued that UCC was in fact being operated to a significant degree for the private benefit of W&H, though not because it was the latter's creature. That then would be a route for using tax law to deal with the problem of improvident or extravagant expenditures by a charitable organization that do not, however, inure to the benefit of insiders.

165 F.3rd at 1179.  Most Veteran's organizations use outside fundraisers who are not considered "insiders."  For a theoretical discussion of the private benefit doctrine as it relates to payments to non-insiders, see my recent article, Third-Party Profit-Taking In Tax Exemption Jurisprudence, 2007 B.Y. U. L. Rev. 977 (2007) (Lexis Access Required) and John Columbo's article, In Search of Private Benefit, 58 Fla. L. Rev. 1063 (2006) (Lexis Access Required).

dkj