Monday, June 30, 2008

Sidel on Philanthopy in Asia

We previously blogged about Mark Sidel's (University of Iowa) article on The Promise and Limits for Collective Action for Nonprofit Self-Regulation: Evidence from Asia.  He recently posted two other articles relating to philanthropy in Asia.  Here is the abstract for Philanthropy and Law in South Asia: Recent Developments in Bangladesh, India, Nepal, Pakistan and Sri Lanka:

This report, edited by Mark Sidel and written by Sanjay Agarwal (India), Qadeer Baig (Pakistan), Noshir Dadrawala (India), Zafar Ismail (Pakistan), Thanuja Jayawardene (Sri Lanka), Sumaiya Khair (Bangladesh), Sapana Pradhan Malla (Nepal), Mark Sidel (US), Anil Kumar Sinha (Nepal), Priya Viswanath (India), Arittha Wikramanayake (Sri Lanka), and Iftekhar Zaman (Bangladesh), provides a comprehensive discussion and analysis of recent developments in state-nonprofit relations and the regulation of the nonprofit sector and philanthropy in five key countries of South Asia - Bangladesh, India, Nepal, Pakistan, and Sri Lanka.

The report covers the full range of government regulation of the nonprofit sector and philanthropy, including registration and incorporation, governance requirements, board, trustee and staff issues, tax treatment, regulation of foreign and domestic donations, regulation of special sectors and issues (such as microcredit organizations, foreign donations, and other topics), nonprofit self-regulation, and other areas. It serves as an update to Mark Sidel and Iftekhar Zaman (eds.), Philanthropy and Law in South Asia (Asia Pacific Philanthropy Consortium, 2004). Both the 2004 volume and this update report are also available at This multi-year, multi-country research study has been generously supported by the Ford Foundation, Asia Foundation, Myer Foundation, Himalaya Foundation, and the University of Iowa, and sponsored by the Asia Pacific Philanthropy Consortium.

And here is the abstract for A Decade of Research and Practice of Diaspora Philanthropy in the Asia Pacific Region: The State of the Field:

This paper provides an overview of research on diaspora philanthropy to the Asia Pacific region over the past ten years (1997-2008), with a focus on diaspora giving to China, India, the Philippines, Vietnam, Bangladesh, Pakistan, Indonesia, and other countries in the Asia Pacific region. It identifies practices in social investment and social entrepreneurship through strategic philanthropy by migrants and discusses how these may have facilitated sustainable social change and development in the diasporas' communities of origin; analyzes the enabling environment for diaspora philanthropy in the key countries of the region with respect to its degree of conduciveness in allowing or encouraging diaspora giving; and focuses on identifing and analyzing the gaps in research on diaspora philanthropy in Asia. The paper was prepared for presentation to the international conference on diaspora philanthropy convened by the Asia Pacific Philanthropy Consortium in Hanoi, Vietnam in May 2008.


June 30, 2008 in International, Publications – Articles | Permalink | Comments (0) | TrackBack (0)

Is For Profit Micro-Finance Squeezing Out Nonprofits In Mexico

A op-ed piece in today's WSJ talks about the effect of for-profit microfinance companies in Mexico and whether they are getting in the way of Mexican nonprofit success.  Micro-finance operates under the assumption that if the very poor had access to capital, they would be resourceful enough (given the hard times they've seen) to lift themselves out of poverty.  Loans from microfinance companies are typically very small (in Mexico, the average loan is $450).  The op-ed challenges the notion that nonprofit organizations, subject to the nondistribution constraint, do a better job than profit seeking microfinance companies in lifting people from poverty.  In doing so, the article provokes us to think about the nondistribution constraint in general:

In his "reflections" on "microfinance interest rates and profits," Mr. Rosenberg writes that "overcharg[ing]" clients under a nonprofit model is OK because it is done for the sake of future borrowers. But when profits go to providers of capital through dividends, then there is a "conflict between the welfare of clients and the welfare of investors." It's not the commercialization of the lending, we're told, but the "size" of the profits that must be scrutinized. 

What seems to elude Mr. Rosenberg is the fact that there is no way for him to know whether there is "overcharg[ing]" or by how much. That information can be delivered only by the market, when innovative new entrants see they can provide services at a better price. This has been happening since for-profit microfinance began to emerge, and the result has been greater competition. Rates have been coming down even as the demand for and availability of services have gone up.

Hmmmm.  Does the argument suggest that there is a sort of negative nonprofit "antitrust" effect caused by the nondistribution constraint?  If all social entities are subject to the nondistribution constraint does the lack of price competition thwart the better delivery of goods and services?  These are interesting questions for those recently advocating L3C's and the repeal or the relaxation of the nondistribution constraint.


June 30, 2008 in In the News | Permalink | Comments (0) | TrackBack (0)

What is the value of the Charitable Deduction for the Human Body?

The bodies on display are plastinated, a process that replaces bodily fluids and fat with plastic.  An interesting story on CNN's website talks about the growing practice of people donating their bodies for those gruesome but educational exhibits showing the entire human body. 

Individual Americans have had the right to bequeath their bodies to science since 1965, when the Uniform Anatomical Gift Act established the human body as property. With that law, a donor's wishes superseded those of the next of kin.  But academics in the field of gross anatomy attribute recent increases in body donations to relaxed social mores, according to an article published by the Association of American Medical Colleges.  Traditionally, medical schools have been the most common recipients of willed specimens in America. Then, in 1993, controversial German anatomist Gunther von Hagens emerged with an alternative.

One of the leaders in the body exhibits is BodyWorlds, a commercial outfit that would not qualify for the charitable contribution deduction, but surely there must be some law (pro or con) on organ donation to colleges, universities and medical research organizations.  I suspect that (1) there is no deduction for organs, because the donor has no basis -- but then the charitable contribution deduction is not limited to basis, or (2) the organ or body donation is useless as a source of a charitable donation because most people don't pay the estate tax anyway.

Still, the topic, complete with visuals, would be a good way to stimulate discussion of the charitable contribution deduction.  At least long enough to get students to stop playing computer games during class.


June 30, 2008 | Permalink | Comments (0) | TrackBack (0)

Former Trustee Indicted for Alleged $6 Million Theft from Charity

The Chicago Tribune reports that the federal government has indicted Dr. Robert Weinstein for conspiring to steal millions from the Northshore Supporting Organization, a charity formed ostensibly to support the Rosalind Franklin University of Medicine and Science in North Chicago.  Dr. Weinstein served as a trustee of both organizations and allegedly worked with Stuart Levine, the government's star witness in its case against Illinois political fundraiser and insider Antoin "Tony" Rezko, to divert $6 million from the Supporting Organization using a Scandinavian accomplice, fake contributions to the University, and sealed promissory notes. 

According to the U.S. Attorney's press release and the indictment, Weinstein and Levine caused the Supporting Organization to transfer $3 million each to them in return for promissory notes that neither of them intended to repay.  They managed to buyback the notes for only $1 million through a complicated scheme involving the University, an intermediary, and sealed envelopes holding the notes but which the University was not permitted to open.  According to the indictment a third charity, identified only as IDDRS, was allegedly the original source of the $6 million ultimately diverted from the Supporting Organization, and Dr. Weinstein was the president and sole director of IDDRS. 

Weinstein and Levine also allegedly used their positions as University trustees to try to require a developer working with the University to pay 20 percent of the developer's net profits their designee, who was then to transfer some or all of that amount to them.  Finally, Weinstein is also charged with having lied to an FBI agent during the course of the Rezko investigation.  The specific federal charges against Dr. Weinstein are wire fraud, mail fraud and making false statements. 

The press release and the indictment are available through the U.S. Attorney's Chicago Press Room website. 


June 30, 2008 in Federal – Executive, In the News | Permalink | Comments (0) | TrackBack (0)

Beer Company Works Through Nonprofit to Help Small Businesses

The Boston Globe reports that Boston Beer, the brewer of Samuel Adams beer, has teamed up with Accion USA, which is headquartered in Boston, to launch an initiative to assist small-business owners.  The "Samuel Adams: Brewing the American Dream" initiative will provide loans from a Boston Beer $250,000 donation and business consulting services, all targeted at New England entrepreneurs working the food and beverage industry.  It will also establish a mentoring program with executives from Boston Beer and other companies.  The first company to receive a loan under the program will be Delectable Desires, a pastry company that rents kitchen space in the same complex as Boston Beer's headquarters.  That complex houses approximately 50 small companies in total, a rental program that like the more recent initiative grew out of Boston Beer founder Jim Koch's desire to help small business entrepreneurs.


June 30, 2008 in In the News | Permalink | Comments (0) | TrackBack (0)

Sunday, June 29, 2008

IRS Joins Colorado Conservation Easement Investigation

The Denver Rocky Mountain News reports that the Internal Revenue Service has accepted the invitation of the Colorado Division of Real Estate to join the Division's investigation of conservation easement transactions in Colorado.  The state's investigation arose because of a generous income tax credit program - up to $375,000 per easement - for landowners who agree to permanently prohibit development on their lands.  The credits can apparently be sold for cash.  The criteria for receiving the credit closely follow the federal tax law requirements for receiving a charitable contribution deduction based on a conservation easement.  The IRS is currently reviewing documents collected by the Division relating to the easements.

According to the article, the concerns arise because of possibly inflated appraisals of the value of the easements involved, as initially reported by the Rocky Mountain News in February.  Colorado Attorney General John Suthers has also opened up a criminal grand jury investigation.  Land trusts identified in the article as having received easements under review include Greenlands Reserve and Colorado Natural Land (formerly Noah Land Trust).  A spokesperson for Greenlands Reserve denied any wrongdoing.

The Denver Post has also published an article providing further details regarding the IRS investigation, including that "[o]f the more than 400 tax returns involving conservation easements that the IRS is investigating nationwide, 290 are in Colorado."


June 29, 2008 in Federal – Executive, In the News, State – Executive | Permalink | Comments (0) | TrackBack (0)

UK Law Enforcement Investigating 25 Charities for Terrorist Ties

The Sunday Mirror reports that Scotland Yard and United Kingdom security services are investigating 25 charities that apparently raise funds in the UK and may support terrorist training camps and attacks.  Eight of the charities have ties to the 7/7 (2005) London bombings that killed 52 people and another three to a failed plot to blow up several airplanes.  The article does not identify any of the charities under investigation, but the New York Times in an August 14, 2006 article identified one of the latter charities as Jama'at-ud-Da'wah, a Pakistani-based charity active in the mosques of Britain's largest cities.

The UK government has taken significant steps to protect the charitable sector from being used to support terrorism, as detailed in "consultation" documents issued last year, and according to a recent news report the Charity Commission plans to issue counter-terrorism guidelines later this year.  The Charity Commission already issued, in August 2007, "operational guidance" on how it will handle cases where it suspects a terrorist organization is involved.


June 29, 2008 in In the News, International | Permalink | Comments (0) | TrackBack (0)

Judge Orders Reorganization of Nonprofit's Board to End Split

The Orland Sentinel reports that Florida Circuit Judge Mark Nacke has ordered the restructuring of the governing board for the Community Development Corporation of Leesburg & Vicinity following an acrimonious split among the board's members.  According to the article, the nonprofit organization grew out of the settlement ten years ago of a multi-million-dollar racial-discrimination suit against the city of Leesburg and the Leesburg Regional medical Center.  The organization's mission is to help revitalize blighted neighborhoods and help the poor with housing and economic opportunities.  It currently receives the bulk of its funding from the city government. 

The rift apparently developed on the board of directors between seven directors on one side and two on the other side, with each faction claiming that one of its members was the board chairman.  The rift also led to an attempt to suspend the organization's executive director, the closing of the organization's office, and the freezing of its bank accounts.

The judge melded both old and new board members into a reorganized, 15-member board, and chose one of the claimants as the board's chairman.  He also found that while the organization had the authority to suspend its executive director, it owed her five weeks backpay because her suspension had not been approved by a properly seated board.  The case docket provides further information about the lawsuit, although the judge's order is not yet available.  A previous Orlando Sentinel story about the dispute concluded that it arose in large part because the board of directors failed to adhere to the organization's bylaws, such as by deciding issues or electing new directors at meetings that lacked a quorum.


June 29, 2008 in In the News, State – Judicial | Permalink | Comments (0) | TrackBack (0)

Saturday, June 28, 2008

DC Sues BlueCross BlueShield Affiliate to Force Distribution of Profits

The Washington Post reports that the District of Columbia interim Attorney General has filed a lawsuit against CareFirst BlueCross BlueShield to force it to contribute at least $100 million to the local community.  The D.C. Council Committee on Public Services and Consumer Affairs also launched an investigation of CareFirst, including granting the Committee's chairman the authority to issue subpoenas.  As the article notes, CareFirst has had several previous run-ins with local and state governments, including over both executive compensation and a failed attempt to merge with a for-profit organization. 

The complaint, filed in the Superior Court of the District of Columbia, Civil Division, is against both CareFirst, Inc. and its subsidiary, Group Hospitalization and Medical Services, Inc. ("GHMSI"), which together do business as CareFirst BlueCross BlueShield in the District of Columbia.  Both organizations are nonprofits, although it does not appear from either the complaint or a Guidestar search that either organization is exempt from federal income tax.  GHMSI's federal charter states, however, that it is a "charitable and benevolent institution" according to the complaint.

The complaint alleges that CareFirst, Inc. took control of GHMSI in 1997 and since then has operated it as essentially a for-profit business, leading to a $754 million "surplus" at the end of 2007, which represented almost two-and-a-half times the total adjusted risk-based capital ratio recommended by the Blue Cross and Blue Shield Association.   The District of Columbia asserts that accumulating this, in its view, excessively large surplus is contrary to GHMSI's charter and is a breach of common law charitable trust principles that apply to GHMSI's assets.  The District is requesting that the court grant authority to both the Commissioner for the District's Department of Insurance Securities and Banking and a court-appointed Special Master to rehabilitate GHMSI and rededicate its operations and surplus to its charitable, public health mission.


June 28, 2008 in In the News, State – Executive | Permalink | Comments (0) | TrackBack (0)

Canada Disallows Millions in Donations to Foundation

The Toronto Globe and Mail reports that the Canada Revenue Agency has disallowed $208 million in donations to the Banyan Tree Foundation.  The Foundation apparently used a giving program under which donors, through the Foundation, pledged part of a donation to another charity and supposedly made loans to provide for the rest of the pledged donation.  The Foundation purportedly used the loans to purchase millions of dollars in term annuities from an insurance company, with the payments from the annuities to be used to fund the rest of the pledged donation.  A Revenue Agency investigation found, however, that the Foundation never provided the insurance company with the loan funds to support the purchase of the annuities.  Instead, it appears that just enough funds were provided to the insurance company to ensure that the purported annuity payments would be made to the various charities, but these payments ceased in 2008.  The Revenue Agency's conclusion is that the program was a sham to make it appear that that there were legitimate loans being used for charitable purposes, which apparently would create significant tax benefits for the donors, when in fact those loans never existed.  The Foundation is challenging the Revenue Agency's claims, according to letters available on the Foundation's website.


June 28, 2008 in In the News, International | Permalink | Comments (0) | TrackBack (0)

Politician Taps Charity's Email List Without Its Permission

The Atlanta Journal-Constitution reports that Cobb County Commissioner Joe Lee Thompson sent political emails to the email list of a charity without the charity's permission.  The Friends for the East Cobb Park is a section 501(c)(3) nonprofit formed to support the creation and maintenance of a park in Marietta, Georgia.  According to its website, it has worked closely with Cobb County since essentially its inception in 1998.  This close relationship may have been what led Commissioner Thompson to use the organization's email database, along with legally obtained email addresses belonging to the Police Department and the county, to send a May 12th message seeking re-election support.  The charity's Vice President also designed the Commissioner's website and may have been the avenue for obtaining access to the charity's database.  Commissioner Thompson is facing a challenger in the July 15th Republican primary.

While the article highlights the risk created by this use to the charity's federal tax-exempt status, the apparent one-time nature of the inappropriate use and the statements by the charity that it has taken steps to ensure no such use occurs again suggest it is probably a prime candidate for the warning letters the IRS has been using when it has come across isolated and apparently inadvertent violations of the political campaign intervention prohibition.   Perhaps the most interesting part of the article is the fact that knowledge about the prohibition has now widespread enough that a major regional paper spotted and reported on the apparent violation even though it only involved a relatively small, local charity.


June 28, 2008 in In the News | Permalink | Comments (0) | TrackBack (0)

Friday, June 27, 2008

Texas AG Sues Nonprofit and its Leaders for Alleged Misuse of Funds

The Dallas Morning News reports that the State of Texas has filed a lawsuit relating to alleged misuse of charitable funds.  According to the Attorney General Greg Abbott's press release, the suit is against People Against Drugs Affordable Housing, Inc., its founders, and three of its directors for alleged violations of the Texas Nonprofit Corporation Act.  The AG's complaint asserts that the charity's primary asset and source of revenue is an apartment complex it acquired in 1993 and that it operates in a manner indistinguishable from a for-profit business.  The complaint further alleges that the charity, under the sole direction of its founder and Executive Director Gene Christensen but with the knowledge of the three directors, used those revenues to (1) operate a NASCAR truck racing team, (2) pay Mr. Christensen annual compensation approaching $200,000 a year plus benefits in exchange for negligible services, and (3) pay for numerous personal expenses of Mr. Christensen, and (4) make no-interest loans to Mr. Christensen and to Mr. Christensen's election campaign for public office.  The AG is seeking the appointment of a temporary receiver for the charity and the replacement of all of its officers and directors.

While the accusations against People Against Drugs and its officers are sadly not unique in the charitable world, what is perhaps surprising is that the charity appears to have operated for almost 15 years "under the radar," thereby allowing the purported abuses to continue for many years.  Perhaps for this reason, the AG is seeking not only to have a receiver take control of the charity and to hold the primary beneficiary - the Executive Director - personally liable, but also, in a relatively unusual step, to hold the three directors personally liable as well.  It will be interesting to see, if the allegations are proven, whether the directors will in fact receive a penalty beyond removal and embarrassment.


June 27, 2008 in In the News, State – Executive | Permalink | Comments (0) | TrackBack (0)

Indictment for Refusing to Testify About Islamic Charities

The Washington Post reports that the Justice Department filed an indictment in U.S. District Court in Alexandria, Virginia charging Sami al-Arian with two counts of criminal contempt for refusing to testify before a grand jury investigating Islamic charities in Northern Virginia.  Dr. al-Arian is a former University of South Florida professor who recently finished serving time in federal prison after pleading guilty to a single county of conspiracy relating to the Palestinian Islamic Jihad group.  He also had been jailed for a year on civil contempt charges relating to his previous refusals to testify.  Prosecutors are particularly interested in what he knows about the International Institute of Islamic Thought or IIIT, a Herndon, Virginia think tank that they believe is one of the key organizations in a Herndon-based network of Muslim charities and other entities that they began aggressively investigating shortly after 9/11.  IIIT denies any terrorist ties.  Dr. al-Arian is represented by George Washington University law professor Jonathan Turley, who has posted his criticisms of the indictment.


June 27, 2008 in Federal – Executive, In the News | Permalink | Comments (0) | TrackBack (0)

NY Legislature Ends Nonprofit Access to Low-Cost Industrial Development Funding

Newsday reports that a dispute between organized labor and industrial development agencies (IDAs) has resulted in nonprofits no longer having access to IDA funding.  Unions objected to IDAs funding nonprofits unless they conditioned that funding on the nonprofits paying union-level wages.  Unable to overcome this objection, the New York State Legislature let the law providing nonprofits access to these funds lapse.  According to the article, the lapsing of the law has put nonprofit plans to build several nursing homes, senior citizen apartments, libraries and schools on hold indefinitely.


June 27, 2008 in In the News, State – Legislative | Permalink | Comments (0) | TrackBack (0)

Further Coverage of Down-Payment Assistance Program Provision

Business Week has published an Associated Press story providing an update on the status of the federal legislative proposal to eliminate nonprofit down-payment assistance programs, initially blogged about yesterday.


June 27, 2008 in Federal – Legislative, In the News | Permalink | Comments (0) | TrackBack (0)

Thursday, June 26, 2008

The Next Frontier of Naming Rights

The receipt by substantial donors of naming rights to nonprofit-owned buildings, classrooms, and even entire schools is now so common it hardly raises any eyebrows - at least as long as the donor's reputation remains intact.  Of course, the donor always runs the risk that the named building will eventually be razed or replaced.  But the Christian Science Monitor reports on a new naming trend with greater permanency, at least unless extinction intervenes - having an entire species named after you.  The Scripps Institution of Oceanography at the University of California San Diego will now permit donors to name an as-yet unnamed ocean species in exchange for donations of various sizes - presumably set based on the attractiveness or rarity of the species involved.

As the article details, the Institution is far from alone.  In recent years there have been various auctions selling species-naming rights to raise funds for preservation and research, and Rwanda - yes, the country - annually sells the rights to name individual guerrillas.  Not that selling such rights is always been as successful as hoped.  Amphibian Ark has tried the online auction route for the right to name frog species but only received modest amounts - $5,500 last month, for example - so far.  And the practice is not without controversy among scientists, which could lead to changes in how species are named in the future.  It appears currently that the name for a newly discovered species is generally at the discretion of the discoverer.  One possible legal issue is therefore what will happen if there is some future attempt to re-organize or rationalize species names?  It is far from clear what the rights of these donors or their heirs would be, especially if the original naming institution does not control such a process.


June 26, 2008 in In the News | Permalink | Comments (0) | TrackBack (0)

Tort Suit by Mother of Church Member Blocked by Charitable Immunity Law

The Newark Star-Ledger reports that a New Jersey state appeals court has ruled that Joan Patterson could not sue a church because her son was a member.  Ms. Patterson slipped on ice outside of the Liberty Corner Presbyterian Church and fractured her wrist in February 2005.  Although Ms. Patterson did not attend the church and was Roman Catholic, not Presbyterian, the court held that New Jersey's Charitable Immunity Act barred her negligence suit because her 17-year old son was a member of the church.  Ms. Patterson was picking him up from a youth event when the accident occurred.  According to court's opinion, while the Act only bars suits by persons who are beneficiaries of the sued nonprofit's works, it found that Ms. Patterson benefited from her son's attendance at the church although she may have preferred to have him attend a Roman Catholic Church instead.  While not stated explicitly, the court's decision may have turned in part on the fact that she apparently had, albeit perhaps somewhat grudgingly, given her permission for her son to attend the church.


June 26, 2008 in In the News, State – Judicial | Permalink | Comments (0) | TrackBack (0)

Unusual Hedge Fund Fee Arrangement Supports Foundation

The New York Times reports that the $1.6 billion Children's Investment Fund Foundation is funded through an unusual fee arrangement with the Children's Investment Fund or T.C.I., a hedge fund.  T.C.I. investors agree to pay a 0.5 percent fee to the Foundation in addition to a 1 percent fee to T.C.I., with the Foundation fee increased by an additional 0.5 percent if T.C.I. earns more than an 11 percent profit.  T.C.I.'s profits are also contributed to the Foundation.  The close relationship between the Foundation and T.C.I. dates from their simultaneous creation in 2003 by Christopher Cooper-Hohn, who runs T.C.I., and his wife Jamie Cooper-Hohn, who runs the Foundation.  The Foundation also invests 90 percent of its assets with T.C.I., with no fees charged and no restrictions on withdrawals.  T.C.I.'s success - a 42 percent annual internal rate of return - has allowed the Foundation to play a major role in shaping programs to benefit children in developing countries.  The Foundation has a smaller U.S. affiliate with current assets of approximately $156 million.


June 26, 2008 in In the News, International | Permalink | Comments (1) | TrackBack (0)

Down payment assistance charities, blamed for housing crisis, targeted for elimination in housing bill

The Senate version of the Foreclosure Prevention Act of 2008 (Section 113) contains the following language, designed to shut down seller-funded down payment assistance charities:  [the quoted provision imposes a down-payment requirement on first time home buyers who seek FHA assistance, but, in effect, prohibits the use of funds from a seller-funded down payment assistance charity]


    Paragraph 9 of section 203(b) of the National Housing Act (12 U.S.C. 1709(b)(9)) is amended to read as follows:


(A) IN GENERAL- A mortgage insured under this section shall be executed by a mortgagor who shall have paid, in cash, on account of the property an amount equal to not less than 3.5 percent of the appraised value of the property or such larger amount as the Secretary may determine.

(B) FAMILY MEMBERS- For purposes of this paragraph, the Secretary shall consider as cash or its equivalent any amounts borrowed from a family member (as such term is defined in section 201), subject only to the requirements that, in any case in which the repayment of such borrowed amounts is secured by a lien against the property, that--

(i) such lien shall be subordinate to the mortgage; and

(ii) the sum of the principal obligation of the mortgage and the obligation secured by such lien may not exceed 100 percent of the appraised value of the property.

(C) PROHIBITED SOURCES- In no case shall the funds required by subparagraph (A) consist, in whole or in part, of funds provided by any of the following parties before, during, or after closing of the property sale:

(i) The seller or any other person or entity that financially benefits from the transaction.

(ii) Any third party or entity that is reimbursed, directly or indirectly, by any of the parties described in clause (i).

The red-lettering in section (C) is my own gloss on the language in the statute.  Even most real-estate lawyers would miss the significance of that section without a bit of important context.   For years, the Service has been trying to shut down seller-funded down payment assistance charities.   These are 501(c)(3) organizations that solicit funds from home builders and developers.  The charities then make grant to lower and middle income families sufficient to make a down payment on a home, perhaps built by the same builder or developer who made the contribution.  In essence, the charity convinces the home builder to provide a discount (equal to the down payment necessary to obtain third party financing) for first time home buyers.  Oftentimes those homes are FHA backed, providing the creditor with even more protection.  The Service mistakenly asserts that the seller-funding of the downpayment creates an improper private benefit, nevermind the public benefit gained from encouraging home ownership.  Even if that were true, the answer, of course, would be to deny the seller a charitable contribution deduction not shut down the charity altogether!

The Foreclosure Prevention Act, a monstrous amalgamation of provisions that would make even a tax lawyer blush, does just that, shuts down the charities altogether.  Proponents blame down payment assistance programs for the housing mess, never-mind the greed and graft of lenders, speculators, and adjustable rate mortgage brokers who really caused the mess.  Talk about a regressive policy.  From a Wall Street Journal Article last weekend:

The [no down-payment] offers -- including "100% financing" -- are made possible due to down-payment assistance programs run by nonprofit organizations. These programs are funded largely by home builders and also by private homeowners desperate to sell. The seller-funded groups provide enough down-payment money to buyers that they can qualify for a mortgage backed by the Federal Housing Administration, which requires at least a 3% down payment.  Supporters of the down-payment programs say they help the FHA fulfill its goal of assisting first-time home buyers. But critics say the programs will burden the government agency, and taxpayers, with bad loans. The FHA, which essentially is filling the void left by the collapse of the subprime market, renewed a push to eliminate the programs this month, after warning that above-average default rates for seller-assisted down-payment programs will force the agency to request a government subsidy for the first time in its 74-year history. The agency says it will need $1.4 billion next year. The FHA estimates that down payments provided by nonprofit groups account for 34% of all 200,000 loans backed by the FHA so far this year, up from 18% in all of 2003 and less than 2% in 2000. And the agency says that borrowers are two to three times as likely to default on their payments when they receive a down payment from a nonprofit.

This all seems ridiculous to me.  Blaming the charity and their beneficiaries for the housing mess is like blaming a lowly gas station attendant for price of gasoline.  Everybody knows that the housing market crash is more a result of "irrational exuberance" of better off investors than the poor first time home buyers.  Indeed, most down-payment assistance charities engage in extensive screening and require beneficiaries to attend long hours of budgeting classes before they are granted down payment assistance.  Moreover, most of the homes in default these days were financed through adjustable rate mortgages, which FHA and most down-payment assistance charities do not support!  No wonder both the Congressional Black and Hispanic Caucuses smell a rat:

The nonprofit groups have the backing of several influential members of Congress, including Reps. Maxine Waters (D., Calif.) and Barney Frank (D., Mass.). The Congressional Black Caucus and the Congressional Hispanic Caucus sent letters this month to House and Senate leaders urging that the programs stay intact, citing their role in improving minority home-ownership rates.

Fortunately, the House version of the bill does not contain a prohibition against seller-funded downpayment assistance.  Still, the IRS is nevertheless pursuing its policy of denying or revoking tax exempt status to charities that receive funding from sellers or developers.  For more discussion on the FHA efforts against downpayment assistance charities see this entry in the WSJ's Development Blog.


June 26, 2008 in Federal – Legislative | Permalink | Comments (11) | TrackBack (0)

Another Possible Blue Cross Conversion to For-Profit Status

The Newark Star Ledger reports that New Jersey's largest health insurer is seriously considering converting to for-profit status.  Although Horizon Blue Cross Blue Shield of New Jersey twice before considered but then rejected converting to for-profit status during the past ten years, the political climate may be more favorable now because New Jersey is looking for funding to help it implement universal health insurance.   The conversion would result in payments to the state of $1 billion to $3 billion over five years as compensation for the tax breaks Horizon had previously enjoyed.  The incentive on Horizon's part for converting appears to be a desire to reduce the level of public scrutiny it faces, particularly with respect to executive compensation and the size of its reserves.  Horizon currently covers approximately 3.6 million individuals, including more than million Medicaid participants.


June 26, 2008 in In the News | Permalink | Comments (1) | TrackBack (0)