Thursday, April 30, 2009

More on PILOTs

Yesterday I posted about an article in the Princetonian reporting that a citizens' group is pressuring Princeton U. to make more voluntary payments in lieu of taxes to the city of Princeton local government. Today, the mayor of Boston provides a column about PILOTs in that city.  The column notes that Boston's property tax assessment department recently completed a study of property owned by large exempt nonprofits (e.g., universities and medical centers):

The report finds that in fiscal year 2009, the tax-exempt property owned by the educational institutions was valued at $7.0 billion, which, if taxable, would have generated $190.2 million in property taxes for the City of Boston. Tax-exempt property owned by the medical institutions was valued at $5.7 billion, which, if taxable, would have generated $154.8 million in property taxes for the City of Boston. 

Under current PILOT agreements, educational institutions will pay Boston $8.7 million in fiscal year 2009, or 4.6 percent of their estimated tax liability if taxable. Medical institutions will pay an estimated $5.8 million, which represents 3.8 percent of what they would pay if taxable.   Not surprisingly, the mayor concludes that maybe these institutions should be doing more . . . 


April 30, 2009 in State – Executive | Permalink | Comments (0) | TrackBack (0)

New IRS Workplan Offers Clues About Priorities for Exempt Orgs

The IRS's strategic plan for 2009-2013 offers some clues about where the agency is headed with regard to oversight of tax-exempt organizations (it's a very spiffy publication, by the way).  Here is the text of the IRS's "Objective 5: Continue focused oversight of tax-exempt sector":

More than $15 trillion in assets are currently controlled by tax-exempt organizations or held in tax-exempt retirement programs and financial instruments. The massive size of this sector requires us to provide more careful oversight and advisory support than ever before.

Tax-exempt and government entities often find it difficult to navigate the complicated, specialized and changing tax rules that apply to them. The IRS will provide guidance and information to help tax-exempt and government entities understand their responsibilities and comply with the law. We will also discourage those who abuse tax-exempt status by actively seeking them out and addressing wrongdoing, making it clear that violations carry a high risk of meaningful punishment.

Certain segments of the tax-exempt sector, such as hospitals and universities, are especially large, complex and growing. For example, university endowments grew by 17 percent to $411 billion in 2007, with the largest nearing $35 billion. Due to their size and complexity, and consequent risk to the tax base, the IRS will continue to monitor compliance and enforce the rules applicable to universities, hospitals and other major segments of the tax-exempt community.

Translated, the IRS seems to be warning tax-exempts that the agency will be paying ever closer attention to this sector, particularly the "heavyweights": hospitals and universities.  But that ever closer attention should also include more IRS published guidance, workshops and seminars.  Noticeably absent from the workplan is any suggestion that the IRS might reconsider the substantive basis for exempting nonprofit hospitals, something that Steve Miller, former commissioner of TE/GE, has intimated is long overdue, but perhaps not something the IRS should undertake without Congressional intervention.  And I suppose there is some sense in the notion that any attempt to revisit substantive exemption standards for hospitals should await health care reform, which everyone thinks really, truly will happen this time around.  

Meanwhile, I'm beginning to wonder whether big universities ought to be exempt, as well.  While perhaps not as ruthlessly bottom-line oriented as modern nonprofit hospitals, universities increasingly are beginning to look like business conglomerates, with an abundance of joint ventures with for-profit companies in areas of research and development, large real estate holdings for research parks and other for-profit ventures, and ever-increasing tuition as their largest source of revenue (and don't get me started on Division I athletics . . .).  Just as nonprofit hospitals today bear no resemblance to the institutions we routinely exempted in the early 1900's, universities today bear little resemblance to the ivy towers of an earlier age.  These institutions (hospitals and universities) are dynamic, changing enterprises.  Is it too much to ask that the law of tax-exemption try to keep up with the changes??


April 30, 2009 in Federal – Executive | Permalink | Comments (0) | TrackBack (0)

Wednesday, April 29, 2009

Saving The N.Y. Times

A very provocative and interesting article by Penelope Muse Abernathy, the Knight Chair in Journalism ant UNC Chapel Hill, examines four strategies for "saving" the N.Y. Times (assuming it needs saving).  Three of these strategies rely either exclusively or primarily on nonprofit philanthropy (converting the Times to a nonprofit and raising a $5 billion endowment to pay operating costs; creating a nonprofit foundation to cover some or all news-gathering costs while leaving the Times itself as a for-profit company; and a purchase of the paper by a large nonprofit institution or consortium of institutions, such as universities, which would run it as part of the educational enterprise).  But if I'm reading the paper correctly, she seems to favor a for-profit approach, with some "white knight" (Mayor Bloomberg?) buying the Times, paying off its debt, and positioning it for success in the new digital media age (hence her suggestion/speculation on Bloomberg, who has made his considerable fortune by distributing financial news via various media, including on-line, TV, radio, etc.).  She mentions the possibility of using the new L3C (low-profit limited liability company) form for this last alternative.

The paper is only 23 pages long, and is well worth a read by anyone interested in the nonprofit sector and the recent speculation regarding converting newspapers to nonprofit form to insure their future viability.


April 29, 2009 in Publications – Articles | Permalink | Comments (1) | TrackBack (0)

More Pressure for PILOTS?

This story in The Daily Princetonian discusses efforts of a local citizens' group to pressure Princeton University to contribute more money to the local government.  Over the past decade or so, many municipalities have cut deals with large nonprofits for "payments in lieu of taxes" (PILOTs) to offset at least some of the lost revenue from tax exemption.  The article in the Princetonian notes that Princeton contributed over $1 million to the Princeton local government under a PILOT agreement, and choose to pay another $8.9 million in taxes on property that they could have requested exemption for.

The article is a very nice summary of the debate over PILOTs and tax exemption for large nonprofits in urban communities.  On the one hand, Princeton would pay as much as $35 million in taxes if it were not exempt.  Exemption pushes up taxes on non-exempt property, making homes less affordable and potentially driving out older and working-class residents.  On the other hand, Princeton claims, probably correctly, that it brings a huge amount of economic activity to the area - and, after all, it is an educational organization, which have traditionally been exempt from taxes.

With the economy in the shape it's in, the debates over PILOTs and what contributions large, exempt nonprofit institutions should and/or do make to their local communities will likely rage on, and I suspect we'll see a lot more arguments over PILOTs, as well as possibly some narrowing in the grounds for exemption under state laws.


April 29, 2009 in State – Legislative | Permalink | Comments (1) | TrackBack (0)

Tuesday, April 28, 2009

Ruminations on Nonprofit CEO Compensation

This story in the Triangle Business Journal, like many other stories in the press over the past several years, raises the specter of tax-exempt nonprofits (in this case, hospitals), losing exemption because of "excessive" CEO compensation.  Unfortunately, the stories almost uniformly misinterpret the law, present the facts in the most sensational manner possible, and generally "get it wrong."  I understand that reporters are busy, that they believe they need to inform the public about issues, that particularly in this era of TARP, executive salaries are a "hot" issue, and that this area is complex.  But you'd think that after several years of this, someone would put in the effort to learn the issues, and quit writing the same wrong stuff time after time after time.

The story in the Triangle, like virtually all the press stories, get their sensationalistic spin from both the absolute amount of compensation (in the case of the two hospitals mentioned in the story, WakeMed and Duke, over $1 million annually for each CEO) and the comparison to other nonprofit CEO salaries (which are almost always lower; those who study nonprofit organizations understand that salaries for nonprofit hospital administrators outpace every other nonprofit salary, which shouldn't surprise anyone: many nonprofit medical centers are huge businesses, generating hundreds of millions or billions in revenue and employing thousands of people).

But the law in this area quite clearly states two things.  First, it is not the absolute amount of compensation that is the issue.  The issue is whether the compensation package as a whole is "reasonable."  And second, "reasonable" in these cases is measured not by just a comparison to other nonprofit salaries, but also a comparison to salaries in the for-profit sector.  The regulations could not be clearer on this point: 

“The value of services is the amount that would ordinarily be paid for like services by like enterprises (whether taxable or tax-exempt) under like circumstances (i.e., reasonable compensation).  Section 162 standards apply in determining reasonableness of compensation . . . .”  Treas. Reg. § 1.4958-4(b)(1)(ii) (italics added).  

In fact, the regulations under Section 4958 provide a safe-harbor provision for compensation arrangements if the arrangement is approved by an independent board or compensation committee of the board that relies on “appropriate data as to comparability prior to making its determination” and documents the basis for its decision.  Treas. Reg. § 1.4958-6(a).

There is a legitimate theoretical issue regarding whether nonprofit executive compensation should be measured against for-profit compensation.  The arguments here are not hard to understand.  On one hand, some assert that keeping charitable management salaries below those of the for-profit sector helps insure that managers retain the “special ethic” of charities as serving their constituents rather than making a buck, and makes sure the maximum amount of money is used for services to the beneficiaries of the charity, whomever they may be (e.g., more free or discounted care for the uninsured poor, in the case of hospitals).  The counter-argument is that such limitations artificially condemn charities to hiring “second rate” management since they will be unable to compete with for-profit firms for the top managerial talent.  Put more starkly, would you rather have your quadruple-bypass surgery done by the head of cardiology who makes $1 million per year, or by a heart surgeon whose salary has been artificially limited to $100,000 per year?  Yeah, I thought so.

But these theoretical arguments about what the law should be do not alter what the law is today.  And under the law as it exists, most of the press stories about nonprofit executive compensation give a false impression that the salary in question violates legal standards.  And that, folks, is both sloppy reporting and not very helpful to the real issues at hand, which in the case of nonprofit hospitals, have more to do with the underlying tests for exemption and whether nonprofit hospitals should be exempt at all, than what hospital executives get paid.  


April 28, 2009 in In the News | Permalink | Comments (1) | TrackBack (0)

Nonprofit Low-Income Housing Losing Exemptions in Wisconsin

This story in the Wisconsin State Journal details how low-income housing organizations are facing the loss of property tax exemption in Wisconsin due to an interpretation of state law by the Wisonsin Supreme Court.  The issues involved apparently started in 2003, when the Wisconsin Supreme Court decided Columbus Park Housing Corporation v. City of Kenosha.  At the time, Wisconsin state law provided that rental property would be exempt only if two requirements were met: (1) the property would be exempt in the hands of the lessee if the lessee owned it and (2) all rental income had to be reinvested in the property or used for debt reduction.  Obviously, low-income housing did not meet requirement (1), since the renters were individuals, not tax-exemption charities. And the case in question affirmed that these requirements applied to low-income housing units, which accordingly failed the exemption test.  The Wisconsin legislature then passed a law clarifying that requirement (1) did not apply to low income housing.    But the law did not address requirement (2), and in fact many low income housing organizations use rental funds for other purposes, such as to subsidize care provided to others served by those organizations, to refinance debt, to offset Medicaid losses and to purchase new properties for low-income housing development (see this article for an excellent discussion of the background to this issue).

The Wisconsin legislature apparently has considered fixes for this problem, but has not yet enacted them into law.  And given the current economic/budget situation at the state and local level, one wonders whether fixing this issue is going to be a political problem . . .


April 28, 2009 in State – Judicial, State – Legislative | Permalink | Comments (0) | TrackBack (0)

Monday, April 27, 2009

N. Carolina Legislature Debates Limiting Sales Tax Exemption for Some Charities

According to this story in the Winston-Salem Journal, some state senators in North Carolina have proposed limiting the current sales tax exemption for nonprofits by capping the exemption at $5 million per year.  The proposal would hit some large nonprofit hospitals and universities, and is (naturally) causing some nonprofit hospital executives to hyperventilate over potential loss of their exempt status for other (e.g., property and income tax) purposes.  They should probably be more worried about health care reform and potential universal coverage; if that happens, charity care, which is the core of the argument in favor of exemption for nonprofit hospitals, will certainly decline if not cease to exist (there may still be some charity cases - for example, illegal aliens not covered by any new government program, and there may still be some argument about whether reimbursements, particularly from government programs such as an expansion of Medicaid, fully cover costs).   I can't wait to see how the nonprofit hospital industry makes its arguments for continued tax exemption in a universal-coverage world . . .


April 27, 2009 in In the News | Permalink | Comments (0) | TrackBack (0)

RHIO's Get 501(c)(3) Status from IRS

After a two-year moratorium, the IRS has begun issuing favorable exemption determinations to Regional Health Information Organizations (RHIO's) like this one in rural California. RHIO's are a relatively new development in health care; according to this article, the organizations enable health care providers and community residents to conveniently share and access patients’ clinical data, such as a patient’s electronic health records (EHR) and may act as a central health data collection agency. The activities of a RHIO may also include education and research projects, as well as creating and operating secure communication systems that support the exchange of health information, data and studies.

The IRS has posted a very short FAQ on RHIO's, which indicates that it's decision to begin issuing favorable determinations was prodded by the recent stimulus legislation and is based on the theory that these organizations "relieve government burdens," one of the bases for exemption laid out in Treasury Regulations 1.501(c)(3)-1(d).

The exemption of RHIO's is a relatively significant development, particularly given that the organizations typically charge fees for their service.  Indeed, one "how to" manual for RHIO's states 

Crucial to the sustainability of a RHIO is the ability to collect fees that accurately reflect the value that each stakeholder receives from participating.(9) To achieve this, RHIOs should consider as many different business models as possible, including service-fee models and transaction-fee models. 

In short, RHIO's essentially are businesses in their operating models.  The IRS apparently has not yet released the actual private rulings on RHIO's (at least, a Lexis search did not turn any up, and I haven't seen any listed in the usual places, such as the Exempt Organizations Tax Review's monthly review of EO rulings).  It will be interesting to see how the IRS handled the commercial activity aspect of these organizations in its rulings.


April 27, 2009 in Federal – Executive | Permalink | Comments (1) | TrackBack (0)

Sunday, April 26, 2009

IRS Lists Abuse of Nonprofits in Its "Dirty Dozen" Tax Scams List

From IRS Release IR-2009-41:

The IRS continues to observe the misuse of tax-exempt organizations. Abuse includes arrangements to improperly shield income or assets from taxation and attempts by donors to maintain control over donated assets or income from donated property. The IRS also continues to investigate various schemes involving the donation of non-cash assets, including easements on property, closely-held corporate stock and real property. Often, the donations are highly overvalued or the organization receiving the donation promises that the donor can purchase the items back at a later date at a price the donor sets. The Pension Protection Act of 2006 imposed increased penalties for inaccurate appraisals and new definitions of qualified appraisals and qualified appraisers for taxpayers claiming charitable contributions.


April 26, 2009 in Federal – Executive | Permalink | Comments (0) | TrackBack (0)

Saturday, April 25, 2009

IRS and Georgetown Sponsor Conference on Nonprofit Governance

The IRS and Georgetown University will be holding a conference on nonprofit governance on June 23, 2009.  Topics include investment strategies, financial management and oversight and executive compensation.  Brochure available here.


April 25, 2009 in Conferences | Permalink | Comments (0) | TrackBack (0)

Sarah Hall Ingram to Take Over as Commissioner of TE/GE

IRS Commissioner Doug Shulman has selected Sarah Hall Ingram to succeed Steven T. Miller (who will become Commissioner, LMSB, which oversees tax administrations for the largest corporations and partnerships in the U.S.) as the commissioner of the Tax Exempt/Government Entities Division of the IRS.  According to the IRS news release, Ingram served as Chief of Appeals for the past three years and was TE/GE Deputy Commissioner from 2004-2006.  Prior to that, Ingram served as Division Counsel/Associate Chief Counsel for TE/GE, where she was responsible for providing legal servIces to TE/GE as well as other parts of the IRS.  Ingram began her career with the IRS in the former Tax Litigation Division in 1982.


April 25, 2009 in Federal – Executive | Permalink | Comments (1) | TrackBack (0)

Wednesday, April 22, 2009

Nonprofit Prof Darryll Jones to Join FAMU as Professor and Associate Dean of Faculty Development

I am pleased to announce that my friend, co-author, co-blogger, classmate and colleague, Professor Darryll Keith Jones of Stetson University College of Law will be joining the faculty of Florida Agricultural and Mechanical University (FAMU) College of Law next academic year as Professor and Associate Dean of Faculty Development.  As many of you know, Darryll is a prolific scholar, dedicated teacher and a fountain of knowledge.  I know that Darryll and his wife, Karla, are very excited by this move and I encourage you to join me in congratulating him on this magnificent accomplishment.  FAMU will be lucky to have Darryll given his prior experience as Academic Dean at Pittsburgh and his stellar scholarly record in the areas of tax law and nonprofit law.  Go Darryll!!


April 22, 2009 in Other | Permalink | Comments (0) | TrackBack (0)

Tuesday, April 21, 2009

Coalition of nonprofit groups takes issue with "revolving door" ban on lobbyists entering government service; seeks exemption for charities and social welfare organizations' lobbyists

Though intended to protect the public interest, President Obama's exclusion of former lobbyists from certain government posts is screening out some registered lobbyists who share the Administration's vision of the public interest, as reported in Tuesday's The New York Times. 

The "revolving door" ban on lobbyists entering government" (section 1(1) of Executive Order Ethics Commitments by Executive Branch Personnel) precludes anyone who was a registered lobbyist from working for any executive agency they had lobbied in the past two years.  The ban is designed to screen out those who go through “the revolving door between government service and the private sector in order to achieve personal gain at the expense of the public interest." (Think of characters like Nick Naylor, the chief spokesman for Big Tobacco's chief spokesman and a "mass murderer/profiteer/bloodsucker/pimp" in the satirical novel and movie Thank You for Smoking.)  But the ban also screens out some people who don't fit that profile. People like registered lobbyist Tom Malinowski, the Washington advocacy director for Human Rights Watch.

The fact that Mr. Malinowski lobbied on behalf of genocide victims rather than military contractors, investment firms or pharmaceutical companies made no difference. Mr. Obama’s anti-lobbyist rules do not distinguish between those who advocate for moneyed interests and those who advocate for public interests, and so Mr. Malinowski was ruled out. But in the process, he has become the symbol of a deep discontent among many Democrats over Mr. Obama’s policy.

The article reports that a coalition of nonprofit groups, including the Center for Lobbying in the Public Interest, has started a campaign to lift the ban for lobbyists for charities and social welfare organizations that (in the Center's words) "lobby for a public purpose rather than for a financial bottom line." According to this coalition, the ban on registered lobbyists is a crude proxy for the real culprit, lobbying by profit-maximizing people on behalf of profit-maximizing interests. 

David Axelrod,  President Obama's senior adviser, says this distinction is too subtle and the need to increase public trust in government is too great.  The Times quotes him saying that “you can’t have carve-outs for lobbyists you like and exclude those that you don’t. It would be very hard for people to understand that distinction. This is one of those cases where we’ve had to sacrifice the help of a lot of very valuable people.”


April 21, 2009 in Federal – Executive | Permalink | Comments (0) | TrackBack (0)

Sunday, April 19, 2009

Bank Trustee Asks for Higher Fees Despite Fee Agreement - AG Says No

With stories about dropping endowment values and struggling charities sharing newspaper pages with stories about overpaid bankers, an article posted by the Philadelphia Inquirer seems hard to believe. A bank trustee wants to double its fees, taking money away from a summer camp for poor children, scholarships for art students, and the episcopal cathedral in Philadelphia.  The two primary charitable beneficiaries are fighting back, and they are getting support from the Attorney General of Pennsylvania. A court hearing is scheduled for July.

Since 1973 two Pennsylvania charities - the College Settlement Camp in Horsham (a camp for poor children who would not otherwise go to summer camp) and the Church of the Savior in West Philadelphia (now the Episcopal Cathedral) - have benefited from a trust created under the will of Elizabeth R. England.  As recently as last year, the trust distributed $450,000 to each charity, an amount that covered one-third of the camp's budget and over one-half of the cathedral's budget.  This year each distribution is expected to be $100,000 less and both charities have had to cut programs.

A big part of the reason behind the lower distribution is a dispute with the Bank of New York Mellon Corp., successor to Ms. England's original trustee, Girard Trust Corn Exchange Bank.  Mellon has asked the Philadelphia Orphans' Court to double its fees, altering an agreement that Ms. England made with Girard in 1963, 10 years before her death.  The trustee has operated under the agreement since the trust's inception, but Mellon now says it should be paid at its standard rate and also argues that it has been underpaid since 1994, the date it last filed a formal accounting with the court.  On top of all that, Mellon is charging the trust for the legal costs incurred in connection with its attempt to increase its trustee's fees.

According to the story in the Inquirer, the fee agreement includes a mechanism that allows the two charities to replace a trustee if it seeks a fee change but no agreement with the charities can be reached. The charities have asked Mellon to turn the trust over to Brown Bros. Harriman & Co., but Mellon has refused.  Mellon may think recent changes to Pennsylvania's trust law strengthen its position, because the changes permit a court to adjust fees in certain situations.  Whether any grounds for adjustment exist remains to be seen.  The charity division of the Attorney General's office has already gotten involved, opposing the request for higher and retroactive fees and also opposing the use of trust funds to pay the trustee's costs.  And that - the AG's involvement - may be a very good sign for kids who want to go to summer camp and for the neighborhood programs the cathedral has had to cut.


April 19, 2009 in State – Judicial | Permalink | Comments (0) | TrackBack (0)

Friday, April 17, 2009

Colleges Receive Money from Mystery Donor(s)

Yahoo just reported that nine universities have received millions of donations from a donor who not only has not been identified but who has required the schools to agree not to try to find out the identity of the donor.  The gifts came through lawyers or other middlemen and came in the form of cashier's checks or checks from a law firm.  The donor stipulated that most of the money must be used for scholarships, with some available for research and other needs.

 The schools receiving money are Purdue ($8 million), University of Iowa ($7 million), University of Southern Mississippi ($6 million), University of North Carolina at Greensboro ($6 million), University of Maryland University College ($6 million), University of Colorado at Colorado Springs ($5.5 million), Norfolk State University ($3.5 million), Penn State-Harrisburg ($3 million), and the University of North Carolina at Ashville ($1.5 million).

The donor may be an individual or a group of donors acting together.  The only thing certain is that the universities are thrilled with the gifts, especially given the current need for more scholarship money.


April 17, 2009 in In the News | Permalink | Comments (0) | TrackBack (0)

Slumdog in the News

Director Danny Boyle, Producer Christian Colson and the team of filmmakers who produced the movie Slumdog Millionaire have pledged $475,000 to a five-year program intended to improve the lives of children living in the slums of Mumbai and operated through Plan, an international charity.  

Another recent story, this one posted by, an Indian news site (ok, I admit I saw it first on Yahoo but it's been removed from that site) reported that Chief Minister Raman Singh has declared that Slumdog will be exempt from the entertainment tax for a year.


April 17, 2009 in In the News | Permalink | Comments (0) | TrackBack (0)

Charitable Carryover Deductions Expire Each Year

In a recent opinion, Maddux v. Commissioner, T.C.Summ.Op., 2009-30, the Tax Court ruled that a taxpayer could not use a carryover charitable deduction that had expired. Note that this case was heard pursuant to section 7463 and the opinion cannot be cited as precedent.

In the course of an audit of the taxpayer's 2002 return, the IRS determined that the taxpayer had a charitable contribution carryover from 2002, as permitted under section 170(d)(1).  The taxpayer assumed that the carryover could be used at any time in the subsequent five years, and took some of the deduction in 2005.  The Tax Court explained that the carryover is to be treated as a deduction in each of the five succeeding years and that some amount expires each year, whether or not the deduction is used.  Thus, when the taxpayer tried to use the carryover in 2005, some of the amount had already expired.  

Thanks to Patricia Brosterhous and her IICLE Flashpoints (a free electronic newsletter produced by the Illinois Bar) for pointing out this opinion.


April 17, 2009 in Federal – Executive | Permalink | Comments (0) | TrackBack (0)

Underwater Funds and Endowment Spending

The press has been reporting about underwater endowment funds and the problems for charities that cannot spend endowment money due to state laws.  The information often is not quite right.

UMIFA, still the law in fewer than 20 states, provides a default rule that governs endowment spending.  If a charity and a donor did not agree otherwise when the donor made the gift, then UMIFA says that the charity can spend from the endowment the amount of appreciation (the amount above the original gift value - termed historic dollar value in UMIFA) that the charity determines to be prudent.  UMIFA does not address the spending of income, and the assumption is (without case law but with guidance posted on the NY AG's website supporting this understanding) that a charity can continue to spend "income" (interest and dividends but not capital gains) even if the fund is underwater.  Thus, the statements in the press that a charity cannot spend from an underwater fund are wrong.  In most cases the charity would not spend in those circumstances, but the legal rule is not quite the way it is usually described.

Thirty states plus the District of Columbia have adopted UPMIFA, and that new statute is effective in some states and will become effective in others this year or next.  In addition to the 31 enactments, bills are still pending in a number of states.  UPMIFA permits a charity to spend from an endowment fund the amount it determines to be prudent, keeping in mind the long-term nature of the fund.  Historic dollar value no longer provides a sort of guidance, but the absence of historic dollar value from the law may not mean that charities will be eager to spend if funds drop too far below their recent values.

The difficulty from the charity's standpoint is a practical one as well as a legal one.  What amount can a board prudently authorize for spending when a fund is down 30% - or more?  Some charities may find it prudent to increase spending, so that important programs and services will not be cut.  Others may curtail spending until the funds' values rebound.  Spending now means that getting the fund back to a value that it had as recently as last year will take longer.  But deciding not to spend may mean that scholarships are not paid or programs are cut.  The choice is not an easy one for charities, and each charity must examine its own needs and make its own prudent decision.


April 17, 2009 in State – Legislative | Permalink | Comments (0) | TrackBack (0)

Colleges Shift Fundraising Goals from Buildings to Scholarships

Stephanie Strom of the New York Times reports that colleges are finding scholarships a more effective goal for fundraising than buildings or new programs, common fundraising goals just a year ago.  Donors understand that more students need financial aid now, and many colleges have increased the aid available to their students.  To do that, the colleges need to raise money and are turning to donors for help.  

Although giving is down, donors are responding to the need for more financial aid.  The annual giving director at Hamilton College reports that annual giving for that school is flat as compared with last year - but "flat is the new up" so he's happy.  The college surveyed alumni and learned that 90% of those who responded wanted their gifts to go to scholarships.  The fundraising campaign has responded to those concerns.

Some schools have asked the donors who created endowed scholarship funds for a little extra annual gift to cover the scholarship distribution this year.  A fund created recently might have fallen in value and be "underwater"  (under its original gift value).  If so, the fund might not be able to spend (if UMIFA applies in that state and if the college did not arrange for a different spending rule in the gift agreement with the donor).  For example a fund valued at $100,000 before the market drop might have been paying out $5,000 a year as a scholarship.  If the fund has dropped in value, a school might ask the donor for an extra $5,000 this year, so that the scholarship can still be paid.  


April 17, 2009 in In the News | Permalink | Comments (0) | TrackBack (0)

Commensurate-in-Scope Doctrine Weakened?

Internal memoranda released by the IRS in the past few days indicate a view of a senior lawyer at the IRS that the commensurate-in-scope doctrine has little continuing relevance.  The internal memoranda were released in compliance with a FOIA lawsuit brought by Tax Analysts.  The memoranda date from July 2007. They are available for photocopying at the IRS' reading room in Washington, D.C., but they have not been released electronically.  

The two memoranda were both written in response to exemption requests.  In one case, an organization was created to accept donations of yachts, sell the yachts, and distribute the proceeds to charity.  An initial proposal to deny exemption based on the failure to carry on a charitable activity commensurate in scope with the organization's resources was the subject of the memorandum.  The reviewer found that the activity was not a typical commercial activity and that the commensurate-in-scope doctrine "was severely compromised" by the enactment of IRC 4942.

The second memorandum involved a nonprofit management organization that operated several charter schools through contracts with three private foundations.  The proposal to deny exemption was based on the similarity between the activity carried on by the organization and activities conducted by for-profit companies managing schools.  The same senior technician reviewer in the Office of the General Counsel, Michael Blumenfeld, said that competition in education by for-profit companies should not affect the exempt nature of educational activities that furthered purposes set forth in 501(c)(3).

Thanks to Russell A. Willis III of for sharing this information with us.


April 17, 2009 in Federal – Executive | Permalink | Comments (0) | TrackBack (0)