Nonprofit Law Prof Blog

IRS Names 10 New Members to ACT Advisory Panel; ACT to Submit Recommendations at June Meeting

IR-2009-53, May 22, 2009

WASHINGTON — The Internal Revenue Service’s Advisory Committee on Tax Exempt and Government Entities (ACT) will hold a public meeting on June 10, when the panel will submit its latest round of recommendations to senior IRS executives.

Ten newly named members of the panel (listed below) will also be introduced at the public meeting. They will begin two-year terms and join 11 returning members.

ACT includes external stakeholders and representatives who deal with employee retirement plans, tax-exempt organizations, tax-exempt bonds and federal, state, local and Indian tribal governments. ACT members are appointed by the Secretary of the Treasury and generally serve two-year terms. They advise the IRS on operational policies and procedures.

At the public meeting, four ACT project teams will present the following four reports that include recommendations:

• Exempt Organizations: Recommendations to Improve the Tax Rules Governing International Grant Making.
• International Pension Issues in a Global Economy: A Survey and Assessment of the IRS’ Role in Breaking Down Barriers
• Record Retention Requirements for Tax-Exempt Bonds and Tax Credit Bonds: A Specific Proposal for Published Guidance
• Federal-State-Local Government Compliance Verification Checklist for Public Employers

ACT was established in 2001 under the Federal Advisory Committee Act to provide an organized public forum for discussion of relevant issues affecting the tax exempt and government entities communities.

ACT’s public meeting will begin at 10 a.m. ET on June 10, 2009 at the IRS headquarters at 1111 Constitution Ave., N.W., Washington, D.C. ACT reports are available on IRS.gov.

Due to limited seating and security requirements, members of the public interested in attending the public meeting should call Cynthia PhillipsGrady to confirm their attendance. She can be reached at 202-283-9954 (not a toll-free call). Attendees must have photo identification and are encouraged to arrive at least 30 minutes before the session begins.

The 10 new members are listed below grouped by their relevant project team:
Employee Plans

Barbara A. Clark, University of California, Oakland

Clark is the benefits counsel for the retirement and health and welfare plans sponsored by the University of California, a state government agency and 501(c)(3) organization. The University provides a defined benefit pension plan and three defined contributions plans for its 124,000 employees and 41,000 retirees. Before joining the University in 2003, Clark had more than 20 years experience as an employee benefits attorney in the private sector. She received her Juris Doctorate from the Boalt Hall School of Law and is a member of the California State Bar.

Kathryn J. Kennedy, John Marshall Law School, Chicago

Kennedy is the Associate Dean for Advanced Studies and Professor of Law at the John Marshall Law School. As the Director for the Center for Tax Law & Employee Benefits at the school, she established the first LLM program in the nation for employee benefits and has since developed the curriculum for more than 20 employee benefits courses. Kennedy served for three years on the Department of Labor’s ERISA Advisory Council and co-authored an employee benefits law textbook. She received her Juris Doctorate from the Northwestern University School of Law.

Exempt Organizations

J. Daniel Gary, General Council on Finance and Administration, United Methodist Church, Nashville

Gary is Administrative Counsel for the General Council on Finance and Administration (GCFA) of The United Methodist Church, the third largest religious denomination in the United States, with approximately 8 million members and 35,000 local churches and affiliated entities. GCFA is responsible for protecting the legal interests of the denomination, and Gary provides guidance on a wide variety of issues related to tax-exempt organizations, including charitable giving, legislative and political campaign activities, and unrelated business income tax (UBIT). Gary received his Juris Doctorate from the Washington and Lee University School of Law and his Ph.D. in mathematics from the University of Illinois.

James P. Joseph, Arnold & Porter LLP, Washington, DC

Joseph is a partner and the head of the tax-exempt organizations practice at Arnold & Porter LLP. In the 10 years he has focused on representing tax-exempt organizations, he has advised public charities, colleges and universities, private foundations and advocacy groups on a variety of issues, including operating business ventures, conducting international activities and grant making, lobbying and advocacy, nonprofit governance, and executive compensation. His practice has involved several high-profile matters that have had broad impact on the nonprofit sector.  Joseph received his Juris Doctorate from the Georgetown University Law Center and is currently Chair of the American Bar Association Subcommittee on Intermediate Sanctions.
Government Entities:  Indian Tribal Governments

Bobette (Bobby Jo) Kramer, Alaska Manufacturing Extension Partnership, Inc., Anchorage

Kramer is the Operations Manager for the Alaska Manufacturing Extension Partnership, Inc., and serves as AMEP’s liaison to rural Alaska and the Alaska Department of Commerce.  She has more than 25 years’ experience in business development and long-term enterprise planning, and has extensive hands-on knowledge of rural community development strategies.  She was president and CEO of her Alaska Native Claims Settlement Act village corporation and is a member of the Native Village of Pilot Point. Kramer is pursuing a Bachelor’s degree in rural development at the College of Rural Alaska.

Wendy S. Pearson, of Counsel, Bennett, Bigelow, & Leedom, P.S., Seattle

Pearson has more than 20 years’ experience as a former IRS attorney and a taxpayer representative and has handled numerous Indian tribal government matters, including constructive receipt, taxation of member benefit programs, and withholding and information reporting.  She also regularly consults with nonprofit entities, hospitals and health care organizations on matters like governance, excess benefit transactions, executive compensation and other compliance issues.  In her practice she regularly consults with tribes and their representatives on tax issues.  Pearson received her LLM in Taxation from the University of Florida School of Law and her Juris Doctorate from the Gonzaga School of Law in Spokane, Wash.

Government Entities: Federal, State and Local Governments

Paul Carlson, State of Nebraska, Lincoln
Carlson has been the Nebraska State Accounting Administrator since 2000, responsible for comptrollership functions for the State, including accounting systems for State agencies, State financial statements, accounting processes, procedures and payments, debt financing, and cash-flow analysis of the State’s general fund.  He has been active in the National Association of State Comptrollers, recently serving as its president. Carlson is a Certified Public Accountant and the Nebraska State Social Security Administrator.  He has completed the coursework for a Ph.D. in Educational Administration at the University of Nebraska, and holds a Masters of Business Administration from the University of Montana.

Patricia A. Phillips, City of Virginia Beach, Virginia Beach
Phillips is Director of Finance for the City of Virginia Beach, where she oversees accounting, payroll, purchasing, risk management, and debt administration for the city.  She has served on the Government Financial Officers Association (GFOA) Standing Committee on Debt Management, the GFOA Standing Committee on Economic Development and Capital Planning, as well as the GFOA Executive Board.  Phillips is a Certified Public Accountant and a Certified Government Financial Manager, and she holds a Masters in Business Administration from Old Dominion University.

Government Entities: Tax Exempt Bonds

David Cholst, Chapman and Cutler LLP, Chicago
Cholst is a partner in the tax department of Chapman and Cutler LLP, where he provides tax advice relating to tax-exempt bonds, Build America Bonds and tax credit bonds.  He represents governmental issuers, underwriters, investment brokers, and attorneys in all matters relating to tax-exempt bonds, including arbitrage rebate. Cholst is in charge of his firm’s rebate computation service. Cholst has been a member of the faculty of the National Association of Bond Lawyers Tax Seminar and is a member of the ABA Tax Exempt Finance Committee.  He received his Juris Doctorate from the University of Chicago Law School.

George T. Magnatta, Saul Ewing LLP, Philadelphia

Magnatta is the chair of Saul Ewing LLP’s public financing department and an experienced practitioner in the tax aspects of public finance. His practice focuses on serving as bond counsel, underwriters’ counsel, borrowers’ counsel and tax counsel for states, cities, economic development authorities, housing authorities and nonprofit entities. Magnatta served as Assistant Branch Chief of the Office of Chief Counsel, Legislation and Regulations Division of the IRS (1981-85).  He is the co-author of ABCs of Industrial Development Bonds (5th Ed.) and is a frequent panelist at meetings of the National Association of Bond Lawyers.  He received his Juris Doctorate from Temple University and an LLM in Taxation from the Georgetown University Law Center.

DAB

Inazu (recent Ph.D.) Publishes "Making Sense of Schaumberg: Seeking Coherence in First Amendement Charitable Solicitation Law"

John D. Inazu (Duke, recent PhD) recently published "Making Sense of Schaumberg: Seeking Coherence in First Amendment Charitable Solicitation Law," 92 Marquette L.R. 551 (2009).  The article is available on the Marquette University Law Review webpage.  Here is the introduction:

    The Supreme Court shaped its approach to charitable solicitation in a trilogy of cases in the 1980s: Village of Schaumburg v. Citizens for a Better Environment, Secretary of State of Maryland v. Joseph H. Munson Co., and Riley v. National Federation of the Blind of North Carolina. Owing largely to ambiguity surrounding the concepts of content analysis, tiered scrutiny, and commercial speech emerging during that era, the Court failed to articulate a coherent framework for evaluating regulations of charitable solicitation. The result has left lower courts unable to judge “the ends which the several rules seek to accomplish, the reasons why those ends are desired, what is given up to gain them, and whether they are worth the price.” The Eighth and Tenth Circuits interpret Schaumburg as an intermediate scrutiny test, the Third and Eleventh Circuits view it as a strict scrutiny test, and the Fourth Circuit has simply noted that the Court has been “unclear” about the appropriate standard. The lack of doctrinal coherence has also left an important form of speech without adequate First Amendment protections.

    My objective in this Article is to articulate a framework for reviewing charitable solicitation regulation that better accounts for the important democratic values of this kind of speech. This requires understanding the relationship between charitable solicitation and related First Amendment concepts. I begin by reviewing the state of three of these concepts—content analysis, tiered scrutiny, and commercial speech—when the Court decided Schaumburg in 1980. In Part III, I review the Court’s charitable solicitation decisions. Part IV proposes an alternative test to that constructed under the Schaumburg-Munson-Riley trilogy. My normative approach accounts for the speaker-based interests related to charitable solicitation and builds upon a “civic conception of free speech” that better ensures “broad communication about matters of public concern” advanced both directly and indirectly through charitable solicitation.5 I contend that a balancing of interests rooted in a concern for democratic discourse offers a more principled and more cogent review of charitable solicitation regulation than the cumbersome formulations applied today.

For the entire article, go to this website: http://law.marquette.edu/lawreview/spring2009/Inazu.pdf

DAB

Leaders of Muslim Charity Sentenced to 65 Years in Prison

The New York Times (based on an AP story) reports that a federal court sentenced the two founding members of the Holy Land Foundation for Relief and Development to 65 years in prison each for funneling millions of dollars to Hamas.  We previously blogged about their conviction on 108 counts in a second trial, after their first trial ended in a mistrial, as well as about the closing arguments in the second trial, the decision by prosecutors to drop a number of charges after the failed first trial, and the ACLU's attempt to remove the names of two other Islamic Charities removed from all court documents.  The Dallas Morning Newsreports that the three other convicted defendants received sentences ranging from 15 to 20 years, and that all five defendants continued to defend their actions.

For early commentary on the sentences, see this OMB Watch statement ("Holy Land Foundation Sentencing Raises Questions for U.S. Charitable Sector") and this Dallas Morning News editorial ("Holy Land Defendants Got What They Deserved").  I am not familiar enough with the facts of the case to comment on the correctness of the convictions or the sentences, but the convictions underline the need for U.S. based charities engaging in international charitable work to ensure they know where their funds are going and that the recipients have not been identified as terrorist organizations, even if they also do truly charitable work.

LHM

Americans United Asks IRS to Review Tax-Exempt Status of Liberty University

After Liberty University declined to officially recognize the status of a campus Democratic club, the group Americans United for Separation of Church and State asked the IRS to review the tax-exempt status of Liberty.  Here is an excerpt from a letter posted on Americans United website:

“Liberty University is a tax-exempt institution and isn’t allowed to support one party over another,” said the Rev. Barry W. Lynn, executive director of Americans United. “If the school insists on pushing policies that favor Republicans over Democrats, it should have to surrender its tax exemption.”

In a letter to the IRS today, Lynn officially requested a review of Liberty’s tax exemption. The letter notes the recent flap and argues that by giving official recognition and student funding to a Republican club but not a Democratic one, Liberty has run afoul of the tax code.

For the entire text of the IRS letter, go to this website: http://www.au.org/media/press-releases/archives/au-letter-to-irs-re-liberty.pdf

(Hat Tip: Tax Prof Blog)

DAB

Greenlining Report on Foundation Board Diversity

As promised yesterday, the Greenlining report on diversity of foundation boards is now available.  here are the key findings from the report:

• One out of four board members of 46 largest foundations in the United States are people of color, including: 8.0 % who are Latino; 12.5% who are African American and 4.5% who are Asian American
• 28.3% of the top 46 foundations have no people of color on their boards at all, including: 56.5% have no Latinos; 37.8% have no African Americans; and 69.6% have no Asian Americans
• Foundations with diverse boards are also overwhelmingly the most diverse in their grantmaking; 47.1% of all grants to people of color-led organizations in 2005 were made by the foundations with the top 10 most diverse boards

For the entire Greenlining report "Diversity on Foundation Boards of Directors," go to the Greenlinging website at http://www.greenlining.org/resources/pdfs/foundationboarddiversityreport2009.pdf

DAB

Credit Union Beats IRS - Income from Insurance Sales Not Taxable

We previously blogged about the test case brought by Community First Credit Unionof Appleton, Wisconsin challenging the IRS position that the sale of credit life and credit disability insurance and guaranteed auto protection insurance resulted in taxable, unrelated business income.  The major national Credit Union associations supported the lawsuit, which they characterized as the lead case in the nation on this issue.  The Appleton Post-Crescent now reports that the Credit Union has won its case, having successfully proved that the income from these insurance sales is substantially related to the Credit Union's exempt purposes.  The article quotes the Credit Union's President as celebrating the victory as one for all state-chartered credit unions and their customers, a sentiment echoed by the Credit Union National Association.  While the amount at issue in this case was relatively small ($54,000), the issue appears to be a significant one for many if not most tax-exempt credit unions.  According to the Credit Union Times, a second lawsuit raising the same issue is already pending, brought by the Bellco Credit Union of Greenwood Village, Colorado.  The IRS does not appear to have commented on the decision or decided whether to challenge it with post-trial motions or an appeal.

(Hat tip: EO Tax Journal)

LHM

Hispanics Are Most Under Represented Group on Foundation Boards

Apropos of the annoncement earlier today that President Obama has nominated a Latina women for appointment to the U.S. Supreme Court, the Chronicle of Philanthropy reports that "Foundations are failing to recruit diverse board leadership, with Hispanics being the most under represented compared to their growing number in American society."  This statement is based on report by the Greenlining Institute.  The Chronicle article indicates that the Greenlining report would be out "on Friday," it was not available when I checked the website earlier today.  Hopefully, if the report is posted soon, we will be able to get it up on the Nonprofit Law prof Blog.

DAB

America's Richest Meet Privately in New York to Discuss Giving

The Chronicle of Philanthropy reports that a small number of the U.S.'s top philanthropists recently met privately in New York to discuss charitable giving issues.  The group included Bill Gates, david Rockefeller, Sr., Oprah Winfrey and Mayor Bloomberg.  Here is an excerptt from the article:

While the meeting and its hush-hush nature has triggered intense speculation by the news media about what was discussed, Patricia Q. Stonesifer, former chief executive of the Bill & Melinda Gates Foundation, said it was simply a gathering of people who have a common passion for helping others.

“A group of philanthropists came together to discuss their giving,” said Ms. Stonesifer, who attended the meeting. “There’s really no secret about that. It was an informal get-together and a chance to exchange ideas about what motivates them and what they have learned so far.”

“There was an enormous amount of enthusiasm and excitement around their giving and that was a very big part of what they were there for,” she added.

To see the entire article, see "America's Top Philanthropists Hold Private Meeting to Discuss Global Problems" in the May 20, 2009, issue of the Chronicle of Philanthropy.

DAB

Are Catholics in Maine Violating Tax-Exemption Laws by Collecting Signatures to Repeal Same-Sex Marriage Law?

The May 21, 2009, issue of the Washington Post has an article about a gay rights group in Maine that is challenging the tax-exempt status of a Catholic Diocese due to its support of a referendum to end same-sex marriage.  Here is an excerpt from the article:

A gay rights advocacy group claims that the Roman Catholic Diocese of Maine is violating tax rules by helping a referendum campaign that would repeal the state's new same-sex marriage law.

The Empowering Spirits Foundation said its challenge was filed Wednesday at an Internal Revenue Service office in Dallas. The San Diego-based group said the diocese is engaging in political activity by collecting signatures for the referendum, violating IRS rules applying to nonprofits.

For entire story, see "Gay rights group: Maine diocese violating tax law" in the May 21, 2009, issue of the Washington Post.

DAB

Redirecting Art Musem Donations to Foodbanks

The May 21, 2009, issue of the New York Times has an interesting article about how wealthy individuals are making giving decisions during a time of downsized investment portfolis.  Here is an excerpt from the article:

Peter Frumkin, a sociologist at the Lyndon B. Johnson School of Public Affairs at the University of Texas, says donors operate from either of two “master theories of giving.”

“One theory is direct service to individuals; the other is change through advocacy and public education,” said Professor Frumkin, the author of “Strategic Giving.”

“In tough times,” he said, “people tend to gravitate toward direct service because they want something concrete from their giving.”

Direct service, he added, “is like buying bonds, and advocacy like growth stocks, and so in tough times donors rebalance their giving portfolios into safer investments.”

Assuming you still have the capacity to give, three techniques you can consider are conversion, deferral and triage.

For the entire article, see "Smart Giving in a Troubled Climate" in the May 21, 2009, issue of the new York Times.

DAB

CBO Report: "Tax Preferences for Collegiate Sports"

The Congressional Budget Office has issued a report on whether income colleges and universities receive from athletic programs should continue to be viewed as related to these institutions' educational purposes and so remain exempt from federal income tax.  CBO prepared the report at the request of Senator Chuck Grassley, Ranking Member of the Senator Finance Committee, who responded to its issuance with a press release demanding that colleges explain their use of commercial revenue from athletics. 

The report reaches the following three conclusions.  The last sentence of the third conclusion - suggesting possible taxation of corporate sponsorships and royalties - is of particular interest (emphasis added):

1.  Athletic departments in NCAA Division I schools derive a considerably larger share of their revenue from commercial activities than do other parts of the universities.

2.  In the case of Division IA schools (a subset of schools in Division I that meet NCAA requirements for football programs), 60 percent to 80 percent of athletic departments’ revenue comes from activities that can be described as commercial. That proportion is seven to eight times that for the rest of the schools’ activities and programs, suggesting that their sports programs may have crossed the line from educational to commercial endeavors. Revenue from commercial activities accounts for a much smaller share of athletic department revenue (20 percent to 30 percent) for schools in the rest of Division I.

3.  Nonetheless, removing the major tax preferences currently available to university athletic departments would be unlikely to significantly alter the nature of those programs or garner much tax revenue even if the sports programs were classified, for tax purposes, as engaging in unrelated commercial activity. As long as athletic departments remained a part of the larger nonprofit or public university, schools would have considerable opportunity to shift revenue, costs, or both between their taxed and untaxed sectors, rendering efforts to tax that unrelated income largely ineffective. Changing the tax treatment of income from certain sources, such as corporate sponsorships or royalties from sales of branded merchandise, would be more likely to affect only the most commercial teams; it would also create less opportunity for shifting revenue or costs.

LHM

 

Donor Sues Brandeis Over Razing of Named Building

In an article I should have caught last week, the Wall Street Journal reportedthat Sumner Kalman is suing Brandeis Universityto block the demolition of the Kalman Science Building, named after Sumner Kalman's great uncle, Julius Kalman.  The University is building a new science center that will be named after another donor to replace the original building.  The University has said it is working with the Kalman family to make sure Julius Kalman continues to be honored appropriately.  Sumner Kalman apparently filed the suit in Suffolk County Probate Court after the Massachusetts Attorney General's office declined to take action having concluded the university was under no obligation to maintain the original building beyond its useful life.

LHM

FTC and State AGs Crackdown on Fake Charities

The Federal Trade Commission has announcedit is working with 48 states to bring enforcement actions against 76 entities or individuals involved in fundraising solicitations that tricked individuals into making donations to fake charities.  Operation False Charity is targeting 32 fundraising companies, 22 non-profits or purported non-profits, and 31 individuals.  The entities included sham non-profit organizations with names such as American Veterans Relief Foundation, Inc., Coalition of Police and Sheriffs, Inc., and Disabled Firefighters Fund, that were created almost entirely to funnel donations to their founders and for-profit fundraisers.  Media coverage of the crackdown is available from the Los Angeles Times, the Columbus Dispatch, and the St. Louis Post-Dispatch.

LHM

Chicago Nonprofit Argues Charter School Is Private Firm So Federal Government Has Jurisdiction Over Union Certification

Chicago Public Radio reported that there is much debate over whether jurisdiction belongs to the federal or Illinois state government to determine the union certification for three campuses of the new Chicago International Charter School (CICS).

The nonprofit management group, Civitas, asserts that the federal government should have jurisdiction over the union certification and filed a petition with the National Labor Relations Board.  A decision is expected this month.  Under federal law, the three charter campuses fighting for union representation would have to hold an election to determine whether teachers want the union. State law does not require an election at the schools, because a majority of teachers have already signed union cards. The Illinois Educational Labor Relations Board says it received 91 signed and dated cards; organizers say that’s about 75% of employees at the three campuses.  

The legal fight has forced Civitas to make a prickly argument: Charter schools have worked hard to emphasize they are public schools, funded with public dollars. But in order to fall under the jurisdiction of the NLRB, an entity must be a private firm, and that is what Civitas is arguing. The Illinois Educational Labor Relations Board has jurisdiction over public educational employers.  Civitas CEO Simon Hess claims Civitas is essentially a private vendor: "just because you receive public funds doesn’t mean you’re a public entity."

There was a similar case a year ago when teachers at Cambridge Lakes Charter School in Kane County, Illinois formed a union. Their employer, the Northern Kane Educational Corporation, also argued that the NLRB should have jurisdiction in the case, using the same private employer argument. But the state IELRB ruled otherwise. In a decision issued in November 2008, the IELRB determined that Northern Kane should indeed be considered a public employer subject to the State Public Educational Employer Act.  The school’s administration appealed the decision to the appellate court, which is where the case remains.

Started in 2002, Civitas is a LLC whose sole member is CICS.

SS

Human Rights Groups Call On Jordan to Scrap Proposed Amendments to Law Regulating NGOs

Human Rights Watch and Euro-Mediterranean Human Rights Network wrote a letterto Jordan's Prime Minister, Nader al-Dahabi, calling upon Jordan to scrap its proposed amendments to a law regulating NGOs and instead propose a new law that would guarantee freedom of association. In their letter to al-Dahabi, the 2 groups called on the government to revisit aspects of the 2008 Law of Societies limiting the activities and membership of NGOs and their ability to function independently from the government. 

In 2006, a coalition of Jordanian NGOs proposed a draft law, but the government rejected it, instead submitting an alternative draft law to parliament that was more restrictive than the old Law of Charitable Societies of 1966. Parliament approved the government's draft with minor changes in 2008, and King Abdullah signed it into law in December 2008. An outcry by local and international NGOs prompted al-Dahabi's government to offer a new round of consultations with NGOs under the aegis of the Social Development Minister, Hala Latouf. But the resulting amendments proposed by the government fell short of NGO expectations. The parliamentary session expected for June is to vote on these government amendments. 

The current law prohibits associations from pursuing any "political objectives" and activities that violate "public order." Both terms are broad and invite governmental abuse. The law also discriminates against non-Muslim religious organizations, by restricting the activities they are allowed to engage in.  Further, in violation of Jordan's international treaty obligations, it excludes non-Jordanians and children from establishing associations in Jordan.  The 2009 proposed amendments would ease the process of establishing an association by describing more clearly the duties of the registrar of associations, but they continue to grant the government ultimate political control to decide whether an association can incorporate. The inclusion of a right to challenge such denials judicially provides inadequate redress, since the law includes no criteria for denying permission and the government could act lawfully by denying permission without reason. The 2 groups argued that the 2009 proposed amendments do not address the 2008 law's disproportionate government control over the work of NGOs, requiring them to submit annual plans to the government in advance, to admit government officials to meetings, and to seek prior approval for any foreign funding. The 2008 law also allows the government to remove an NGO's management and replace it with state functionaries and to dissolve the NGO for repeating minor infractions of the law. The new amendments would actually increase governmental control, allowing it access to an NGO's finances at any time without cause or a judicial warrant. According to the 2 groups, such measures make it difficult for associations to operate independently of government. 

SS

NYT Offers Ways to Make Smart Gifts to Charities In This Economy

The New York Times offers ways to make smart gifts to charities as the economy suffers.

NYT suggests that people focus on how to do the most good in this stricken economy.  According to Peter Frumkin, a sociologist at the Lyndon B. Johnson School of Public Affairs at the University of Texas, donors operate from either of two “master theories of giving.”  One theory is direct service to individuals; the other is change through advocacy and public education.  In tough times, people tend to gravitate toward direct service because they want something concrete from their giving.  Direct service is like buying bonds and advocacy is like growth stocks and so in tough times donors re-balance their giving portfolios into safer investments.

According to the NYT, many charities face not just tough times, but disaster. At some organizations, volunteer trustees, especially those on the finance committee, have grown accustomed to monthly projections of income and expenses that are soaked in ever more red ink.  Nationwide, charities are reporting that donations are flat to down sharply, especially for organizations that rely on gifts of appreciated stock. This year, Americans are likely to harvest $426 billion in capital gains, less than half of the nearly $875 billion harvested in 2007, according to Citizens for Tax Justice, which calculated its own figures after the Congressional Budget Office decided in January not to issue its annual estimate.  NYT reports that with tax revenues falling, governments are tightening up on contracts with nonprofits and delaying or canceling new grants even though pleas for help are rising among social service agencies.

NYT provides three techniques to consider: conversion, deferral, and triage.  Conversion is a strategy for those who have a multi-year pledge to an endowment of a charity that needs operating cash now.  Endowments are intended to build long-term stability, but without money now an organization or other agency could be forced to curtail operations sharply or to close.  In a conversion, a person proposes that this year’s endowment gift go all or in part to operating funds the charity can spend immediately.  

Because pledges can be enforceable promises, NYT advises readers who need to make a deferral to get a written agreement that they are either reducing their commitment to the endowment or are extending the payment period.  The article suggests raising the issue by sending the charity a written notification along the lines of “my commitment to you remains intact, but I don’t have liquidity right now; when we have it my gifts will resume.”

Some fund-raising executives may press for a more specific timetable. How long it will take for the stock market to recover is speculation, but Allen Sinai, chief economist at Decision Economics Inc., told clients that he thought the market had begun to recover. He cautioned, however, that “our expectation is for a very muted bull market because the U.S. will not produce much in the way of capital gains realizations,” in part because investors have so many losses they can use for tax purposes to offset future gains.

The third technique is triage: separating out charities that will not survive without your support, and trying to assess whether they are worth saving. Letting some nonprofits go out of business troubles many donors, yet it clears out duplication and inefficiency, as well as organizations whose time has passed.  NYT cautions donors to think carefully about scale because the larger-is-better model isn’t always the best.  Professor Frumkin believes few donors would openly risk letting a smaller nonprofit fail by withdrawing support. Instead, he said, they tend to change larger gifts into small gifts, which he calls “nuisance grants.”

SS

Russia Creates Working Group to Draft Changes to Federal Law Affecting NGOs

In an order released on May 12, Russian President Dmitry Medvedev createda working group to draft changes to Russia's law on non-commercial organizations (NCOs). Approximately 35% of Russian NGOs are registered as NCOs and the rest are registered under different legal forms.  The working group, composed of representatives of the presidential administration, the Ministry of Justice, the Duma and Federation Council, and civil society, is to submit proposals within three weeks of May 8, the date the order took effect.

A coalition including Human Rights Watch and Russian human rights organizations urged the working group to adopt proposed reformsin order to guarantee the right to freedom of association.  "President Medvedev's directive is a first step toward removing the choking restrictions on Russia's NGOs," said Holly Cartner, Europe and Asia director at Human Rights Watch. "The working group has a chance here to make real changes and to end government interference so Russia's civic life can flourish."

At a meeting with the members of the Presidential Council for Civil Society Institutions and Human Rights on April 15, Medvedev acknowledged the difficulties faced by NGOs, including restrictions "without sufficient justification," and the fact that many government officials view NGOs as a threat.   At the time, Medvedev stated his willingness to review the law.  Thousands of organizations have been denied registration, liquidated and harassed under Russia's existing NGO law.  NGOs are calling for a reform process that takes their experiences into account in a procedure that is open and consultative.

In his order and public statements, President Medvedev has not committed to specific reforms. Because the effort under way only touches on one subset of NGOs, the working group will not address the regulation of a majority of organizations. Moreover, any reforms that result from the panel's work will not change limitations on foreign grant funding introduced by Prime Minister Vladimir Putin in 2008.

Russia's 2006 NGO law subjects Russian and foreign NGOs to intensive government scrutiny and interference contrary to international standards on freedom of association.  The law grants state officials excessive powers to interfere in the founding and operation of NGOs. Organizations may be denied registration for presenting documents "prepared in an inappropriate manner" or if an organization's activities are considered objectionable. For example, the Ministry of Justice rejected the registration application of the Tyumen-based Rainbow House, whose advocacy for the rights of lesbian, gay, bisexual, and transgendered people was found to undermine the "sovereignty and territorial integrity of the Russian Federation." Other organizations reported having to submit and resubmit registration documents several times because of minor errors identified by the Ministry of Justice in their founding documents. 

Further, under current law, NGOs can be warned for a wide variety of minor violations, including not filing timely activity reports or errors in founding documents. Two such warnings can result in liquidation, the only presumptive remedy for violations prescribed in the law.  NGOs are also required to submit yearly reports, which combined with audits can take up large amounts of time.   Many NGOs are also vulnerable to being targeted under the 2002 Law on Countering Extremist Activity, which designates certain forms of defamation of public officials as extremist.  NGOs and activists that are outspoken on controversial topics of Russian government policy are frequently targeted under this law.  

 Human Rights Watch, the Moscow Helsinki Group, AGORA, the Youth Human Rights Movement, and the Human Rights Resource Center submitted a list of proposed reforms for the NGO law to the Ministry of Justice in April and to the Presidential Council for Civil Society Organizations and Human Rights in early May.  These proposals are based on four principles for regulating NGOs that spring from Russia's domestic and international human rights obligations: government actions should be lawful; authorities should not interfere with the groups' activities; the authorities should presume that NGOs  operate with good faith; and government action should be transparent, easy to understand, and predictable.

The Committee of Ministers of the Council of Europe, of which Russia is a member, adopted a recommendation in 2007 that minimum standards should be respected concerning the creation, management, and the general activities of NGOs. A recent review of Russia's NGO legislation by the Council of Europe's Expert Council on NGO Law, established to evaluate the conformity of member states' NGO laws and practices with Council of Europe standards and European practice, criticized Russia's NGO registration procedure, concluding that it "needs to be seriously simplified and built on straightforward bases."

SS

Nonprofit Sues Arizona Claiming New State Law Emptied Government Fund Benefiting the Nonprofit

Faced with budget problems, Arizona swiped $22.5 million from its 21st Century Competitive Initiative Fund, leaving Science Foundation Arizona with $18.4 million in unpaid reimbursements, the nonprofit claims in Maricopa County Court. The nonprofit, which uses research and development to diversify the state's economy, says Arizona Senate Bill 1001, signed into law on Jan. 31, emptied the fund of $22.5 million and dumped it into the general fund. The plaintiff argues that Arizona failed to make payments of $6.2 million and $10.7 million in November and December 2008, noting that the state had a cash flow problem,  forcing the plaintiff to advance "the private portion of grant payments to pay for the research work needed early." 

Science Foundation Arizona seeks a writ of mandamus ordering the state to pay it $18.4 million. The Arizona 21st Century Competitive Initiative Fund was established in 2006 to create "a partnership between Arizona and the business community to fund various research and development programs in partnership with private entities throughout the state, in an effort to diversify the state's economy and create higher paying jobs," according to the complaint. The contract between the Arizona Commerce and Economic Development Commission and Science Foundation Arizona outlined what would happen if the state "needed to either suspend or terminate the contract because of a lack of funding or if the State wanted to terminate for convenience," according to the lawsuit. The contract allowed the state to terminate "for convenience" upon 30 days written notice, but provided that the contractor "[would] be entitled to receive just and equitable compensation for that work completed prior to the effective date of termination." The foundation had $7.6 million from grants that were awarded in 2007 and continued in 2008 and 2009. The foundation says it spent the money but was not reimbursed by the state.

SS

Financier J. Ezra Merkin Agreed to Step Down as Manager of His Hedge Funds and Place Them in Receivorship

The Wall Street Journal reports that financier and money manager, J. Ezra Merkin, agreed to New York Attorney General Andrew Cuomo's demands to step down as manager of his hedge funds and place them into receivership.  Cuomo charged Merkin with civil fraud last month for funneling $2.4 billion from universities and nonprofit organizations into Bernard Madoff's firm.  Cuomo alleged Merkin "betrayed hundreds of investors" by repeatedly lying to them about how he invested their money.  Attorneys from Cuomo's office presented the agreement to Justice Richard Lowe III in New York State Supreme Court on Tuesday morning.  

The agreement means Merkin will no longer control his three hedge funds: Ascot, Gabriel, and Ariel. Two receivers were named to manage the funds.  One receiver will be responsible for managing the remaining money, nearly $1 billion, in the Gabriel and Ariel funds. Another will oversee Ascot, whose entire $1.8 billion in assets were lost in Madoff's Ponzi scheme.  Cuomo is expected to submit a formal agreement next week, giving time to New York University to review the agreement.  NYU, New York Law School, and Mortimer Zuckerman's charitable trust have sued Merkin as well.  

The trustee in charge of recovering Madoff investors' assets, Irving Picard, has also recently sued Merkin seeking the return of about $558 million that his funds withdrew from Madoff's firm.

SS

TIGTA Issues Audit Report on 2004 Political Activities Compliance Initiative

The Treasury Inspector General for Tax Administration has issued an audit reporton the IRS' Political Activities Compliance Initiative for the 2004 election season at the request of the Senate Finance Committee.  The Initiative involved examinations of section 501(c)(3) organizations for possible violation of the political campaign intervention prohibition - i.e., for supporting or opposing candidates for elected public office.  Several interesting points from this report:

*  Most But Not All Exams Closed:  Four and a-half years after the election, the IRS has managed to close 107 of the 110 examinations that were part of the Initiative.  The report does not indicate why three examinations remain open, or how quickly the IRS ended the closed cases.  An earlier TIGTA report criticized the IRS for not meeting its own timeliness standards for processing alleged political activity referrals, although that report focused on the time between receipt of a referral and notification of the organization involved rather than on the entire time period before closure of an examination.

*  Few Penalties Imposed:  Consistent with previous reportsby the IRS, the IRS resolved the vast majority of cases where the IRS determined political campaign intervention had occurred by issuing a written advisory with a warning and no penalty (48 of 54 cases, based on the 99 cases TIGTA could review and after correcting for miscoded cases (see below)).  In only six cases did the IRS revoke the organization's tax-exempt status, and in no case did the IRS impose the excise tax available under Internal Revenue Code section 4955.

*  Most Referrals from External Sources:  TIGTA found that individuals from outside the IRS provided the highest number of referrals (approximately half) and with watchdog organization referrals, accounted for 74 of the 110 examinations.  IRS employees were the sole source of a referral in only 17 of the cases.  The remaining cases involved both IRS and outside source referrals.  A previous TIGTA report found that the IRS processing of such referrals was not inappropriate in any way, such as being subject to political influence.

*  Miscoding, Missing Records, and Missing Determinations:  Perhaps most troubling is the fact that TIGTA discovered a number of recordkeeping and communication problems.  These problems included 14 cases that were improperly coded as involving prohibited political campaign intervention, when the actual finding was of no such intervention, the inability of the IRS to locate 19 of the closed examination files (although it found some information for 11 of those cases), and the failure by the IRS to state whether prohibited political activity had occurred in 15 of the closing letters sent (out of the 99 cases TIGTA had sufficient information to review).

While TIGTA did not evaluate the conclusions of the IRS examiners, it did note that most (75%) of the examinations involved only a single possible infraction, most (70%) of the examinations involved local as opposed to national or international organizations, and approximately half (47%) involved churches with the rest focusing on other types of charities. 

LHM