Nonprofit Law Prof Blog

Musings on charitable endowments and reserves

Not very long ago, Senator Chuck Grassley, IA, "put the screws" to big universities for hoarding money in what he believed were "excessive" endowments (see prior blog post here).  But this article in the Washington Post should remind us all that charities are just as vulnerable to economic downturns as any for-profit business, and that having significant reserves to weather these downturns is prudent management.  The article details a study of Washington D.C. area charities and found that a significant percentage had too little (or none at all) in reserves to help weather the current downturn.  Interestingly, the study found that bigger charities were more likely to have insufficient reserves than smaller ones.

So charities clearly need to keep a prudent amount of reserves for weathering bad economic times.  But the other side of this question is when, if ever, does a stash of cash become excessive?  Truth is, I don't know.  Squirreling away huge sums of money for the future, whether we call it a "reserve" or an "endowment" implicates the pros and cons of spending for the charitable needs of the current generation vs. future generations.  Many prominent scholars (e.g., Evelyn Brody at Chicago-Kent; Henry Hansmann of Yale; Michael Klausner of Stanford) have written about this issue, with varying conclusions, though I'd say that the weight of opinion is that there is no really good reason for charities to skew their spending towards future generations and a few foundations have made courageous decisions to spend themselves out of existence rather than conserve resources in order to exist indefinitely.  I'd say that Harvard's endowment is (or at least was) beyond the point of reasonable for the scope of its charitable enterprise, but I don't think there is any good consensus on when a prudent reserve crosses the line to Scrooge McDuck's money bin . . .

JDC

Exempt Charities or . . . vacation spots?

The line between an exempt charity and a commercial business has grown ever murkier in our society.  Nonprofit hospitals offer services and operate much like for-profit counterparts, down to using debt collection agencies for past due bills.  Universities raise tuition, build hotels and "research parks," and race to form research partnerships with for-profit entities while shoveling billions into endowments.  But a recent trio of state exemption cases may best describe the tension between what is a charity and what is a commercial business.  In McDuffie County, Georgia, the local property tax assessors are challenging exemption for Fountain Campground, which claims exemption for some 70 acres of land as a site of religious worship - except that the land appears to be fenced, with posted no-tresspassing signs, and is regularly used as a hunt club.  In the Davenport, Iowa, area, local bars and music clubs are claiming unfair competition from River Music Experience, an exempt charity which offers live music acts in its Redstone Room performing venue.  And in Cape May, New Jersey, an order of nuns is seeking tax exemption for property they claim is a religious retreat: three buildings with 160 rooms overlooking the Atlantic Ocean.  Local officials opined that "some of the retreats sound a lot like vacations."

So when, exactly, is an organization an exempt charity or a hunt club, or a bar with live entertainment, or an ocean vacation spot? If the legendary Blue Note in New York City decided to convert to nonprofit status and offer jazz appreciation classes, would it be a tax-exempt charity?  If Tesla Motors was formed by environmental activists as a nonprofit dedicated to commercializing an all-electric sports car in order to save the environment, would it be a charity?

Food for thought . . . 

JDC

Laid-off editors and reporters from Puerto Rico newspaper start a new one as nonprofit employee cooperative

A group of reporters, editors, and other union members in Puerto Rico have started a newspaper organized as a nonprofit employee cooperative.  They started this paper, called the Daily Sun, after their former employer the San Juan Daily Star closed last summer after almost 50 years.  Reports the Miami Herald: "With its break-even economic model and a mission no greater than to employ people, its managers say Puerto Rico's newest media venture may have discovered a business strategy to keep newspaper journalism alive: no profits."

rak

 

New TE/GE Commissioner Ingram Speaks on Nonprofit Governance

Sarah Hall Ingram, the new commissioner of the IRS TE/GE (Tax-exempt and Government Entities) division of the IRS, spoke on June 23 at Georgetown's Continuing Legal Education program about the IRS role in nonprofit governance. In the speech, Ingram identified four general principles that she believes are essential to good nonprofit governance:

A foundational principle is that the organization should clearly understand and publicly express its mission. This helps assure that the organization provides a public benefit and does not drift away from a charitable purpose. It helps an organization avoid practices that are inconsistent with tax-exempt status.

Equally important is the principle that the organization’s board should be engaged, informed and independent. The board should have real responsibility and authority. It must, for example, be able to implement, in the life of the organization, the rules against inurement and self-dealing.

Another set of key good governance principles are those relating to the proper use and safeguarding of assets. These principles are supported by policies and practices that address executive compensation, that protect against conflicts of interest, and that support independent financial reviews.

Transparency is another key principle. I believe that board decisions should be reflected in minutes, that records supporting decisions should be retained for reasonable periods, that whistleblowers should be protected, and that each year’s Form 990 should be complete, accurate and prepared in good faith.

Ingram insisted that the IRS would not create a "one size fits all" definition of governance, but strongly reaffirmed the IRS's role in governance issues: "Another principle I will follow isthat the IRS has a clear, unambiguous role to play in governance."   While I have some doubts about the extent to which the IRS should be active in governance matters, it is hard to argue with Ingram's view that certain core exemption issues (executive pay, other private inurement, political activity, etc.) do involve governance processes.  It will be interesting to see how the IRS's role in governance evolves under Ingram's leadership.

JDC

ACLU Report: War on Terror Undercuts Liberty of Muslim Donors

Yesterday, we blogged about French President Sarkozy's pledge to outlaw the burqa.  This post prompted two of our readers to send me a report recently issued by the ACLU which concludes that the United States' fight against terrorism has dealt a harsh blow to Muslim charities and interfered with their donors’ religious freedom.   Although we blogged about this report just ten days ago, I shall submit another post about this interesting development.

According to the ACLU report, the government's actions have "created a climate of fear that chills American Muslims’ free and full exercise of their religion through charitable giving, or Zakat, one of the 'five pillars' of Islam and a religious obligation for all observant Muslims."  

The report is based on interviews with more than 100 Muslim community leaders as well as experts on antiterrorism laws and regulations. Although it does not estimate the total decline in donations to Muslim groups, it says a total of nine Islamic charities have closed as a result of government action against them since the Sept. 11 attacks.

A recent New York Times story quoted Maja Freij, chief financial officer at the Arab Community Center for Economic and Social Services, a large Arab-American social services group based in Dearborn, Michigan, as saying, "It’s absolute madness how this policy has been put together and practiced.  It makes you guilty by association, offers no due process and lacks checks and balances.”

Meanwhile, Farhana Khera, executive director of Muslim Advocates, told The Times, “American Muslims with U.S. passports are returning from abroad and being asked about their charitable donations by customs and immigration agents.”

VEJ

Pastor to Flock: Bring Guns to Church

Today's New York Times reports that Ken Pagano, pastor of the New Bethel Church in Louisville, Kentucky, has invited members of his congregation to wear or carry their firearms into the sanctuary tomorrow night to "celebrate our rights as Americans."  The event will form part of Bring-Your-Gun-to-Church Day, which will include a $1 raffle of a handgun, firearms safety lessons and a picnic. 

Pastor Pagano has for some time been a passionate advocate of gun rights.  Two weeks ago, he preached a sermon entitled "God, Guns, Gospel and Geometry."  The Times also reports him as saying, "God and guns were part of the foundation of this country." He also opined that "Not every Christian denomination is pacifist.”  

In Pastor Pagano's church in Louisville, a large wooden cross hangs over the altar; two American flags jut out of side walls.       

Commenting on Pastor Pagano's invitation to his flock, Pam Gersh, a Louisville public relations consultant who helped organize a rally in that city to coincide with the Million Mom March against guns in Washington, said, "This pastor is obviously crossing a line here and saying ‘I can even take my guns to church, and there is nothing you can do about it.’ ”

Pastor Pagano disagrees:

When someone from within the church tells me that being a Christian and having firearms are contradictions, that they’re incompatible with the Gospel — baloney. As soon as you start saying that it’s not something that Christians do, well, guns are just the foil. The issue now is the Gospel. So in a sense, it does become a crusade. Now the Gospel is at stake.

VEJ

Sarkozy Would Outlaw the Burqa

Earlier this week, the New York Times reported that in an address to the French parliament on Monday, French President, Nicolas Sarkozy, gave a withering critique of burqas as an unacceptable symbol of "enslavement."  According to Mr. Sarkozy, there is no room in the French republic for burqas, garments some Muslim women wear to cover their bodies and faces.  

Said Mr. Sarkozy:

The issue of the burqa is not a religious issue. It is a question of freedom and of women’s dignity,  The burqa is not a religious sign. It is a sign of the subjugation, of the submission, of women.

To enthusiastic applause, Mr. Sarkozy stated: “I want to say solemnly that it will not be welcome on our territory.”

I note that France has the largest Muslim population in Western Europe.  Current estimates are that there are approximately five million Muslims living in France.  Yet, traditional Islamic garments have been a divisive issue in that country for several years.  In 2004, for example, France passed legislation prohibiting the wearing of head scarves and conspicuous religious symbols at public schools.  

Meanwhile, Mr. Sarkozy appears to have spoken from both sides of his mouth.  On the one hand, he stated that in France, "the Muslim religion must be respected like other religions."  Yet, he also stated that "the burqa is not welcome in France.  We cannot accept in our country women imprisoned behind bars, cut off from social life, deprived of identity.”

He also gave his support to a cross-party initiative by about 60 legislators who proposed that a parliamentary commission study the burqa and methods to combat its spread.

It would seem that Mr. Sarkozy is likening the wearing of the burqa to "women being imprisoned behind bars, cut off from social life, [and] deprived of identity."  Yet, in my work as a member of the Board of Experts of the International Religious Liberty Association, I have come across many Islamic women in many countries who willingly and gladly wear their burqas.  Sure, the burqa is something some western minds do not understand; but why should the government of France -- or any government, for that matter -- outlaw its use?  What next will President Sarkozy do -- call for Roman Catholic nuns to stop wearing their habits or for ministers of religion like myself to stop wearing our clerical collars or clerical robes in public?    

VEJ

  

NCRP Report: Foundations Hit by Madoff scheme Lacked Adequate Board Size and Diversity

A new report released by the National Committee for Responsive Philanthropy (NCRP) reveals that the majority of the foundations hit hardest by Bernard Madoff's ponzi scheme lacked two things in common: (1) adequate board size, and (2) board diversity.

The report's key findings indicate that:

1. One hundred five (71 percent) of the close to 150 foundations [studied] lost between 30 and 100 percent of their assets due to investments with Madoff.
2. The median board size among these 105 foundations was three, with a range of 0-7 total trustees.
3. A mere 16 (15 percent) of these 105 foundations had boards comprising five or more individuals ... 38 foundations listed only one or two trustees, and 46 foundations listed three of four trustees.
4. Of the 16 foundations with five or more trustees, an analysis of trustee names shows notable homogeneity.

The NCRP recommends that foundations have at least five board members and that these board members have a diverse background. The committee also encourages foundations to have a conflict-of-interest policy and a code of conduct, and to make public demographic information about the board.

VEJ

Analysis: Y.M.C.A., Salvation Army and United Way Have Most Valuable Brands in Nonprofit Field

An analysis by the marketing firm Cone LLC and Intangible Business, a British brand-valuation company, has concluded that the Y.M.C.A. has the most valuable brand in the nonprofit field, followed by the Salvation Army and the United Way of America.

The analysis used financial data, projected growth in revenues and a survey of 1,000 Americans to determine the top 100 most valuable nonprofit brand names among organizations providing social, environmental and animal-related services.

According to the New York Times, nonprofits have for some time now been making efforts to value their brand names.  However, "the new analysis appears to be the first that applies the same method of measuring that value across many different nonprofits." 

The Times continues:

The analysis spotted some interesting things. Environmental groups are the darlings of donors right now and their revenues are among the fastest growing in the sector — but their brand names scored lower values in the Cone research.

“They have spent a lot of time raising awareness of the issues through things like calls to action — put a brick in your toilet, turn out the lights — but not for their brands,” [said Alison DaSilva, executive vice president of Cone].

Conversely, she said, the Make-A-Wish Foundation enjoys widespread recognition, but its revenues do not reflect that. “They can capitalize on the brand recognition to increase revenues,” Ms. DaSilva said.

Rounding up the Top Ten are American Red Cross, Goodwill Industries International, Catholic Charities, Habitat for Humanity International, American Cancer Society, The Arc of the United States, and Boys & Girls Clubs of America.  

VEJ

 

Russian present introduces bill to lower hurdles for nonprofit organizations

The New York Times reports that "President Dmitri A. Medvedev introduced legislation on Wednesday to ease some of the regulatory burdens on nonprofit groups. The current law was approved under Mr. Medvedev’s predecessor, Vladimir V. Putin, who asserted that hat foreign governments were using the groups to meddle in Russia’s affairs." No details yet on the bill's contents. For discussion of the Russia's current regulation of nonprofits, link here and here

rak

International Society for Third Sector Research Issues Call for Papers

The International Society for Third Sector Research (ISTR) has issued a call for contributions.  Here is the text of the CFC.

Call for Contributions

ISTR 9th International Conference

"Facing Crises:Challenges and Opportunities Confronting the Third Sector and Civil Society"

The International Society for Third-Sector Research (ISTR) is pleased to announce that the Call for Contributions for the 9th International Conference is published on our website (www.istr.org/conferences/istanbul/). The conference will be held at Kadir Has University in Istanbul, Turkey, on July 7-10, 2010.

The Call is currently available in English and Spanish; Arabic, Chinese, German and French languages will be added in the very near future.

The deadline for submissions is October 19, 2009.

For more information, see the ISTRwebsite at: www.istr.org/conferences/istanbul/

DAB

A.P. to distribute work from nonprofit groups devoted to investigative journalism

Some for-profit newspapers have reduced the size of their staffs in the face of financial difficulty. In order to fill the gap in investigative reporting, they may soon be relying more heavily on the work of nonprofit organizations devoted to investigative journalism.  As reported in the New York Times, the Associated Press announced that it will distribute work by four such organizations: ProPublica ("journalism in the public interest")  Center for Investigative Reporting ("journalism dedicated to revealing injustice") The Center for Public Integrity ("investigative journalism in the public interest")  The Investigative Reporting Workshop at the American University School of Communication.  (The AP is itself operated as a nonprofit cooperative owned by 1,500 U.S. daily newspaper members, who elect its board of directors.)

rak

A.C.L.U. Report Says Antiterror Fight Undercuts Liberty of Muslim Donors

The American Civil Liberties Union (ACLU) has issued a report that claims that the U.S. government's actions in the fight against terrorism "have created a climate of fear that chills American Muslims’ free and full exercise of their religion through charitable giving, or Zakat, one of the “five pillars” of Islam and a religious obligation for all observant Muslims."  The report, entitled "Blocking Faith, Freezing Charity: Chilling Muslim Charitable Giving in the “War on Terrorism Financing." The New York Times'' Stephanie Strom wrote about the new report on Monday, June 15. 

rak

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Momentum Appears to Be Growing for a Nonprofit Insurer Compromise for Health Care Reform

  NPR reported this morning that a network of regional nonprofit health insurance cooperatives, modeled on rural agricultural cooperatives (discussed at 2:30 mark on), might prove to be the needed compromise between the Obama Administration's public insurer proposal and the concerns of both Republicans and moderate Democrats in Congress that a public insurer would force private insurers out of the health insurance market.  As previously posted, Senator Ken Conrad (D., N.D.) put forward this idea in a closed Senate Finance Committee last week.  For more details regarding the competing concerns, see this related NPR report (the cooperatives idea is mentioned specifically at the 3:50 mark).

LHM

IRS Appeals Denies FOIA Request for "Subversive" Exempt Organization Materials

Tax Analysts (paid subscription required) reports that the Internal Revenue Service's Appeals office has affirmed the denial of a Freedom of Information Act request from Paul Streckfus of the EO Tax Journal for all IRS documents on "subversive organizations" as that term is used in the Internal Revenue Manual.  The story notes that Marcus Owens of the Caplin & Drysdale law firm has filed a similar request, but it is silent regarding whether the status of that request (full disclosure: I am Of Counsel with Caplin & Drysdale).

LHM

Religious Group in Japan Fined ¥300 Million For Treating Taxable Income as Offerings

The Japan Times reports that the Kantoshinetsu Regional Tax Bureau in Japan has fined the Cosmic Truth Society ¥300 million (US$3 million) for wrongly treating ¥1.4 billion in taxable revenues as tax-exempt offerings.  The article states that while the group reported about 60 percent of the revenues from its 23 love hotels in Japan, it failed to declare the remaining 40 percent of revenues over the seven-year period through February 2008.  The group has objected to the decision.

LHM

Zakreski on "Reform of the Law Relating to Unincorporated Nonprofit Associations"

Kevin Zakreski (member of the National Conference of Commissioners on Uniform State Laws unincorporated nonprofit committee) has posted Reform of the Law Relating to Unincorporated Nonprofit Associations, 41 University of British Columbia Law Review 115 (a peer-reviewed journal) on SSRN.  For U.S. readers, the last sentence of the abstract may be of most interest (emphasis added):

There are three primary modes of collective nonprofit activity: the nonprofit corporation; the charitable trust; and the unincorporated nonprofit association. The residual or default mode is the unincorporated nonprofit association. Whenever people band together and agree to pursue common nonprofit purposes and they do not take the steps required to incorporate or to create a charitable trust, they form an unincorporated nonprofit association. Unlike the coherent bodies of law that govern nonprofit corporations and charitable trusts, the law applicable to unincorporated nonprofit associations in common-law Canada is a hodgepodge of rules that are not well known and not well adapted to contemporary social needs. It is a body of law that is ripe for reform.

This comment reviews both the law of unincorporated nonprofit associations and the recent efforts to reform this area of the law. It begins by setting out some background information on the types of unincorporated nonprofit associations, the number active in Canada, and their typical activities. Then, it briefly explores the development of the law applicable to unincorporated nonprofit associations in the nineteenth century and examines how this body of law has led to a number of problems in connection with selected legal issues. The comment concludes by noting several law reform projects in Canada and elsewhere, with a special emphasis on the ongoing project to create a harmonized legal framework for unincorporated nonprofit associations in North America, which is being carried out jointly by the Uniform Law Conference of Canada, the National Conference of Commissioners on Uniform State Laws, and the Mexican Conference of Commissioners on Uniform State Laws.

LHM

Rooney Becomes Permanent Executive Director at Indiana's Center on Philanthropy

The NonProfit Times reports that "Patrick M. Rooney, Ph.D., is the new executive director of the Center on Philanthropy at Indiana University in Indianapolis. He has been interim executive director since this past September when Eugene R. Tempel left the position to become president of the Indiana University Foundation."  Here is Dr. Rooney's bio from the Center's press release on the appointment:

"Rooney has served on boards and committees for several nonprofit organizations, as well as on national advisory committees for the U.S. Corporation for National and Community Service, the U.S. Bureau of the Census’ Current Population Survey, the Association of Fundraising Professionals and Independent Sector. He earned his B.A., M.A., and Ph.D. in Economics at the University of Notre Dame and a Certificate of Management Development at Harvard University. He also earned a Certificate in Fund Raising Management from The Fund Raising School at the Center on Philanthropy."

LHM

Brody & Tyler on "How Public is Private Philanthropy"

John Tyler (Ewing Marion Kauffman Foundation) will be presenting a forthcoming report he prepared with Evelyn Brody (Chicago-Kent/IIT) entitled How Public is Private Philanthropy: Separating Myth from Realityon June 19th at the Hudson Institute's conference center in Washington DC.  Panel members who will discuss the report include Glenn Lammi (Washington Legal Foundation), Ray Madoff (Boston College), and Ralph Smith (Annie E. Casey Foundation).  The report will be published by the Philanthropy Roundtable.

LHM

IRS Advisory Committee Issues Latest Recommendations

The Advisory Committee on Tax Exempt and Government Entities (ACT) issued its latest Report of Recommendations to the Internal Revenue Service yesterday.  Of most interest to nonprofits will be the set of recommendations relating to clarifying and facilitating cross-border philanthropy by private foundations.  Those recommendations are:

1.  Creating a depository of equivalency determinations - i.e., determinations that a foreign entity is the equivalent of a U.S. charity.

2.  Publishing guidance clarifying that certain foreign sources of income count as public support for purposes of classifying a foreign entity as a public charity (as opposed to as a private foundation).

3.  Simplifying and enhancing the private foundation expenditure responsibility rules by providing various safe harbors.

4.  Providing additional examples of program-related investments.

The seven earlier ACT reports are also available.  To the best of my knowledge, no one has analyzed these reports to see to what extent the IRS followed ACT's recommendations.

LHM