Nonprofit Law Prof Blog

Sign of the Times: University Removes Donors Name From Business School After Donor Reneges on Naming Gift

Insurance Mogul Barry Kaye, who pledged $16 million dollars to Florida Atlantic University in exchange for naming the business school after him, has reneged on his pledge. Kaye pledged in 2007 to donate the money in several installments. But when the latest installment was delayed, school officials became concerned. According to the Palm Beach Post, Kaye made much of his money in the insurance business which has seen much better days. While it is possible that some portions of the Business School may retain the Kaye name, the name of the school itself will no longer be "Barry Kaye College of Business."

For the entire story, see "Barry Kaye defaults on $16 million pledge to Boca Raton's Florida Atlantic University" in the July 29, 2009, issue of the Palm Beach Post.

DAB

Sign of the Times: What So Wrong with a Nonprofit Loaning Money to Its Board Members or Officers?

Apropos of our blog post on July 28, 2009, concerning a Florida Nonprofit that is in trouble with that state for allegedly loaning money to its President, here is an interesting story from the July 25 issue of Press Democrat which looks at this issue in depth. According to the story, a nonprofit university foundation loaned millions of dollars to individuals. One such loan was made to a board member who resigned from the board just two days prior to receiving a $500,000 loan. The nonprofit now has millions in outstanding loans to individuals and some of these individuals, including the former board member, have indicated that the loans will not be repaid. Here is an excerpt from the Press Democrat story:

The foundation's investment practices came to light after Santa Rosa developer and financier Clem Carinalli, the key recipient of foundation loans, said he could no longer repay a $1.25 million loan from the foundation. Carinalli served on the foundation board and resigned in 1995 — two days before he received his first foundation loan for $500,000.

Carinalli and his mortgage company would arrange more than half of the 19 private loans to local landowners that followed — including one as large as $4.5 million. By 2003, the foundation had placed half of its $40 million investment portfolio in private loans — a policy it continued despite warnings from its auditors and its own board members.

Last week Carinalli returned to the foundation a 10-acre field outside Windsor used to secure the loan he cannot repay. The group's attorney said it now is worth less than the amount of the loan.

Some donors, SSU faculty and foundation experts now question the foundation's governance, asking whether the loans were advantageous deals made at favorable terms that resulted in the foundation being excessively vulnerable to a downturn in property values.

"They were operating as a bank," said county Supervisor Shirlee Zane, a Sonoma State University graduate and donor to the foundation. "It was very careless. The foundation board should be held accountable for this, absolutely."

For the entire story, see "SSU foundation's private land loans" in the July 25, 2009, issue of the Press Democrat.

DAB

Procedural Glitch Causes IRS to Halt Investigation of a Pulpit Freedom Sunday Church

The Minneapolis-St. Paul Star Tribune reportsthat the IRS has halted its investigation of Warroad Community Church in Warroad, Minnesota because of a procedural glitch.  The church was one of the more than 30 participants in "Pulpit Freedom Sunday," an Alliance Defense Fund organized challenge to the Internal Revenue Code section 501(c)(3) political campaign intervention prohibition.  According to the article, the IRS investigation was not, however, based on the September 2008 sermon delivered as part of that effort but instead was based on a May 2008 sermon that criticized both Barack Obama and Hillary Clinton. 

The procedural problem that IRS cited as the reason for dropping the investigation is almost certainly the Minnesota federal district court decision earlier this year that the IRS had delegated the authority to begin church inquiries to an IRS employee who was too low down in the IRS hierarchy, as we previously blogged about.  As the government has apparently chosen not to appeal that decision (ending an investigation into Living Word Christian Center of Brooklyn Park), it is binding for all Minnesota federal district courts.  It is not yet clear, however, whether the IRS is halting investigations of churches located outside of Minnesota even if they were authorized by the same IRS employee.  Also, the IRS explicitly reserved the right to re-openthe investigation of Warroad Community Church, presumably if the new investigation is authorized by a sufficiently senior IRS employee under the Living Word Christian Center decision.

LHM

Nonprofit Programs at the ABA Annual Meeting

Below is a listing of the nonprofit and philanthropy related programs at this week's ABA Annual meeting in Chicago:

Thursday, July 30; 2:00 p.m. to 3:30 p.m.; Law Firm Legal Aid: International Humanitarian Opportunity or Lost Year?; Picasso, Bronze Level, West Tower, Hyatt Regency Chicago

The storm of the economic crises continues to rain heavily on law firms across the country. Layoffs, delayed start dates for new associates, furloughs for current associates. Many law firm associates have turned to the nonprofit world for opportunities to do pro bono work until the clouds pass. For many local and international NGOs, the interest in pro bono work has been overwhelming. What are the challenges associated with preparing attorneys for international non-profit assignments? Are these opportunities being offered to a diverse pool of attorneys or a select few? What is the competitive impact on established non-profit lawyers? How will NGOs cope with the end to this "boom" in available talent when the economy turns around? How will this affect attorney career development, and what are the challenges associated with reintegrating? This program will examine these questions and the broader ramifications of the economic crisis on the legal profession.

Saturday, August 1; 2:30 p.m. to 4:30 p.m.; Unique Aspects of Representing Religious Organizations; Sheraton Ballroom I, Level 4, Sheraton Chicago

Do you represent a church, synagogue, temple or other religious organization? Are you aware of the unique legal protections and exceptions that apply particularly to religious organizations? Expert practitioners will discuss representing religious organizations regarding land use and zoning, entity structuring tort litigation and more. Presented by: Committee on Nonprofit Organizations Speakers: Eric Rassbach, Washington, D.C.; Lisa A. Runquist, Northridge, California; James A. Serritella, Chicago, Illinois; Chair: Patrick Sternal, Northridge, California

Saturday, August 1; 4:30 – 5:30 pm; Nonprofit Governance; Parlor E, Level 3, Sheraton Chicago; Corporate Governance; Co-chairs: Michael E. Malamut, Boston, Massachusetts and John Stout, Minneapolis, Minnesota

(No description available)

Sunday, August 2; 8:00 a.m. to 9:00 a.m.; Model Nonprofit Corporation Act; Tennessee Room, Level 2, Sheraton Chicago; Nonprofit Organizations; Chair: Lawrence J. Beaser, Philadelphia, Pennsylvania

(No description available)

DAB

IRS to Remove Subversive Organizations Section of IRM

On July 17, 2009, Tax Analysts reported that the IRS plans to remove from the Internal Revenue Manual "controversial language that told revenue agents how to handle examinations of tax-exempt organizations suspected of being 'subversive.'" The IRM provision apparently stems from a Communist era law enacted in 1950. Although the so-called "Security Act of 1950" was repealed in 1993, the portion of the IRM concerning "subversive" organizations has remained until now.

For the entire Tax Analysts story, see "IRS will Eliminate Language on Subversive EO's From Internal Revenue Manual" at 2009 TNT 136-6 in LEXIS (July 17, 2009).

DAB

Bloomberg's NIMBY Policy for the Homeless in New York

While in law school, I recall learning about a concept in environmental law class that goes by the acronym "NIMBY."  It means "not in my back yard."  I learned about the concept when we were studying rules that pertain to laws that are spawned by a desire of certain communities not to have certain noxious pollutants near there homes or communities.  Well, it lookslike Mayor Bloomberg has created a NIMBY policy with respect to the homeless in New York City.  Under a new policy adopted by the City, homeless individuals and families in the cities shelters are offered free one-way tickets to and location in the world where they have family willing to take them in.  Here is an excerpt from the July 29, 2009, article in the New York Times:

They are flown to Paris ($6,332), Orlando ($858.40), Johannesburg ($2,550.70), or most frequently, San Juan ($484.20).

They are not executives on business trips or couples on honeymoons. Rather, all are families who have ended up homeless, and all the plane tickets are courtesy of the city of New York (one-way).

The Bloomberg administration, which has struggled with a seemingly intractable problem of homelessness for years, has paid for more than 550 families to leave the city since 2007, as a way of keeping them out of the expensive shelter system, which costs $36,000 a year per family. All it takes is for a relative elsewhere to agree to take the family in.

Many of them are longtime New Yorkers who have come upon hard times, arrive at the shelter’s doorstep and jump at the offer to move at no cost. Others are recent arrivals who are happy to return home after becoming discouraged by the city’s noise, the mazelike subway, the difficult job market or the high cost of housing.

For the entire story, see "City Aids Homeless With One-Way Tickets Home" in the July 29, 2009, issue of the New York Times.

DAB

Recent 501(c)(3) Tax Exemption Revocations

For a list of 501(c)(3)'s that recently lost federal tax exemption status, go to this location on the IRS website.  Although the IRS publishes in Publication 78 a list organizations exempt from tax under 501(c)(3), Publication 78 does not immediately reflect revocations due to publication lag time.  Instead, the IRS publishes recent revocations in the Internal Revenue Bulletin.  Here are just a few of the organizations noted on the IRS website that were recently revoked, including name of the organization, location and date of publication of the notice of revocation:

Name	Location	Publication Date
Advance Practice Foundation, Inc.	Basking Ridge, NJ	4/6/09
Alternative Care, Inc.	Gainesville, FL	3/2/09
Ammend Credit Counseling and Debt Consolidation	Cincinnati, OH	3/2/09
Brucker Charitable Foundation	Mountain Home, TX	4/6/09
Consumer Budget Counseling, Inc.	Port Charlotte, FL	3/2/09
Consumer Debt Management Services	Deerfield Beach, FL	3/2/09
Credit Counseling, Inc.	Sunrise, FL	3/2/09
Debt Free Foundation, Inc.	Provo, UT	4/6/09
Dunn-Mason Foundation	Farmington Hills, MI	4/6/09
Ellen Stephen Hospice & Home Care	Kyle, SD	3/2/09
GIK Foundation	Bellevue, WA	4/6/09
Goodwill Industries of Greater Cleveland, Inc.	Cleveland, OH	4/6/09
Homebuyer Gift Charity, Inc.	Greensburg, PA	3/30/09
Hoodland Community Childrens Center	Welches, OR	2/9/09
Housing Development Group	Denver, CO	4/6/09
Innovative Womens Network, Inc.	Houston, TX	3/2/09
Kuumba Trust	Pittsburgh, PA	3/2/09
Ladoras Family Services Inc.	Compton, CA	4/6/09
Leszinski Family Support Organization	Atlanta, GA	3/2/09
National Business Fellowship Foundation	Raeford, NC	4/6/09
A New Goal Credit Counseling Agency	San Francisco, CA	3/2/09
N.U. Yoga Ashrama in America	Winter, WI	4/6/09
Pecan Park Learning Center	Jackson, MS	4/6/09
Realty America.Org, Inc.	Indian Harbour Beach, FL	3/2/09
Reliable Cash Management Association	Buffalo Grove, IL	4/6/09
Robert and Donna Herbolich Charitable Supporting	Hudson, OH	4/6/09
Rocky Mountain Big Horn Sheep Foundation	Red River, MN	4/6/09
Ronsard Foundation	Statesville, NC	3/2/09
Sandton Lifestyles	Los Angeles, CA	4/6/09
Skippers Learning Center	Lake City, SC	4/6/09
Starfish Foundation, Inc.	Richardson, TX	3/2/09
Sweet Life Program	Las Vegas, NV	4/6/09
Three Point Volunteer Fire Department, Inc.	Williamsburg, KY	4/6/09
Trans-Atlantic Health Organization	Gaithersburg, MD	3/2/09
Urban Light Community Development	Houston, TX	4/6/09
Walter E & Romell A King Foundation	Gary, IN	4/6/09
World Project Inc.	Temecula, CA	4/6/09

DAB

Weisbord and DeScioli Publish "The Effects of Donor Standing on Philanthropy: Insights from the Psychology of Gift-Giving"

Reid Weisbord (Law Clerk, US District Court, Eastern District, PA) and Peter DeScioli (Post Doctoral Research Associate, Chapman University Economic Science Institute) have published "The Effects of Donor Standing on Philanthropy: Insights from the Psychology of Gift-Giving" inthe Gonzaga Law Review.  Here is the abstract from the SSRN Nonprofit and Philanthropy Law Abstracting Journal:

Societies have long struggled with contradictions between the ideals of philanthropy and the real motives of philanthropists. Cultural artifacts such as traditional Jewish legal codes and the legend of Saint Nicholas of Myra show that societies especially revere philanthropists who give anonymously, without expectation of repayment. But contrary to these ideals, donors often use philanthropy to obtain personal rewards, such as the wealthy patrons of ancient Greece whose opulent displays of benefactions were aimed at social status and political dominance. The gap between ideals and reality creates a dilemma: Societies wish to promote philanthropy but offering incentives taints the authenticity of the donor’s intent.

This dilemma is central to the recent policy debate about the enforceability of donor-imposed gift restrictions. The law has traditionally allowed donors to pursue their personal charitable goals by imposing restrictions on the use of charitable gifts, but until recently, donors lacked legal standing to enforce their restrictions in court.

In this Article, we describe the detrimental effects of donor enforcement rights on the public’s shared interest in charitable assets. We then investigate the issue of donor standing by reviewing and comparing economic and psychological models of gift-giving behavior. On the basis of research from experimental psychology, we propose the novel hypothesis that, contrary to the intended effect, donor standing is unlikely to promote charitable giving and may cause a decrease in charitable contributions.

For the entire article, go to http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1435149

DAB

Taking Money from Poor Blind Children?: The Florida Vision Quest Situation

In Florida, a nonprofit group that provides eyeglasses to the poor (Florida's Vision Quest, Inc. - www.flvq.org) has been charged with improperly using more than $100,000 in state money.  Here is a list of a few of the alleged improper uses and the nonprofit's response:

*??$28,500 as a retainer to Hebrock Steiner, a Tallahassee lobbying firm. Jeppesen said the firm provided fundraising advice, not lobbying.

*??$3,100 in travel expenses for Jeppesen and a co-worker to go to the 2007 International Vision Expo in Las Vegas. Jeppesen said the expo resulted in the donation of $30,000 in equipment.

*??$27,000 to forgive a 2005 loan from Vision Quest to Jeppesen and her ex-husband, who was Vision Quest's president. Jeppesen said the loan was beyond the scope of the state's review.

Now, with respect to the loan, I am not so sure that just saying that the loan was "beyond the scope of the state's review" resolves very much. Given that Florida's Vision Quest is a 501(c)(3), I wonder if this loan to these "insiders" furthered the charitable function?

For the entire story, see "Nonprofit eyeglasses provider refuses to reimburse state for flagged expenses"in the July 28, 2009, issue of the St. Petersburg Times.

DAB

Lobbyists Contribute Millions to Foundations Affiliated with Congressional Caucuses

USA Today reports that lobbyists and businesses that employ them donated $5.8 million to charitable foundations that are affiliated with various congressional caucuses.  Using lobbying report data, the article found that almost all of the funds - $5.7 million - went to two groups: the Congressional Black Caucus Foundation and the Congressional Hispanic Caucus Institute.  The caucuses themselves are barred from using private funds to operate and receive only a limited amount of public money.  According to its website, the Foundation is "a nonprofit, nonpartisan public policy, research and educational institute that aims to help improve the socioeconomic circumstances of African Americans and other underserved communities."    Its Chairperson is Rep. Kendrick B. Meek, and nine other members of Congress sit on its board along with representatives of many prominent business such as Citi, Ford Motor Company, and Microsoft.  As for the Institute, it describes itself as "the premier Hispanic non-profit and non-partisan 501(c) (3) leadership development organization in the country."  Its Chair is Rep. Nydia Velázquez, and numerous members of Congress and representatives of major companies also sit on its board.

LHM

Defining "Church": Foundation of Human Understanding v. U.S.

Last week, the Court of Federal Claims held that a religious group that was once properly recognized as a "church" for tax exempt purposes lost its "church" status.  According to Chief Judge Hewitt's opinion, the organization lost its "church" status because the extent to which it "brings people together to worship [became] incidental to its main function . . .[of] dissemination of its religious message through radio and internet broadcasts, coupled with written publications."  Here is the courts conlusion:

To qualify as a church, "an organization must serve an associational role in accomplishing its religious purpose."  The associational test is a "threshold" standard which religious organizations must satisfy in order to obtain church status. Id. In creating the associational standard, the United States District Court for the District of Columbia stated that demonstrating associational aspects is the "minimum" requirement necessary for a religious organization to gain church status.

During the tax years in question, Foundation's activities were similar to the activities of those plaintiffs whose suits for church status were unsuccessful primarily because their activities lacked the associational aspects which convinced the Tax Court to grant church status to Foundation in its prior declaratory judgment action. . . .

In explaining its rejection of plaintiff's declaratory judgment action in VIA, the Tax Court summarized the key characteristics exhibited by plaintiff in Foundation I which were sufficient to support recognition of church status: plaintiff conducted services "three to four times a week by ordained ministers for congregations of no less than 50 to 300 members[;] [Foundation] ministers were ordained only after having completed a three-year apprenticeship under the tutelage of [Foundation's] founder and leader[;] [and] Foundation operated a regular school for children in which the teaching of [Foundation] principles formed part of the curriculum."  There is no evidence in the record presently before the court in this case to show that the distinguishing characteristics of plaintiff in Foundation I, as delineated by the Tax Court in VIA, continue to exist. See supra Part IV.B.1.a-n. In fact, the evidence before the court shows that plaintiff's primary activities are those which caused the most concern for the Tax Court in Foundation I and subsequent cases. In VIA, the resemblance between plaintiff in VIA and Foundation I which cut against the plaintiff in VIA was the plaintiff's use of the mass media and commercial activities. The court noted that Foundation's use of mass media and commercial activities in order to spread its beliefs, including radio broadcasts, a magazine, and the sale of audio tapes and books, were "of concern" to the court in Foundation I. Id. It appears that the Tax Court decision relied on the fact that Foundation also exhibited "associational aspects" which were "much more than incidental" when the court recognized plaintiff in Foundation I as a church. The evidence now before the court presents a picture of Foundation that resembles the plaintiff in VIA much more closely than it resembles the plaintiff described in the court's findings in Foundation I. Plaintiff no longer provides religious services to an established congregation. See supra Part IV.B.1.m-n. Plaintiff's primary activities are internet and radio broadcasting, activities which are no longer supplemented by the associational activities in existence at the time of the Tax Court's decision in Foundation I. See supra Part IV.B.1.n (discussing the irregularity of plaintiff's Sunday meetings, seminars and weddings). The court in VIA stated that VIA, unlike plaintiff in Foundation I, exhibited a form of worship which was only incidental to petitioner's other activities, and was therefore insufficient to obtain church status.

In Spiritual Outreach I, the Tax Court entertained a declaratory judgment action in which petitioner contested the IRS's initial determination that petitioner did not qualify as a church under I.R.C. sections 509(a)(1) and 170(b)(1)(A)(i).  The court held that petitioner failed to satisfy the associational test. In that case, petitioner maintained an outdoor amphitheater on its grounds at which petitioner held bimonthly musical programs. Petitioner held a total of twenty gatherings during the two years at issue in the case. The musical programs always included congregational singing, and opened and closed with a prayer facilitated by a minister. Id. Also during the two years at issue, petitioner held several retreats on the church grounds "wherein followers of different religions met for the purpose of meditation study and spiritual advancement." Id. A total of five wedding ceremonies were conducted in petitioner's chapel by ministers from guest churches. Id. The court was unpersuaded that "musical festivals and revivals . . . and gatherings for individual meditation and prayer by persons who do not regularly come together as a congregation for such purposes" was sufficient to satisfy the "cohesiveness factor which . . . is an essential ingredient of a 'church.'" Id. The court distinguished petitioner in Spiritual Outreach I from plaintiff in Foundation I, describing the associational factor as "critical." Id. The court stated that the presence of the associational factor in Foundation I was essential to resolving what was a "close question" in that case. Id. The record before the court describes an organization similar to the petitioner in Spiritual Outreach I, and is therefore similarly distinguishable from plaintiff's record presented in Foundation I.

In Church of Eternal Life, the court held that plaintiff failed the threshold associational test based on a finding that petitioner's principal activities included "the operation of a library containing about 4,000 items, bi-monthly meetings, the distribution of literature, the sale of merchandise and the publication of a newsletter."  Based on the court's factual findings in this opinion, Foundation is an institution that closely resembles the plaintiff in Church of Eternal Life. Foundation similarly fails to satisfy the associational standard.

Here, as in First Church of In Theo, plaintiff is a "self-described non-membership organization" whose "religious purposes were accomplished through the writing, publishing, and distribution of religious literature rather than through the regular assembly of a group of believers to worship together."  In addition to failing to meet most of the fourteen criteria, the court in First Church of In Theo also concluded that plaintiff "fail[ed] to satisfy the threshold criteria of communal activity necessary for a church." Id. Accordingly, here, as in First Church of In Theo, the court finds that plaintiff is not a church within the meaning of section 170(b)(1)(A)(i) as interpreted by the weight of persuasive authority.

Because plaintiff no longer exhibits the associational characteristics which were critical to convincing the Tax Court to grant church status to Foundation in 1987, what may have been a "close question" on the facts before the court in Foundation I is more readily determinable in this case.

The extent to which Foundation brings people together to worship is incidental to its main function which consists of a dissemination of its religious message through radio and internet broadcasts, coupled with written publications. "When bringing people together for worship is only an incidental part of the activities of a religious organization, those limited activities are insufficient to label the entire organization a church."

The case is Foundation of Human Understanding v. U.S. (July 21, 2009) (available on LEXIS in the Tax Analysts at 2009 TNT 139-8).

(Hat Tip:  Ellen Aprill)

DAB

Tighter Controls Urged on Non-profit Student Loan Agencies

In response to a bill that was proposed last Tuesday in the House Education and Labor Committee to eliminate the Federal Family Education Loan (FFEL) program and use the savings in part to significantly boost spending on Pell Grants, some are calling for tighter controls on non-profit lender set-asides.  Higher Ed Watch, having already expressed opposition to the provision that would provide a set-aside for all existing non-profit student loan agencies to service the loans of up to 100,000 borrowers in their home states, has called on Congress to at least bar the participation of lenders found to have overcharged the government or acted against the best interests of students.  The article pointed to The South Carolina Student Loan Corporation to make the point:

Should the bill become law, it would give the agency, known as SCSLC, a guaranteed direct loan servicing contract in the state. But according to a recent Higher Ed Watch investigation, SCSLC appears to have used its ties to the state student loan guaranty agency to obtain excessive taxpayer subsidies from the federal government. The loan agency has allegedly done this by helping the state guaranty agency exploit an emergency program the government has in place to ensure that all eligible students are able to obtain federal student loans. The U.S. Department of Education is carrying out its own investigation of these allegations and is expected to issue a report soon.

The legislation would essentially give each and every one of the Education Finance Council’s (EFC) members a no-bid contract to service the loans in question.  Higher Ed Watch, unhappy that the final provision is nearly identical to that proposed by the EFC, points out that the trade association has been quietly shopping amongst a select group of Congressional offices in recent weeks.  It is calling for the federal government to start holding lenders accountable for their actions.  To start, it has suggested that the committee reconsider awarding no-bid contracts to non-profit student loan agencies such as the Iowa Student Loan Liquidity Corporation, which the state’s attorney general found deliberately steered students to its most expensive loan products.

SS

Muslim Groups Want to Be Removed from Holy Land Co-Conspirators List

The Dallas Morning News reported that the American Civil Liberties Union (ACLU) filed a request in Dallas federal court to have two Muslim organizations removed from a list of unindicted co-conspirators compiled by prosecutors in a case known as the Holy Land Foundation terrorism financing case.  The list originated from the case, which was tried last fall and involved the trial of five former organizers of The Holy Land Foundation, once the largest Muslim charity in the U.S., for funneling millions of dollars to a U.S. designated terrorist group. 

The Islamic Society of North America (ISNA) is a national community-based Muslim group and the North American Islamic Trust (NAIT) is a charitable trust that holds deeds on mosques and Islamic centers across the U.S.  The leaders of both groups say that they were blindsided by their inclusion as unindicted co-conspirators, noting that they were told by government authorities before last year's public release of the list that they were not suspected of any criminal activity.

According to the prosecutors, the list of 300 individuals and entities was compiled so that the statements from people in the named organizations could be used at trial without them being considered hearsay.  The ACLU lawyers filed papers with the U.S. District Judge Jorge Solis, arguing that ISNA and NAIT are mainstream Muslim organizations that have been unfairly branded as criminals by being included on the government’s list of individuals and entities allegedly linked in some way to the Holy Land case.  The Council on American-Islamic Relations (CAIR), a Muslim civil rights group, made a similar request in August to have it's name removed from the list, which is still pending.  The government's list says that ISNA, NAIT and CAIR have been tied to the U.S. Muslim Brotherhood. Prosecutors at last year's trial called it an Islamist group that is the parent organization of the Hamas movement.

Its unclear when Judge Solis will issue rulings on the three groups' requests.  The Holy Land Foundation case ended in mistrial last fall and the retrial is set for September 8

ss

Open Constitution Institute Targeted By Chinese Government

The Open Constitution Initiative (OCI), also known by the Chinese abreviation Gongmeng, is an independent legal research group that, until last week, brought together human-rights lawyers and academics to research legal topics and take on politically sensitive pro bono cases.

Recent articles in the Economist, the Wall Street Journal and the National Center for Policy Analysis (NCPA) have reported the organization was shuttered last week by the Chinese Government for allegedly violating laws that govern nonprofits.

Since 2003, Gongmeng has operated in a legal grey zone.  Due to a requirement that NGOs have government sponsorship to register, many groups, such as Gongmeng, are founded as businesses.  The OCI’s name in Chinese translates as the Public Alliance Information Consultancy Company.  Consequently, it has to pay business taxes, which the group says it paid.  The Chinese Government says otherwise. 

On July 17, in addition to levying a bill for little over $200,000, the authorities confiscated almost everything in the Gongmeng office: from files, computers and desks to the water cooler.  They have also declared the research group within the organization illegal because, they say, it is unregistered.

The NCPA calls the Gongmeng crackdown one of the larger incidents in a series of recent blows to Chinese human-rights lawyers.  Last month around 20 human-rights lawyers were effectively disbarred, in a clear warning to other lawyers not to accept politically sensitive cases.  It is also a warning to foreign donors who support Chinese NGOs (Yale's China Law Center provided grants to Gongmeng).

Gongmeng was a small think tank, but the fact that the Chinese authorities went out of their way to shut it down shows the value of its work, observers say.  The group has been so prominent in civil-rights cases that the government seems wary of confronting it directly.  Instead, it has decided to just make its continued operation practically impossible.

SS

New Law Lets Non-Profits Tap Into Their Endowments' Original Principal

Wisconsin State Governor Jim Doyle signed Senate Bill 31 into law on Monday and opened the door for non-profits to access funds that have previously been off limits.  The Milwaukee Journal Sentinel reports the Bill adopts new national standards for the prudent investment and management of institutional funds and allows charitable organizations that manage endowments to withdraw from, and therefore reduce, an endowment's original principal. 

Until now, organizations in Wisconsin typically  have been barred from spending from an endowment fund when the value of the fund dipped below the amount of the fund's original principal.  However, the historical losses incurred in the current economic downturn have led organizations and the legislature to look for more flexibility in the use of endowment funds.

The change was backed by institutions such as the University of Wisconsin Foundation and Marquette University, among others.  Although there is concern about over spending and severe drops in foundation levels, the Bill will permit groups to access  endowments funds during a recession, when the need is greatest and the earnings from such funds' investments  are  severely reduced. 

Variations on the measure have been passed in 41 states in the past three years.

SS

Elected Officials: Perhaps Not the Best Founders for A Non-Profit

With the many recent investigations and court cases relating to fraudulent non-profits and elected officials, perhaps it is time to legislate to prevent those in control of tax-payer dollars from starting tax-exempt organizations.  This was Glyn Vincent’s suggestion in response to a recent incident in New York involving Councilman Miguel Martinez pleading guilty to three federal charges of kick-backs and an additional charge of stealing $40,000 from a now shuttered non-profit, the Upper Manhattan Council Assisting Neighbors. 

In his article, Vincent reports having spoken with his Councilwoman, Gale A. Brewer, prior to her learning Martinez pled guilty.  Brewer indicated that she didn’t think there was anything wrong with a Councilman having a sister on the board of a non-profit, but added that Martinez had clearly acted illegally in siphoning off funds.  In discussing what has been dubbed the slush-fund scandal, she said there are plenty of rules and regulations governing Councilmens' ethical parameters that are well understood and easy to obey.  Simply put, you always have to declare what you’re getting and giving.

Despite the slush fund scandal and the ongoing investigation into the relationship between multiple officials and non-profits, Brewer did not think the Council needed more oversight or regulation.  Recently enacted Council ethical guidelines regulate even small gifts given by neighborhood groups and lobbyists.  Brewer mentioned, however, that perhaps elected officials should not organize or start new non-profits while they are in office.

Vincent, commenting on the wisdom of Brewer's proposition, suggested that it should be the law.  Given that the number of cases of elected officials tied to fraudulent non-profits is rising, it may not be long before a bill creating such restrictions materializes.  

SS

Stimulus Legislation Opens More Capital to Non-Profits

Media Health Leaders reports on new opportunities emerging for non-profit hospitals to fund projects they’d been holding off on due to the inability to access capital.  The Tax Reform Act of 1986, which limited the sale by non-profit hospitals of bank-qualified bonds to $10 million a year, was changed in February when President Barack Obama signed the American Recovery and Reinvestment Act of 2009 into law.  The temporary provision makes it possible for non-profit hospitals and other 501c(3) organizations to sell up to $30 million in tax-exempt bank-qualified bonds in a single calendar year.

The stimulus package not only increased the amount available to non-profits, it decreased the obstacles and provided incentives for organizations to get involved in the bond program.  There is no application fee and the financing can be done in as few as 60 days, compared to regular tax-exempt bond financing, which takes 90 days or more. 

Additionally, under the Build America Bonds program, there is an option to have the federal government pay 35% of the interest on the bonds each year as a tax credit through the life of the bonds. 

Currently, the program is only open to new issue capital expenditure bonds issued before January 1, 2011. 

SS

PA Non-Profit, Victim of Fraud, Seeks Restitution Whilst Facing Possible Revocation of its Corporate Franchise

The sentencing of Ruth Arnao, former aide and longtime friend of convicted ex-State Senator Vincent J. Fumo, brings limited closure to a sordid tale of petty theft from a Pennsylvania non-profit.  Arnao, once the head of Citizens’ Alliance for Better Neighborhoods, was found guilty of conspiring to defraud the nonprofit by getting it to pay for hundreds of personal and consumer services.  She was sentenced to serve 12 months and 1 day behind bars while Fumo got 55 months.

Meanwhile the state Attorney General’s Office took the first step toward dissolving Citizens’ Alliance in April, filing a civil complaint seeking revocation of its corporate franchise.  The non-profit has issued a statement casting itself as a victim of Fumo and Arnao’s fraud scheme.  According to the Philadelphia Inquirer, in the victim impact statement submitted last week just prior to Fumo's sentencing, Citizens’ Alliance said that it wanted restitution, including the $2.1 million it had contributed to Arnao’s defense.  The report stated that the non-profit’s reputation had been “damaged irreparably as a result of its constant associations with the illegal activities of the defendants.”  It also said that in addition to having to discontinue many of its programs and discharge employees, the reputation of its board of directors had been harmed. 

As for the financial loss, Assistant U.S. Attorneys John J. Pease and Robert A. Zauzmer contended that as a result of Fumo and Arnao’s fraud, which included purchases of tools, expensive paint, farm equipment and cars,  the non-profit suffered $1.7 million in losses, not including the money spent on lawyers.

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Tax Exemption Proposal For Struggling Newspapers

In response to the quickly shrinking newsroom staffs and the alarming rate of papers going out of business, the idea of major newspapers turning into non-profits is not so far fetched.  According to an article in Media Shift, it was among the options discussed at a hearing before the Senate Subcommittee on Communications, Technology and the Internet.  One advocate, Arianna Huffington, co-founder and editor-in-chief of the Huffington Post, suggested a new revenue model to combat the industry’s economic problems and opposed trying to increase revenue by restricting access to online content.

"The great upheaval the news industry is going through is the result of a perfect storm of transformative technology, the advent of Craigslist, generational shifts in the way people find and consume news, and the dire impact the economic crisis has had on advertising," she testified. "And there is no question that, as the industry moves forward and we figure out the new rules of the road, there will be -- and needs to be -- a great deal of experimentation with new revenue models."

Another backer of broadening the options for the struggling papers was Senator Ben Cardin.  The committee discussed his proposal for legislation that would allow newspapers to transition to non-profit entities, thereby qualifying for exemption from certain taxes.  The catch is that, as non-profits, newspapers would have to refrain from endorsing political candidates.  His proposal is pending as S. 673 (111th Cong., 1st Sess. 2009).   Although the bill has been referred to a committee, no further action has been taken on it since its introduction in March.

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Sunset Provision Suggested for Non-Profits

The Philanthropy Journal draws attention to the interesting suggestion made by Tom Belford on his blog, The Agitator, that the IRS introduce a sunset provision on the designation of “charitable status.” Recent news reports that urged Massachusetts’ 36,000 nonprofits to consider merging and highlighted the inefficiency and potential harm the myriad of “unregulated” aid groups operating in the health field can create, led Belford to the conclusion that the nonprofits should meet some sort of performance measure or close their doors. 

Belford’s suggestion for a sunset provision of some kind on the IRS charitable status is meant to support a “perform or die” methodology, in which the non-profits “ … figure out a way . . . to establish that [their] nonprofit actually is performing… performing in the sense of achieving substantial goals, not just processing stuff.”

Though he admits his approach may be found crude by some readers, his theory that Massachusetts or Africa would not be worse off if half as many non-profits were expending the same level of resources in each region, has merit.

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