Nonprofit Law Prof Blog

Legislation Responding to Citizens United Introduced

Major newspapers (including the Chicago Tribune and the Los Angeles Times) are reporting that United States Senator Charles Schumer (Dem., New York) has now introduced his bill intended to curb the effect of the United States Supreme Court’s decision in Citizens United v. Federal Election Commission, previously blogged here.  A summary of the bill appears in this press release. 

JRB

Senator Grassley Seeks Disclosure of Drug Company Donations to Mental Illness Groups

The Chronicle of Philanthropy reports that Senator Charles Grassley (Rep., Iowa), as part of a probe into corporate donations to health care charities, has requested the National Alliance on Mental Illness (“NAMI”) to report its efforts to encourage its state chapters to disclose contributions from pharmaceutical companies.  In a recent letter to the organization, Grassley is reported to laud NAMI for disclosing its own pharmaceutical contributions, but also to ask how NAMI is helping state chapters "make their sources of funding transparent" and ensure that they spend money properly, and to inquire whether NAMI would require state chapters to file conflict-of-interest forms.  “NAMI chapters are surely accepting funds from pharmaceutical companies, and some of them have accepted substantial sums over the period of our inquiry," Grassley reportedly asserts in the letter.  The Chronicle reports that the Grassley letter includes a chart depicting NAMI chapters receiving the most drug company contributions from January 2005 to October 2009 – chapters in California ($632,000), Ohio ($623,000), and New York ($448,000).  The largest donors among pharmaceutical companies named in the letter, says the Chronicle, were Eli Lilly ($2.2-million), AstraZeneca  ($1.6-million), and Bristol-Myers Squibb ($1.3-million).  The Grassley letter reportedly follows a December letter in which he asked 33 medical organizations – including NAMI, the American Cancer Society, the American Diabetes Association, and the American Heart Association -- for details about their financial support from pharmaceutical, medical device, and insurance industries.

JRB

Treasury Official Acknowledges Need for Guidance for Nonprofit Hospitals in Wake of New Law

Tax Notes Today reports that Helen Morrison, deputy benefits counsel in Treasury's Office of Tax Policy, stated on April 28 that guidance is needed "sooner rather than later" on charity hospital requirements imposed by section 9007 of the Patient Protection and Affordable Care Act (Public Law 111-148).  The legislation requires tax-exempt charitable hospitals to conduct assessments of community health needs at least once every three years, to develop a financial assistance policy, and to limit amounts charged for emergency or other medically necessary care provided to individuals eligible for assistance under the financial assistance policy.  The act also prohibits a charitable hospital from engaging in extraordinary collection actions before reasonably attempting to determine whether the patient is eligible for assistance under its financial assistance policy.  For the full story, see “Guidance Needed on New Charitable Hospital Provisions, Treasury Official Says,” 2010 TNT 82-5.
 
JRB

Abstracts in Response to Call for Papers Due Friday

The Association of American Law Schools Section on Nonprofit and Philanthropy Law has issued a call for papers in connection with the AALS 2011 Annual Meeting in San Francisco, California on “The Federalization of Nonprofit and Charity Law.”  Abstracts are due tomorrow, Friday, April 30, 2010.  Select submission details from the AALS website follow:

The abstract should be accompanied by a cover letter with the author’s name and contact information. The abstract itself must not contain any references that identify the author or the author’s school, but should note if the submitter is a junior faculty member who has been teaching for seven years or less. The submitting author is responsible for taking any steps necessary to redact ALL other self-identifying information.

Form and Length:

Initial submissions should be in the form of abstracts of 1,000 words or less and should note if the submitter is a junior faculty member, but not any other identifying information. Presenters will be chosen based on evaluation of the submitted abstracts.

Contact for submission and inquiries:

Nancy A. McLaughlin
Robert W. Swenson Professor of Law
Associate Dean for Faculty Research and Development
University of Utah SJ Quinney College of Law
332 South 1400 East, Room 101
Salt Lake City, Utah 84112
(801) 581-5944
mclaughlinn@law.utah.edu

JRB

Audit by NYC Comptroller Finds Fault with “Powerhouse” Nonprofit

The New York Times reports that the Economic Development Corporation, a nonprofit organization with a president appointed by the mayor of New York City, has been written up following an audit of the organization by the NYC Comptroller.  The nonprofit, which reportedly “has swelled in the size of its budget and in its importance as the primary vehicle for an aggressive development agenda,” was found to have collected inadequate rent, overpaid a contractor and approved unsubstantiated payroll records.  It was also criticized for its lack of transparency and internal controls.  According to Comptroller John C. Liu, the nonprofit “has become a powerhouse agency, but we have very little understanding of what comes in and out of it. … 'You cannot see anything that is going on.''  The New York Times reported the following specifics:

The audit found that the Economic Development Corporation did not hand over $98 million in lease payments from developers in a Times Square project, whose tenants include Conde Nast and Reuters; $16 million in proceeds from the sale of city-owned property in the Bronx, Brooklyn and Queens; and $10.6 million from the dormant fund.  The comptroller found smaller examples of what he said were waste and mismanagement. The corporation improperly accounted for more than $861,000 in loans intended to help small businesses. In one case, the agency gave $338,928 in excess energy credits to businesses as part of a cost savings program it operated with Consolidated Edison.

In a detailed two-page rebuttal, the development agency defended its actions, including its practice of retaining a portion of its money, a practice it says was supported in an opinion from the city's Law Department.

JRB

A Hospital Conversion Does Not Necessarily Imply a Religious Conversion

Conversions of nonprofit hospitals into for-profit firms raise a host of legal issues familiar to exempt organization lawyers.   The Boston Globe reports that such conversions of legal form do not always lead to the abandonment of the historically religious mission of the “converted” hospital, however.  Currently, Cerberus Capital Management, a private equity firm, is in the process of acquiring Boston's Catholic hospital network, Caritas Christi Health Care.  The parties are seeking to ensure that any resulting for-profit hospital will continue to operate in accordance with the traditional Catholic values of Caritas.  How will this be accomplished?  Caritas and Cerberus are drafting a “stewardship agreement” with the Roman Catholic Archdiocese of Boston.  The Globe states the following with respect to this agreement:

At its heart, the stewardship agreement will commit Caritas to strictly adhere to the Ethical and Religious Directives for Catholic Health Care Services agreed to by the US Conference of Catholic Bishops. The directives lay out the principles of Catholic health care - respect for human life from conception until natural death; care for the poor; contribution to the common good - and explain how health care institutions should put them into practice. The directives prohibit medical procedures that the church considers morally wrong, including abortions, sterilizations, certain fertility treatments, and euthanasia.

In addition to complying with the church's ethical guidelines, Caritas will promise to maintain its current level of spending on charitable services ….  In 2009 the six Caritas hospitals spent $66 million: $37 million on charitable care for the uninsured and underinsured, $26 million on community benefits such as support groups and skin cancer screenings, and $3 million on ``mission'' spending such as pastoral care.

Opinions differ as to whether such a stewardship agreement can, in practice, live up to its terms when the hospital is owned and managed by those motivated by profits.  For more on the acquisition, see Charity’s Call Ingrained at Catholic Hospitals, Hope, Hesitation over Caritas Deal, and Equity Firm Set to Buy Caritas.

JRB

Restrictions on Endowments Removed for Metropolitan Opera

The Wall Street Journal reports that The Metropolitan Opera “took the unusual step of unleashing $22 million from its restricted endowment in early 2009 by asking donors to lift regulations on how their contributions could be spent.”  Approximately one third of this sum was reportedly used for current operations.  The perceived need to free endowment assets was hardly mysterious, for the Met’s $282 million of expenses towered over its $133 million in revenue.  Its financial position improving with the general economic recovery, the Met has given no indication that it will seek the release of other donor restrictions

Note: New York’s version of the relevant provision of the Uniform Management of Institutional Funds Act provides as follows:

With the consent of the donor in a writing acknowledged by him, the governing board may release, in whole or in part, a restriction imposed by the applicable gift instrument on the use or investment of an institutional fund.

NY Cons. L. Serv. N-PCL § 522  (2010).

JRB

Legislation Sought to Pave Way for Florida Neighborhoods for those with Special Needs

The St. Petersburg Times reports that Florida State Representative Kelli Stargel (Rep.) has introduced legislation that would allow local governments to permit the construction of group homes for the disabled within 1000 feet of each other.  Current state statutory law prohibiting these facilities within close proximity reportedly was prompted by the concern that “homes catering to addicts and the developmentally delayed would drive down property values.”   But some parents of developmentally disabled children are lobbying Florida lawmakers for “a cluster of communities catering to those with autism, Down syndrome, cerebral palsy and other disabilities.”

JRB

Tax Court: No Deduction for Façade Easement where Bank Has Prior Claim

Tax Notes Today reports that the United States Tax Court, in an opinion granting summary judgment to the IRS, has denied a taxpayer-couple's charitable contribution deduction for a façade easement that they granted to a charity.  In Kaufman v. Commissioner, the Tax Court found the taxpayers’ easement failed to satisfy the requirements of section 170(h) of the Internal Revenue Code and the regulations thereunder.  Under section 1.170A-14(g)(6)(ii) of the regulations, the donor must agree that the donation of the perpetual conservation restriction confers a property right, immediately vested in the donee, with a fair market value that, at the time of the gift, is at least equal to the proportionate value that the perpetual conservation restriction bears to the value of the property as a whole. Moreover, section 1.170A-14(g)(6)(ii) of the regulations states that, when changed conditions extinguish a perpetual conservation restriction and there is a subsequent sale, exchange, or involuntary conversion of the property, the donee generally must be entitled to a portion of the proceeds at least equal to that same proportionate value.  The Tax Court then reasoned as follows:

Petitioners concede that the property had a mortgage and that the bank retained a "prior claim" to all proceeds of condemnation and to all insurance proceeds as a result of any casualty, hazard, or accident occurring to or about the property. Moreover, petitioners do not dispute that the bank was entitled to those proceeds "in preference" to [the donee] until the mortgage was satisfied and discharged. The right of [the donee] to its proportionate share of future proceeds was thus not guaranteed.

The case is available electronically at 2010 TNT 80-12.

JRB

Federal Information Returns of Georgia Nonprofit Adoption Agencies Examined

The Atlanta Journal-Constitution reports that it has examined the information returns filed by most of the 336 private, nonprofit foster care and adoption agencies licensed in Georgia as part of a four-part series of articles on the regulation of these entities.  According to the story, although some institutions paid modest salaries to nonprofit executives, journalists “found numerous examples where top executives' compensation accounted for one-fourth to one-third of agencies' budgets.”  The story also cites “many instances” in which “administrative costs exceeded expenses on direct services for children.”

JRB

IRS Denies Exemption to Trust Formed Primarily to Support Foreign Institution

Tax Notes Today reports that the IRS has determined that a domestic trust ostensibly formed to  further charitable, religious and educational purposes does not qualify for exemption from federal income tax as an organization described in Internal Revenue Code section 501(c)(3).  The adverse determination is available at 2010 TNT 79-40.  Here is a copy of the abstract:

The IRS has denied exempt status to an organization that supports a foreign institute for Jewish studies, finding that private rather than public interests are being served and that the group -- as a foreign conduit -- would not be eligible to receive deductible donations if, on appeal, the IRS were to find it qualifies for exempt status.

JRB

Council on Foundations Holds Annual Conference

The 2010 annual conference of the Council on Foundations concludes today in Denver.  Plenary speakers at the conference include former Vice President Al Gore and Commissioner of Internal Revenue Douglas Shulman.  Commissioner Shulman’s prepared remarks have been published.    Read more about the conference by visiting the Chronicle of Philanthropy’s Conference Notebook.

JRB

Executives’ Salaries Paid by Cultural Organizations Examined

The New York Times reports that it has “surveyed dozens of arts organizations in New York City and elsewhere in the country, reviewed their federal income tax returns, and interviewed many of their managers and several leading compensation experts to evaluate how executive salaries have fared in the tumult of the recent recession.”  The general finding is that growth in executives’ salaries has waned, not just because of the recession, but also because of enhanced appreciation for good governance and expanded information reporting to the IRS required under the new Form 990.

JRB

Is New Legislation on Campaign-Related Advertising Almost Here?

The Boston Globe has reported that congressional Democrats are ready to introduce legislation that would "require sweeping disclosures by corporations, unions, and nonprofit groups that pay for political advertising."  The contemplated bill is a response to the recent Supreme Court opinion of Citizens United v. Federal Elections Commission, 558 U.S. ___, 175 L. Ed. 2d 753, 2010 U.S. LEXIS 766 (2010), and (as previously blogged here) has been widely anticipated.  The proposed legislation is reported to require chief executive officers to attach their approval of political advertisements, and to require organizations to disclose major donors whose donations are used for campaign-related activity.  For more details, see the description of the proposed legislation on Politico.

JRB

Petrovits, Shakespeare and Shih post paper on SSRN

Christine Petrovits (New York University, Leonard N. Stern School of Business), Catherine Shakespeare (University of Michigan, Stephen M. Ross School of Business) and Aimee Shih (Ph.D. candidate, New York University, Leonard N. Stern School of Business) have posted The Causes and Consequences of Internal Control Problems in Nonprofit Organizations on SSRN.  Here is the abstract:

This study examines the causes and consequences of internal control deficiencies in the nonprofit sector using a sample of 27,495 public charities from 1999 to 2007. We first document that the likelihood of reporting an internal control problem increases for nonprofit organizations which are in poor financial health, growing, more complex, and/or smaller. We then present evidence that the disclosure of weak internal controls over financial reporting is negatively associated with subsequent donor support received after controlling for the current level of donor support and other factors influencing donations. We likewise report a negative association between internal control problems and subsequent government grants. Our results suggest that donors and government agencies, important sources of capital for nonprofit organizations, react either directly or indirectly to internal control information.

JRB

Tax Court Denies Charitable Contributions Deduction for Gifts to Nonqualifying Donees

A recent summary opinion of the United States Tax Court, Wilkes v. Comm’r, T.C. Summ. Op. 2010-53, reminds taxpayers and their advisors of the importance of donating directly to a charitable entity qualifying under section 170(c) of the Internal Revenue Code before claiming a charitable contributions deduction.  In Wilkes, the taxpayers made two kinds of gifts.  One type consisted of transfers directly to needy individuals identified by church leaders as deserving of support.  The other type consisted of gifts to several missionaries planting churches elsewhere in the United States and in South Africa.  Deductions for gifts to the needy individuals and to the church planter in South Africa were denied because they were not made to a qualified charitable donee (i.e., an entity organized in the United States and operated for educational, religious, or other qualifying exempt purposes).  Deductions were upheld for gifts to the domestic church planters, for they were acting as agents of local churches when the individuals solicited and expended donated funds.  This decision, released on April 22 and reported by Tax Notes Today, is available at 2010 TNT 78-16.

Caveat: Taxpayers also generally cannot claim a charitable contributions deduction when they make their checks payable to charitable donees and then require that their donations be used to benefit individuals designated by the taxpayers.  For a complete discussion and analysis of these and similar cases of “earmarking” purportedly charitable gifts for individuals, see Johnny Rex Buckles, The Case for the Taxpaying Good Samaritan: Deducting Earmarked Transfers to Charity under Federal Income Tax Law, Theory & Policy, 70 Fordham L. Rev. 1243 (2002), available on SSRN. 

JRB

Josh Eagle has posted Notional Generosity on SSRN.  Here is the abstract:

This article explores a phenomenon that might be called “gift-form generosity”: people earning similar amounts of income are more willing to part with a dollar’s worth of one kind of property than another. Among all income groups, the form of property with which charitable donors are most willing to part is the “conservation easement.” Data show, for example, that the average charitable easement donation is more than 100 times greater in value than the total, annual charitable contribution made by the average American taxpayer. Why are donors so willing to part with conservation easements? The answer may lie in donors’ ability to engage in what I call “donative arbitrage,” that is, the opportunity to profit, in tax-benefit terms, from the difference between the donor’s subjective valuation of the property and the value a hypothetical “willing buyer” would pay for it. To the extent that this hypothesis is correct, donors may in many cases be willing to sell their easements for less than the amount they currently receive as a tax benefit. Overpaying for conservation easements reduces the amount of public money that would otherwise be available for much needed conservation on private land. Allowing deductions for easement donations also creates individual incentives that are opposite of those that would produce optimal results. Specifically, landowners who most prefer to keep their land in its current condition (and who would thus give up very little in agreeing to land-use restrictions) will be the most likely to donate conservation easements. On the other hand, because similar restrictions would be expensive to them, landowners who are most interested in developing their property will be the least likely to donate. Thus, easement subsidies are spent protecting the land that is least in need of the protection afforded by easements. The article concludes by suggesting several ways that Congress might change the law so as to improve the efficiency of conservation easement subsidies.

NAM

Tax-Exempt Organizations News from the Georgetown Law Conference

At the annual Georgetown University Law Center conference on "Representing & Managing Tax-Exempt Organizations," TE/GE Commissioner Sarah Hall Ingram announced that the IRS will soon be issuing an interim report on its study of colleges and universities and their reporting of unrelated business income tax, endowments, and executive compensation.  According to the BNA Daily Tax Report, the IRS study encompassed approximately 400 colleges and universities.

IRS Director of Exempt Organizations Lois Lerner reported that the EO Division workplan, which was not released this fiscal year, will return next year.

Begininng this week, the IRS is mailing postcards to more than 4 million small businesses and tax-exempt organizations to raise awareness and educate such organizations with respect to the benefits of the recently enacted small business health care tax credit.  The credit, which takes effect this year, is designed to encourage small employers, including tax-exempt organizations, to offer health insurance coverage for the first time or maintain their current coverage.  To be eligible for the credit, an exempt organization must have less than the equivalent of 25 full-time employees and pay an average annual wage of less than $50,000.  In addition, the organization must pay for at least 50% of the cost of health care coverage for some of its employees.

As also reported today by the New York Times, the May 15th deadline is looming for tax-exempt organizations to avoid revocation of their exempt status for failure to file a Form 990 for three consecutive years.  The IRS has been issuing notices to organizations since the law was enacted as part of the Pension Protection Act of 2006.  Prior to the Act, only organizations with gross revenues of $25,000 or more were required to file an annual information return.  Since the Act, all organizations must file some type of annual return, including the Form 990-N for organizations with annual gross receipts of $25,000 or less.  The New York Times estimates that one-fifth to one-fourth of the 1.6 million charities will lose their exemptions due to this law at midnight on May 15, 2010.

NAM

Form 990 Assists IRS in Avoiding Nonprofit Audits

At yesterday's conference entitled "Top Issues in Nonprofit Governance" sponsored by the Independent Sector, the Internal Revenue Service and Georgetown University Law Center, Sarah Hall Ingram, TE/GE Commissioner, stated that the IRS will be using the Form 990 to "figure out who needs our attention and who doesn't."  As a consequence, exempt organizations will be reviewed more often and contacted about particular issues arising from their annual reports, ultimately resulting in fewer in-person audits.  As reported in the BNA Daily Tax Report, Ms. Ingram did state that any audits will not include issues pertaining to a nonprofit's governance policies.  However, the IRS will inquire into a particular organization's failure to answer the new questions and schedules pertaining to governance in the revised Form 990.  Although some disagreement exists as to the IRS's proper purview with respect to nonprofit governance, Ms. Hall stated that the IRS is confident of the relationship between competent governance and compliance with the tax exemption laws.  She further stated that early reports reveal that the new Form 990 questions both encourage and yield better governance of nonprofits.

Other participants at the conference, namely the chief of the New York state Charities Bureau, seem to support Ms. Ingram's observations on good governance, recounting that most of the New York Bureau's current investigations involve lack of proper governance.  The New York chief propounded that deficient governance results in increased waste, misuse of assets, and charitable inefficiency.

NAM

Massachusetts Municipalities Join Others Seeking PILOTs

As previously blogged, cities and towns throughout the country are looking to local nonprofits for funds to cover continued operating deficits.  The Boston Globe reports that Concord, Massachusetts town officials issued letters to 34 local nonprofits in January requesting voluntary payments in lieu of property taxes (or PILOTs).  In the letters, the officials delineated the town's fiscal challenges, how nonprofits benefit from the town's services, and how residents bear nearly the entire tax burden.  Essentially, the letters asked the nonprofits to contribute their "fair share" to the town's operational budget.  Only one nonprofit has responded to date with a modest payment.  Other nonprofits responded with demonstrations of other contributions they make to the town's finances and operations.  The town is separately negotiating an agreement with its largest nonprofit landowner, Harvard University.  The nonprofits located in Concord own property worth $935 million, from which the town would otherwise generate $12.2 million in property taxes. 

The article also mentions that other Massachusetts communities, including Boston and Belmont, are considering or requesting PILOTs from nonprofits located in their communities.  Specifically, a Boston mayoral task force recently recommended a "uniform payment formula" to be applied to nonprofit organizations, gradually attaining 25 percent of what would be the organizaton's property tax assessment.  As municipalities continue to battle decreasing tax revenues and increasing operational costs, the necessity and propriety of PILOTs will continue to be discussed by such municipalities across the nation.

NAM