Nonprofit Law Prof Blog

INDIA—NEW REVISIONS TO DIRECT TAX CODE PROPOSED

Under the latest proposal from the Finance Ministry, a Revised Discussion Papersuggests the following changes affecting charities and NPOs will be made in the Direct Tax Code (DTC).

·     NPOs already registered under the Income-tax Act, 1961 and holding valid registration on the date on which DTC comes into effect, would not be required to apply for fresh registration under the DTC. However, they would be required to provide additional information to facilitate the administration of the new provisions;

·     Up to 15% of the surplus or 10% of gross receipts, whichever is higher, will be allowed to be carried forward to be used within three years from the end of the relevant financial year. In other words, indefinite accumulation of up to 15% of gross receipts as is prevalent will not be allowed;

·     The term “charitable purpose” will be retained in place of “permitted welfare activity” proposed earlier;

·     Donations by an NPO out of its accumulated surplus to another NPO will not be considered as an application for “charitable purpose;”

·     A basic exemption limit will be provided and the surplus in excess of such limit will be subject to tax;

·     The cash method of accounting will be retained since it is simple to follow and easy to administer;

·     The Central Government will be empowered to notify any non-profit organization of public importance as an exempt entity;

·     Currently NPOs are allowed unlimited carry forward of unspent balance to the next financial year. It is proposed not to allow this;

·     NPOs will no longer be allowed to accumulate funds for up to 5 years;

·     Donors will not be able to enjoy 100% deduction for donations made to projects approved under section 35AC; and

·     Business activity, even if incidental, will not be allowed for NPOs established for a “charitable purpose” but falling under the category, “advancement of any other object of general public utility.”

 

kws

Supreme Court Upholds Application of "Material Support" of Terrorist Organizations to Humanitarian and Political Support

The Supreme Court of the United States ruled in Holder v. Humanitarian Law Project that the law prohibiting providing material support or resources to designated "foreign terrorist organizations" was constitutional as applied to the provision of support for lawful, nonviolent purposes such as humanitarian and political activities in that the statute neither was unconstitutional vague (under the Fifth Amendment) nor infringed on freedom of speech and association (under the First Amendment).  The Court reasoned both that statutory terms such as "training," "expert advice or assistance, "service, and "personnel" were sufficiently clear to provide fair notice of what is prohibited and that even innocuous and legal support raised legitimate risks of both diversion of that support to terrorist activity and the freeing up of other resources for such activity.  The plaintiffs included six nonprofit organizations, including the Humanitarian Law Project.

Media Coverage:  AP; NPR; NY Times (editorial); Wall Street Journal; Washington Post (editorial).

LHM

Fed Courts Update: ACORN, Credit Union, and Charity Subject to Terrorism Investigation Win

We previously blogged about ACORN's lawsuit challenging Congress attempt to defund it, Bellco Credit Union's UBIT battle with the IRS, and KindHearts' struggle to regain control of its assets, frozen when the U.S. Treasury Department's Office of Foreign Assets Control opened an investigation into whether that group should be designated as a terrorist organization.  Some of this information is a bit dated, but I thought our readers would appreciate learning how those cases turned out (short story: all three groups won, at least to some extent):

• The Center for Constitutional Rights, which represented ACORN, announced that a federal district court issued a permanent injunctionblocking the defunding, based on its opinionthat Congress' action represented an unconstitutional bill of attainder.  The victory is Pyhrric, however, given that ACORN announced its decision to disband shortly thereafter.

• As covered extensively in the credit union press (see Credit Union Magazine, Credit Union Times), Bellco Credit Union(mostly) won its case challenging the IRS' determination that certain income streams were subject to unrelated business income tax.  More specifically, a federal district court concluded in a bench trial that UBIT did not apply to credit insurance income or royalties from accidental and death and dismemberment insurance.  The court hadpreviously concluded that UBIT also did not apply to financial services income from the provision of products and services to Bellco's members, although it did apply to such income from non-members and certain other income from other entities. In its most recent decision, the court also concluded that UBIT applied to credit insurance sales income that came through another entity.  The decision is unfortunately not available for free, but is available through electronic databases such as Westlaw.

UPDATE:  A reader notes that "The Bellco decisions are readily accessible through PACER.  The ruling on cross motions for summary judgment, back in November of 2009, is 35 pages, and the final ruling in April of 2010 is 38 pages. Usually final decisions are free [although the read is not positive they are for the court that issued these rulings], and anything else is eight cents a page."

• The ACLU, which represents KindHearts for Charitable Humanitarian Development, Inc., announced that a federal district court confirmed its earlier ruling that the Treasury Department's freezing of KindHearts' assets violated the Constitution and ordered that the government must obtain a warrant based on probable cause before seizing an organization's assets, even when the organization is suspected of supporting terrorism.  The court's opinionrejected government criticism of its earlier ruling, but concluded both that the government would be given an opportunity to make a post-hoc probable cause showing (to remedy the Fourth Amendment violation) and to produce sufficient evidence to give KindHearts adequate notice and opportunity to respond (to remedy the Fifth Amendment violation).  The court also remandedto the Office of Foreign Assets Control (OFAC), with specific instructions, the issue of the amount of assets that should be released to pay KindHearts' attorney fees, and left in place its previous stay preventing the government from proceeding with terrorist organization designation proceedings against the group.

LHM

Brunson: Rethinking Public Charities and Political Speech

Samuel Brunson (Loyola - Chicago) has posted Rethinking Public Charities and Political Speech, which he also presented at the Junior Tax Scholars Workshop earlier this month.  Here is the abstract:

As a precondition to maintaining its tax-exempt status, a public charity cannot campaign for or against any candidate for office. This prohibition, introduced in 1954 without fanfare, debate, or legislative history, has since created uncertainty and administrative burden for public charities, and has provoked firestorms of debate among academics, policymakers, and directors of public charities themselves. The subjects of these debates have ranged from the wisdom to the constitutionality of such a prohibition on political speech.

The debates have not, however, provided any significant certainty to public charities or to policymakers. Without legislative history or debate, public charities can only guess at the purposes underlying the prohibition. The arguments used to defend the prohibition are met by equally compelling counterarguments, while the arguments for why the prohibition should be eliminated are equally countered.

As this debate occurs, the penalty for violation of the prohibition is the loss by a public charity of its tax-exempt status. In light of the draconian nature of the penalty, the IRS underenforces the prohibition, as some public charities routinely flout the prohibition and others self-censor more than is necessary in order to stay on the right side of an uncertain line. Neither reaction leads to the efficient administration of the tax law.

The problem, this Article argues, is that all of the arguments surrounding the prohibition on public charities’ political campaigning takes place in the shadow of the current language of IRC § 501(c)(3), to which commentators and policymakers must ascribe purpose. Rather than argue the benefits and deficiencies of the current regime, the discussion of the role of public charities in political campaigns needs to start anew, without taking as a given the benefits and burdens of the current system. Whatever the result of the new discussion, however, the Article argues that is necessary to provide the IRS with the option to impose intermediate penalties on public charities that violate a prohibition on campaigning.

LHM

Cowan: Nonprofits and the Sales and Use Tax

Mark J. Cowan (Boise State) has posted Nonprofits and the Sales and Use Tax, which will be published in the Florida Tax Review.  Here is the abstract:

States vary in the application of their sales and use tax regimes to nonprofit organizations. Some states grant broad exemptions, others limit exemptions to an enumerated list of organizations, and others treat nonprofits much like they would any other taxpayer. The purpose of this Article is to analyze ways that states might review, rationalize, and reform the way they apply their sales and use taxes to nonprofit organizations. The Article addresses the key issues of whether sales/use tax exemptions should be used to subsidize nonprofits and whether such subsidies create unfair competition. The Article analyzes the issues from a sales/use tax point of view and a nonprofit point of view – drawing on the practical realities and the theories underlying both areas of the tax law. The analysis highlights longstanding, well-known problems in the broader state sales/use tax systems, but also reveals issues that are unique to nonprofits. For good measure, the political issue of the taxation of Girl Scout Cookies, which seems to arise at nearly every turn, is addressed.

LHM

Expanding Electioneering Disclosure - Except for AARP, NRA & Sierra Club?

Normally I would wait for the legislative dust to settle, but the most recent developments with respect to the DISCLOSE Act (how would like to be the congressional staffer that had to come up with a name to fit that acronym) are too good to skip.  For those of you who have not been following this bill, or rather bills since there is a House version (H.R. 5175) and a Senate version (S. 3295), it is Congress' attempt to counter the effects of the Supreme Court's Citizens United decision striking down long-standing bans on corporations spending their general funds on certain types of election-related communications.  As the name suggests, a major component of the bill is required disclosure of who pays for such communications, including significant donors to any organization that engage in such communications.

While more knowledgeable commentators than me have predicted that passage of the bill is unlikely, the interesting recent development is the attempt to carve out an exception for certain powerful nonprofit organizations so they would not actively oppose the bill.  In a nutshell and as reported widely in the press, the House Democrats sought to blunt threatened opposition from the National Rifle Association by creating an exception for section 501(c)(4) organizations that have existed for at least 10 years, derive no more than 15 percent of their funding from corporate or union sources, have a presence in all U.S. states, and have more than 1 million dues-paying members - a description that appears to only match the NRA and possibly the AARP.  A change to reduce the members threshold to 500,000 may have expanded the exception to include the Sierra Club (which still opposes the bill even with this expansion). Nevertheless, press reports indicate that the proposed exception may have created as many opponents as it eliminated, dooming whatever chances the bill had for passage in the House, much less the Senate where passage was already highly uncertain.

Coverage:  The AtlanticWire; CQPolitics; NY Times; Washington Post.

LHM

Berg: Population Health and Tax-Exempt Hospitals

Jessica Wilen Berg (Case Western) has posted Population Health and Tax-Exempt Hospitals: Putting the Community Back into the 'Community Benefit' Standard, which will be published in the Georgia Law Review.  Here is the abstract:

Disputes about tax-exemption are occurring all over the country. The IRS and CBO are engaged in national studies of non-profit hospitals and community benefits. State governments are considering whether to legislate minimum amounts of charity care in exchange for tax-exemption. Congress is debating whether hospitals should remain a part of the non-profit sector at all. At the same time, uninsured individuals are suing hospitals for unfair billing and collection practices. Creative accounting and expansive definitions of "free" care have led to a variety of non-ideal practices by hospitals in order to balance their bottom line, while at the same time maintain tax-exempt status. This article argues that the longstanding focus on providing individual charity care to meet the community benefit standard for tax-exemption is misguided. Instead, I determine that there are conceptual and practical arguments for requiring hospitals to provide population or public health benefits. I offer a detailed analysis for implementing a new standard, and a framework for quantifying community benefit under that standard. The suggestions set forth should result in better, more expansive benefits for communities; clearer guidance for health care institutions and tax authorities; and fewer problematic incentives for tax-exempt hospitals attempting to meet their community benefit obligations.

LHM

Capps et al.: Antitrust Treatment of Nonprofits: Should Hospitals Receive Special Care?

Cory S. Capps (Bates White, LLC), Guy David (University of Pennsylvania - The Wharton School) and Dennis W. Carlton (University of Chicago - Booth School of Business) have posted Antitrust Treatment of Nonprofits: Should Hospitals Receive Special Care?  Here is the abstract:

Nonprofit hospitals receive favorable tax treatment in exchange for providing socially beneficial activities. Extending this rationale suggests that nonprofit hospital mergers should be evaluated differently than mergers of for-profit hospitals because suppression of competition may also allow nonprofits to cross-subsidize care for the poor. Using detailed California data, we find no evidence that nonprofit hospitals are more likely than for-profit hospitals to provide more charity care or offer unprofitable services in response to an increase in market power. Therefore, we find no empirical justification for different antitrust standards for nonprofit hospitals, as some courts have suggested.

LHM

Bishop: The Low-Profit LLC (L3C)

Carter G. Bishop (Suffolk) has posted "The Low-Profit LLC (L3C): Program Related Investment by Proxy or Perversion?" on SSRN, which will be published in the Arkansas Law Review.  Here is the abstract:

Since 2008 several states have adopted or are considering statutory amendments permitting an LLC to become an L3C when organized for a business purpose and operated to significantly further charitable purposes but without a significant purpose to produce income or asset appreciation. The L3C hybrid is designed to brand the hybrid entity as a business enterprise with a social conscience. But given that the LLC form preexisted and can be operated for any lawful purpose including low-profit, what is the advantage of the L3C statutory operating form? The L3C statutory elements can easily be incorporated in an LLC operating agreement. Closer inspection reveals that, beyond modest branding assertions, the L3C is configured to attract untapped private foundation capital. Given the risky tranche investment scheme targeted for the L3C, the private foundation must be assured its investment in the L3C will be classified as a program related investment (PRI) to avoid prohibitive excise taxes. To date that requires advance federal tax authority approval and it is unlikely the L3C statutory restrictions will serve as a proxy for federal approval. Even if so, additional excise taxes require the foundation to monitor the investment to assure it is appropriately used by the L3C. This requires approval over L3C expenditures and significant accounting reports that will be detailed in the operating agreement. Finally, it is open to question whether tranche investing will threaten the foundation’s exemption through private inurement to the other investors that results from using foundation assets without reasonable compensation.

NAM

Private Inurement Alleged in Sale of NY Church-owned Seniors Complex

An article in today's New York Times questions the sale of a 300-unit seniors apartment complex by its owner, Greater Allen African Methodist Episcopal Cathedral of New York, to a partnership comprised of the church's pastor, Rev. Floyd Flake, a former church CFO, and two real estate developers.  In acquiring ownership  of the complex, the Rev. Flake and his partners allegedly purchased the property for approximately $3 million less than the church's board-approved selling price.  The partnership made no cash investment in the purchase, but rather financed the deal, including proposed renovations, with $21.3 million in loans and cash incentives from government programs, specifically a federal program that makes it expedient to refinance old HUD loans used to build low-income senior apartment complexes.  Although described as refinancings, these transactions typically involve a sale that not is not listed for open bids in the market.  Despite the relatedness of the parties in the transaction, the sale was approved by the New York state attorney general's office and State Supreme Court.  The article postulates that Rev. Flake and his partners stand to retain millions of dollars in the deal and raises questions as to whether the proposed renovations ever materialized.  The general contractor on the improvements was a construction company owned by the two real estate developers that are partners in Rev. Flake's partnership.

NAM

Feds Report Volunteering Surge in 2009 as Well as Other Volunteering Data

The federal Corporation for National & Community Service issued its annual Volunteering in America reportthis week, finding that 63.4 million Americans volunteered in 2009 by contributing 8.1 billion hours of service.  These figures represented an increase of 1.6 million volunteers over 2008, the largest single-year increase since 2003, and repesenting an increase in the volunteer rate from 26.4 to 26.8 percent.  For purposes of the report, volunteers are defined as "adults ages 16 or older who performed unpaid volunteer activities for or through an organization."  The report provides either directly or through its website a wealth of information regarding volunteer demographics, geographic locations, and organizations served, including the ability to download the available data in multiple formats.

LHM 

Thinking About $600 Billion

Fortune reports that a May 2009 dinner of billionaires Bill Gates and Warren Buffett launched a campaign to encourage the richest Americans to give away at least 50 percent of their net worth.  Based on the wealth guestimates for the members of the Forbes 400 list (all billionaires), full participation would result in $600 billion of donations.  This is essentially double the total annual estimated giving by all Americans.  Attendees at the initial dinner included Oprah Winfrey, Ted Turner, Michael Bloomberg, and George Soros.  Gates and Buffett did not suggest any particular target for this giving, other than charitable causes generally.

The possibility of such generosity raises a number of interesting issues.  Will the pattern of giving usually attributed to the wealthy, such as favoring institutions of higher education and the arts over other types of charities, also hold true for this super-rich group?  Will they tend to create endowments, thereby reducing the increase in annual charitable expenditures to perhaps only 5 percent of the amount given, or follow in Warren Buffett's footsteps by requiring quick expenditure of their gifts?  Will such a surge in giving, if it materializes, lead to greater or reduced calls for tightening the definition of what qualifies as "charitable" for federal tax purposes?  Based just on the hundreds of comments already posted on the Fortune story that appeared a little more than 48 hours ago, people are certainly interested in what will happen if this effort is successful.

UPDATE:  Additional coverage:  The Economist; Wall Street Journal.

LHM

NY Times on Richard Berman and the Center for Consumer Freedom

The New York Times reports that Richard B. Berman has created a network of nonprofits, including the Center for Consumer Freedom, to criticize groups including the Humane Society, Mothers Against Drunk Driving, and the Physician's Committee for Responsible Medicine.  He and his groups have themselves come under criticism both for their apparent support by industries that are hurt by the efforts of his targets and for their relationships with his for-profit communications firm, Berman and Company.  According to the article, Berman's nonprofits are closely tied to Berman and Company, with overlapping employees and consultants as well as payments flowing from the nonprofits to the for-profit firm often representing more than 50 percent of the nonprofits' revenues. Berman defends the nonprofits and his firm, however, noting that at least two of them have been subject to IRS audit but retained their exemptions.  According to the article, the other nonprofits include the Employment Policies Institute, and according to the Center for Media and Democracy they also include the Center for Union Facts, the Employment Roundtable (which appears to no longer be active), and ActivistCash.com (self-identified as a project of the Center for Consumer Freedom). 

LHM

Boston Globe Reports on University Presidents' Housing Thanks to 990 Disclosures

The Boston Globe reports that Boston-area universities used a variety of methods to estimate the value of housing provided to their presidents and reported on their IRS Forms 900.  For example, some schools reported the fair market rental value of the entire house occupied by their president, while others only reported the rental value for the "private" portion of the house.  These differences lead to variations such as Boston University president Robert Brown having a reported benefit of $21,000 per month, based on the rental value for the entire house, while Harvard University reported a benefit of only $8,000 per month based on the "private" area of president Drew Faust's residence, as compared to the estimated $12,000 per month rental value for the entire property.  The article also noted that Suffolk University does not provide university-owned housing to its president, David Sargent.

LHM

IRS Advisory Committee Recommends Online Guide for Setting Executive Compensation

In its latest Report of Recommendations, the IRS Advisory Committee on Tax Exempt and Government Entities (ACT) recommended that the IRS provide additional assistance to charities, that is Internal Revenue Code section 501(c)(3) organizations, with respect to setting executive compensation.  The Committee developed an online instructional guide to provide this assistance, including "step-by-step, plain language advice for managers, boards and advisors of charities to assist them in a wide range of areas, including: developing internal procedures and compensation comparables, reporting salary information in their IRS Form 990 filings, and maintaining appropriate records necessary to meet the rebuttable presumption of reasonableness and comply with the regulations promulgated pursuant to Section 4958."  IRS officials have not, as of yet, made any commitment to follow this recommendation.

A complete list of ACT's reports is available on the IRS website.

LHM

Reports Present Differing Views of Foundation Grantmaking in Response to the Great Recession

Two recent reports present sharply divergent views regarding whether and to what extent grantmaking foundations have stepped up to the plate in response to the recent economic downturn. 

The Philanthropic Collaborative, a new coalition of charities, foundations, and elected officials, released Responding in Crisis: An Early Analysis of Foundations' Grantmaking During the Economic Crisis.  Based on a non-representative sample of approximately 2,700 grants totaling $472 million, this report concludes that foundations have "quietly, expertly, and quickly . . . supported American individuals, families, and communities in need," including by sending more grants to states experiencing relatively more severe mortgage delinquency problems and an increasing proportion of grants and overall grant amounts to states with high unemployment. 

In contrast, the Center for Philanthropy released A Time of Need: Nonprofits Report Poor Communication and Little Help from Foundations During the Economic Downturn.  This report on 6,000 grantees of 37 foundations from across the country concluded that the grantees both "do not perceive funders to have communicated their responses to the economic downturn clearly, if at all" and "report that funders have offered them little useful help in responding to the challenges of the downturn." 

Given the different study methods and subjects, not to mention their limited data, the studies are not necessarily inconsistent but instead may reflect two very different perspectives, that of grantors versus that of existing grantees, on what is broadly the same issue.  The key questions are therefore which perspective is the better one, and is their an even better, third perspective from which to look at this issue

LHM

Hudson Institute Releases 2010 Index of Global Philanthropy and Remittances

The Hudson Institute's Center for Global Prosperity released the 2010 version of its annual Index of Global Philanthropy and Remittances (executive summary (4+ MB); full report (13+ MB)).  The report reviews financial support from the United States and other countries to developing countries in 2008, including government aid, private aid, and remittances, as well as investment.  Among its findings, the report notes that U.S. private philanthropic support held steady in 2008 at $37.3 billion, as compared to $36.9 billion in 2007, and was $10 billion more than U.S. government official development assistance.  Both figures were dwarfed by remittances from people in the U.S. to relatives and friends in the developing countries, which reached its highest level ever in 2008 at $96.8 billion.

LHM

White House Social Innovation Fund Annnounces $50 Million of Private Support

The Social Innovation Fund announced that private philanthropy groups had committed $50 million to the Fund.  An accompanying fact sheetidentifies five private foundations that pledged $45 million over the next two years.  The Council on Foundations also released a letter of support for the Fund signed by more than 130 community foundations.  The 2009 Edward M. Kennedy Service America Act created the Fund to promote social innovation through nonprofit organizations.  The Fund is housed in the federal Corporation for National and Community Service. 

For further coverage, see the Chronicle of Philanthropy and the White House blog.

LHM

Giving USA 2010 Report Shows First Decline Since 1987

USA Today reports that the annual report on charitable contributions in the United States shows such giving declined by 3.6 percent in 2009 to $304 billion.  The decline is the first reported since 1987 and only the second since the report began in 1956.  The report is available for purchase from the GivingUSA Foundation and from the Center on Philanthropy at Indiana University.

UPDATE:  A Wall Street Journal blog entry notes that besides showing a decline in giving, the report also shows a number of shifts in giving, most notably away from public-society benefit organizations and toward international aid.  Whether these shifts reflect long-term trends, however, is not discussed.

LHM

Study of Donors Reveals Relative Performance Has Little Impact

Hope Consulting of San Francisco, supported by the Aspen Network of Development Entrepreneurs, the Metanoia Fund of Boston, the Rockefeller Foundation, and the William and Flora Hewlett Foundation, recently issued a report on charitable giving.  Titled Money for Good: The US Market for Impact Investments and Charitable Gifts from Individual Donors and Investors, the report explored three key questions through a study of donors with incomes over $80,000:

1. How can nonprofits more effectively obtain donations from individuals?
2. How can a greater share of donations go to the highest performing nonprofits?
3. What is the market potential for impact investing and how can it be realized?

As noted in a Chronicle of Philanthropy article about the report, one of the more interesting findings is that while these donors say they want to support more effective charities, they are rarely willing to to either research or base their giving decisions on performance.  These results suggest that simply requiring more disclosure of information about nonprofits is not enough to better inform donors; instead, it is also important to determine how such information can be delivered to donors such that they receive and use it.

LHM