Monday, February 28, 2011

Dialysis Clinic v. Levin: A Different View on Hospital Tax Exemption

Unlike the Illinois Supreme Court and its decision in the Provena Covenant tax exemption case (see prior posts here and here), the Ohio Supreme Court last June rejected a strict charity care test for property tax exemption for health care providers in an opinion that seems to have mostly flown under the radar.  In Dialysis Clinic, Inc. v. Levin, 125 Ohio St.3d 1455 (2010),  the Ohio Supreme Court faced a case involving an entity that provided dialysis services for patients who suffer from end-stage renal disease.  The taxpayer Dialysis Clinic had been denied a tax exemption by the Ohio Tax Commissioner, a decision upheld by the Board of Tax Appeals.

The facts showed that Dialysis Clinic admitted both Medicare and Medicaid patients, and often “wrote-off” the co-pay required of Medicare or Medicaid in the case of indigent patients.  The Clinic also claimed that it provided “charity care” for persons ineligible for either Medicare or Medicaid, but apparently did not offer any proof regarding the dollar value of such care.  Both the Tax Commissioner and Board of Tax Appeals held that the write-offs of the co-pays or other bad debts were not charity care, that there was no other evidence of charity care in the record, and that some such evidence was required to support exemption under Ohio law. 

On appeal to the Ohio Supreme Court, the Clinic argued that it should be treated as exempt from Ohio property taxes.  The Clinic argued first that Ohio should take into account the fact that the Clinic was recognized as an exempt charity under Internal Revenue Code Section 501(c)(3) as a factor supporting exemption in Ohio.  Like Illinois and other state courts, however, the Ohio Supreme Court rejected any link between federal tax exemption and state property tax exemption.  Instead, the Ohio Supreme Court noted that the Ohio test for exemption was narrower than the “community benefit” test of federal law: in Ohio, exemption would be granted if services were provided “on a nonprofit basis to those in need, without regard to race, creed, or ability to pay.” 

The clinic, however, failed this latter test, primarily because the Clinic’s own indigency policy stated that treatment was “not a charity or gift to patients” and that “DCI retains all rights to refuse to admit and treat a patenit who has no ability to pay.”   This statement, according to the court, expressly contradicted the requirement of Ohio state law that a charity offer services to all-comers, without regard to ability to pay. 

Unlike the Illinois Supreme Court plurality in Provena, however, the Ohio Supreme Court explicitly rejected the notion that some minimum level of charity care was necessary for a health-care provider to secure state property tax exemption.  “A threshold amount of unreimbursed care is not required, and the commissioner’s contrary assertion is unfounded.”   In short, Ohio law requires only that an institution have an “open-door” policy – that is, that it treat any indigent patients that show up, and if no indigent patients show up, that would not bar exemption.  Ohio, therefore, appears to adopt the same approach as the majority of states in not requiring any specific amount of charity care for exemption, as long as the institution in question in fact serves all indigents seeking services.

With state budgets still a mess, I doubt that we have seen the end of state litigation over tax exemption for hospitals. But in Ohio, at least, it appears that nonprofit hospitals will have a much easier time holding on to property tax exemption than those in its nearby neighbor, Illinois.




February 28, 2011 | Permalink | Comments (2) | TrackBack (0)

Thursday, February 3, 2011

Bill Gates' 2011 Annual Letter on Philanthropy


Bill Gates has released his third annual letter on philanthropy.  In this video, he provides a brief introduction. 

February 3, 2011 in In the News | Permalink | Comments (1) | TrackBack (0)

Richard Hasen: "Citizens United and the Illusion of Coherence"

Richard Hasen has published "Citizens United and the Illusion of Coherence at 109 Michigan Law Review 581 (2011).  Here is the abstract: 


The self-congratulatory tone of the majority and concurring opinions in last term's controversial Supreme Court blockbuster, Citizens United v. Federal Election Commission, extended beyond the trumpeting of an absolutist vision of the First Amendment that allows corporations to spend unlimited sums independently to support or oppose candidates for office. The triumphalism extended to the majority's view that it had imposed coherence on the unwieldy body of campaign finance jurisprudence by excising an "outlier" 1990 opinion, Austin v. Michigan Chamber of Commerce, which had upheld such corporate limits, and parts of a 2003 opinion, McConnell v. FEC, extending Austin to unions and to a broader set of election-related television and radio broadcasts. The majority saw itself as returning the Court to the fountainhead of this jurisprudence, the Court's 1976 opinion in Buckley v. ValeoCitizens United indisputably harmonized campaign finance law on the question of the constitutionality of spending limits on corporations, even if its view of Austin as an "outlier" remains contested. But the Court in doing so amplified and solidified other significant, incoherent aspects of its campaign finance jurisprudence. 

Part I of this Article situates Citizens United in the campaign finance jurisprudence that preceded it and describes in detail the key opinions in the case. Part II explains how the Court's analysis in Citizens United is likely to lead to new incoherence in the Court's campaign finance jurisprudence, because it is unlikely that the Court will follow the new case to its extreme, for example to allow spending by foreign nationals to influence candidate elections, to treat spending in judicial elections the same way as spending for other races, or to strike down reasonable limits on campaign contributions made directly to candidates. Part III suggests that incoherence is likely to be an enduring feature of the Court's campaign finance jurisprudence, because consistent application of a coherent approach could well be politically unpalatable for majority of the Justices on the Court. It also considers the challenge such incoherence poses for lawyers arguing campaign finance cases in the Supreme Court and lower courts.

I am in a "law student" state of mind.  Which means I don't feel like pondering the why's and wherefores.  I just want to know whether the lobbying restrictions and campaign intervention prohibition in 501(c)(3) is constitutional?  "Will it be on the exam?"  Does Citizens United have more to do with those provisions than we are admitting?  Surely, the issue will arise in 2012 when one side or the other intentionally violates the prohibition in an effort to force a judicial opinion on the topic. 



February 3, 2011 in Publications – Articles | Permalink | Comments (0) | TrackBack (0)

Wednesday, February 2, 2011

Illinois Owes 2000 Nonprofits More than 1 billion dollars; 60 Minutes on State Budget Crisis and Other Horror Stories

In case you missed it last Christmas, check out this really unnerving 60 Minutes segment during which it is noted that state budget problems have resulted in nonprofits (amongst other sectors) just not being paid monies owed.  Illinois is said to owe some 2000 nonprofits more than $1,000,000,000.  And if you are really into horror movies, add to the 60 Minutes report this Special Report entitled, "State Budget Crisis:  Ripping the Safety Net Held by Nonprofits" prepared by the National Council on Nonprofits (March 2010). 


February 2, 2011 | Permalink | Comments (0) | TrackBack (0)

Tim Delaney on State Threats to Nonprofits

Tim Delaney, President and CEO of the National Council of Nonprofits, has initiated what he calls "an uncomfortable -- but necessary conversation" regarding the way state and local governments are coming to view nonprofits as more burden than benefit.  In Part I, he identified "three dangerous policy trends" emerging across the nation:

These trends are interrelated and need to be addressed proactively with the nonprofit sector’s focused collective energy.

"The trends are:

  1. State and local governments shifting their fiscal burdens onto nonprofits and foundations;
  2. Policymakers still know frighteningly little about nonprofit organizations; and
  3. A steady marginalization of nonprofits from the public policy process that, in turn, represses the voice of the American people."

 In Part II, he argues that nonprofits are conceding these trends by their collective failure to speak up and participate in the political process: 

"The Steady Marginalization of Nonprofits from Public Policy

Numerous forces have conspired, sometimes unwittingly, to steadily marginalize nonprofits from the public policymaking process. By erecting and reinforcing several barriers that limit and often exclude nonprofit participation, they have been silencing the voices of the American people."

Anybody who is paying half attention should be aware that the threats to tax exemption are emanating largely from the states, notwithstanding Senator Grassley's bullpulpit.  Despite occasional complaints regarding what nonprofits don't do, federal tax exemption for charities is a relatively safe aspect of the federal tax code.  The states and local governments, though, are leading a rather active charge against charitable tax exemption.  So Delaney's article is worth reading and thinking about. 





February 2, 2011 in Current Affairs | Permalink | Comments (0) | TrackBack (0)

Senator Dick Durbin Challenges Nonprofit Higher Education to Be More Aggressive Against For-Profit Higher Education; And To Clean Their Own Houses While They Are At it!

    "And I’m not talking only about low-performing for-profit colleges. There are public colleges and private non-profit colleges that are also failing their students.  It is time for a serious conversation about the cost and quality of our higher education system.  It’s time to question why we allow some colleges to continue to take in new students when they only graduate 15 or 16 percent of students, year after year.  It’s time to question rising tuition and rising student loan debt when students aren’t seeing improvements in outcomes.  And it’s time for a serious conversation about a new study that found that nearly half of college students showed no significant improvement in critical thinking, complex reasoning and writing by the end of their sophomore years. And that one-third of students did not take a single course requiring even 40 pages of reading per week."

Bloomberg News reports today that in a speech before the National Association of Independent Colleges and Universities yesterday, Senator Dick Durbin challenged the nonprofit higher education community to resist efforts by for-profit higher education lobbyist to sidetrack legislative efforts aimed at for profit higher education.  

Durbin, an Illinois Democrat, has criticized for-profit institutions, saying they fail to prepare students for jobs and saddle them with debt. For-profit colleges such as Apollo Group Inc.’s University of Phoenix, DeVry Inc. and Washington Post Co.’s Kaplan University received 25 percent of Pell Grants, federal aid to students based on financial need. The maximum Pell Grant for the 2010-11 award year is $5,550.

Traditional, nonprofit Law schools and graduate schools are currently confronting accusations from everywhere that they produce too many J.D.'s and P.hD's, for too few jobs and too much debt.  Even further, law schools are everywhere engaged in soul searching regarding the extent to which they actually or adequately prepare graduates for the practice of law.  Prominent people within the legal academy are explicitly stating that law school is a losing investment.  So we should be careful in attributing failures to the for profit or nonprofit status of higher education. Here is a further excerpt from Durbin's speech (the full text of which is linked above):

For-profit colleges are the fastest-growing segment of higher education. In the last 10 years, enrollment at for-profit institutions has grown 225 percent.  For-profit colleges are also consuming a disproportionate share of federal financial aid dollars.  Think about this: Last year, the top three recipients of federal student aid -- the University of Phoenix, DeVry and Kaplan University – were all for-profit colleges. For-profit schools educate less than 10 percent of all college students, but receive 25 percent of all Pell grants.  They also educate 23 percent of all students attending college on the Post 9/11 GI Bill, but they account for 36 percent of the Post 9/11 GI Bill funds.  All told, for-profit colleges receive an average of 77 percent of their revenue from federal loans and grants. If you include funds from the new GI Bill and other military tuition programs, it’s more than 90 percent at some schools.  Let me be clear: There are many good for-profit colleges and they serve a vital purpose: supplying education and job training that helps people take the next step up the economic ladder.  Your institutions may even learn from for-profit colleges how to adapt education to better fit the way people live and work today, allowing students to study online and on their own schedule.

But there are also a lot of bad for-profit schools that are raking in huge amounts of federal dollars and leaving students poorly trained and over their heads in debt.  At some schools, students pay $20,000 to $30,000 for an associate’s degree only to learn that their credentials can’t help them find a job. They’re no more employable than they were before but now they’re deep in debt.  Here are some alarming numbers: For-profit colleges make up less than 10 percent of college students – but 44 percent of federal student loans defaults.

I have a brother who, after 20 something years in the Air Force, attended the University of Phoenix, got a degree in computer something or other and is now doing quite well.  His military service paid for his education so he does not have a bunch of student loans to repay.  Anyway, like Durbin I agree that there is a place for for-profit higher education and that federal subsidies are not necessarily wasted at those institutions.  But as it relates to nonprofit, tax exempt status, higher education does no service to the poor if they must mortgage their entire post graduate lives to receive the benefit of higher education.  The rules Durbin argues for regarding outcomes will inevitably and logically apply to the nonprofit higher education sector as well.


February 2, 2011 in Conferences | Permalink | Comments (0) | TrackBack (0)

JAMA Study Finds For-Profit Hospice Organizations "Cherry-Pick" Lower Cost Patients, Leaving Higher Cost Patients to Nonprofit Hospice; Medicare Payment Structure Incentivizes The Strategy

Capitalist systems are amoral (some might argue immoral) so the results of a recent JAMA study (described and linked to below) should not be surprising.  The study results helps us think about what should be the proper role of nonprofits in society.  Capitalism presupposes the necessity that in order for some to be rich, others must be poor.  Capitalism requires the poor and the poor will always be with us.  Nonprofits ought to militate against this particular amoral or immoral aspect of capitalism.  This is not to condemn capitalism in toto.  If, indeed, it provides more utility for more people than any other economic model than, of course, it is not entirely immoral.  But to determine beforehand that some people must, of necessity, be poor so most people have what they need is the quandry of capitalism.  Nonprofits help solve the quandry and, as I argued yesterday, should be tax exempt and supported in other ways only to the extent they do so. 

A study in the current Journal of American Medical Association helps demonstrate the broader point, while also demonstrating the need to make changes to the medicare payment structure.  The study concludes that for-profit hospice organizations typically select lower cost patients, leaving higher cost patients to the nonprofit sector.  Nevertheless, both for-profits and nonprofits are reimbursed using identical per diem rates.  Here is the study abstract:

Context: Medicare's per diem payment structure may create financial incentives to select patients who require less resource-intensive care and have longer hospice stays. For-profit and nonprofit hospices may respond differently to financial incentives.

Objective: To compare patient diagnosis and location of care between for-profit and nonprofit hospices and examine whether number of visits per day and length of stay vary by diagnosis and profit status.

Design, Setting, and Patients: Cross-sectional study using data from the 2007 National Home and Hospice Care Survey. Nationally representative sample of 4705 patients discharged from hospice.

Main Outcome Measures: Diagnosis and location of care (home, nursing home, hospital, residential hospice, or other) by hospice profit status. Hospice length of stay and number of visits per day by various hospice personnel.

Results: For-profit hospices (1087 discharges from 145 agencies), compared with nonprofit hospices (3618 discharges from 524 agencies), had a lower proportion of patients with cancer (34.1%; 95% CI, 29.9%-38.6%, vs 48.4%; 95% CI, 45.0%-51.8%) and a higher proportion of patients with dementia (17.2%; 95% CI, 14.1%-20.8%, vs 8.4%; 95% CI, 6.6%-10.6%) and other noncancer diagnoses (48.7%; 95% CI, 43.2%-54.1%, vs 43.2%; 95% CI, 40.0%-46.5%; adjusted P < .001). After adjustment for demographic, clinical, and agency characteristics, there was no significant difference in location of care by profit status. For-profit hospices compared with nonprofit hospices had a significantly longer length of stay (median, 20 days; interquartile range [IQR], 6-88, vs 16 days; IQR, 5-52 days; adjusted P = .01) and were more likely to have patients with stays longer than 365 days (6.9%; 95% CI, 5.0%-9.4%, vs 2.8%; 95% CI, 2.0%-4.0%) and less likely to have patients with stays of less than 7 days (28.1%; 95% CI, 23.9%-32.7%, vs 34.3%; 95% CI, 31.3%-37.3%; P = .005). Compared with cancer patients, those with dementia or other diagnoses had fewer visits per day from nurses (0.50 visits; IQR, 0.32-0.87, vs 0.37 visits; IQR, 0.20-0.78, and 0.41 visits; IQR, 0.26-0.79, respectively; adjusted P = .002) and social workers (0.15 visits; IQR, 0.07-0.31, vs 0.11 visits; IQR, 0.04-0.27, and 0.14 visits; IQR, 0.07-0.31, respectively; adjusted P < .001).

Conclusion: Compared with nonprofit hospice agencies, for-profit hospice agencies had a higher percentage of patients with diagnoses associated with lower-skilled needs and longer lengths of stay.

A Los Angeles Times article had this to say of the study:

They found that for-profit services had a lower proportion of patients with cancer than nonprofit providers, and a higher proportion of patients with dementia (which are, generally, less expensive to treat). For-profits had more patients living in nursing homes (also less expensive to treat.) 

The team also found that the average length of stay for patients in for-profit hospice was 20 days, while the average length of stay in a nonprofit hospice was 16 days.  Because costs are highest at the onset of enrollment and near death, longer stays in hospice are more profitable for providers.

Between 2000 and 2007 the number of for-profit hospice agencies more than doubled, from 725 to 1,660, while the number of nonprofit operators stayed about the same.  For-profits have "significantly higher" profit margins than nonprofits, reported the researchers. Indeed, nonprofits, true to their name, operate at a loss.

The team did not assess the relationship between profit status and quality of care, but did suggest that policy makers should consider the study's results when planning how Medicare hospice reimbursements will work in the future.

"Patient selection of this nature leaves nonprofit hospice agencies disproportionately caring for the most costly patients," the team wrote. "As a result, those hospices serving the neediest patients may face difficult financial obstacles to providing appropriate care in this fixed per-diem payment system."



February 2, 2011 in Studies and Reports | Permalink | Comments (0) | TrackBack (0)

Tuesday, February 1, 2011

What Value Tax Exemption?

In a brief, but thought provoking essay appearing in the February 7, 2011 issue of America Magazine, John Diiulio asks how we might value of nonprofits in American society.  While his focus is on religious institutions, specifically the Catholic Church, the question is timely, as he points out, because whenever the economy takes a dip local governments especially start looking at nonprofits the way Wyle E. Coyote used to eye the Road Runner. Does withdrawing tax exemption during times of economic crisis really make things worse?

Here is a short excerpt from his article:

As the fiscal crisis, which first showed itself in 2007, continues, ever more federal, state and local policymakers in both parties are asking tough but timely questions about the nonprofit sector: How much does it lighten local property tax coffers and reduce federal tax revenues? What is the total tab for all the tax-funded subsidies? And what does the wider public actually get in return for all the tax breaks and government funding? Studies are underway, but nobody knows for sure what the results will be. Yet no matter what the research ultimately shows, public pressure for accountability will continue to grow as more media attention is focused on corruption scandals involving nonprofits and as the public sees and hears more about nonprofit executives who make really big bucks (like the many private university presidents with million-dollar-plus annual compensation packages).

The issue is obscured by references to scandal and excessive salaries, and using exemption for houses of worship is not a good context.  Tax exemption for worship is a whole 'nother matter.    I'm talking more about "good" activities of the type that are more apt to commercialization.  And it seems to me that in the information age, we could generate a market for just about anything worth having.  We could probably eliminate all the scandals and questionable salaries and still be faced with the question whether tax exemption is, in the main, worth the foregone revenue.  That's really the question to be asked.  Diiulio puts it this way:  how would we react if one day we woke up an all the tax exempt nonprofits no longer existed?  I am of the opinion that tax exemption should be reserved only for institutions that necessarily, not just coincidentally, alleviate poverty.  Diiulio's response, by the way, is almost entirely conditioned on the assumption that nonprofits serve those who cannot do for themselves.  What about arts, sports, and things indulged in primarily by people who don't worry about where their next meal comes from?  That is a typical and not entirely illegitimate retort, I'll admit.  But I am willing to leave those things to the market.  This is a blog, remember, so its ok to articulate "off the cuff" as I am doing now without all sorts of references to ancient history and philisophers.  But even those who may disagree usually point to the lack of "free care," for example when it comes to tax exemption for nonprofit hospitals.  Besides, one of the goals of blogging is to increase readership and provoke debate.  That's not why I insist that tax exemption should be reserved for institutions that serve the poor (details, details, I know, but I don't have time to elucidate on the details; I'll do it in a law review article one of these days).  I think tax exemption for organizations that cater to those who are able is a waste of money. 


February 1, 2011 in In the News | Permalink | Comments (1) | TrackBack (0)

Pomeranz Provides Insight on the meaning of "Social Welfare Organization"

John Pomeranz (Harmon, Curran, Spielberg + Eisenberg, LLP) was kind enough to share his thoughts on a previous posts asking "what exactly is a social welfare organization."  His thoughts, with links to a great white paper on the topic are reprinted below:

John Pomeranz Just a quick note on your recent post on Nonprofit Law Prof Blog about 501(c)(4)s).  Lobbying in support of a 501(c)(4)'s "social welfare" mission is treated as a social welfare activity and counts toward fulfilling the requirement that social welfare be the "primary purpose" of the 501(c)(4).  One overly-simplistic but nonetheless helpful way to think about what qualifies as social welfare activity is to say that anything a 501(c)(3) can do -- including things that a 501(c)(3) can do in limited doses, like lobbying -- can be treated by a 501(c)(4) as a social welfare activity.  Thus, lobbying is social welfare but attempts to influence elections (verboten for 501(c)(3)s) are not.

It is, of course, more complicated than that.  To see how complicated, you might consider this excellent set of comments filed back in 2004 by several smart folks associated with the ABA Tax Section's EO Committee, including my partner Beth Kingsley, your co-blogger Lloyd Mayer, and a host of other experts in this area:  Despite the years that have gone by, these comments are still relevant (probably even more so now in the wake of the Citizens United decision).

We're going to see a lot more 501(c)(4)s spending a lot of money on ads and other lobbying activities in the next few months.  Quite a few 501(c)(4)s were created in mid 2010 and spent a lot of money trying to influence the congressional elections.  Now they're going to need to spend at least as much money on non-electoral lobbying (and other social welfare activities) before the end of their fiscal year to make sure they meet their 501(c)(4) primary purpose requirement.  We'll see a similar increase in lobbying ads in anticipation of the 2012 presidential and congressional races as a host of old and new 501(c)(4)s try to make sure they've done enough social welfare spending to counterbalance the electoral spending they're going to do.



February 1, 2011 in Federal – Legislative | Permalink | Comments (0) | TrackBack (0)

Draft Protection of Charitable Assets Act, with Comments

Thanks to Mark Fitzgibbons for passing along to us the Draft Protection of Charitable Assets Act prepared by the National Conference of Commissioners on Uniform State Law.  Fitzgibbons discusses the predecessor draft in the January 13, 2011 edition of the Chronicle of Philanthropy (subscription required).  He was kind enough, though to share his critical thoughts on the current draft, which we reprint below.  By the way, our co-editor Susan Gary served on the drafting committee:


Comments on the Protection of Charitable Assets Act, formerly the

Oversight of Charitable Assets Act

Mark J. Fitzgibbons[1][1]


I thank NCCUSL and the Drafting Committee on the Protection of Charitable Assets Act, formerly the Oversight of Charitable Assets Act (the “Act”), for allowing me to express concerns about the January 10, 2011 draft of the Act.  My comments do not express all objections I would make, but focus on changes to Section 4 of the Act, and I also make certain comments about the underlying premise of the Act.

The Prefatory Note to the Act states, “the committee has not seen evidence of overreaching by charitable regulators.”  I am not aware, on the other hand, whether the committee has seen evidence of a need for the Act.

History, however, is filled with examples of government abuse of charitable assets and charities, especially for political purposes and even perhaps before private miscreants ever abused charitable assets themselves.  For example, “Shortly after the reign of [Roman emperor] Marcus Aurelius . . . thirty barrack emperors in their struggle to rule Rome between 192 and 324 A.D. ‘borrowed’ funds belonging to charities from the municipal treasuries.”[2][2]  Using the excuse of fiduciary abuses by trustees, King Henry VIII dissolved the monasteries in the 1530s.[3][3]

My own files of just one agency are filled with examples of not merely overreaching, but abuse and unlawful conduct by state charity regulators.[4][4]  Charities are reluctant to publicize or even fight such abuses for two principal reasons:  (1) state regulators control their licenses to solicit contributions, and charities fear officious retaliation, and (2) charities fear that publicizing adversarial actions by states scares donors, and charities tend to enter into agreements with states regardless of whether state regulators engaged in abusive conduct.[5][5]

My friends the state charity regulators consistently turn a blind eye to their own violations of law, and when such violations are brought to their attention, their reaction tends to be, “So sue us.”  The Constitution is the law that governs government, but in addition to constitutional violations, state regulators often abuse, misapply and violate the state laws they purport to enforce.  State regulators are in fact the biggest violators of the laws that govern nonprofits, and any effort by this Committee must protect against abuses and unlawful actions by state officials.

Edits to the Act Fail to Cure Constitutional Defects, and Have Even Added More

The changes to Section 4 of the Act are not only woefully anemic with respect to preventing government abuse of charities, many are actually a step backwards.  Changes to Section 4 include feigned but failed constitutional fixes that will only foster litigation.[6][6]

While the changes provide a thin veil to address 14th Amendment objections I raised in my first set of comments, they fail to abide by all of the requirements of the 4th Amendment.[7][7]  Respondents are not protected against 4th Amendment violations caused by the Act, and would need to expend valuable, often scarce and overstretched resources in courts for the purpose of protecting their rights.

Instead of including protections against 4th and even 1st Amendment violations and abuses at the outset, the Act creates the need for charities to litigate.  Any statute that creates the need to litigate to protect rights is unworthy of consideration.

The Act gives attorneys general the unilateral power to commence investigations, which is a violation of the separation of powers and the principle of checks and balances.  To comply with all of the requirements of the 4th Amendment, including the need for oath and affirmation, the Act should only authorize investigations after oath and affirmation before a court or tribunal truly independent from the attorneys general, and only for actual cause (not upon mere “belief,” which is ripe for abuse).  The Act fails to provide such checks on abusive, unlawful or unconstitutional investigations.

The Comment to Section 4 includes a poor attempt to explain its evasion of the 4th Amendment: “Information often comes to the attorney general in a form much less formal that a sworn complaint; for example, information about abuses and misdeeds is often brought to light in newspaper stories.”

There is, of course, no “newspaper story” exception to, nor attorney general or state charity regulator exemption from, the 4th Amendment.  This Comment to Section 4, however, is typical of the approach by state regulators to cut corners, evade the law, and often use information less reliable than the higher standard of cause to initiate their investigations (or, for their political cronies, to ignore the need to investigate.  See, “ACORN and the AGs,” included in the exhibits to my comments).[8][8]

Revised Section 4 also includes a new provision that is a remarkably brazen violation of the 5th Amendment, which reads, “An individual may not refuse to answer a material question, produce documentary material, or testify in an investigation pursuant to this section on the ground that the testimony or documentary material may tend to incriminate the individual or subject the individual to a penalty.”[9][9]

That is not only an open and notorious violation of the 5th Amendment, it wasn’t allowed even under English common law.  In The King v. Dr. Purnell, 96 Eng. Rep. 20 K.B. (1748), for example, the Attorney General was denied visitation access to documents from Oxford University, which university was not “private” because it was established by the Crown, on grounds equivalent to the 5th Amendment right against self-incrimination.[10][10]

The Act’s Foundations Are Wrong

Besides the open and notorious violations of the Constitution proposed in the Act, and those it would foster such as violations of the 1st Amendment, the underlying premises of the Act are materially flawed.

State regulators claim they seek to clarify the common law, but they exaggerate the authority of the attorneys general even at common law, bypass common law procedural protections that prevented abuses the Act would authorize, and, under American jurisprudence and principles, attorneys general are bound by a written Constitution.

The attorney general was not initially given power over charities even by the 1601 Statute of Charitable Uses.  Investigations of fiduciary abuses could be brought by parties other than the attorney general, but only after information had been presented to a tribunal of commissioners.  After evidence of malfeasance, a warrant could be issued for the sheriff to gather a jury.  In other words, even at common law, there were distinct procedures, separation of powers, and checks on abusive use of government authority.

Decades after passage of the 1601 Statute the attorney general was given authority to act, but even then only as a relator.  The Act gives attorneys general more powers, both in terms of quantity and substance, than were given attorneys general in old English law.

Also, when a person brought a frivolous charge of fiduciary abuse against a charity, English law provided that a charity could recover damages.[11][11]  I highly recommend that the Act provide such a remedy both against attorneys general and private plaintiffs who use attorneys general as intervenors or relators in their frivolous suits.

American jurisprudence, beginning with Trustees of Dartmouth College v. Woodward, also made the important distinction of the “private” nonprofit corporation that may be “public” in its uses.[12][12]  Corporations of England were usually established by the Crown or the Church, which accounts for why at common law the attorney general had visitation authority.  The doctrine of visitation in America changed to reflect private property rights on which the government could not trespass without due process, or engage in takings or other breaches of private property rights.

American jurisprudence also recognizes the distinction between the privately created charitable corporation, where law applies, versus the charitable trust, where the principles of equity may apply.  The Act fails to make this important, even if misunderstood, distinction.  Indeed,

The new nation vehemently condemned anything reminiscent of English sovereign power or of an aristocratic society as unfit for a democracy.  Not only did some states repeal all English statutes including the Statute of Charitable Uses, but some jurisdictions rejected the doctrine of cy pres because it was mistakenly regarded as being exercisable only by the prerogative power of the king and hence contrary to the spirit of our democratic institutions and in conflict with the doctrine of separation of powers.[13][13]

Not all states recognize that the attorney general has common law authority with respect to charities.  That may be for the reason that not all states initially recognized cy pres, where the state could step in at equity where a charitable bequest was vague.  Attorneys general did have common law authority under cy pres, which isn’t universally recognized.  But even that is far, far different than the mighty powers the Act would grant attorneys general over the assets of privately created nonprofits.

The Act confuses principles and doctrine of private property versus civic charities, corporations versus trusts, law versus equity, and compounds these errors in a massive, unconstitutional power grab.  The Act’s power grab, however, is actually built on sand.

For example, the California Supervision of Trustees and Fundraisers for Charitable Purposes Act, Government Code 12580 – 12599.7 (the “CA Act”) fails to distinguish between a charitable trust and a charitable corporation.  California case law recognizes a common law authority of attorneys general, but the antecedent case on which all other cases ultimately rely is People ex rel. Ellert v. Cogswell, 45 P. 270 (1896).

Mrs. Cogswell and her husband created a trust giving their real property to create a school for Californians pursuant to a California act specifically created to encourage such gifts.  Mrs. Cogswell attempted to block the gift on grounds that due to ailments she never understood the scope and breadth of it.  The mayor of San Francisco acted as relator, and the state sought to enforce the trust over Mrs. Cogwell’s objections and efforts to obtain remedy.

California is just one example of a state that has taken minimalist principles in equity and only applicable to trusts or gifts to state institutions, and contorted, expanded and compounded them to aggrandize the authority of the state over privately created charitable corporations.  That approach was rejected in Trustees of Dartmouth College v. Woodward.

If a uniform law were needed, the Act unfortunately takes the worst elements most favorable to aggrandizing government power and harmful to nonprofits, while serving no apparent benefit to the public, especially given the excessive regulation already in place.

My friends the state regulators sadly seek to create yet another inept system adding expense for both states and charities, ultimately financed by taxpayers and donors, where information goes into yet another bureaucratic black hole.  They have already demonstrated inadequate and unlawful administration of current laws, yet they seek to compound the misery through the Act.

A better uniform law would be the online disclosure system I have proposed to state regulators.  It would provide information to even more state regulators than the current charitable solicitation laws and the Act combined would provide.  It would also provide donors more information than current law and the Act combined, which are bureaucratic black holes.  Lastly, the online disclosure system would save both states and charities money, which money is currently diverted from taxpayers and donors’ intended purposes for their contributions and gifts.

The changes to the Act shown in the January 10 draft are not a serious effort.  There are other problems with the Act that I do not address.  After reading the January 10 draft and based on my nearly two decades of dealing with state charity regulators, I am not convinced the Act is a worthy project.

[1][1] President of Corporate and Legal Affairs, American Target Advertising, Inc. (ATA), Manassas, Virginia


[3][3] Fishman, The Political Use of Private Benevolence: The Statute of Charitable Uses, DIGITALCOMMONS@PACE, at 29 – 30 (April 23, 2008).

[4][4] I attach as exhibits several published accounts.  There is not a single state with which I deal that hasn’t engaged in abusive or unlawful conduct, and my letters are too voluminous to include as an attachment to these comments.

[5][5]  The Act applies to many more organizations than just charities, such as 501(c)(4) organizations. These comments use the term “charity” to apply to all nonprofits covered by the Act, and even the entities that are not nonprofits covered by the Act.

[6][6] Please, as Thomas Jefferson once wrote to James Madison, pardon my freedom.

[7][7] “The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized.”

[8][8] As the Supreme Court has stated, “Officious examination can be expensive, so much so that it eats up men’s substance.  It can be time-consuming, clogging the process of business.  It can become prosecution when carried beyond reason.” Oklahoma Press Publishing Co. v. Walling, 327 U.S. 186, 213 (1946).

[9][9] The sentences following the violation of the 5th Amendment feign immunity, but such immunity would not be recognized in jurisdictions other than the state issuing the demand, or by the federal government.

 [10][10] Justice McKenna’s dissent in Wilson v. United States, 221 U.S. 361 (1911), citing to an abundance of common law decisions, explains why the majority opinion misconstrued the common law and Hale v. Henkel, 201 U.S. 43 (1906) in deciding that an individual may not invoke the 5th Amendment when a corporation’s records are sought.  Hale v. Henkel, at 76, recognized, among other things, that corporations are protected by the 4th Amendment, and “an order for the production of books and papers may constitute an unreasonable search and seizure within the Fourth Amendment.”  The Act’s violation of the 5th Amendment doesn’t even confine itself to the limited doctrine espoused in Wilson v. United States.

[11][11] Fishman, at 31.

[12][12] My article “State Regulators Make a Misguided Push to Tighten Control Over Charities” in the January 13, 2011 Chronicle of Philanthropy provides a brief summary.

[13][13] FISCH, Sec. 22, at 21.



February 1, 2011 in Studies and Reports | Permalink | Comments (0) | TrackBack (0)