Thursday, March 31, 2011

Compensation for Nonprofit Board Members

I often tell my students that, in many states, enforcement of nonprofit law happens only when a newspaper reporter sniffs out a scandal or the A.G. wants to be governor and thinks he/she can get mileage out of whipping up public outrage.  In Massachusetts, the Boston Globe reports that the state's A.G., Martha Coakley, is putting pressure on nonprofit health insurance providers to stop paying generous fees to their board members.  This recent focus on nonprofit health insurance companies arose when it was revealed earlier this month that Blue Cross Blue Shield of Massachusetts graced its departing chief executive with an $11 million payout.  Under pressure from Coakley, BCBS and another large health plan announced that they would suspend paying fees to their board members.

In recent days, the state's second largest health insurer, Harvard Pilgrim Health Care, along with Tufts Health Plan, threw it back in Coakley's face and announced that they would not stop paying generous stipends to their nonprofit board members.  The now controversial payments range from $19k to $83k annually for part-time work.  In the seemingly clueless words of Thomas P. O'Neill III, former Massachusetts lieutenant governor who now serves on the board of Tufts Health Plan, "[t]hese are people from various walks of life who bring a skill set.  These are not political hacks . . ."

It would be interesting to know how these payments would be evaluated under the federal Intermediate Sanctions Doctrine.  I suspect they would pass muster, and I suspect the companies have already paid high priced lawyers to give the payments a stamp of approval.


March 31, 2011 in Current Affairs, In the News, State – Executive | Permalink | Comments (0) | TrackBack (0)

A market for kidneys?

As we all know, newspapers and law journals have been filled for at least a decade with stories and debates over whether it is a good thing or a bad thing to allow the market to intrude in areas that typically have been considered charitable.  Now the LA Times reports on debates over whether there ought to be a market for spare kidneys.  As the story reminds us, each of us has two kidneys but we only need one, as long as it functions properly.  I have never researched the deductibility of medical expenses related to donating a kidney.  If this article is correct, perhaps that question will become mute: the market will determine how much we (or, more likely, a poor person from a developing country) will be paid for giving up an organ.


March 31, 2011 in Current Affairs, In the News | Permalink | Comments (0) | TrackBack (0)

Wednesday, March 30, 2011

A Compelling Social Enterprise Story

The Community Development Law Clinic that I supervise recently represented Carolina for Kibera (CFK), a nonprofit organization that focuses on public health and community development in Kibera, a sprawling slum just outside of Nairobi, Kenya.  (For those who are curious, we performed a standard legal audit for the organization and determined that it is in fine legal condition.)  CFK was founded a decade ago by a UNC-Chapel Hill undergraduate, Rye Barcott, with a decidedly grassroots approach.  Residents of Kibera told Rye and his collaborators that young people in the community needed healthy activities, so they founded a soccer league that has grown into an important institution.  Soccer provided a way into the lives of young people and their families, and today CFK is a thriving, million-dollar-a-year NGO that runs several heralded programs including an extremely successful health clinic.  As CFK grew, Rye became somewhat of a social enterprise celebrity.  It did not hurt his reputation that he entered the Marines after graduating from Chapel Hill and continued to act as a principal of the organization while he was on active service in Iraq.

Now Rye has written a book, It Happened on the Way to War: A Marine's Path to Peace.  Available on Amazon, the book is being advertised as the next Three Cups.  I have not yet read the book, so I cannot endorse it (I hope it has more literary merit than Three Cups), but I can tell you that Rye's story is compelling and that, if he comes through your town to do a reading or a CFK fundraiser, it would be worth the trip.


March 30, 2011 in Books, Current Affairs | Permalink | Comments (0) | TrackBack (0)

A Charitable Baldwin

I don't mind admitting that I'm more drawn to celebrity gossip than C-Span.  In that spirit, a recent item in the Wall Street Journal reports that actor Alec Baldwin intends to donate his profits from his gig as spokesperson for Capital One to nonprofit arts organizations.  Thus far he has given $1 million to the New York Philharmonic and $500,000 to the Roundabout Theater Company, where he sometimes performs.  In a brief interview with the WSJ, he asks "How can I get my hands on more money [to donate]?  How can I set up a food company like Paul Newman that prints money?  Could I sell hair gel?"

So, it turns out that Alec Baldwin, in addition to being a celebrity, is a budding social entrepreneur.  I'm sure many of us could help advise him on his hair gel venture.


March 30, 2011 in Current Affairs, Film, In the News, Television | Permalink | Comments (0) | TrackBack (0)

Tuesday, March 29, 2011

Commerciality Doctrine Frustrations

I write on Commerciality partly because it is fresh in my mind and partly because I only now (on Tuesday afternoon) realized that I'm supposed to be blogging this week and I can write this without further research.

I often tell my Nonprofit Law students that the Commerciality Doctrine is  like a "bludger" in a game of quiddich.  For those not familiar with the Harry Potter series of books, the bludger is a small, hard ball that flies through the air knocking quiddich players off of their broomsticks when they are concentrating on other aspects of the game.  Like the Commerciality Doctrine, the bludger produces anxiety in players because it is utterly unpredictable.  No one knows when it will strike and what kind of damage it will cause.

Recently, a client of the Community Development Law Clinic that I supervise was very nearly felled by the Commerciality Doctrine.  The client was a start-up organization that wished to form a nonprofit 501(c)(3) to promote public health and good nutrition, focusing particularly on a low-income, primarily African American community in North Carolina.  The stakeholders included representatives from the community and a group of Public Health Ph.D. researchers and practitioners affiliated with a large, nearby university.  The centerpiece of their charitable plans involved launching a fast-food restaurant that would be a gathering place and classroom for their public health/education interventions, and would also model good nutrition by featuring a menu of delicious, cheap, nutritiously sound dishes.

To make a long, frustrating story short, the IRS considered the restaurant to be too commercial.  The examining officer told us that the only way to get it approved was to make it look more like a soup kitchen: no fixed prices, no fixed menu, no professional staff, and food served to anyone who walked in the door.  We replied that the stakeholders did not want to launch a soup kitchen; that this was a social enterprise that intended to be partly self-sustaining as it pursued its educational and charitable goals. We cited Presbyterian and Reformed Publishing Co. V Commissioner for the proposition that profit-generating activities -- even those that appear similar to commercial activities -- are permissible if they are in furtherance of a charitable goal.  The officer's response was "yea, but that's about books, and we're talking about food."

In the end, when it became clear that we would appeal an adverse decision, we arrived at a compromise whereby the examining officer would grant c3 status and the new organization would, among other things, post suggested donations rather than fixed prices.

What does this experience prove?  The Commerciality Doctrine is nonsensical and probably unconstitutional.  In a world of social enterprise, we need new laws.


March 29, 2011 in Federal – Executive, Federal – Judicial, Food and Drink | Permalink | Comments (2) | TrackBack (0)

Friday, March 25, 2011

Death of Brian O'Connell, Co-founder of Independent Sector

Brian O'Connell, co-founder of Independent Sector, died on Monday of complications from cancer.  Independent Sector has a beautiful remembrance of him on its home page including the video linked to above and the following:

Brian O’Connell spent a lifetime advancing the issues of the nonprofit and the philanthropic sector. For twelve years he was national director of the National Mental Health Association during a period of breakthroughs in community care and in the understanding and treatment of depression. During that time he was also an organizer and first chairman of the National Committee on Patients’ Rights. For the prior dozen years he was with the American Heart Association, serving as the director of its California affiliate.

He became president of the National Council of Philanthropy and executive director of the Coalition of National Voluntary Organizations. On March 5, 1980, after almost two years of preparation and planning, he and John W. Gardner launched Independent Sector. Brian served for 15 years as president and CEO of the organization, which from the beginning has been devoted to strengthening voluntary initiative, philanthropy and civic action. During that time, he was on the ground floor of the founding of CIVICUS: World Alliance for Civic Participation.

Brian was a 1953 graduate of Tufts University and later received the Tufts Distinguished Alumni Award. He served as a trustee there, and after leaving Independent Sector, professor of citizenship and public service from 1995 to 2006 He helped found the Jonathan M. Tisch College of Citizenship and Public Service at Tufts, where he established the Brian O'Connell Library. Comprised of books from his personal collection, he hoped visitors to Tisch College would read the volumes, which address citizenship and civic education, the nonprofit sector, and philanthropy.

Most recently Brian served on the boards of The Bridgespan Group and The Cape Cod Foundation. Prior assignments included board membership with: the Ewing Marion Kauffman Foundation, the National Academy of Public Administration, Points of Light Foundation, Hogg Foundation, and the National Assembly of Health and Social Welfare Organizations. He was also chairman of the 1989 Salzburg Seminar on non-governmental organizations.

Brian was an elected Fellow of the American Public Health Association and the National Academy of Public Administration and received several honorary degrees, including a doctorate of humanities from Fairleigh Dickinson University and doctorate of laws from Indiana University. He performed his graduate work at the Maxwell School of Citizenship and Public Affairs at Syracuse.

Brian O’Connell received many awards including a special John W. Gardner Leadership Award when he retired from Independent Sector; Weston Howland Award for Citizenship from the Lincoln Filene Center; Gold Key Award of the American Society of Association Executives; United Way of America’s Award for Professionalism; the Chairman’s Award of the National Society of Fund Raising Executives, and with John W. Gardner, the 1998 Tiffany Award for Public Service.

Brian penned 14 books including his most recent, his memoir, Fifty Years in Public Causes: Stories from a Road Less Traveled, and donated a beautiful “Brian O’Connell Bookshelf” with signed copies of each to Independent Sector in September 2010. Other titles include Civil Society: The Underpinnings of American Democracy; Voices From the Heart: In Celebration of America’s Volunteers; The Board Member’s Book; Effective Leadership in Voluntary Organizations; America’s Voluntary Spirit; Board Overboard: Laughs and Lessons for All But the Perfect Nonprofit; People Power: Service, Advocacy, Empowerment; Powered By Coalition: The Story of Independent Sector; Philanthropy in Action; and, with his wife, Ann Brown O’Connell, Volunteers in Action.

The NonProfit Times has a moving story on O'Connell's life well lived here.

“Brian O’Connell offered the sector and the nation a wonderful gift, and we would not be where we are today without his vision and leadership,” said Diana Aviv, president and CEO of Independent Sector. “He was passionate about building the sector and, through his work and insight, advanced research and education that helped to create the next generation of leadership. We will always be grateful for his service to our organization, our sector, and our country.”

Colleagues remember O’Connell as committed, meticulous, forward-thinking and gracious. “More than anything I recall that he was an expert at cultivation -- cultivating staff, the board, and people outside the organization,” said John Thomas, who worked with O’Connell for more than 25 years, first at the National Mental Health Association and then at Independent Sector as vice president of communications. Thomas also remembered his tact. “He would send us memos to prompt us to do things. He would start every memo with ‘You probably already thought of this…’ Of course we had not thought of it, but he made us feel good.”

I can hardly think of a better way to spend a good life and career than in the pursuit of good for the sake of good.


March 25, 2011 in In the News | Permalink | Comments (0) | TrackBack (0)

Thursday, March 24, 2011

Texas' Hogg Foundation: Philanthropic Model of Note

Maybe I'm being selfish: I live and work in Texas, so this story got me rather excited: 

Today's Nonprofit Quarterly touts the Hogg Foundation for Mental Health as a strong policy player in the mental health field in Texas.  Having noted that

In Texas, more than 4.3 million residents, including 1.2 million children, live with some form of mental health disorder ... [a]nd, according to the Texas Medical Association, Texas ranks 49 in the nation for the amount it spends per person on mental health care[,]

the Quarterly explains that:

Founded in 1940 by the children of Texas Governor James S. Hogg, and housed within the Division of Diversity and Community Engagement at The University of Texas at Austin, the foundation has a masterfully developed strategy for impacting the mental health system in Texas. Not only does the Hogg Foundation tackle research, but also funds policy advocacy and, itself, engages in legislative education. Within that framework is a deep undercurrent that places a high value on consumer involvement in policy development and service delivery.

I highly recommend the article for reading, not only because it speaks well of a Texas foundation, but also because I find that the Hogg Foundation's activities provide an excellent example of what non-profit organizations should do: provide much-needed services that the government either will not or cannot provide.


March 24, 2011 | Permalink | Comments (0) | TrackBack (0)

Wednesday, March 23, 2011

"Protection of Charitable Assets Act" Update

The Uniform Law Commission (the same folks who brought us UPMIFA) has a project in the works called the "Protection of Charitable Assets Act." This project intends to address state oversight of charitable assets, notably the authority of the state attorney general, registration, and notice requirements for certain "life events."  The act focuses on the AG's role in charity governance, essentially complementing state statutes on charitable solicitations.

The drafting committee has a meeting scheduled for April 1-3, 2011, in Washington, D.C., to be followed, subject to progress, by a second (and final) reading at the July 2011 annual meeting of the commissioners.

The URL for the project, with the draft and memo for the April 2011 meeting (and earlier drafts and and memos), is

If you have suggestions on this project, please send them to the Reporter, Susan Gary, at


March 23, 2011 | Permalink | Comments (0) | TrackBack (0)

Slow Response in Giving for Japan Disaster

According to an article appearing in today's Chronicle of Philanthropy, the rate of donations for relief efforts following the devastating earthquake and tsunamis in Japan is slower than after last year's earthquake in Haiti and after 2005's Hurricane Katrina.  The article maintains that more than a dozen relief groups contacted by The Chronicle said they were not raising money for relief efforts in Japan.  Some organizations, such as Oxfam America, report they are still determining how they will respond to the disaster. Others, such as American Jewish World Service, said they are not responding because they work only in developing countries.  Meanwhile, some others have been cautious about raising money for the catastrophe because the needs are not yet clear -- at least, so they claim. 

Notwithstanding the slow response, however, American donors have thus far contributed over $136 million for the relief effort.  Nearly two-thirds of the total has been raised buy one organization -- the American Red Cross.


March 23, 2011 in Current Affairs, In the News | Permalink | Comments (0) | TrackBack (0)

Monday, March 21, 2011

Judge Rejects Amish Request to Let Faith Community Deal With Alleged Ponzi Schemer

Today's Washington Post  is reporting that federal bankruptcy judge, Russ Kendig, on Friday refused to dismiss a case involving alleged Ponzi schemer, Monroe Beachy, and cede control of the matter to members of the Amish community of which Beachy is a member.  According to Judge Kendig, a dismissal on the grounds requested by Beachy and about 2,000 members of the Amish community would violate the Establishment Clause of the First Amendment.  

When Beachy sought refuge in bankruptcy court last year, many of his investors and fellow members of the Amish community complained that their deeply held religious beliefs had been violated.  According to the Post, 

In court filings, they focused less on any financial fraud Beachy might have perpetrated than on his decision to draw them into a judicial proceeding. Resolving financial disputes through the courts is contrary to their faith, they said, and more than 2,000 of them urged the court to let them resolve the matter among themselves. Amid the backlash, Beachy had a change of heart and asked the court to let him withdraw his bankruptcy filing.

The Amish had proposed setting up a private alternative to court-supervised bankruptcy. In fact, they formed a committee to oversee the matter under the supervision of Amish bishops and an Amish church.

But Judge Kendig will have none of this.  The Post reports him as saying that any such delegation of the court's authority is forbidden by the Establishment Clause.

Although I have little -- if any -- sympathy for Beachy, this case troubles me.  On the one hand, I understand Judge Kendig's concern that delegating the court's authority to the Amish committee would violate the Establishment Clause.  Yet, I understand the Amish who, if they wish to pursue their claims against Beachy, must now do so through the courts, in violation of their deeply-held religious beliefs.  Maybe we need the Supreme Court so speak on this matter.




March 21, 2011 in Church and State, In the News | Permalink | Comments (1) | TrackBack (0)

Thursday, March 17, 2011

Grassley Wants Tax Exemption On Table in Tax Reform Talks

A report in today's BNA Daily Tax report is sending shivers down the spines of tax-exempt organizations.  Sen. Charles Grassley, who has often used his perch as either the ranking majority or minority member of the Senate Finance Committee to impose reforms on (or to attack unnecessarily, depending on your viewpoint) tax-exempt organizations, is at it again.  The BNA report indicated that Grassley wants an estimate of the cost of tax exemption and wants to put the issue of tax exemption on the table in the ongoing budget/tax-reform talks.  (The BNA Daily Tax Report is a subscription-only service; the citation for those of you who have access is 49 DER J-1, March 14, 2011).

Grassley's immediate target appears to be exempt organizations that engage in fee-for-service activities (he apparently cited the case of OCLC, an Ohio nonprofit provider of library sofetware services, which has been the subject of a lawsuit filed by California-based for-profit SkyRiver Technology Solutions), but his request that Congress estimate the cost of tax-exemption and treat it as a "tax expenditure" has far-reaching implications. 

Unlike the deduction for charitable donations under Section 170, tax exemption has never been treated as a "tax-expenditure" in the budget process.  Though the whole concept of "tax-exependiture" is still somewhat controversial, it has been a part of the budget and tax policy landscape since Stanley Surrey pushed the concept during his tenure as Assistant Secretary for Tax Policy at the Treasury Department in the late 1960's and oversaw the first tax expenditure budget in the US in 1968.  In general, the concept of a "tax-expenditure" is based on the notion that certain tax benefits are the equivalent of government grants - that they are in essence "expenditures" by the government cloked in the form of tax benefits.  Thus the tax expenditure budget includes items such as the charitable deduction, the home mortgage interest deduction, and similar items that are widely accepted today as "government subsidies" and deviations from the normative base for the income tax.

But exempt status under 501(c)(3) has never been considered a tax expenditure, in part because characterizing exemption as a "subsidy" or "deviation" from the normative tax base has always been a controversial issue among tax policy experts.  It is not clear whether exemption is a "deviation" from the normative tax base or simply a part of defining that base.  For example, would one consider our decision not to impose tax on the partnership as a separate taxable entity a "deviation" from the normative tax base (since we do impose an entity-level tax on most corporations)?  Or would we just say that considering partnerships pass-through entities is simply a part of the overall definition of the normative base?  And isn't it a little odd to call tax-exemption a "subsidy" for organizations that spend all their income on a charitable class like the poor?

While I am certainly sympathetic to Grassley's comment that some "charities" today look an awful lot like for-profit businesses, Grassley's request to estimate the cost of exemption seems to move in the direction of including exemption as a tax expenditure, and is a really, really big deal from the tax theory/policy side. 

For those of you interested in exploring a bit more of the theoretical debate here, I recommend a relatively short and very readable article by Professor Dan Halperin at Harvard in the Exempt Organization Tax Review (also subscription-only, though it is also available on Lexis): Tax Policy and Endowments - Is Excessive Accumulation Subsidized? (Part I), 67 Exempt Org. Tax Rev. 17 (Jan. 2011), and Part II, 67 Exempt Org. Tax Rev. 125 (Feb. 2011).

(Hat tip to Evelyn Brody for spotting this in the Daily Tax Report)



March 17, 2011 | Permalink | Comments (1) | TrackBack (0)

Friday, March 11, 2011

A Different Perspective on Compensating Directors of Massachusetts Nonprofit Health Insurers

All week the blog has followed the story – some might say drama – of the Massachusetts Attorney General’s scrutiny of the compensation of directors of nonprofit health insurers.  In Redirect the Outrage, Boston Globe columnist Steven Syre offers a different take on the matter.  The gist of his perspective, in his own words, is the following: “The problem with those boards has nothing to do with compensation. It’s all about composition.”  He continues:

Our biggest health insurers aren’t really public charities, no matter what the law or Martha Coakley say. They’re big insurance companies and should act that way. People love to hate insurance companies, but those businesses will be an important part of the puzzle if we ever mean to solve — or at least slow down — the real problem of soaring health care costs. …

When it comes to boards, insurance companies should be recruiting a smaller number of people with specialized skills and backgrounds to lead the managers in charge of big, complex businesses. That means throwing over many of the people who currently sit on those boards, but don’t come close to meeting such a standard.  It also means paying for the best available talent and expertise that creates real value. Why? Because that’s what it will take.

Syre does not advocate that Blue Cross continue with board business as usual.  While he thinks that the directors “are not wildly overpaid based on the size of the company they oversee,” he also considers the board “too big” and some members to have been “invited onto it for the wrong reasons.”  And what about the rising costs of health care?  Here is Syre's view of that issue in a nutshell, which comes full circle:

Insurance companies are in a position to make more when we pay more, but they aren’t a leading cause of the higher health costs. Hospitals and other providers that charge more — along with all of us who insist on access to expensive facilities and tend to use more services — are most responsible.  Managing those costs and expectations is the key to getting our hands around health care costs. Insurance companies can, and should be, part of the answer.  One way insurers can do better: Improve their boards by finding the best directors and paying them.

Syre has a point.  But its implications reach well beyond board compensation and composition.  His column observes that talented people “stand in line to give their money away to hospitals and sit on their boards for free,” but that “insurance companies that are legally considered public charities in Massachusetts fit a different profile.” The latter do not rely on charitable contributions.  The bigger issue is how the law should classify such a nonprofit entity for purposes of taxation and regulation.


March 11, 2011 | Permalink | Comments (0) | TrackBack (0)

Congressman Blumenauer Addresses Foundations on Possible Tax Law Changes

An interesting article in The Chronicle of Philanthropy, Congressman Urges Foundation Officials to Push for Tax Changes, discusses several tax issues of relevance to charities, including the foundations represented by employees who congregated in D.C. this week for “the Council on Foundations and the Forum of Regional Associations of Grantmakers’ annual ‘Foundations on the Hill’ day.”  Addressing the group was Rep. Earl Blumenauer, Democrat of Oregon and a member of the House Ways and Means Committee, who reportedly reminded the foundations of the “enormous pressure on legislators to reduce the federal deficit” and said that “some people are eyeing ways to change the charitable deduction.”   According to the story, Blumenauer observed the decrease in large charitable gifts in 2010, a year in which no estate tax was imposed, and suggested that Congress might consider some simplification of private foundation excise tax rules and permanent codification of the IRA charitable rollover rules.

The “simplification” of the private foundation excise tax rules is, I assume, a reference to a proposal to end the dual rate structure of the excise tax on private foundations’ net investment income.   The issue is discussed on the website of the Council on Foundations.


March 11, 2011 | Permalink | Comments (0) | TrackBack (0)

Thursday, March 10, 2011

More on Massachusetts Health Insurers’ Director Compensation

What a week it is shaping up to be for Massachusetts health insurers!  In yet another article in the Boston Globe, 2 more boards rethink own pay, we learn that Harvard Pilgrim Health Care and Tufts Health Plan have said that their boards will soon meet to deliberate upon Massachusetts Attorney General Martha Coakley’s pressure on them to stop receiving “five-figure annual payments.”   The story continues:

“These board fees for insurance companies are off the reservation,’’ said F. Warren McFarlan, professor emeritus at Harvard Business School and an authority on nonprofit boards, noting that the state’s nonprofit hospitals and universities do not pay their part-time directors.   “On for-profit boards, you expect to be paid. In the nonprofit world, it’s about time, talent, and treasure. It’s about serving the organization’s mission,’’ he said.

Documents filed with the state Division of Insurance last week showed that Harvard Pilgrim, Tufts, and Fallon Community Health Plan, like Blue Cross, paid most of their directors large sums for part-time board service in 2010. While less generous than those given to Blue Cross board members, payments ranged from $21,900 to $68,100 at Harvard Pilgrim, $19,500 to $82,500 at Tufts (except for two board members who received nominal fees), and $13,900 to $24,350 at Fallon.

AG Coakley’s office is reportedly completing a 16-month probe of nonprofit board member compensation, and is expected to recommend that nonprofit insurers end director compensation. 


March 10, 2011 | Permalink | Comments (0) | TrackBack (0)

The Texas Version of UPMIFA and A Peculiar Rule Governing Pooled Endowment Funds

I am writing an article on the Uniform Prudent Management of Institutional Funds Act (“UPMIFA”) and have decided to discuss a peculiar provision in the Texas version of the model act. The Texas Uniform Prudent Management of Institutional Funds Act (“TUPMIFA”), enacted in 2007, largely reflects the text of UPMIFA.  However, TUPMIFA contains a strange provision applicable to pooled endowment funds.  The Texas statute, see TEX. PROP. CODE § 163.005(g) (2010), states as follows:

If an institution pools the assets of individual endowment funds for collective investment, this section [i.e., the section governing the decision to spend or accumulate] applies to the pooled fund and does not apply to individual endowment funds, including individual endowment funds for which the nature of the underlying asset or donor restrictions preclude inclusion in a pool but which are managed by the institution in accordance with a collective investment policy.

The Texas rule plainly deviates from UPMIFA.  Although UPMIFA permits the pooling of endowment funds, such pooling is authorized only “for purposes of management and investment.” UNIF. PRUDENT MGMT. OF INSTITUTIONAL FUNDS ACT § 3(d).  Further, the official comments to UPMIFA state that the pooled funds will be considered individually for purposes of the rules relating to spending and modification of restrictions under the uniform act.  See id. § 3(d) cmt.
The TUPMIFA directive to apply its spending/accumulation section to “the pooled fund” and not to “the individual endowment funds” strikes me, and some others with whom I have spoken, as quite problematic.  As under UPMIFA, relevant factors under TUPMIFA that bear upon the decision to appropriate for expenditure, or instead accumulate, endowment funds include the “the duration and preservation of the endowment fund,” TEX. PROP. CODE § 163.005(a)(1), and “the purposes of the … endowment fund.”  Id. § 163.005(a)(2).  These particular factors are fund-specific.   It seems quite impossible to apply these factors to “the pooled fund” in any sensible manner.
I believe that a statutory amendment is necessary to conform the Texas rule to the approach of the model act.  As I have mentioned in a recent presentation (with MariBen Ramsey, the Interim President/CEO and General Counsel of the Austin Community Foundation) at the 28th Annual Nonprofit Organizations Institute, until the Texas provision is amended to remedy this defect, a plausible solution is to draft endowment fund investment policies so as to circumvent the statutory malady, and make certain that such policies are incorporated by reference in the terms of gift instruments.  Consistent with UPMIFA, the spending/accumulation rules of TUPMIFA are explicitly made “[s]ubject to the intent of a donor expressed in the gift instrument.”  Id.   Thus, the problem can be avoided if the gift instrument states that the pooling of funds will not render irrelevant “the purposes of the … endowment fund” and “the duration and preservation of the endowment fund” in considering whether to expend or accumulate.

I welcome any insight that others may have to offer on this deviation from UPMIFA enacted in Texas.


March 10, 2011 | Permalink | Comments (0) | TrackBack (0)

Wednesday, March 9, 2011

Charities, Spring Cleaning and Tax Law

What do charities, spring cleaning and tax law have in common?  More than you may think.   A recent article in The Buffalo News, Springtime Giveaway, explains:

Spring will eventually arrive in Western New York and ignite the annual fervor in many people to reorganize and spruce up their living spaces.  And as they declutter and decide to part ways with household items they no longer use, local charities enjoy a steep climb in donations. “We’d like for people to think about us all year long, but spring is our busiest time of our year –our peak season,” said Florence Conti, president/ CEO of Goodwill Industries of Western New York…Local charities are the grateful recipients of the pounds of used items discarded each year during the spring cleaning ritual. The contributions greatly boost their supplies, and in turn, their bottom lines.  “We rely heavily on those donations to support our inventory in our stores,” Conti said. “Donations account for 70 percent of our annual revenue.”

Along with the satisfaction of helping such worthy causes, your contributions could also reduce your tax liability. … “The donation of property is a little bit complex,” said Dianne Besunder, an IRS spokeswoman in New York City. “It depends an awful lot on keeping the appropriate records, having a qualifying charity and knowing the value of your donations.”

The article provides a good occasion to highlight a few charitable contribution deduction rules that seem especially important to spring-cleaning itemizers who plan to donate clothes and other household belongings to charity.  Section 170(f)(8) of the Internal Revenue Code sets forth substantiation requirements for donations of $250 or more:

(8) Substantiation requirement for certain contributions.
      (A) General rule. No deduction shall be allowed under subsection (a) for any contribution of $ 250 or more unless the taxpayer substantiates the contribution by a contemporaneous written acknowledgment of the contribution by the donee organization that meets the requirements of subparagraph (B).
      (B) Content of acknowledgement. An acknowledgement meets the requirements of this subparagraph if it includes the following information:
         (i) The amount of cash and a description (but not value) of any property other than cash contributed.
         (ii) Whether the donee organization provided any goods or services in consideration, in whole or in part, for any property described in clause (i).
         (iii) A description and good faith estimate of the value of any goods or services referred to in clause (ii) or, if such goods or services consist solely of intangible religious benefits, a statement to that effect.
      For purposes of this subparagraph, the term "intangible religious benefit" means any intangible religious benefit which is provided by an organization organized exclusively for religious purposes and which generally is not sold in a commercial transaction outside the donative context.
      (C) Contemporaneous. For purposes of subparagraph (A), an acknowledgment shall be considered to be contemporaneous if the taxpayer obtains the acknowledgment on or before the earlier of--
         (i) the date on which the taxpayer files a return for the taxable year in which the contribution was made, or
         (ii) the due date (including extensions) for filing such return.
      (D) Substantiation not required for contributions reported by the donee organization. Subparagraph (A) shall not apply to a contribution if the donee organization files a return, on such form and in accordance with such regulations as the Secretary may prescribe, which includes the information described in subparagraph (B) with respect to the contribution.
      (E) Regulations. The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this paragraph, including regulations that may provide that some or all of the requirements of this paragraph do not apply in appropriate cases.

Secondly, Code section 170(f)(16) sets forth special rules for donations of clothing, furniture, household appliances, linens and the like:

(16) Contributions of clothing and household items.
      (A) In general. In the case of an individual, partnership, or corporation, no deduction shall be allowed under subsection (a) for any contribution of clothing or a household item unless such clothing or household item is in good used condition or better.
      (B) Items of minimal value. Notwithstanding subparagraph (A), the Secretary may by regulation deny a deduction under subsection (a) for any contribution of clothing or a household item which has minimal monetary value.
      (C) Exception for certain property. Subparagraphs (A) and (B) shall not apply to any contribution of a single item of clothing or a household item for which a deduction of more than $ 500 is claimed if the taxpayer includes with the taxpayer's return a qualified appraisal with respect to the property.
      (D) Household items. For purposes of this paragraph--
         (i) In general. The term "household items" includes furniture, furnishings, electronics, appliances, linens, and other similar items.
         (ii) Excluded items. Such term does not include--
            (I) food,
            (II) paintings, antiques, and other objects of art,
            (III) jewelry and gems, and
            (IV) collections.
      (E) Special rule for pass-thru entities. In the case of a partnership or S corporation, this paragraph shall be applied at the entity level, except that the deduction shall be denied at the partner or shareholder level.

Additionally, Code section 170(f)(11) sets forth rules concerning required appraisals for donations of big-ticket items. (Interested readers can follow the link; I will spare you the details of this one.)


March 9, 2011 | Permalink | Comments (0) | TrackBack (0)

Massachusetts Blue Cross Suspends Directors’ Pay in View of Mounting Scrutiny

In Insurer’s board suspends own pay, the Boston Globe reports that Blue Cross Blue Shield of Massachusetts board members voted to suspend their collective five-figure annual directors’ payments and to begin discussions with the office of Massachusetts Attorney General Martha Coakley and community leaders about the nonprofit’s status as a public charity.  Blue Cross chief executive Andrew Dreyfus is quoted as acknowledging the board compensation issue as a "great distraction," and as opining that "it was important that [the board] make a statement" following public outcry over the board fees and an $11 million payout of former CEO Cleve L. Killingsworth upon his departure.  Attorney General Coakely is reportedly calling on the state’s three other nonprofit health insurers — Harvard Pilgrim Health Care, Tufts Health Plan, and Fallon Community Health Plan — likewise to end the practice of compensating directors.
The story further reports that the Massachusetts Attorney General’s office has recently begun to investigate the Blue’s practices in 2005, when its board approved the  Killingsworth employment contract giving rise to his severance package.  Attorney General Coakley reportedly said that, while her office would participate in the nonprofit’s internal review of its legal status, "any decisions about changes would be left up to the insurer’s board:"

"They have two choices right now," she said. "They can stay organized as a not-for-profit, but I would hope that their directors would stay non-compensated indefinitely. Or if they decide they want to be organized as a for-profit, they’re going to have to get a statutory change" because the insurer was set up by state law.

CEO Dreyfus is reported to have dismissed the option of abandoning the nonprofit organization form for Blue Cross:

He suggested two other possible outcomes: It could remain a nonprofit, but drop its designation as a public charity, which now puts it in the same category as organizations that accept donations, such as museums. Blue Cross also could become a member-owned mutual insurance company. In either case, he said, the board would have to determine whether to resume paying directors under a new legal structure.


March 9, 2011 | Permalink | Comments (0) | TrackBack (0)

Tuesday, March 8, 2011

Exemption Revoked for Conservation Easement Shams

In Private Letter Ruling 201109030 (Dec. 8, 2010), released on March 4 and recently reported in Tax Notes Today, the Internal Revenue Service (“IRS”) revoked the federal income tax exemption of an organization claiming to qualify under section 501(c)(3) of the Internal Revenue Code (“Code”).  The organization received donations of five conservation easements, three of which are most notable.  The first was a tract of non-environmentally-sensitive land located on the grounds of a private, gated condominium/tennis resort and used as a storm water retention area and a miniature golf course.  The second, a 30-acre tract on a small bayou, was originally part of a larger real estate development.  A state EPA department required the developer to set aside wetlands before he could obtain necessary permits.  An IRS agent who examined the tract observed that it had been used as a dumping ground and four-wheeling playground.  A third easement consisted of interior easement lots in a residential subdivision containing large water front residential lots and wooded interior lots.  The easement lots added wooded space between houses.  Moreover, two ponds, and a boat/RV storage facility, had been constructed on the easement property.

The IRS determined that the transfers of the easements failed the test of “qualified conservation contribution” under Code section 170(h)(1).

Contributions … that are not for the protection of a relatively natural habitat of fish, wildlife, or plants, or similar ecosystems, that restrict the entrance of the general public from their benefit and education, that benefit only a private residential community of home owners, that restrict entrance to only the easement contributors, that are not donated in perpetuity, that are not monitored by the exempt organization on are regular basis do not qualify as charitable conservation easement contributions.

Further, the organization that received the transfers failed the test of Code section 501(c)(3) on grounds of advancing a non-exempt purpose:

ORG is not operating exclusively for an exempt conservation easement purpose as defined in IRC Section 501(c)(3) and IRC Section 170(h), because more than an insubstantial part of ORG activities are in furtherance of a non-exempt purpose. The non-exempt purpose of accepting non-qualifying conservation easement contributions by ORG serves the private interest of donors rather than an IRC 501(c)(3) purpose.

A word to the wise charitable conservation organizations: If a real estate developer approaches you as a potential donee of a conservation easement, make certain the transaction is not merely a device for seeking a tax benefit for a private community’s exclusive, collective recreational benefit.  Do not let a habitat for woodsy wildlife become a habitat for Hyatt humanity.


March 8, 2011 | Permalink | Comments (0) | TrackBack (0)

Indianapolis Nonprofits Indicative of the Times?: Nonprofit Grant Receipts and Dwindling Municipal Revenues

In Crime-prevention grants cut, putting some programs at risk, The Indianapolis Star reports that nonprofits in Indianapolis are feeling the pinch of declining city revenue: 

With a $74,000 city grant last year, the Church of Acts started a program that has taken hundreds of teenagers off the street each Friday night.  The children play basketball and video games, shoot pool and play foosball at three locations across the city.  Now, those activities and dozens of others are in jeopardy of elimination because of cuts in the city's 2-year-old Community Crime Prevention Grant Program.  The total money for the grants will be reduced by 50 percent, to $2 million, in 2011. That means Cheri Gable and organizers of other programs will have to convince city grantors that their programs are worth saving.

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Last year, 68 groups shared $4 million in grants ranging from $19,000 to $249,000. The largest chunk of grants -- $1.5 million -- went to programs for youths. The second-largest, $1 million, targeted offender re-entry programs. Education, health and neighborhood services rounded out recipients.  The organizations ranged in size from the Salvation Army to Bethlehem House on the Northside, a small nonprofit with a $400,000 annual budget that helps people battle substance abuse and cope with HIV.

"The cuts make me nervous," said Nate Rush, Bethlehem House executive director. Last year's $56,000 grant allowed him to hire a full-time counselor who served 75 people, he said.
"We are a small community-based organization that doesn't receive any other grants," Rush said. "We provide long-term services for free. The people we see don't have any money and couldn't get this help anywhere else over the long haul."

The decrease in funding from municipal sources hardly seems a problem unique to Indianapolis nonprofits.  In The New York Times’ Broke Town, U.S.A., author Roger Lowenstein offers a sobering assessment of the financial condition of cities across the nation:

Cities across America are facing dire financial distress. Meredith Whitney, a banking analyst turned independent adviser who correctly predicted the banking meltdown, has issued an Armageddon-like prediction of mass municipal defaults. Others — notably Newt Gingrich — have suggested that state governments as well as cities should be allowed to file for bankruptcy. Congress held a hearing to examine the idea.

These forecasts of apocalypse have touched a nerve. Americans, still reeling from the devastating impact of the mortgage debacle, are fearful that the next economic disaster is only a matter of time. To anyone reading the headlines of budget deficits and staggering pension liabilities, it takes little imagination to conclude that the next big one will be government itself.

The problems of cities are everywhere. The city council of Harrisburg, the capital of Pennsylvania, has enlisted a big New York law firm to explore bankruptcy as a means of restructuring a crushing debt. Central Falls, R.I., is in receivership. Hamtramck, Mich., a small city within Detroit’s borders, says it could run out of money next month. Hamtramck has only 90 employees, yet it is saddled with the pensions and health care obligations of 252 retirees. Detroit itself is at risk. Large deficits will mean closing about half of the city’s schools and will push high-school class sizes to 60 students.

These and other struggling locales do not begin to approach Whitney’s forecast of hundreds of billions in municipal defaults this year. (It would take defaults by 40 cities with as much debt as Detroit to reach even $100 billion.) Some industry experts accuse Whitney of exaggerating the crisis and of worsening the cities’ problems by frightening away investors. Whitney’s theory is that states, whose finances are also in desperate shape, will cut off local aid to preserve their own budgets; cities that have been subsisting on government transfers would become fiscal orphans and, in a financial sense, unworkable. She has not elaborated on her thesis beyond a few well-chosen television appearances. (She declined to talk to me.) But in the two months following Whitney’s warning, investors unloaded about $25 billion in shares of mutual funds that invest in municipal bonds. The selling spree sent the prices of these munis, typically among the most reliable investments, into a free fall.

Of course, some nonprofits are much more dependent on local governments than are others.  Health and human services appear to rely heavily on governmental sources of funding.  The following brief discussion, appearing on the website of the National Center for Charitable Statistics, offers some perspective on the issue:

What percentage of an average public charity's total revenue comes from government?

Government support for charities is difficult to measure because it comes in different forms and is reported on the IRS Form 990 in several places. A grant to provide a service for the public, for example, is reported under "Government contributions (grants)" on Form 990, line 1c, while a contract to provide a service or good to the government itself is reported under "Program service revenue" on Form 990, line 2. Program service revenue is further divided into revenue from Medicare/Medicaid and from government fees and contracts, as well as other contracts.

In 2004, government grants only made up about 9 percent of revenue for all reporting charities (about $100 billion), but represented a higher proportion for human service, international, and public benefit organizations. This amount does not include  government funding from Medicare and Medicaid, and the revenue from contracts for providing services directly to the government, all of which are reported under program service revenues on the Form 990. (Medicare and Medicaid revenues are drastically underreported on the Form 990.  See the latest Nonprofit Almanac 2008 for more information and new estimates for these sources.)

A third source of government support for charities is more indirect, as individuals may receive grants or subsidies and then use them to pay fees for services and goods provided by nonprofits. This would include, for example, primary and secondary school vouchers or college scholarships. Further research is necessary to measure this source of government support for charities.

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March 8, 2011 | Permalink | Comments (0) | TrackBack (0)

Monday, March 7, 2011

Do we need a "related party" statute for 501(c)(3) transactions?

The Tax Code is replete with provisions designed to prevent the use of "straw persons" to accomplish what a direct participant in a transaction cannot.  IRC 267 is a prime example, and even the definition of "disqualified persons" in IRC 4958 has spawned regulations designed to preventing the use of related parties to accomplish what a principal cannot otherwise do.  Do we need a provisions relating to what related-party charities can or cannot do in order to prevent other charities from violating established prohibitions?  There are already various attribution rules sprinkled throughout the tax (and no doubt the federal election statute and regs) provisions and I am not unsympathetic to the overregulation of transactions in the market-place.  But the question arose when I read a recent NY Times article detailing the contributions made to charities supervised by the relatives of politicians.  Here is a short blurb:

Louisiana’s biggest corporate players, many with long agendas before the state government, are restricted in making campaign contributions to Gov. Bobby Jindal. But they can give whatever they like to the foundation set up by his wife months after he took office.  AT&T, which needed Mr. Jindal, a Republican, to sign off on legislation allowing the company to sell cable television services without having to negotiate with individual parishes, has pledged at least $250,000 to the Supriya Jindal Foundation for Louisiana's Children.  Marathon Oil, which last year won approval from the Jindal administration to increase the amount of oil it can refine at its Louisiana plant, also committed to a $250,000 donation. And the military contractor Northrop Grumman, which got state officials to help set up an airplane maintenance facility at a former Air Force base, promised $10,000 to the charity. The foundation has collected nearly $1 million in previously unreported pledges from major oil companies, insurers and other corporations in Louisiana with high-stakes regulatory issues, according to a review by The New York Times.  It is among the newest of charities set up by elected officials, including members of Congress, or their families that are mutually beneficial: companies seeking to influence politicians or curry favor can donate unrestricted amounts of money, while the officials benefit from the good will associated with charitable work financed by businesses.

An earlier NY Time article discussed the unusual success that charities run by family members of politicians have in gathering donations while the related party is in office as well as the ethical questions attendant to those donations:

But some current and former lawmakers, as well as ethics officials on Capitol Hill, find the charitable donations troubling, calling them one of the last major unregulated fronts in the “pay to play” culture in Washington. The donations typically far exceed what companies are permitted to give to candidates in campaign contributions.  The Office of Congressional Ethics, a House oversight group, twice last year investigated lawmakers’ charities, but took no action, in part because the House granted waivers exempting the congressmen from prohibitions against soliciting donations from companies with business before their committees.  The donations by corporations and lobbyists to politicians’ favorite causes can create expectations that the lawmakers will return the favor, said Mickey Edwards, an Oklahoma Republican who served 16 years in the House.  “Almost all of these foundations, they were set up for a good purpose,” Mr. Edwards said. “But as soon as you take a donation, it creates more than just an appearance problem for the member of Congress. It is a real conflict.”




March 7, 2011 in In the News | Permalink | Comments (0) | TrackBack (0)