Nonprofit Law Prof Blog

UK Charity Commission Urged to Allow Not-for-Profit, Charitable Newspapers

We have previously blogged about the trend in the United States toward the creation of nonprofit news organizations (see, for example, a Pew Research Center's Project on Excellence in Journalism post, a federal legislation post, and a Texas Tribune post).  Now from across the Pond comes word that a group of journalists, academics, and charitable funders is asking the Charity Commission for England and Wales to make it easier for nonprofits there to qualify as charities.  The requests were apparently based upon a recent report prepared by the Reuters Institute for the Study of Journalism at Oxford University titled Is There a Better Structure for News Providers?  The Potential in Charitable and Trust Ownership, which is summarized briefly on Oxford's website but is not yet available in full form.  The author is Robert G. Picard.  Here is the summary:

Charitable and trust ownership are frequently advocated as alternatives to challenges in commercial news organisations. This book adds information, evidence and knowledge to the dialogue taking place by exploring existing arrangements in UK, France, Canada, and US, looking at various structural arrangements and exploring advantages and disadvantages of various forms.

LHM

Nonprofit Converts to "B Corporation" Status to Take Investment Funds

Forbes reports that nonprofit CouchSurfing.org has become a "B" or "Benefit" Corporation in order to receive $7.6 million in funding from Benchmark Capital and the Omidyar Network.  The now former nonprofit connects global travelers with locals throughout the world and has a user base of three million people in 81,000 cities.  The B Corporation is an invention of the nonprofit B Lab, which certifies for-profit corporations as B corporations if they meet social, environmental performance, and legal accountability standards and "build business constituency for good business" according to the Certified B Corporation website.  B Lab is also working to enact B Corporation legislation in at least three states (California, Michigan, and New York). 

Hat Tip: Tactical Philanthropy

LHM

NJ Supreme Court Rules Extensive Gov't Ties Renders Nonprofit a "Public Agency"

In a decision earlier this week, the Supreme Court of New Jersey ruled that the New Jersey State League of Municipalities, an unincorporated nonprofit association, is a a "public agency" for purposes of that state's open records laws because of its creation and control by municipal officials.  Reversing two lower court decisions, the Supreme Court found that the New Jersey Open Public Records Act applied to the League's records because the definition of "public agency" under that Act includes an instrumentality created by a combination of political subdivisions, which the League is, and does not require the carrying out of a traditional government function.  The court also concluded that the League's records qualified as government records.  Critical facts included that the League was created pursuant by state statute to serve as an association of municipalities and was controlled by elected or appointed officials from New Jersey's municipalities, all 566 of which are represented by the League.  The court carefully distinguished New Jersey's Open Public Meeting Act, which only applies to "public bodies," the definition of which requires either the performance of a governmental function or authorization to expend public funds.

Coverage:  New Jersey Star-Ledger.

LHM

WSJ: "Tax Break for Clergy Questioned"

Earlier this year, the Tax Court held in Driscoll v, Commissioner, 135 T.C. No. 27 that minister Phil Driscoll could claim a housing allowance under Internal Revenue Code section 107 for expenses related to his second home as well as for expenses related to his first home.  Mr. Driscoll had previously been convicted of tax evasion.

Now an article in the Wall Street Journal reports that Senator Charles Grassley, who previously questioned the compensation and other financial practices of six megachurches, is asking whether the ruling violates the spirit, if not the letter, of section 107.  Especially in the era of concerns about the debt, it will be interested to see if Congress decides some tightening of the housing allowance's generosity is appropriate.

LHM

Tobin on 501(c)(4)s and the Gift Tax

Donald Tobin (Ohio State) has written a letter to the editor of Tax Notes Today regarding the recent decision by the IRS to drop gift tax audits of donors to section 501(c)(4) social welfare organizations in the face of congressional criticism.  Unlike some commentators, he does not fault the IRS either for opening the audits in the first place or for making what he views as a "practical and pragmatic" decision to end them while it reexamines it position on this issue.  Rather, he criticizes the members of Congress who sent public letters to the IRS criticizing the audits for seeking to "harass and intimidate" the IRS in order to protect "powerful and politically connected donors" rather than letting the IRS apply the law as written.  In Tobin's view, "If Congress does not want the IRS to engage in audits of (c)(4)s, Congress should not impose those responsibilities on the IRS. What is unfair is to impose those responsibilities on the agency and then accuse it of playing politics when it enforces the very provisions passed by Congress."

Hat tip:  Tax Prof blog.

LHM

Chicago Tribune: "Catholic Charities Loses Ruling on Foster Care"

The Chicago Tribune reports that a state court has ruled that the state of Illinois can refuse to renew its contracts with Catholic Charities of the Diocese of Springfield-in-Illinois to provide publicly funded foster care and adoption services in that state based on the charity's turning away of openly gay parents.  I previously blogged about this dispute, which was trigged by a new state law requiring recipients of state money to treat people in civil unions as they would treat married couples.  The court concluded that despite a contractual relationship stretching over four decades, the charity did not  have a legally recognized protected property interest in the renewal of the contracts at issue.  The court therefore did not reach the question of whether the decision not to renew violated due process or, according to the article, the charity's argument based on free exercise of religion and a religious exemption in the new state law.

LHM

UPDATE: NJ Drops Donor Designation Rule Proposal

Yesterday I blogged about a New Jersey proposal to enhance donor designation of charitable contributions, perhaps unconstitutionally.  Later yesterday, the NonProfit Times reported that New Jersey Division of Consumer Affairs has dropped the proposal, apparently in response to comments highlighting the cost and difficulty of implementing the proposed rule.  For additional coverage, see the update issued by the New Jersey-based Center for Nonprofits, which submitted comments expressing concern about the proposal.

LHM

Jenkins on "Who's Afraid of Philanthrocapitalism"

Garry Jenkins (Ohio State) has posted Who's Afraid of Philanthrocapitalism (forthcoming Case Western Reserve Law Review).  Here is the abstract:

This Article explores the concept of philanthrocapitalism - an emerging model for charitable giving intended to enhance the practice of philanthropy through the application of certain business techniques, particularly envisioned as being deftly carried out by a subset of ultra-rich, experienced business people. During the past fifteen years, but most strikingly in the past five, private foundations influenced by philanthrocapitalism and its forbearers have become increasingly directive, controlling, metric focused, and business oriented with respect to their interactions with grantee public charities in an attempt to demonstrate that the work of the foundations is “strategic” and “accountable.” Combining empirical analysis and theoretical critique, this Article challenges the prevailing wisdom that philanthrocapitalism offers a better, smarter philanthropy, thereby strengthening the entire nonprofit sector. In fact, after observing and documenting the tenets of and rhetoric associated with philanthrocapitalism, there is a serious risk that the shift to business-like, market-driven giving may change the nature of philanthropy in ways we will come to regret. Moreover, this Article links concerns about philanthrocapitalism to a broader disquiet about the blurring lines between the public and the private. I argue that nonprofit scholars and advocates should pay greater attention to this movement and what its “success” might mean for the social sector.

LHM

NJ Proposes Taking Donor Designation to the Next Level

The NonProfit Times reports that the New Jersey Division of Consumer Affairs is seeking public comments on a proposed rule that would require charities to inform donors that they can direct a soliciting charity to use the donor's contribution to fund a particular program if a solicitation by that charity names multiple programs as an inducement for the donor making the contribution in the first place.  The proposed rule would apply to organizations that received contributions of more than $250,000 in the previous fisal year.  According to the article, Errol Copilevitz of Copilevitz & Canter, a firm that specializes in charitable solicitation laws, has already objected to the proposal on the grounds that it unconstitutionally compels speech and fails to recognize that realistically some of the funds raised would need to be used to cover fundraising expenses.

LHM

GOOD/Jumo Merger Raises Interesting Charitable Asset Questions

The NY Times reports that the for-profit company GOOD, a self-described "integrated media platform for people who want to live well and do good," is acquiring nonprofit charity Jumo, a social networking platform that "enables people to find organizations and similarly minded people working on important causes here in the United States and across the world."  The deal apparently arose out of Jumo's struggle to find a viable and distinctive role in the growing nonprofit social media space.  While the terms of the deal are not known, it is clear that any money paid to Jumo will need to continue to be dedicated to charitable purposes.  Such deals of course raise significant valuation issues, as well as the risk of excessive consulting contracts or other payments to charity insiders to facilitate the deal.  In this case, the situation may also be complicated by the fact that Jumo was funded to the tune of $3.5 million by several foundations, including the Ford Foundation, the Omidyar Network, and the John S. and James L. Knight Foundation.  While the article quotes the last foundation as applauding the deal, it is not clear how the two other named foundations view it.

LHM

Witte on "Classification Issues in the Exemption of Churches and Charities from Property Taxation"

John Witte Jr. (Emory) has posted Whether Piety or Charity: Classification Issues in the Exemption of Churches and Charities from Property Taxation, which was previously published in Religion and the Independent Sector in America (1992).  Here is the abstract:

The law governing tax exemption of church property illustrates the problem of classifying institutions and activities of the independent sector along religious lines. The “independent sector” is comprised of a variety of institutions, like families, schools, charities, churches, corporations, clubs, and others. Religion assumes a variety of forms and functions within these institutions, ranging from the incidental to the indispensable. The law, however, requires that sharp distinctions be drawn between “religious” and “non-religious” institutions and activities.

Such distinctions are required by state statutory law. Historically, two separate bodies of state law governed tax exemption of church property: (1) a body of common law, which accorded such exemptions to church properties based upon the religious uses to which they were devoted, and (2) a body of equity law, which accorded such exemptions to church properties based upon the charitable uses to which they were devoted. Currently, only one body of state statutory law governs such exemptions, yet exemptions remain based on either the religious uses or the charitable uses of a property. State officials are thus required to distinguish between piety and charity, religion and benevolence, to determine whether and on what basis a petitioner’s property can be exempted from taxation.

Such distinctions are also required by federal constitutional law. The Constitution of the United States permits government regulations of various non-religious institutions and activities, provided such regulations comply with generally applicable constitutional values. It permits governmental regulation of religious groups and activities, only if they comply with the specific mandates of the establishment and free exercise clauses of the first amendment. State tax exemptions for religious institutions and religious uses of property, therefore, require separate constitutional treatment.

The religion clauses of the first amendment, as currently interpreted, appear to offer conflicting directives on tax status of church property. The establishment clause has been interpreted to forbid government from imparting special benefits to religious groups. The free exercise clause has been interpreted to forbid government from imposing special burdens on religious groups. The free exercise clause has been interpreted to forbid government from imposing special burdens on religious groups. Neither the exemption nor the taxation of church property appears to satisfy the principles of both clauses. To exempt church property, while taxing that of other non-religious groups, appear to violate the “no special benefit” principle of the establishment clause. To tax church property, while taxing that of other non-religious groups, appears to violate the “no special burden” principle of the free exercise clause. To tax church property, while exempting that of other charitable groups, appears to violate the “no special burden” principle of the free exercise clause. In Walz v. Tax Commission (1970), the United States Supreme Court held that tax exemptions of church property, while neither proscribed by the establishment clause nor prescribed by the free exercise clause, are constitutionally permissible. In more recent cases involving federal income taxation and state sale and use taxation, however, the Court has called this precedent into serious question.

This Article retraces the history of tax exemption of church property in America and analyzes current patterns of tax exemption litigation and legislation in light of this history. Part I analyses the common law and equity law sources of tax exemption law, the challenge posed to these laws by early state constitutional provisions, and the rise of the modern theory and law of tax exemption of church property that emerged in response to these challenges. Part II analyzes briefly new trends in litigation over the tax exemption of church property, particularly in cases raised by new religious groups, which have sought to avail themselves of the same protections enjoyed by traditional religious groups. Part III poses an alternative to the current reforms of tax exemption law now being debated and analyzes this alternative provisionally in light of historical exemption laws and current constitutional interpretations.

LHM

Atkinson Comments on Galle: "Keeping Republics Republican"

Rob Atkinson (Florida State) has posted Keeping Republics Republican (Texas Law Review), a comment on Brian Galle's (Boston College) article Keep Charity Charitable (also Texas Law Review).  Here is the abstract:

Several months ago I told Brian Galle I had accepted the offer of Texas Law Review See Also to comment on his article, Keep Charity Charitable. He remarked, with his typically casual candor, “I’d have asked someone I disagree with more.” The title of Professor Galle’s article nicely identifies our common ground: he now believes, very much as I once believed, in the wisdom of keeping charity charitable and meeting a wide range of basic social needs through nonprofit or “third sector” organizations, as opposed to for-profit firms on the one hand and government agencies on the other. Professor Galle’s article addresses a position with which he and I both disagree: one that would cede a more-or-less large portion of the traditional field of charity to for-profit firms – in this particular dustup, those who favor “for-profit charity” over “charitable charity.”

LHM

LA Times: "Los Angeles to Hand Over Animal Shelter to Nonprofit Group"

While perhaps more commonly seen in the health care area in recent years (see previously blog posts about Grady Memorial Hospital in Atlanta and Martin Luther King Jr. Hospital in Los Angeles), today brings a L.A. Times report about the transfer of another kind of service from a local government to a nonprofit group.  According to the article, the Los Angeles City Council voted yesterday to turn over management of the Northeast Valley Animal Care Center to the Best Friends Animal Society.  While the Center is only three years old, it has never been fully staffed because of government budget constraints.  Best Friends will not be receiving any payment for its services and said it will be spending up to $1 million to improve the facility, which originally cost $19 million.  The City of Los Angeles estimated that it would have cost it $3.3 million annually to run the shelter.  This may be only part of a wave of such transfers, as the city is also considering whether to turn over to nonprofits or other private entities the management of several arts facilities, the Los Angeles Convention Center, and the Los Angeles Zoo and Botanical Gardens.

LHM

NYT: "Funds Restored to Aid Groups in Gaza"

I previously blogged about the U.S. State Department's threat to withhold funds for international aid in Gaza because of a Hamas decision to audit the groups receiving those funds.  The N.Y. Times has published an AP report that Hamas dropped its audit demand after the State Department made good on its threat by "pausing" its financial support until Hamas backed down.

LHM

Illinois Department of Revenue Denies Property Tax Exemption to Three More Hospitals

On the heels of the 2010 decision by the Illinois Supreme Court in the Provena Covenant hospital tax exemption case (see prior posts here and here), today the Illinois Department of Revenue denied exempt status to three Illinois hospitals:  Northwestern Memorial Hospital (Prentice Women's Hospital), a newly-constructed hospital in the wealthier Chicago suburbs; Edward Hospital in Naperville; and Decatur Memorial Hospital in Decatur.  The reported charity care amounts ranged from 1.85% of patient revenues in the case of Prentice Women's Hospital to .96% in the case of Decatur Memorial - all in excess of the .07% determined by the court in Provena to be "de minimis," but not strikingly larger than the Provena number.  And in each case, the hospitals in question reported substantial net patient revenue (from $1.18 billion in the case of Northwestern's overall system to $252 million for Decatur) and had for-profit entities in the ownership chain.

So what does this mean?  Well, first it is clear that, to its credit, the Department of Revenue has ignored the tired "community benefit" arguments made by Illinois hospitals even after the Provena decision made clear that "community benefit" wasn't going to carry the day in Illinois.  But at least at this particular time, I have no information on the internal metrics being applied or developed by the Department in order to reach these decisions.  Has the Department settled on a "number" for charity care?  The cases denied today indicate that 1.85% of patient revenues won't be enough when the hospital is part of system that generates over a billion dollars in profit.  But what if the hospital barely breaks even?  What if the charity care percentage at Prentice Women's Hospital had been 5% instead of 1.85%?  Is 5% "de minimis" (some federal tax precedents would argue not). 

Until we get specific official guidance from the Department of Revenue, these questions are still just that - questions.  But, in the mode of Johnny Carson's "The Great Karnak," I will go out on a limb here and make a prophecy:

More litigation is coming in Illinois on the issue of property tax exemptions for nonprofit hospitals.

JDC

NYT: "California Scrutinizes Nonprofits, Sometimes Ending a Tax Exemption"

The New York Times reports that California nonprofit groups are being increasingly scrutinized with respect to the benefits they provide to state residents, with groups that are deemed not to be benefiting state residents sufficiently losing their property tax exemptions.  The denials by county assessors are apparently based on the requirement (see Q&A13) that exempt property be used in way that "primarily benefits persons within the geographical boundaries of the State of California."  The article notes, however, that this requirement appears to be have been applied inconsistently and therefore may be constitutionally vulnerable as a result.  It is also not clear how such a requirement is consistent with the Commerce Clause of the U.S. Constitution, given the Supreme Court's decision in Camps Newfound/Owatonna, Inc. v. Town of Harrison, 520 U.S. 564 (1997).

LHM

Politico: Millions Flow Anonymously Into 501(c)s on Both Sides

Politico reports early indications that many millions of dollars are flowing anonymously into new and old non-charitable, tax-exempt section 501(c) organizations on both sides of the political aisle, as well as into the infamous SuperPACs that are required to publicly disclosure the identities of their significant donors.  On the left are the recently created American Bridge 21st Century Foundation, Patriot Majority, and Priorities USA, each with an affiliated SuperPAC (Priorities USA Action, American Bridge 21st Century, and Patriot Majority PAC).  On the right are the slightly more established (existed at least as early as 2010) Americans for Prosperity and Crossroads Grassroots Policy Strategies (i.e., Crossroads GPS), with the latter also having an affiliated SuperPAC (American Crossroads).  They join longstanding, politically active tax-exempt organizations, including labor unions such as the Service Employees Union International, the U.S. Chamber of Commerce, and the 60 Plus Association.  Information about the 2011 revenue and expenditures of the section 501(c) organizations is based on voluntarily released information and required reporting of certain election-related spending and so is necessarily incomplete.  Information about SuperPAC revenue and spending, or as it is more formally known Independent Expenditure-Only Committee spending, can be found on the FEC website for such organizations that are involved in federal elections.  For those who have not been following Stephen Colbert's SuperPAC, the great advantage of such entities is their ability to raise unlimited contributions from individuals, unions, and corporations as long as they operate independently of candidates and political parties.  Their great disadvantage as compared to section 501(c) organizations, at least for some potential donors, is they must publicly disclose the identities of all significant contributors.

LHM

State Dept. Reacts to Hamas Audit Threat for American-Financed Charities in Gaza

The NY Times reports that the U.S. State Department is threatening to withdraw $100 million of spending in Gaza unless Hamas leaders drop their demand to audit American-financed charities operating there.  According to the article, the trigger for the threat was the decision by Hamas officials to suspend the operation of International Medical Corps after it refused to submit to such an audit.  The dispute is apparently only the latest controversy in what has become an increasingly tense confrontation between the Hamas authorities in Gaza and nongovernmental organizations operating there.  Previously, Hamas demanded that all NGOs register with the government, pay a fee, and submit financial reports, demands that many NGOs initially resisted but eventually agreed to.  The audits appear to have been a step too far for at least some NGOs, however.

LHM

 

Starting to Sound Like a Broken Record: DC Politicians Use Nonprofits to Reward Friends & Donors

We have blogged on numerous occasions about politicians, sometimes quite legally, using nonprofit organizations to steer public funds to charities tied to their friends, financial supporters, or even themselves. Most recently, we blogged about a civil lawsuit that the D.C. Attorney General had filed against D.C. Council member Harry Thomas Jr. based on allegations that Thomas had diverted more than $300,000 in public funds for his own benefit, in large party through a charity.

Now the Washington Post reports that Thomas and other Council members have used their influence over the same charity, the D.C. Council-created D.C. Children and Youth Investment Trust Corp., to direct $13 million to favored charities without going through the normal bidding process, even though the Trust Corp. is supposed to independently decide which local charities best address problems facing city youths.  Those charities often had board members or other officials who made significant campaign contributions to city officials, including Council members, or who were former staff of Council members.  The story is clear that unlike the allegations in the suit against Thomas, which the article notes has now been settled, there are no accusations here that any of the funds were diverted for the personal benefit of Council members, or that this past earmarking violated the law (as of the current year, such earmarking is now forbidden).  Nevertheless, it is another troubling example of politicians using charities - with the apparent consent and possibly encouragement of well-connected charity leaders - to do more than serve the public good.

LHM

Major 501(c)(3) Health Care Provider to Buy 501(c)(4) Health Insurer

The Boston Globe reports that Partners HealthCare System Inc., a section 501(c)(3) tax-exempt nonprofit organization that is the parent organization for a group of section 501(c)(3) organizations operating Massachusetts General Hospital, Brigham and Women's Hospital, seven other other hospitals, a physician network, community health centers, and other health related programs, has signed a letter of intent to acquire Neighborhood Health Plan, a section 501(c)(4) tax-exempt nonprofit managed care organization that insures more than 240,000, mostly low-income, residents of Massachusetts. The article does not address whether the tax classification of Neighborhood Health would be affected by the deal.

According to the article, in exchange for the acquisition the 50,000+ employee Partners would provide grants to more than 50 community health centers affiliated with Neighborhood Health and also strive to improve the provision of health care to the urban poor in Boston and other (presumably Massachusetts) cities.  While this is apparently the first entry by Partners into the health insurance business, the article notes that other Massachusetts hospitals have or are likely in the near future to become affiliated with health insurance providers.  Because this deal would represent a significant consolidation of health care in Massachusetts, the article notes that concerns relating to competition may lead to close scutiny by state and federal officials who must approve the transaction.

LHM