Nonprofit Law Prof Blog

Kabbalah Centre Under IRS Scrutiny

The Los Angeles-based Kabbalah Centre, a school bringing Jewish mysticism to a celebrity-studded following – is now under criminal investigation by the Internal Revenue Service, reports the Los Angeles Times in Celebrities Gave Kabbalah Centre Cachet, and Spurred Its Growth (the second of a two-part article series).  Founded by Philip and Karen Berg and originally conducted from the Berg’s living room in Jerusalem and later in Queens, “the Kabbalah Centre had become an empire with branches in major cities, a publishing arm and scores of passionate young volunteers,” says the story.   An empire indeed, as the story continues:

The center's assets grew from $20 million in 1998, the year after Madonna went public with her ties to kabbalah, to more than $260 million by 2009, according to the resume of a former chief financial officer and tax returns the center and affiliated organizations filed before becoming exempt.

The center's revenue sources include fees for classes and sales of merchandise such as candles, red-string bracelets that the center says will ward off evil, and bottled water long touted as having healing powers.

Soliciting donations remained a focus of the Bergs and other ranking leaders. Major donors to the center or its affiliated nonprofits include Madonna, whose foundation has reported giving more than $10 million, and fashion designer Donna Karan, whose foundation has reported giving at least $2 million.

The Times states that the criminal division of the IRS is now investigating “whether the Bergs enriched themselves with members' donations,” and that “prosecutors subpoenaed financial records from the center and two affiliated charities with links to Madonna.”   The Bergs declined an interview with the Times, but issued a statement that the center would respond to the subpoenas.  Their statement concludes as follows:

The Centre is disappointed that the recent press regarding the Centre and this investigation is being fueled by rumors spread by a few disgruntled former students and former employees with personal agendas. The Centre is confident that the investigation will show that the Centre has and continues to serve its mission and act in furtherance of the wisdom and teaching of Kabbalah.

 JRB

Independent Sector Annual Conference to Discuss Proposed Limits on Charitable Contributions

In Giving’s “Perfect Storm”; Proposed Limits on Tax Deductions Worry Leaders of Nonprofits, the Chicago Tribune reports that over 1,000 philanthropic leaders and nonprofit executives will meet at the Independent Sector Annual Conference in Chicago this week to discuss a number of pressing issues, including proposals to limit the federal income tax deduction for charitable donations.  One such familiar proposal has come from President Obama’s administration, which wants to limit the benefit to a taxpayer from the income tax deduction for charitable contributions to 28% thereof.  The story reports that Diana Aviv, president and CEO of Independent Sector, cites studies estimating that the proposal could cost nonprofits $ 7 billion.   Charities are particularly concerned with the reduction in donations any such proposal could cause in view of their current financial circumstances.  First, donations are harder to attract with the poor economy.  Secondly, because state governments have decreased funding of social services, the need for nonprofits to fill the void is greater than ever. 

JRB

Nonprofit Credit Unions Benefit from Financial Reform Legislation

The Detroit News reports that customers who are disenchanted with the track record of large national banks in the wake of the global financial crises have an additional reason to look with favor upon nonprofit credit unions as their financial institutions of choice: a favorable exemption that they enjoy under the financial reform legislation.  Prior to the new law, banks customarily charged significant fees to merchants when bank customers paid for their goods and services with debit cards.   Explains the story:

Banks charged those fees, called interchange charges or "swipe fees," to merchants each time a customer's debit card was used. The cost averaged 44 cents each time a debit card was used. The financial reform law limits swipe fees to something between 21 to 24 cents, which some experts say will trim bank revenues by 40 percent.

Some banks, such as Bank of America, intend to compensate for the loss in revenue from swipe fees by charging their account holders a monthly fee for holding debit cards.  Many credit unions need not follow suit, however:

But community banks and most credit unions are exempt from the interchange cap, giving them a chance to keep their debit cards fee-free without seeing their income drop. That is, unless merchants start declining cards from financial institutions that are exempt from the swipe fee limit.

The Detroit News notes that this special exemption complements a more basic advantage of the nonprofit form enjoyed by nonprofit credit unions:

[C]redit unions still have plenty of advantages to encourage customers to switch. Fees are lower at credit unions, which are organized as nonprofit institutions. Profits are passed back to members in the form of annual dividends at some credit unions, but most institutions apply profits to keep loan rates lower and saving account interest higher than competing big commercial banks.

JRB

Give Clinical Teaching a Try

As some of you know, I spend much of my time supervising a Community Development Law (CDL) Clinic at UNC-Chapel Hill.  We work exclusively with nonprofit organizations, and, although we don't go to court for them, we do pretty much anything else that 1) they need, 2) will create a good learning experience for our law students and 3) the faculty supervisors feel competent so supervise.  I collaborate in the CDL Clinic with Professor Judith Wegner.  More on her, below.

Because most of my Nonprofit Law colleagues in the academy are from the "podium" side of their law schools, I thought it would be interesting to briefly describe some of the work we do.  We began this year with approximately thirty-eight clients, most of them new.  We split our eight students (who work with us for the full academic year) into two-person teams and each team received five or six clients.  We give them multiple clients because it ensures they will always have sufficient work to keep them occupied and because it compels them to be careful about setting priorities, planning ahead, and communicating carefully with their clients about the timing of the legal tasks.

I try to limit the number of nonprofit formations we accept each year, but we usually do one per student and I try to choose organizations that will present novel, or at least interesting, legal issues.  This year, for example, we are forming a nunnery for adherents of a non-Judeo-Christian religion.  After interviewing the client, the students immediately recognized that there could be a private inurement or private benefit problem, since the principals who wish to form the organization would be living in the community and benefiting from its religious education program, not to mention its food and shelter.  Another new organization wishes to stimulate economic development in poverty-stricken South American communities, partly by teaching peasant cofee growers how to improve the quality of their harvests and market them at premium prices to coffee exporters.  In addition to the usual complications of forming organizations that work overseas, the students recognized that they might have to grapple with "commerciality" concerns.

We also work with existing organizations of various sizes.  One public health organization we have been advising for several years has been grappling with legal issues caused by its tremendous success and impact.  It has grown from a small, local nonprofit organization to a national model with projects around the country. CDL students this year have been advising the organization about protecting its intellectual property and about its obligations to file Certificates of Authority and/or Charitable Solicitation licenses in various jurisdictions.

Other clients have us working on zoning and land-use planning, UBIT, risk reduction strategies (particularly for organizations that work with minors), affordable housing, and finding the line between "religious organization" and "church" for IRS purposes.  As I have mentioned in earlier blog postings, we have a regular stream of clients who consider themselves social enterprises and want to know whether to form as nonprofits or for-profits.

Earlier in this prolix post, I mentioned my colleague, Judith Wegner.  As many of you know, she was the dean of this law school, was the president of the AALS, and was one of the authors of the Carnegie Report.  Several years ago, Judith decided that she wanted to add clinical supervision to her vast teaching experience, so she approached me about sitting "second chair" in the CDL Clinic.  She has been supervising CDL students since then, and she and I have learned much from one another.

For those of you who teach podium classes on Nonprofit Law but have not strayed down to your clinics, you ought to think about giving it a whirl.  I think you would find it fun and challenging.

TAK

Steve Jobs Found Venture Philanthropy "Annoying"

I am not surprised by the revelation in the new Steve Jobs Biography, written by Walter Isaacson and described in a recent Chronicle of Philanthropy article, that Jobs turned away from philanthropy because he was annoyed when the person he hired to manage it kept talking about "venture philanthropy," how to "leverage giving," and the promotion of "social entrepreneurs."  As I and others have written in various academic publications, drawbacks of the Fourth Sector include the breathless rhetoric that its promoters employ in describing it, coupled with their insistence that everything about it is innovative, even revolutionary.  Over several years of observing the Fourth Sector, I have noticed that the MBAs often are comfortable with the language of "leveraging" and "outcome metrics" and "social return on investment," while many of the lawyers  -- even those who are excited about the development of the Fourth Sector -- roll their eyes and grit their teeth.  Maybe Jobs would have been more accepting of the Fourth Sector rhetoric if he had gone to Business School.

TAK

Are Charities Subsidizing Tax Breaks for Private Industry?

This week my Nonprofit Law class discussed the increasing trend of financially pinched states (and their local governments) squeezing money out of charitable organizations either through narrow interpretations and applications of their property tax statutes or by demanding PILOTs and SILOTs.  It is therefore timely that a recent Chronicle of Philanthropy  blog post quoted two national nonprofit leaders as claiming that states and local governments are "overreaching."  They ask whether it is wise and just for states and localities to be imposing property taxes on charities at the same time that many are tripping over one another to offer tax breaks to private enterprises to lure them into their jurisdictions.  I agree with the nonprofit leaders, especially when one considers that the tax break/incentive programs targeted at private firms rarely work as matter of long-term economic development.  States and local governments lure industries to their regions, and then, a few years later when another state (or foreign country) offers a better deal, the industry leaves town taking its jobs with it.  As a long-term economic development strategy, the states and local governments would be much wiser to invest in education and infrastructure.  That's what attracts private employers who sink roots.

TAK

Medical-Legal Partnership in Kenya

I spent part of my summer in Kenya looking into the possibility of establishing a medial-legal partnership (MLP) in Kibera, a sprawling slum on the outskirts of Nairobi.  The project, if it goes forward, will be in collaboration with an NGO called Carolina for Kibera (CFK), which I have mentioned in previous posts.  It would involve placing a Kenyan lawyer on staff at CFK's highly successful Tabitha Medical Clinic and asking that lawyer to address the "upstream social determinants" of the patients' health problems.  More on that below.

The MLP movement has been building in the U.S. since the early 1990s.  By many accounts, it started when Barry Zuckerman, a medical doctor at a pediatric health clinic in Boston, realized that he repeatedly treated children with asthma and other respiratory ailments, but that they repeatedly returned to his clinic in crisis because their poor housing conditions, including infestation by mold, roaches, and rodents, were exacerbating their medical conditions.  He hit on the idea of putting a lawyer on staff in the medical clinic to deal with the upstream social determinants.  In the case of the asthmatic child, the staff lawyer compelled the landlord to improve the child's housing conditions, and the medical problem improved.  This early success has now been duplicated across the U.S., and there is a budding literature describing the concept and a national organization dedicated to spreading the idea.

In Kibera, the legal issues affecting patients' health are different.  The paramount legal/health issue is gender based sexual violence, which is perpetrated with virtual impunity.  Another legal issue is the absence of wills.   Men who provide resources for their families die without wills, and collateral male relatives often claim the resources of the deceased, sometimes citing customary law.  This leaves the widow and children economically vulnerable, leading in turn to a panoply of negative health consequences including exposure to HIV/AIDS. 

The question is whether the MLP model developed in the U.S. will be efficacious in Africa and other parts of the developing world. One group in Kenya, Legal Aid of Eldoret (LACE), has launched what appears to be a successful MLP in a regional city.  That project was founded with the assistance of our law colleague, Fran Quigley, from the University of Indiana. 

The project I have in mind would attempt to implement such an MLP in Kibera and would from the start include a research component that would carefully measure the outcomes.  If the MLP  works, and if its success can be measured, more programs and more funding will follow.

We'll see.

TAK

Democracy Now!

This morning's New York Times included a story on a grass-roots radio newscast called Democracy Now!  (Apparently they are on TV, too, but I've never seen them in that medium.)  This struck me as interesting because I have stumbled on to Democracy Now! radio broadcasts several times in recent months and was struck by the fact that a) their production values are much less slick than commercial radio and/or All Things Considered and the like, and b) the content is much harder hitting and much more interesting.  I have long been a NPR listener, but I have grown dismayed at how bland their reporting has become.  It seems obvious to me that most public radio has been cowed into submission political attacks, de-funding threats, and their increased need to rely on corporate sponsorship.  Democracy Now! is an independent nonprofit organization, which means that its producers "never have to worry about how an advertiser might feel . . .."  It's worth a listen.

TAK

College Sports

Yesterday's Chronicle of Higher Educationreports that a study commissioned by the Knight Commission on Intercollegiate Athletics has determined that "[a]thelitic programs in the Football Bowl Subdivision spent on athletes at a rate that far outpaced academic spending per student during a recent five-year period."  One extreme example at the athletic conference level found that one league, the Southeastern Conference, reported academic spending of  $13,471 per student in 2009 while athletic spending per athlete was $156,833.  These results will no doubt inflame Senator Grassley and will add to the public's growing the public's growing skepticism about whether revenues from college athletic programs ought to be tax exempt because of their close connection to education.

TAK

Sen. Grassley At It Again

The Chronicle of Philanthropy reportsthat the Senate recently rejected Sen. Grassley's proposal to bar the Justice Department from awarding grants to charities that put money in offshore accounts to avoid paying income taxes.  In a news item that I somehow missed, a 2010 Senate investigation found that the Boys & Girls' Clubs of America held more than $50 million in offshore equities and partnerships in order to "avoid paying . . . UBIT."  I would not have thought that such passive investment income would be subject to UBIT, but perhaps one of the true tax profs among us can explain.

TAK

The White House and the NC 4th Sector Cluster Initiative

I have been out of the blogosphere for quite a while, so I hope readers will forgive a review of ancient history. 

For a couple of years I have been active with a group in my home state of North Carolina that calls itself the Fourth Sector Cluster Initiative.  It is comprised of social entrepreneurs from the business, government, and nonprofit sectors who intend to make North Carolina a nexus for the emerging Fourth Sector.  My involvement has been largely confined to discussing legal impediments under state and federal law to the flowering of the Fourth Sector.  If you look here, you can see a video of one of my typical rants against the Commerciality Doctrine.

Last June, the Cluster Initiative got face time with  White House officials when President Obama and his Council on Jobs and Competitiveness came to Durham, NC.  In a meeting with the Council, I had the privilege of explaining the work of Carolina Law's Community Development Law Clinic in a twenty-second burst.  Interestingly, I was warned by event organizers not to refer to the Fourth Sector as the "Social Enterprise Sector."  Why?  Because that term sounds too much like "socialism" and therefore might be attacked by Republicans.  I kid you not.

Later, I watched President Obama give a talk at Cree Industries in Durham.  From that experience, I learned two things.  First, our president is an extremely impressive extemporaneous speaker.  Second, it's not worth it to attend a presidential speech because afterwards you have to wait for an hour in the parking lot until the big man heads for the airport.

TAK

Reduced Funding Sources Present Opportunity to Reduce Nonprofits' Duplication

As reported in the San Francisco Chronicle, the difficult economic times for state and local governments, in particular, as well as other funders is presenting some nonprofits with hard choices - either merge with another nonprofit with similar programs or cease to exist.  The City of San Francisco, which spends approximately $500 million per year to fund local nonprofits that provide a variety of health and human services, is a prime example of how nonprofits must seek partnerships to survive in these times of decreased funding sources.  The article illustrates that in many instances the combining of nonprofit agencies has lead to increased services and public impact.  For instance there are presently 10 nonprofits that provide employment counseling services to the homeless.  Some of these nonprofits receive over $100,000 for providing such services; others receive between $30,000 and $40,000.  There is a strong argument that the aggregate funds could be better utilized if the various agencies combined to offer a single, comprehensive program.

NAM

IRS Guidance on Tax-Exempts Participating in Medicare Shared Savings Program

The Centers for Medicare & Medicaid Services has released final regulations describing the rules for the Medicare Shared Savings Program (Shared Savings Program) and accountable care organizations (ACOs).

On April 18, 2011, the IRS released Notice 2011-20, summarizing how it expects existing IRS guidance to apply to § 501(c)(3) organizations, such as charitable hospitals, participating in the Shared Savings Program through ACOs.  The IRS released Fact Sheet 2011-11 confirming that Notice 2011-20 continues to reflect IRS expectations regarding the Shared Savings Program and ACOs, and providing additional information for charitable organizations that may wish to participate in the Shared Savings Program. For more information, see the CMS website.

NAM

Lipp & Crawford: "Donating to College Athletics: A Taxing Gesture of Kindness"

Bridget Crawford (Pace) and Troy Lipp (Pace) have posted on SSRN Donating to College Athletics:  A Taxing Gesture of Kindness (Tax Notes 2011).  Here is the abstract:

This article considers the tax consequences of a booster's contribution to a college athletics program, using the case study of financier Robert Burton's multi-million dollar contribution to the University of Connecticut football program.  This article discusses the income and gift tax issues that arise in connection with gifts made in contemplation of corresponding benefits, as well as potential tax consequences if a donor subsequently withdraws a gift.  Donors who expect a role in a team's affairs may face unfavorable tax consequences.

NAM

Should Solyndra's Failure Yield More Tax Reforms for Supporting Organizations?

As previously blogged (see here), the George Kaiser Family Foundation's (GKFF), a tax-exempt entity and the largest investor in the failed solar company, Solyndra, is garnering further scrutiny for its alleged lack of sufficient contributions to charitable activities.  As detailed in a Washington Post article, the ever-vigilant watchdog on charities' activities, Senator Charles Grassley, wrote to Treasury Secretary Geithner and IRS Commissioner Shulman urging them to finalize rules that would prevent supporting organizations like GKFF from avoiding the mandatory payout rules imposed on private foundations.  By establishing itself as a supporting organization for the Tulsa Community Foundation, GKFF is effectively circumventing private foundation rules to which it would otherwise be subject.  In some recent years, according to the Post article, GKFF distributed as low as .2 percent of its assets to charitable activities.

As Senator Grassley stated at the Senate Finance Committee hearing yesterday, "[t]he recent Solyndra scandal highlights the need for further reforms. With Solyndra, the government didn’t just lose out on its investment through the $535 million loan guarantee [from the Energy Department]. It also lost out on the tremendous subsidy it provided the George Kaiser Family Foundation through the charitable contribution deduction.”  As John Colombo stated in his prior blog entry on this issue, the lack of accountability that results from these type of supporting organization scenarios is problematic and should be eliminated.

NAM

The Future of the Charitable Contributions Deduction

As previously blogged (see here), the Senate Finance Committee held a hearing yesterday to discuss the future of the charitable contributions deduction.  As reported by numerous news sources (see two articles, here and here), most of those who testified on behalf of charitable organizations argued that any floor or cap on the charitable contributions deduction would result in a significant decrease of charitable contributions, a potentially devastating result to the nation's charities.  Frank Sammartino, a tax analyst at the Congressional Budget Office, conjectured that Obama's plan (limiting the deduction to 28% of high-income taxpayers' AGI) would likely reduce higher-income-taxpayers' contributions, but offered no hard estimates.  The President's National Commission on Fiscal Responsibility and Reform (see its report here) has proposed a tax credit for charitable contributions exceeding 2% of a taxpayer's AGI.

Senator Max Baucus, Chair of the Senate Finance Committee, raised the common counterpoint - namely, that most taxpayers do not itemize their deductions and, therefore, do not accrue any tax benefits for their charitable contributions.  The result, he opined, was that some charities receive larger amounts of contributions because they attract high-income taxpayers who achieve the largest tax reductions.  "Let us encourage charitable giving in a way that is fair and efficient," he proferred before leaving the hearing.

In addition to potential reform of the charitable contributions deduction, other topics discussed at the hearing included the deduction for household goods and services, donations in support of the arts, and tax benefits provided to supporting organizations. 

NAM

Charitable Giving Increases in 2011, but Still Behind Pre-Recession Giving

The Chronicle of Philanthropy reports that the charities that fundraise from predominantly private sources anticipate a median increase of 4.7 percent—namely, that half of the surveyed charities anticipate more and the other half anticipates less.  It is an increase of 1.2 percent over last year's gains.  Nevertheless, charities are still not fundraising at their pre-recession levels.  Compared to 2007 figures (adjusted for inflation), the surveyed charities are still 8 percent below pre-recession fundraising amounts.

Two charities in the top 10 defied the trend—The Salvation Army (No. 2) experienced 5.1 percent growth in giving; the American Red Cross took in nearly 64 percent more, attributable primarily to Haiti-related donations..

NAM

Michigan "Blues" Conversion Sparks Controversy

A legislative effort to convert Blue Cross Blue Shield of Michigan, a nonprofit organization that controls 70% of Michigan's insurance market, into a for-profit insurance company is encountering strong opposition from the chair of the state's Senate Insurance Committee.  The Detroit News reports that the 31-year-old statute granting the Blues' nonprofit status is up for review, which prompted the Governor to call for a "fresh look" and consideration of a for-profit conversion that could arguably stimulate competition, decrease rates, and improve overall access to health care.  The company is opposed to the proposed conversion, arguing that "[a] nonprofit, community-governed Blue Cross allows the company to do more to improve health care quality and security for all the people of Michigan, rather than operate as a profit generator for stockholder owners."

This Michigan development is not a new nor unique one, as Blues have been converted in other states.  As aptly raised by The Nonprofit Quarterly in its related article, a for-profit conversion customarily results in the creation of a charitable foundation - does this adequately account for the loss of charitable assets that results from such a conversion?  Will there be any tangible effect from the Blues operating as a for-profit insurer, especially in light of the Affordable Care Act?

NAM

Senator Grassley - Still Focused on a Charity Care Standard and Hospital Executives' Compensation

In related articles on hospitals' tax exemptions appearing recently in the Des Moines Register, U.S. Senator Chuck Grassley adds to his track record of seeking greater accountability of tax-exempt nonprofits, specifically nonprofit hospitals.  As one article highlights Grassley's efforts towards greater transparent reporting by tax-exempt hospitals, most of which was enacted as part of the Patient Protection & Affordable Care Act of 2010 (see prior posts here and here), it also reveals Grassley's apparently unabandoned effort to impose a definite charity care standard on such hospitals (see prior post here).  Noting that tax-exempt charities classed as private foundations are subject to mandatory payout rules, the Senator opined that a similar rule could be imposed on hospitals, but declined to set the required level of such a payout requirement.  Grassley does view Medicaid reimbursement shortfalls as one of the components of a hospital's charity care provisions.  The article does point out that a set percentage of charity care would adversely affect smaller, more rural hospitals with varying amounts of uninsured and underinsured patients.

In another article, Senator Grassley discussed that his "skepticism" of nonprofit hospitals is only increased in light of reports detailing certain hospital executives' large compensation packages.

NAM

Illinois - The Fight Over Tax Exemption for Hospitals Continues

The Chicago Tribune reports on the continually evolving issue of a charity care prerequisite for hospitals' state property tax exemption.  As previously blogged by John Colombo (see posts here and here), the Illinois Supreme Court determined in March 2010 that Provena Covenant Medical Center in Urbana did not meet the state law's definition of "charitable" necessary for real property tax exemption; specifically, that a hospital must provide some substantial amount of charity care in order to be granted an exemption.  Relying on that Provena decision, in August 2011, the Illinois Department of Revenue revoked the property tax exemptions for three Illinois hospitals on the basis of too minimal amounts of charity care (see John's post on this development here).  After these revocations, the Illinois Governor declared a moratorium until March 1, 2012 with respect to hospitals' tax exemption determinations.  In the interim, the State and other stakeholders are supposed to reach a resolution.

Although the Provena decision adopted a charity care standard for hospital tax exemption, there are no bright-line rules on what constitutes charity care and how much should be conferred by a hospital to maintain its tax-exempt status.  Hospitals are arguing that a definite charity care standard (say, 5% of the hospital's revenues) would be more burdensome on some hospitals than others.  Hospitals are seeking legislation that would set clear and definable standards for tax exemption.

In light of these recent developments, local assessors are addressing the taxability of hospitals with varying approaches.  Some are are assessing taxes on hospitals thereby leaving it to the State's Department of Revenue to determine if each hospital qualifies for tax exemption under standards hopefully reached prior to the lift of the moratorium next March.  Other assessors are forgoing assessments of hospitals, but requesting that such hospitals file new applications for exemptions.  Regardless of the approach adopted, the issue of whether to tax or not tax a hospital is certain to create an "administrative nightmare" for Illinois and its local governments.  And, perhaps more importantly, will the feds use the eventual Illinois resolution as a basis for reexamining the federal income tax treatment of nonprofit hospitals?

NAM