Monday, April 30, 2012

Will They Never Learn? Aggressive Debt Collection in Hospitals

In 2006, the Illinois Department of Revenue revoked property tax exemption from Provena-Covenant Hospital in Urbana, IL, a case that began in 2004 with a recommendation from the local county Board of Review that started with the attention garnered by articles (including one in the New York Times) about Provena's debt collection practices - using "body attachments" to have debtors thrown in jail. Now comes word from a report by Minnesota's Attorney General that Fairview Health Services in that state employed Accretive Health, a health-care oriented debt collection firm, and "embedded" debt collectors in Fairview's emergency rooms to pressure patients to pay for medical services ahead of time and collect past bills. An even better article is this article in Modern Healthcare but you'll need a subscription to view it. (I note that Fairview has since terminated its relationship with Accretive - nothing like getting caught red-handed to help ameliorate bad behavior; Provena also had a miraculous conversion to a "kinder and gentler" approach after losing its tax exemption).

Aside from the fact that it seems to me the Accretive tactics ought to violate I.R.C. Section 501(r)(6) (forbidding "extraordinary collection actions" by tax-exempt hospitals), the whole incident once again brings me back to the notion that it is time simply to end tax exemption for nonprofit hospitals who do not meet other tests of charitable status (e.g., teaching hospitals would continued to be exempt as educational institutions; hospitals or clinics whose primary patient base were the poor would be exempt as a classic poor-relief charity). Early in my career I took this view, then moderated somewhat based upon the work by Jill Horwitz at Michigan showing that nonprofit hospitals often provided services that for-profit hospitals did not. But over the past few years, I've come back to what I view as a central truth about nonprofit hospitals: they aren't charities in any sense of the word. They are huge businesses and they act like it. Did anyone in Fairview's management wake up one morning and say something like "My God, we can't do this; we're a CHARITY for cryin' out loud." Of course not; they quit the practice when they got caught (maybe they did not know what was going on, in which case they are guilty of simple incompetence rather than malevolence).

One of Accretive's biggest clients is Ascension Health, a Catholic health care network that is among the (if not THE) largest nonprofit health care provider in the United States (see story here about Ascension and Accretive). Is Ascension a charity or simply a big business? I know what I think: Ascension is as much a "charity" as Rush Limbaugh is a communist. Time for us as a society to recognize that many (most?) nonprofit hospitals are not charities in any practical sense of that word, and act accordingly. At the very least, we can then avoid being disappointed when they act like Repo Man.




April 30, 2012 in Current Affairs | Permalink | Comments (0) | TrackBack (0)

Sunday, April 29, 2012

Montana AG Settles with Central Asia Institute & Greg Mortenson

Earlier this month, Montana Attorney General announced that his office had reached a settled with the section 501(c)(3) Central Asia Institute and its founder, author Greg Mortenson, after allegations arose regarding the accuracy of reports regarding the Institute's work (see, e.g., the 60 Minutes segment reported on by the NY Times/AP).  According the AG's announcement, he concluded "that CAI’s board of directors failed to fulfill some of their responsibilities as board members of a nonprofit charity. Further, Mortenson failed to fulfill some of his responsibilities as executive director and as an officer and director of the organization."  In the settlement agreement, Mortenson, who co-authored "Three Cups of Tea" and "Stones into Schools" about the Institute's accomplishments, agreed to repay over $1 million to the Institute and not sit on the Institute's board as long as he remains an Institute employee.  A new board of at least seven members will be appointed during a 12-month transition period.

In related news, the Christian Science Monitor reports that Mortenson and the Institute also face a civil lawsuit from four individuals claiming that they were mislead by allegedly false accounts in his books.  The readers claim they bought the books and donated to the Institute based on the stories of the Institute's work related in the books.


April 29, 2012 in In the News, State – Executive | Permalink | Comments (0) | TrackBack (0)

IRS Rules Foreign Political Activities Do Not Promote Social Welfare

In a final determination letter released earlier this month (201214035), the IRS ruled that a nonprofit organization did not qualify as a section 501(c)(4) social welfare organization because 80% of the organization's time would be spent supporting the political interests of a candidate in a foreign country.  The letter is noteworthy because while it has long been thought that "intervention in political campaigns on behalf of or in opposition to any candidate for public office" (Reg. § 1.501(c)(4)-1(a)(ii)) extended to candidates for foreign public offices, to the best of my knowledge this is the first IRS ruling that expressly takes this position.  Since the definition of political campaign intervention is generally the same under both section 501(c)(3) and section 501(c)(4), this (nonprecedential) letter indicates that the 501(c)(3) prohibition on such intervention also extends to candidates for foreign public offices.


April 29, 2012 in Federal – Executive | Permalink | Comments (0) | TrackBack (0)

Myanmar: US Eases Sanctions on Nonprofit Work

AP reports that the U.S. Treasury Department has eased restrictions on financial transactions in support of groups working in areas such as democracy-building, health and education, sport and religious activities.  This step is part of a larger lifting of sanctions by Western nations in light of recent elections that say sweeping opposition party victories in that country.  A Reuters report quoted a senior Treasury Department official as stating "[w]e are taking this step today to support a broader range of not-for-profit activity in Burma by private U.S. organizations and individuals to promote increased cooperation between the Burmese and the American people."  The actual language of the eased restrictions can be found in Office of Foriegn Assets Control General LIcense No. 14-C relating to Burma.


April 29, 2012 in Federal – Executive, In the News, International | Permalink | Comments (0) | TrackBack (0)

Hermes: Guide to the IRS Decision-Making Process Under § 501(c)(3) for Journalism and Publishing NPOs

Jeffrey P. Hermes (Harvard's Berkman Center for Internet & Society) has posted a Guide to the Internal Revenue Service Decision-Making Process Under Section 501(c)(3) for Journalism and Publishing and Non-Profit Organizations on SSRN.  Here is the abstract:

Confusion about the IRS’s processes and standards has led to criticism of the IRS as being arbitrary in its decision-making process and adverse to the journalism industry. But while there have been controversial decisions by the IRS in particular cases, it is critical to understand that the IRS’s primary duty with respect to these applications is to protect the public fisc by ensuring that only organizations that meet criteria enacted by the United States Congress are granted a Section 501(c)(3) exemption. Although the IRS has some discretion in applying these criteria, it does not have the authority to recognize broad new categories of tax-exempt organizations, such as news outlets.

Until and unless there is action in Congress to facilitate tax exemptions for journalism non-profits, news organizations seeking 501(c)(3) status must learn how to structure their operations to meet the existing standards applied by the IRS. To that end, this guide is intended to provide practical information regarding the standards that the IRS applies in determining whether to grant federal tax-exempt status to a non-profit organization under Section 501(c)(3).


April 29, 2012 in Publications – Articles | Permalink | Comments (0) | TrackBack (0)

NVSQ April 2012 Issue

The Nonprofit and Voluntary Sector Quarterly has published its April 2012 issue.  Here is the table of contents:

  • Femida Handy, Jeffrey L. Brudney, and Lucas C.P.M. Meijs, From the Editors’ Desk


  • John Wilson, Volunteerism Research: A Review Essay
  • Leif Atle Beisland and Roy Mersland, An Analysis of the Drivers of Microfinance Rating Assessments
  • Thomas de Hoop, Luuk van Kempen, and Ricardo Fort, Do Cash Transfers Crowd Out Community Investment in Public Goods? Lessons from a Field Experiment on Health Education
  • Marie-Josée Fleury et al., Determinants of Referral to the Public Health care and Social Sector by Nonprofit Organizations: Clinical Profile and Interorganizational Characteristics
  • Kathrin Komp, Theo van Tilburg, and Marjolein Broese van Groenou, Age, Retirement, and Health as Factors in Volunteering in Later Life
  • Thad D. Calabrese, The Accumulation of Nonprofit Profits: A Dynamic Analysis
  • Tereza Pospíšilová, Nonprofit Management Education in the Czech Republic: The Struggle for Civil Society Versus the Struggle for Survival


  • Michele Hickey, Book Review: Transformational Philanthropy: Entrepreneurs and Nonprofits
  • Suzie S. Weng, Book Review: Social Services and the Ethnic Community: History and Analysis and The New Chinese America: Class, Economy, and Social Hierarchy
  • Lloyd Hitoshi Mayer, Book Review: Politics, Taxes, and the Pulpit: Provocative First Amendment Conflicts


April 29, 2012 in Publications – Articles | Permalink | Comments (0) | TrackBack (0)

Wednesday, April 25, 2012

NYT: "Egype Rejects Registration Bids From 8 U.S. Nonprofit Groups"

In its continuing coverage of troubles U.S. nonprofit organizations are having with the Egyptian government (previously blogged about here and here), the NY Times reports that the Egyptian Insurance and Social Affairs Ministry has rejected registration applications from eight U.S. nonprofits.  The grounds for the rejections are reported to be that the groups' activities violated Egyptian sovereignty.  The groups ranged from the well known Carter Center to a Mormon missionary group to an organization for Coptic Christian orphansReuters also reports that this week Interpol denied a request from Egypt to issue worldwide arrest warrants for 15 employees of U.S. non-governmental organizations, including 12 who are U.S. citizens.  The reported grounds for the denial was that the request was not in line with Interpol's rules that forbid political, military, religious or racial interventions.


April 25, 2012 in In the News, International | Permalink | Comments (0) | TrackBack (0)

Charlotte Nonprofit Hospitals Under Scrutiny

The Charlotte Observer is running a five-part series on nonprofit hospitals in the Charlotte, North Carolina area.  So far the series has focused on their apparently high profits, sparse charity care, aggressive bill collection practices, and lobbying clout.  It provides a case study of a question that has been plaguing nonprofit hospitals across the country: are they truly different from their for-profit counterparts?


Hat Tip:  EO Tax Journal

April 25, 2012 in In the News | Permalink | Comments (0) | TrackBack (0)

Tuesday, April 24, 2012

Common Cause Releases ALEC IRS Complaint; ALEC Responds

Common Cause released yesterday its lengthy letter to the IRS asserting that the American Legislative Exchange Council (ALEC) has underreported its lobbying expenditures and does not qualify for section 501(c)(3) status.  The online version of the letter in turn provides links to thousands of pages of exhibits that Common Cause says support its assertions.  Common Cause filed the letter under the Tax Whistleblower Act, 26 U.S.C. § 7623(b), although there is no indication that Common Cause is seeking any financial reward if the IRS in fact determines that ALEC owes unpaid taxes.

Here, in its entirety, is the statement by attorney Alan P. Dye on behalf of ALEC, in response to the complaint and the related news stories blogged about yesterday:

Statement by Alan P. Dye on Latest Harassment Tactic Against ALEC by Liberal Front Groups

WASHINGTON – Alan P. Dye, legal counsel to the American Legislative Exchange Council (ALEC), issued the following statement in response to the frivolous IRS complaint by Common Cause against ALEC:

“The attacks on the American Legislative Exchange Council are based on patently false claims being made by liberal front groups that differ with ALEC on philosophical terms.

“The current complaint mostly ignores applicable law and distorts what it does not ignore. After three decades of counseling clients on nonprofit and federal disclosure requirements, it’s clear to me that this is a tired campaign to abuse the legal system, distort the facts and tarnish the reputation of ideological foes.

“Without question, Common Cause is a partisan front group masquerading as an ethics watchdog.”


April 24, 2012 in Federal – Executive, In the News | Permalink | Comments (0) | TrackBack (0)

Nonprofits Play Significant Role in Election Independent Spending To Date

USA Today reports that while wealthy individuals and corporations dominated giving to SuperPACs so far this election cycle, several nonprofit organizations also contributed millions of dollars.  The largest was the National Education Association, which gave over $3.5 million, making it the fourth largest source of SuperPAC funds.  The AFL-CIO is also near the top of the list, with over $2 million in contributions, as is the SEIU with slightly over $1.8 million given.

More significant, however, is the amount of money flowing to nonprofit organizations to be spent directly on election-related communications.  The most prominent of these organizations is Crossroads GPS, a section 501(c)(4) organization associated with Karl Rove that has received close to $100 million this election cycle according to Politico.  Politico has also posted publicly released copies of the fiscal year 2010 Form 990 and short year 2011 Form 990 for Crossroads GPS.  The redacted Schedule Bs to these returns show the sizes of the donations by the largest contributors - including one donor who gave $10.1 million - without revealing their identities.


April 24, 2012 in In the News | Permalink | Comments (0) | TrackBack (0)

Monday, April 23, 2012

ALEC's 501(c)(3) Status Under Pressure - Did Businesses Improperly Deduct Lobbying Expenses?

Questions continue regarding whether the American Legislative Exchange Council, or ALEC, qualifies for its claimed section 501(c)(3) status given its apparently extensive lobbying.  Common Cause has long complained that ALEC underreports its lobbying activities, including filing a complaint making this allegation with the IRS last year.  Its concerns have recently attractive significant media attention, including a New York Times article this weekend and NPR coverage last week and today.  The recent attention began in the wake of the Trayvon Martin shooting because of ALEC's support of "stand your ground" laws, which led a number of corporate supporters of ALEC to end their funding (see, e.g., CBS News story), but has now grown beyond that limited issue .  Common Cause recently filed a second complaint with the IRS, the details of which it plans to release later today.

ALEC states it "works to advance the fundamental principles of free-market enterprise, limited government, and federalism at the state level through a nonpartisan public-private partnership of America’s state legislators, members of the private sector and the general public."  It has both state legislator members and private members, including prominent business corporations.  One significant advantage of ALEC being classified as a section 501(c)(3) organizations is that the private members could deduct contributions to the group as charitable contributions, while contributions to other types of 501(c) organizations are generally not deductible to the extent they are used for lobbying (under Internal Revenue Code sections 162(e) and 6033(e)).


April 23, 2012 in Federal – Executive, In the News | Permalink | Comments (0) | TrackBack (0)

IRS Accused of Improperly Releasing 501(c)(3) Donor Information Tying Romney to Same-Sex Marriage Opponent

The National Organization for Marriage, a section 501(c)(3) organization supporting traditional marriage, released documents alleging showing that an unredacted Schedule B to its 2008 Form 990 that was obtained by the Human Rights Campaign and given to the Huffington Post must have come from the copy of the form filed with the IRS.  In a letter to the IRS, NOM asserts that it was able to remove a layer of redacting on the Schedule to reveal IRS added information, including an  "OFFICIAL USE ONLY" stamp.  The information revealed was particularly explosive because it showed a $10,000 donation from a Mitt Romney connected political action committee, Free and Strong America PAC, as well as the names of 49 other significant donors to NOM.

If true, this is a very serious situation as it suggests someone inside the IRS has decided to leak confidential taxpayer information, almost certainly for political reasons.  Yet there has been surprisingly little if any news coverage of this story, other than in the tax trade press (Tax Notes Today (subscription required)) and a blog entry at the Weekly Standard.  While media bias with respect to coverage of the same-sex marriage debate could be the explanation, another possibility is that despite much rhetoric about the importance of taxpayer privacy, in the age of Facebook and Twitter people view such privacy as much less important - particularly when it comes to donations to charities - than is generally assumed.



April 23, 2012 in Federal – Executive, In the News | Permalink | Comments (0) | TrackBack (0)

Saturday, April 21, 2012

Did Bishop Jenky of Peoria Violate the Campaign Intervention Rule?

Readers of this blog almost certainly are aware that Section 501(c)(3) contains a prohibition on charitable organizations "interven[ing] in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office." The campaign intervention prohibition always seems to take center stage during the presidential campaign cycle, and it always seems that churches are at the center of this debate.

So here we go again.  On April 14, Bishop Daniel Jenky of the Diocese of Peoria delivered a homily that would serve as an excellent exam question on these issues.  The full text of the homily is available here, but the part of the homily most relevant to the legal question posed in the title to this post is as follows:

Remember that in past history other governments have tried to force Christians to huddle and hide only within the confines of their churches like the first disciples locked up in the Upper Room.

In the late 19th century, Bismarck waged his “Kulturkampf,” a Culture War, against the Roman Catholic Church, closing down every Catholic school and hospital, convent and monastery in Imperial Germany.

Clemenceau, nicknamed “the priest eater,” tried the same thing in France in the first decade of the 20th Century.

Hitler and Stalin, at their better moments, would just barely tolerate some churches remaining open, but would not tolerate any competition with the state in education, social services, and health care.

In clear violation of our First Amendment rights, Barack Obama – with his radical, pro abortion and extreme secularist agenda, now seems intent on following a similar path.

Now things have come to such a pass in America that this is a battle that we could lose, but before the awesome judgement seat of Almighty God this is not a war where any believing Catholic may remain neutral.

This fall, every practicing Catholic must vote, and must vote their Catholic consciences, or by the following fall our Catholic schools, our Catholic hospitals, our Catholic Newman Centers, all our public ministries -- only excepting our church buildings – could easily be shut down. Because no Catholic institution, under any circumstance, can ever cooperate with the instrinsic evil of killing innocent human life in the womb.

No Catholic ministry – and yes, Mr. President, for Catholics our schools and hospitals are ministries – can remain faithful to the Lordship of the Risen Christ and to his glorious Gospel of Life if they are forced to pay for abortions.

OK.  So we know that Bishop Jenky feels that Barak Obama is waging war against the Catholic Church. But did the Bishop's homily violate the law?  Some folks think so: The Rev. Barry Lynn, executive director of Americans United for Separation of Church and State, sent a complaint to the IRS alleging that the homily in fact violated the campaign intervention prohibition.  Others believe the limitation itself is unconstitutional.  Two of this blog's editors have written extensively on the constitutional aspect.  See Johnny Rex Buckles, Does the Constitutional Norm of Separation of Church and State Justify the Denial of Tax Exemption to Churches that Engage in Partisan Political Speech?, 84 Ind. L.J. 447 (2009); Johnny Rex Buckles, Is the Ban on Participation in Political Campaigns by Charities Essential to their Vitality and Democracy? A Reply to Professor Tobin, 42 U. Rich. L. Rev. 1057 (2008); Lloyd Mayer, Politics at the Pulpit: Tax Benefits, Substantial Burdens, and Institutional Free Exercise, 89 B.U.L. Rev. 1137 (2009).

But I'm more interested for now in whether Jenky violated the rule as currently interpreted by the IRS. For this, we have to go to the current state of the law on the subject, IRS Revenue Ruling 2007-41 (available here). The relevant part of this ruling deals with differentiating "issue advocacy" (which is permitted) from campaign intervention, which is not. That part of the ruling states as follows:

Section 501(c)(3) organizations may take positions on public policy issues, including issues that divide candidates in an election for public office. However, section 501(c)(3) organizations must avoid any issue advocacy that functions as political campaign intervention. Even if a statement does not expressly tell an audience to vote for or against a specific candidate, an organization delivering the statement is at risk of violating the political campaign intervention prohibition if there is any message favoring or opposing a candidate. A statement can identify a candidate not only by stating the candi­date’s name but also by other means such as showing a picture of the candidate, referring to political party affiliations, or other distinctive features of a candidate’s platform or biography. All the facts and circumstances need to be considered to determine if the advocacy is political cam­paign intervention. Key factors in determining whether a communication results in political campaign intervention include the following:

  1. Whether the statement expresses ap­proval or disapproval for one or more candidates’ positions and/or actions;
  2. Whether the statement is delivered close in time to the election;
  3. Whether the statement makes reference to voting or an election;
  4. Whether the issue addressed in the communication has been raised as an issue distinguishing candidates for a given office;
  5. Whether the communication is part of an ongoing series of communications by the organization on the same issue that are made independent of the tim­ing of any election; and
  6. Whether the timing of the communication and identification of the candi­date are related to a non-electoral event such as a scheduled vote on specific legislation by an officeholder who also happens to be a candidate for public office. [NOTE: the numbers are supplied by me; these are bullets in the actual ruling, but I'll use the numbers in my analysis below]

A communication is particularly at risk of political campaign intervention when it makes reference to candidates or voting in a specific upcoming election.

So let's walk through the IRS factors.  Did Bishop Jenky "express approval or disapproval for one or more candidates' positions" in his homily?  I think undeniably so.  Was the statement delivered "close in time" to an election?  Fuzzy, but we clearly are in the 2012 election cycle, so I'd say yes to this as well.  Does the statement "make reference to voting or an election"?  You betcha, to paraphrase a past vice-presidential candidate.  How about "whether the issue addressed in the communication has been raised as an issue distinguishing candidates for a given office"?  Not quite as clear, but I think Romney and the rest of the now-defunct Republican presidential primary candidate field made their views on this point quite well-known.  What about item 5?  I'd say this might be the one factor that favors the Bishop: the leadership of the Catholic Church "went ballistic" on this issue before the campaign season really geared up.  But 6 is clearly not true. So, my view is that Jenky violated five of the six factors identified by the IRS in Rev. Rul. 2007-41, and therefore violated the campaign prohibition rule.  Since he clearly was acting in his capacity as a leader of the particular exempt organization at issue here (the Diocese of Peoria), my conclusion is that the IRS should indeed investigate this matter and should conclude a violation occurred.  Your mileage may vary, as they say.  And again, I'm not commenting on the constitutionality of the prohibition; I'm only noting that under the current state of the law as interpreted by Rev. Rul. 2007-41, Jenky blew it, and if the IRS wants any credibility on this subject, they need to carry through with an investigation and finding on the matter.


April 21, 2012 | Permalink | Comments (2) | TrackBack (0)

Thursday, April 19, 2012

Correlation Between Nonprofit Governance and Tax-Exempt Compliance

In her remarks to the Georgetown University Law Center program on Representing and Managing Tax-Exempt Organizations, IRS Exempt Organizations Director Lois Lerner discussed the findings of an IRS study of its governance checksheet, which is comprised of a list of questions used by IRS agents to determine the governance practices of an exempt organization. In October 2009, IRS agents began completing the checksheet at the completion of every public charity examination.  The result is over 1300 checksheets that were examined as part of the study. 

The study's analysis found "a statistically significant correlation between questions related to some governance practices and tax compliance."  The correlative questions are, in Lerner's words: 

1.    Organizations with a written mission statement are more likely to be compliant;

2.    Organizations that always use comparability data when making compensation decisions are more likely to be compliant;

3.    Organizations with procedures in place for the proper use of charitable assets are more likely to be compliant; and

4.    Organizations where the 990 was reviewed by the entire board of directors are more likely to be compliant.  This is an important point and one I'd like to highlight.  It indicates that having your entire board engaged in what is being reported on the 990 is not only helpful, but it correlates to better compliance.

Lerner also stated that "[o]n the flip side, among the organizations we examined, we saw that those that said control was concentrated in one individual, or in a small, select group of individuals, were less likely to be tax compliant."

Diversion of Assets Initiative:  Lerner also announced a new audit initiative focusing on tax-exempts that divert their assets for their own use or for uses not in furtherance of their charitable purposes.  Lerner reported that approximately $170 million in assets were diverted in instances involving theft, embezzlement, or Ponzi schemes.  With respect to 82 organizations, civil or criminal charges were brought against the responsible party. The charges were typically pursued by the organizations themselves or local authorities, not the IRS. The IRS compiled this information from Forms 990 as well as the internet and other publicly-available information.

(For additional discussion:  Daily Tax Report)


April 19, 2012 in Conferences, Federal – Executive | Permalink | Comments (0) | TrackBack (0)

Issuance of Shares by "Participation Nonprofits"

In his new book, Finance and the Good Society (Princeton),Yale economist Robert Shiller specifically addresses societal philanthropy and the role of the nonprofit sector.  In particular, he proposes the concept of "nonprofit stock."  Here is the explanation is his Huffington Post blog entry entitled "Ten Ways Finance Can Be a Force for Good in Society:"

2.  Create what I am calling, in my new book, participation nonprofits, nonprofits that might run schools or hospitals or the like, but that raise money by selling shares to the public.  Such a firm pays dividends from its profits into a special account in the name of the shareholder. The shareholders get a charitable tax deduction for making the investment, but can use the dividends in the account only for further charitable contributions, including purchasing shares in participation nonprofits, or can spend them on themselves in some predefined emergency situations such as a medical crisis. With participation nonprofits, charitable giving will be more fun for the donors, for they could watch their money grow and feel their influence grow with it, if they invest wisely, fulfilling a natural human need for stimulation and appreciation. For example, the Wikipedia Foundation might have been even more successful if it had been set up as a participation nonprofit, and found some revenue opportunity associated with their mission. Instead of operating on a shoestring of the mere 75 employees it has today, I'll bet it would have received many billions in donations by now, which it probably could use for a much expanded social purpose.

(Hat tip:  Nonprofit Quarterly)


April 19, 2012 in Current Affairs, State – Legislative | Permalink | Comments (0) | TrackBack (0)

Prompt Action by Nonprofit Board Members Key to Avoiding Fiduciary Liability

As reported by the Daily Tax Report, at a Georgetown University Law Center program yesterday on Nonprofit Governance, Missouri Attorney General Bob Carlson provided simple advice - nonprofit boards can avoid potential legal liability for a breach of fidicuary duties if their reaction to such breach "is quick and shows immediate action."  Carlson provided the example of a nonprofit executive director that failed to share financial information with the board of the directors, resulting in the board being completely unaware of the organization's near collapse.  Upon learning of the dire financial status of the organization, the board immediately fired the executive director, installed an interim director, “and essentially righted the ship on the fly, so the organization did not go under.”  Their prompt reaction, opined Carlson, prevented them from being sued.  Carlson stated that he typically gives Board members the opportunity to correct a fiduciary problem, and only pursues lawsuits if there is not a sufficient response. 

Along with IRS Exempt Organizations Director Lois Lerner, Carlson advised erring on the side of transparency, with both officials providing examples of items that nonprofits should considered posting to their websites:  financial statements, executive compensation, and the minutes of meetings.  He believes that more transparency ultimately leads to better fundraising ability, because donors often complain about their lack of knowledge with respect to the use of their donations.  Both Carlson and Lerner agreed that recruiting and retaining "engaged" board members is essential to smooth operations and avoidance of trouble.  In addition, board knowledge of its governance responsibilities leads to overall better decisionmaking.

NOTE:  Lerner advised that the IRS will release the preliminary results of its study of governance on April 19, 2012.


April 19, 2012 in Conferences, Federal – Executive, State – Executive | Permalink | Comments (0) | TrackBack (0)

IRS Issues Proposed Regulations on Program-Related Investments

As reported by the Daily Tax Report, the Internal Revenue Service issued proposed regulations on private foundations' program-related investments (PRIs).  Under the proposed rules, more private foundations' investments will qualify as PRIs, thus avoiding the §4944 excise tax.  Under §4944, a private foundation's investments may trigger the excise tax if they jeopardize the foundation's ability to implement its exempt purposes.  Accordingly, the proposed regulations provide a broader range of investments that would not be considered as jeopardizing.  The proposed regulations do not amend or modify the existing §53.4944-3(b) regulations, but add nine new examples that "illustrate that a wider range of investments qualify as PRIs."   

In the explanation of the new rules, the IRS states the following:

[A] PRI may accomplish a variety of charitable purposes, such as advancing science, combatting environmental deterioration, and promoting the arts.  Several examples also demonstrate that an investment that funds activities in one or more foreign countries, including investments that alleviate the impact of a natural disaster or that fund educational programs for poor individuals, may further the accomplishment of charitable purposes and qualify as a PRI.  One example illustrates that the existence of a high potential rate of return on an investment does not, by itself, prevent the investment from qualifying as a PRI.  Another example illustrates that a private foundation's acceptance of an equity position in conjunction with making a loan does not necessarily prevent the investment from qualifying as a PRI, and two examples illustrate that a private foundation's provision of credit enhancement can qualify as a PRI.

The proposed regulations appeared in the Federal Register on April 19.  Comments and requests for a public hearing must be received by the IRS by July 18, 2012.



April 19, 2012 in Federal – Executive | Permalink | Comments (0) | TrackBack (0)

New York Times Debate on Tax Exemptions for Wealthy Universities

This week's "Room for Debate" tackles an issue controversial among nonprofit academics:  whether wealthy universities such as Princeton, Harvard and Yale should continue to receive tax subsidies.  More specifically, this week's debate asks participants to discuss whether "government [should] change its tax exemption policies for universities as a way of equalizing educational resources in America."  The specific prompt for the New York Times's attention to this issue is a recent op-ed by Richard Vedder, a professor at Ohio University and director of the Center for College Affordability and Productivity.  Vedder argues that the tax subsidies afforded affluent institutions like Princeton far exceed governmental assistance to smaller schools like the College of New Jersey, and that since wealthy and moderately affluent students comprise the bulk of attendees at the former, the tax subsidies constitute "a regressive social policy that many would argue is inconsistent with using higher education as a tool in promoting the American Dream."  Interestingly, most of the commentators seem to disagree with Vedder's proposal, although most concede that inequality in access to higher education is a problem.


April 19, 2012 | Permalink | Comments (0) | TrackBack (0)

Wednesday, April 18, 2012

Illinois Hospitals' Property Tax Exemption Battle Could Negatively Affect Credit Ratings

As reported by the Daily Tax Report, Fitch Ratings, a global rating agency, released a report entitled Illinois Property Tax Exemption Battle, in which the rating agency concluded that the Illinois Department of Revenue's current enforcement stance on the property tax exemptions of Illinois nonprofit hospitals is a "negative credit development" for certain of these hospitals.  As previously blogged, Illinois Governor Quinn lifted a moratorium on nonprofit hospital exemption cases last month.  Essentially, according to the report, a nonprofit hospital's loss of tax exemption, along with current operational challenges, could "negatively affect" the hospitals' creditworthiness.  The report opines that certain "lower rated entities will have a limited ability to absorb an additional expense in the form of a property tax."

The report acknowledges that this tax-exemption challenge is not limited to Illinois, mentioning an Ohio nonprofit dialysis clinic [Dialysis Clinic, Inc. v. Levin, see previous blog] that, similar to Provena Covenant Medical Center in Illinois, lost its property tax exemption due to insufficient provision of charity care.  The Ohio Supreme Court upheld revocation of the clinic's property tax exemption.  The Court noted that the Ohio test for exemption was narrower than the “community benefit” test of federal law, but did not find that a minimum amount of charity care is required.  Rather, in Ohio, an exemption is granted if services are provided “on a nonprofit basis to those in need, without regard to race, creed, or ability to pay.” 

Whether the Fitch report will impact the ongoing Illinois debate on hospitals' property tax exemption is unclear.  The spokesman for the Illinois Hospital Association is nevertheless "hopeful that a legislative solution can be enacted" in the upcoming General Assembly session.


April 18, 2012 in Current Affairs, In the News, State – Executive, State – Legislative | Permalink | Comments (0) | TrackBack (0)

Tuesday, April 17, 2012

Sidel Is Outstanding Academic Award Recipient in ABA Nonprofit Lawyer Awards

Mark Sidel, Doyle-Bascom Professor of Law and Public Affairs at the University of Wisconsin, received the Outstanding Academic Award in the ABA Business Law Section's annual Outstanding Lawyer Awards for 2012 (see the University's announcement here).  Sidel's research and writing focuses on the nonprofit sector and philanthropy, both domestic and international.  He has previously served in program positions with the Ford Foundation in Beijing, Hanoi, Bangkok and New Delhi, focusing on philanthropy and the nonprofit sector, legal reform, and governance.  In addition to academia, Mark serves in numerous capacities in the nonprofit community.  


April 17, 2012 in In the News | Permalink | Comments (0) | TrackBack (0)