Nonprofit Law Prof Blog

ABA Tax Comments on the PRI Regulations

As we previously reported here, the IRS issued proposed regulations on program-related investments (PRIs) under Code Section 4944.  These proposed regulations took the form of nine additional examples to be added to the existing PRI regulations that cover a variety of fact patterns, including equity investing, international activities, and credit enhancement. 

On August 8, 2012, the ABA Section of Taxation submitted comments to the IRS regarding the proposed regulations.  I know that many members of the Exempt Organizations Group of the Tax Section (specifically including David Chertoff, formerly of the MacArthur Foundation and Rob Wexler from Adler & Colvin in San Fransico) had worked tirelessly with the IRS for years to obtain an update from the IRS on the PRI regulations.  The comments themselves are summarized as follows:

• The Tax Section requested that the preamble to the Proposed Regulations, which summarizes the types of transactions that the new PRI examples cover, be included in the Regulations themselves.   
• The comments further request that the IRS issue additional examples in certain subtantive areas, such as mixed-income housing and nonprofit newspapers.   In its prior submissions to the IRS, the Tax Section proposed such examples.  I understand that one of the objections that the IRS raised was that it wanted the examples to describe activities that were clearly already charitable under existing law.  Examples in some of these new areas might have raised issues under Section 501(c)(3)/Section 170, and not just under Section 4944.
• Finally, the Tax Section raised specific comments on some of the examples (example 11, regarding the for-profit subsidiary that developed vaccines; example 15, regarding international disaster relief, and example 16, regarding LLC investments.)

Congratulations to everyone at the ABA Tax Section - Exempt Orgs group for their success so far in getting *actual* proposed regulations on the books!  We look forward to seeing how those final regs turn out. 

EWW

 

 

Three new papers on charitable issues

From and with a deep hat tip to Prof. Paul Caron's most wonderful Tax Prof Blog, we have three recent papers on charitable topics, including one by our own Prof. Lloyd Mayer:

Lloyd H. Mayer (Notre Dame), The ‘Independent’ Sector: Fee-for-Service Charity and the Limits of Autonomy, 65 Vand. L. Rev. 51 (2012):

Although numerous scholars have attempted to explain and justify the benefits provided to charities, none has been completely successful. Their theories share, however, two required characteristics for charities. First, charities must be distinct from other types of entities in society, including governmental bodies, businesses, other types of nonprofit organizations, and informal entities such as families. Second, charities must provide some form of public benefit. Given these defining characteristics, the principal role for the laws governing charities is to protect charities from influences that could potentially undermine these traits. This Article is the first to recognize fully the importance of this approach, which I term the autonomy perspective. Applying this new perspective to the law governing charities reveals that while existing law generally protects charity autonomy, it fails to do so in one major respect. Current law does not directly address the growing and often negative influence of consumers who purchase services from charities primarily for the consumer’s own benefit and with little if any regard to the public benefit charities must provide. This Article then considers under what market conditions the influence of these consumers, whether patients, students, retirement community residents, or others, is likely to be detrimental to a charity’s pursuit of public benefit, and what options exist for addressing this influence. It concludes with suggestions for further research that would help lawmakers target this influence and so better address questionable behavior by charities.

Jaclyn Cherry (South Carolina), Charitable Organizations and Commercial Activity: A New Era. Will the Social Entrepreneurship Movement Force Change?, 5 J. Bus. Entrepreneurship & L. 345 (2012):

The purpose of this article is to take a broad look at where we are now as a result of the continuing confusion regarding the “commerciality doctrine.” It will focus on three areas influencing and defining organizations that are struggling with the law in this sector: 1) it will briefly define commercial activity in terms of social entrepreneurship and provide examples of organizations that have entered this hybrid sector as L3C Organizations and B Corporations; 2) it will give an overview of the law that has developed as the “commerciality doctrine;” and 3) it will discuss the UBIT and suggest that this test needs to be utilized by courts in conjunction with the “commerciality doctrine” for there to be any semblance of order for nonprofits to follow. Finally, this article concludes by suggesting that changes within the system are overdue. It suggests a three part analysis requiring that the IRS and courts apply the UBIT tests in coordination with, and not separate from, the “commerciality doctrine” (with a new definition of “substantial commercial activity”); second, that the “commerciality doctrine” be defined more clearly by synthesizing the courts tests from Presbyterian and Reformed Publishing and Airlie Foundation; and third, that an “intermediate sanction” type penalty be developed which would be triggered by failure to meet the above tests, before the loss of tax exempt status occurs. If nothing is done to address this issue, which may well end up being the case, then organizations will drift between the nonprofit and for-profit worlds in a very counter-productive manner for the sector and for the individuals they are created to benefit.

Carly B. Eisenberg (Nixon Peabody, Boston) & Kevin Outterson (Boston University), Agents Without Principals: Regulating the Duty of Loyalty for Nonprofit Corporations Through the Intermediate Sanctions Tax Regulations, 5 J. Bus. Entrepreneurship & L. 243 (2012):

Delaware corporate law imposes a duty of loyalty on officers and directors as a mechanism to regulate and deter self-dealing transactions. In nonprofit corporations, however, there are generally no shareholders with direct financial incentives to monitor against self-dealing. In the absence of shareholders and other principals, Congress and the IRS have articulated duty of loyalty rules for nonprofits that reach far beyond those applied to the for-profit world — most prominently the § 4958 intermediate sanctions. This article identifies the persons who owe a duty of loyalty to a nonprofit corporation, the applicable fiduciary standards for violating the duty of loyalty, and the remedies, procedures, and exoneration provisions under these fiduciary rules. While § 4958 and Delaware corporate law cover similar territory, they take remarkably different paths. By comparing the Tax Code with Delaware corporate law, it is readily apparent that, in the absence of shareholders, tax rules police the duty of loyalty for nonprofits more strictly than Delaware corporate law. 

EWW

Help From the IRS - Direct LLC Gifts Approved!

For a while now, many of us have thought that a donor should get a charitable deduction for a gift made directly to a single member LLC (SMLLC) that is wholly owned by an organization eligible to receive deductible contributions.  After all, the tax law treats the SMLLC as a disregarded entity and attributes its tax attributes up to the single member.  Why shouldn't the contribution be deemed made to the parent? 

While this is the logical result, the IRS has heretofore been hesistant to confirm it in writing.  This has been a source of some consternation for charities, especially those faced with the prospect of high value commercial real estate gifts.  Those charities certainly would love to take those gifts directly into a SMLLC and stay out of the chain of title, but donors are understandibly hesitant when their tax advisors say, "Well, you ought to get a deduction... but we can't be sure."

Happily, we now have IRS Notice 2012-52 (July 31, 2012), which states that a gift to a domestic SMLLC will be treated as "a charitable contribution to a branch or division of the U.S. charity."  In an extra present, the IRS indicates that the Notice is effective for "charitable contributions made on or after July 31, 2012. However, taxpayers may rely on this notice prior to its effective date for taxable years for which the period of limitation on refund or credit under § 6511 has not expired."

One note of interest in the Notice is the discussion of substantiation.  The charity/member is treated as the donee organization for purposes of the substantiation rules under Section 170(f), including the written acknowledgement rules.  This means that the charity/member is supposed to send the "you've received no goods or services" letter to the donor.  The IRS goes on to state: "[t]o avoid unnecessary inquiries by the Service, the charity is encouraged to disclose, in the acknowledgment or another statement, that the SMLLC is wholly owned by the U.S. charity and treated by the U.S. charity as a disregarded entity."  This got me to thinking - part of the reason for using the SMLLC in the first place is to get the charity itself out of the chain of title for liability protection purposes.  Would the IRS accept the following acknowledgement on the letterhead of the SMLLC?

Thank you for your donation of expensive commercial real estate that formerly held a dry cleaner and a gas station.  You've received no goods and services in return for your donation.  Please note that for federal income tax purposes, your donation is treated as having been made directly to Charity.  LLC is a a single member limited liability company that is wholly owned by Charity and is treated as a disregarded entity for federal tax purposes.  Consult your tax advisor for further details.

Sincerely,

Charity, in its capacity as the sole member of LLC

By:____________________________

President, Charity

From the language of the Notice, I'm not sure that would acceptable - would it need to be on the Charity's letterhead?  Signed by Charity in its individual capacity?  I'd be curious to know how others would handle this.

EWW

Red States, Blue States

The Chronicle of Philanthropy released a study on Monday showing that "red states" give more to charity than "blue states."  Using data from 2008 tax returns, the authors compared charitable contributions to "discretionary income," which they define as income left over after paying for food, clothing, health care, child care, housing, taxes, and other necessities. 

The study identified several patterns that seem to have caught the eye of the media, but that probably won't surprise those already familiar with charitable giving patterns.  The first is that the states whose residents gave the highest percentage of their discretionary income to charity all voted for McCain in 2008, while those whose residents gave the lowest percentage voted for Obama.  Another finding is that households earning $50,000 to $75,000 a year give a higher percentage (7.6% of discretionary income) than other individuals.  One finding I hadn't seen before but that shouldn't really surprise us is that wealthy individuals who live in economically diverse neighborhoods give a higher percentage of their income than wealthy individuals who live amongst themselves.

The study also suggests that religious motivations play a large role in incentivizing charitable giving, noting that two of the nine most generous states (Utah and Idaho) have large Mormon populations and that the other top givers are in the Bible Belt.  To its credit, the study examined whether the results change when religious giving is ignored, and finds that they do.  New York rises from 18th to 2nd in generosity, for example, and Pennsylvania from 40th to 4th.  However, the study doesn't seem to break down the percentage given to groups that assist the poor, in contrast to organizations like museums and private schools and universities.  And as I've argued in my scholarship, knowing who is giving to what is necessary for a full understanding of charitable giving patterns and policy.

Miranda Perry Fleischer

 

Is California the Next to Tackle Nonprofit Hospitals

A tidbit from Fitch Ratings via Reuters:

Fitch views the increased scrutiny of the tax-exempt status of
California's nonprofit hospitals with concern given the added financial pressure
it could present if the tax-exempt status was revoked. The California Senate
Select Committee on Charity Care and Nonprofit Hospitals began hearing arguments
last week considering whether hospitals provide sufficient charity and community
benefit to justify their tax-exempt status. A state audit published in early
August showed that there is no defined amount of community benefits required
from nonprofit hospitals, and the amounts they provide vary widely.

See also this report issued by the Califonia Nurses Association.  So will California be the next state to tackle tax exemption for nonprofit hospitals?  If so, I hope they do a better job than Illinois . . . 

JDC

Churches, Money and Tax Exemption

An article posted in today's Chicago Tribune digital edition (free subscription required), which appears to have originally come from the Economist, is a very interesting look at the finances and financial management of the Catholic Church in America.   Using data from bankruptcy filings by dioceses that faced large damage awards over sexual abuse, the article paints a picture of financial mismanagement, if not skulduggery.  One paragraph sort of sums it up:

The picture that emerges is not flattering. The church’s finances look poorly co-ordinated considering (or perhaps because of) their complexity. The management of money is often sloppy. And some parts of the church have indulged in ungainly financial contortions in some cases--it is alleged--both to divert funds away from uses intended by donors and to frustrate creditors with legitimate claims, including its own nuns and priests. The dioceses that have filed for bankruptcy may not be typical of the church as a whole. But given the overall lack of openness there is no way of knowing to what extent they are outliers. 

The last sentence is, I think, particularly important.  Churches do not have to file a Form 990 or an application for exemption on Form 1023.  We know virtually nothing about how they manage their money, yet we grant tax exemption virtually automatically to any entity calling itself a church.  

Others have questioned whether churches should receive tax exemption at all (I happen to be in the camp that says "no," provided they get an unlimited deduction for what I would classify as charitable expenditures, which would not include building expenses/maintenance/pastor and staff salaries, etc. - but I realize this is an issue on which reasonable people can and should disagree).   But I view this story as less about the merits of exemption than the merits of financial disclosure by exempt charities.   Churches need to file a 990 like everyone else.  We need disinfecting sunlight on their financial operations, particularly when folks starting hiding behind God as the rationale for their actions, many of which end up being very un-god-like.  And for those of you who might claim that subjecting churches to information filing on a 990 is a violation of the free exercise clause . . . well, I'd like to see that case litigated.

JDC

 

Status of Lawsuit Over 9/11 Museum Cross

CBS News, following up on stories from other media outlets, reports that the National September 11 Memorial and Museum has filed a motion to dismiss a lawsuit brought by American Atheists Inc. The atheist group opposes the presentation of a cross-shaped steel beam that surfaced from the Twin Towers rubble, a cross characterized by the story as “a famous Ground Zero symbol right after the September 11 attacks.” The atheist organization’s legal director, Edwin Kagin, reportedly has argued that the display constitutes "a violation of both federal and New York law in that public funds will be used to establish the Christian religion on public land." The story summarizes the museum’s defense:

As reported by other media outlets, the museum in its court filing characterized itself is an "independent non-profit corporation." It called the cross an "important and essential artifact" that "belongs at the World Trade Center site as it comprises a key component of the re-telling of the story of 9/11."

Villanova law professor and Vice-Dean Michael Moreland (among others) is quoted at some length in the piece. Opines Moreland:

"If the court agrees with the Museum that it is a private non-profit organization," Morel told CBS News, "then the museum will win because a private party can't violate the Establishment Clause - only the government can. "But, second, displays of religious symbols by the government aren't always unconstitutional. In 2010, a majority of the Supreme Court indicated that a memorial cross on government land in the Mojave Desert was constitutionally permissible because a reasonable observer wouldn't conclude that the government was 'endorsing' Christianity by displaying the cross on public land. Given the historical significance of the 9/11 cross during the Ground Zero cleanup, I think the museum has a strong argument that the cross's historical significance outweighs any perceived government endorsement of religion."

Because the museum’s governing documents and its disclosures to the IRS are relevant to resolving the first issue (i.e., its private entity nature), I have taken a quick peek at the section of the museum’s website listing relevant tax-related materials. According to the museum’s most recently posted Form 990, its public charity status derives from its sources of support, not from any status as a governmental unit. Not qualifying as a governmental entity for tax purposes should help the museum’s case somewhat. While government grants far and away comprise the museum’s most extensive support, receipt of government grants is not alone sufficient to transform a nonprofit entity into a state actor. Further, if anyone is really worried about whether government funds were necessarily used to polish up the old cross-beam, it looks like there was more than enough in private donations to put a shine on that steel in perpetuity. As to formal control of the museum, a response to one of the questions in the museum’s application for recognition of exemption from federal income tax, Form 1023, describes the museum as a not-for-profit corporation, but I saw no copy of its articles of incorporation. A response to another question states that no initial director of the museum is a public official or an appointee of a public official, but further states that the bylaws contemplate the appointment of additional directors by the New York State Governor and the Mayor of NYC. I do not know what the current articles and bylaws require as to the composition of the museum’s board. However, that a governmental official appoints members of a private charity’s board should not necessarily transform the charity into a governmental actor for Establishment Clause (or other) purposes.  The appointment mechanism may be designed to ensure community representativeness, not quasi-governmental functionality.  Cf. Treas. Reg. section 1.170A-9(e)(3)(v).

JRB

Veterans Charity and Fundraiser Under Scrutiny in Massachusetts

The Boston Herald reports that the Massachusetts Attorney General has sued Dynamic Marketing Solutions, a Rhode Island fundraising telemarketer, and its charity client Bay State Vietnam Veterans Inc. According to the story, the lawsuit alleges that agents for the telemarketing company claimed to have been soldiers who served in Afghanistan, failed to identify themselves as professional fundraisers -- as required by Massachusetts law, and led donors to believe that all contributions would benefit veterans, when in fact the fundraiser contracted to receive 85% of funds collected. The suit reportedly seeks imposition of $5,000 in civil penalties per deceptive act that is judicially determined to have occurred.

JRB

How to Receive Retroactively Effective Property Tax Exemptions in New York

While perusing recent issues of Tax Analysts State Tax Today for items of interest, I noticed two special acts passed by the New York legislature. Each act authorizes a governmental authority to accept from a not-for-profit organization a late application for real property tax exemption. The language of each act is similar, with one stating, “Notwithstanding any other provision of law to the contrary, the assessor of the [named governmental body] is hereby authorized to accept from the [named not-for-profit] an application for exemption from real property taxes pursuant to section 420-a of the real property tax law for the [assessment roll of the relevant period], for the parcel owned by such [non-for-profit] which is located at [designated location]….” Each act also contains similar language authorizing a determination of exemption, with one stating, “If satisfied that such not-for-profit organization would otherwise be entitled to such exemptions if such not-for-profit organization had filed applications or renewal applications for exemptions by the appropriate taxable status date, the assessor, upon approval by the [appropriate governing body], may make appropriate correction to the subject roll.” Taxes already paid may be refunded if exemption is granted.

This system of relying on case-by-case legislative action to permit consideration of untimely filed applications for property tax exemption by taxing authorities seems a bit peculiar. Moreover, the text of each act is not phrased in mandatory terms; the legislation literally just authorizes the consideration of untimely filed applications. But hey, I have never practiced law in New York, so maybe I am missing something here. I would be interested in hearing a cogent explanation for this system by anyone who knows exactly why obtaining review of late exemption applications works this way in New York. 

(To access the two acts discussed in this posting, see 2012 STT 158-11 and 2012 STT 158-12 in Tax Analysts State Tax Today).

JRB

Federal Health Care Law Spurring Hospital Affiliation in California

The Los Angeles Times reports that the national consolidation of hospitals spurred by the Affordable Care Act is continuing in Southern California, as St. Joseph Health System and Hoag Memorial Hospital Presbyterian have agreed on an affiliation among seven of their hospitals, which ultimately requires the approval of the California Attorney General. The story announces not a merger, but the formation of a new holding company “to better integrate medical care and to eliminate duplicative services.” The Catholic St. Joseph hospitals and the Presbyterian Hoag Memorial hospitals reportedly “will retain their separate faith-based identities.” Implying that the cost-saving affiliation is in part a response to funding cuts under the new health care law, the Times cites the California Hospital Association’s estimate “that hospitals statewide face $17 billion in federal cuts over 10 years under the Affordable Care Act.”  

JRB

IRS Extends Private Foundation’s Window for Disposing of Excess Business Holdings

The IRS recently released a private letter ruling granting the request of a private foundation to extend the period for disposing of its excess business holdings by an additional five years. The foundation received a gift of units of a limited liability company (“LLC”) that caused it to have excess business holdings, which normally must be disposed of within five years under section 4943(c)(6)(A) of the Internal Revenue Code (the “Code”). However, Code section 4943(c)(7) authorizes the IRS to extend for an additional five years the initial five-year period “in the case of an unusually large gift or bequest of diverse business holdings or holdings with complex corporate structures” if certain conditions are satisfied. Among them, the foundation must show the following:

[I]t made diligent efforts to dispose of such holdings during the initial five-year period, and … disposition within the initial five-year period has not been possible (except at a price substantially below fair market value) by reason of such size and complexity or diversity of holdings….

In granting the private foundation’s request, the IRS was persuaded that certain terms of the LLC operating agreement adversely affected the value of the LLC interests so as to trigger the statutory grounds for relief. In relevant part, the ruling reasons as follows:

Based on a strategic buyer valuation analysis … you concluded that LLC's value in 2013 may be almost double its value in 2010. Thus, you would have incurred a substantial loss if LLC had been sold in 2010 (compared to a sale in 2013), which would have diminished your capability to continue to accomplish your tax-exempt purpose, since your interest in LLC comprised e% of your total assets.

You also state that you could have sold at least a portion of your interest in LLC in a 2011 tender offer, but such a sale would have been at a price that you believe was substantially below fair market value. In addition, you believe that accepting the tender offer at the price it was offered would have diminished your capability to continue to accomplish your tax-exempt purpose.

Further, restrictions placed on interests in the LLC pursuant to LLC's Operating Agreement have made it difficult for you to dispose/sell your LLC interest. First, the LLC has a right of first refusal over any proposed sale to a third person. Second, d% of the members have tag-along rights; this means "that any prospective buyer of the Foundation's interest would also have to purchase the interests of those other [d%] owners."

Thus, as required under section 4943(c)(7), you have shown that you have made diligent efforts to dispose of your holdings during the initial five-year period, and that disposition within the initial five-year period has not been possible (except at a price substantially below fair market value) by reason of such size and complexity or diversity of holdings.

The ruling is noteworthy in its liberal interpretation of the statutory grounds for extending the period for disposing of excess business holdings. It treats an LLC’s right of first refusal over sales of LLC interests and members’ “tag-along rights” as creating a “complex corporate structure” within the meaning of section 4943(c)(7). Counsel drafting operating agreements, partnership agreements, and other documents governing closely held business should keep this ruling in mind during the drafting stage if future gifts of business interests to a private foundation are contemplated.

The ruling is Priv. Ltr. Rul. 2012-32-038 (May 24, 2012) and is reported in Tax Notes Today (electronic citation: 2012 TNT 156-30).

JRB

Massachusetts Law Changes Lay of Land for Hospital Funding

The Boston Globe reports that a new Massachusetts law will aid some, but not all, hospitals. Among the law’s provisions is one establishing a Distressed Hospital Trust Fund that will distribute $135 million over four years among some 35 community hospitals, who must compete for funding. The story says hospitals that do not qualify for funding include teaching hospitals, hospitals charging “very high prices,” and for-profit hospitals. According to the Globe, the law is intended to prevent health spending from growing faster than the Massachusetts economy through 2017, and to retard spending for another five years. The law is believed to offer savings of up to $200 billion in health costs over 15 years “by encouraging providers to use fewer expensive procedures, to better coordinate patients’ care to keep them healthier, and to steer patients to lower-cost hospitals and doctors.”

And whence comes the money for carrying out the law? A significant portion will be generated by a special tax on three hospitals. The story continues:

The cost-control law … targets three Harvard-¬affiliated hospital systems — Partners HealthCare, Boston Children’s Hospital, and Beth Israel Deaconess Medical Center — to pay a one-time $60 million tax to fund health programs.

Representative Steven Walsh is quoted as saying that lawmakers “created a formula we felt would only hit those hospitals that are healthy enough to withstand’’ it. That apparently means that the only hospitals being taxed are those few which are most profitable.

As one would expect, a target of this targeted tax is crying foul. The Globe quotes Partners HealthCare Spokesman Rich Copp:

“Imposing a tax on a very small number of hospitals is not a fair way to approach this issue, particularly when the money is being used to solve a problem the state created by underfunding the Medicaid program,’’ he said. “Burdening hospitals with more costs in a bill to reduce costs is a paradox, as well as bad public policy.’’

 

JRB

California Senate Committee to Address Nonprofit Hospital Charity Care

In Nonprofit Hospitals Face State Hearing on Tax-Exempt Status, the Los Angeles Times reports that a California state auditor's report reveals a lack of definitive standards for reporting charity care by nonprofit hospitals. This issue, among others, will be taken up by a California Senate committee at a hearing tomorrow “as part of the debate over whether nonprofit hospitals do enough to justify their tax-exempt status,” says the Times. As another stanza in what is becoming a familiar song from sea to shining sea, the story continues:

California law requires most tax-exempt hospitals to submit information annually on their "community benefits" through free or partial charity care and other means.

But state law doesn't require nonprofit hospitals to deliver specific amounts of uncompensated care and other community benefits in order to qualify for their tax-exempt status, according to state auditors.

For their part, as is often the case, hospitals reportedly are noting that, in addition to providing free care to the uninsured, they provide millions of dollars in care that is not fully compensated through government health programs.  

JRB

On-Line Religious Entity Denied Exemption and Church Status

The IRS has recently released a determination letter denying recognition of federal income tax exemption to an organization claiming to be an on-line church ministry.  The applicant, a nonprofit corporation, proposed to provide "Christian spiritual leadership and pastoral care to individuals and fellowships in the international community of believers” who visit its website.  The entity would offer "free spiritual services through the website including, but not limited to sermon preparation, outlines, and spiritual illustrations; Bible study, prayer group, and leadership training materials; membership, statement of faith, and other church-building materials; articles and fictional reading materials; etc."  The entity’s revenues would derive from the sales of religious and quasi-religious materials, including self-help “seminars” previously sold by the entity’s founder, and books that the entity’s founder anticipates writing.  The copyright of these books would remain with the author, and the applicant would receive only ten percent of the sales proceeds.  The entity adopted a statement of faith and a code of doctrine and discipline, but did not have a regularly scheduled religious service or an established place of worship.  Although the applicant would have membership, it encouraged members to join local churches.  At the time of its application, the entity’s certificate of formation failed to contain a dissolution clause irrevocably devoting assets to exempt purposes and failed to prohibit private inurement of its net earnings, but the applicant later stated that it would correct these deficiencies.  The entity’s governing board consisted of its founder and two family members. 

The IRS concluded that the entity had failed to demonstrate that it is exclusively operated for an exempt purpose. It had a significant non-exempt purpose of promoting the works of its founder. Observing that the Treasury regulations “clearly regard transfers of for-profit activity to an exempt organization as indicative of private benefit,” see, e.g., Treas. Reg. section 1.501(c)(3)-1(d)(1)(iii), Examples 2 and 3, the IRS noted that the applicant proposed to pay to produce and promote material from which its founder and other authors will primarily benefit. “Benefits directed to those who control an organization deserve special scrutiny,” said the IRS.  Although “[a] community based board of people with no financial interests in the entity can help prevent it from operating for private rather than public benefit,” the applicant’s governing board was small and related to one another.  Hence, reasoned the IRS, “combined with the private benefit demonstrated above, it creates greater cause to believe that you are operated for private, rather than public, interests.”

In what can be analogized to judicial dicta, the IRS also stated that the applicant would not be classified as a church had it qualified for exemption under Internal Revenue Code section 501(c)(3).  After citing its 14-factor test to determine whether an entity is a church, the IRS reasoned as follows:

You lack the most important, associational characteristics of a church, as well as most of the other factors deemed important to church identity. A website on the internet does not qualify as a place of worship, nor do individuals accessing that website constitute a congregation assembled to worship [citation omitted] .... Additionally, you do not ordain ministers, do not have regular congregations or services, do not have schools for religious instruction, and do not perform any sacraments such as weddings, baptisms, or funerals. Also, you encourage members to maintain membership in other churches and be baptized by other ministers. Therefore, although your purposes and activities would be religious, we cannot recognize you as a church for the purposes of public charity status.

I consider this determination letter instructive in this respect – its ease of finding the presence of private benefit when an entity governed by a founder-dominated board will benefit both itself and its founder through a commercial relationship.  The ruling highlights the importance of independent boards when conflict-of interest transactions are in issue and the charity has few stakeholders likely to monitor its affairs.  For further analysis of the degree to which the IRS has promoted independent boards through its process of granting determination letters, see Benjamin Moses Leff, Federal Regulation of Nonprofit Board Independence: Focus on Independent Stakeholders as a 'Middle Way,' 99 Ky. L. J. 731 (2011).

As to the ruling’s dicta concerning the non-church status of the applicant, I believe that in future cases in which an applicant conducting an on-line ministry makes a stronger case for exemption, the IRS should remain open to the possibility that such an applicant can qualify as a “church.”  Let us move beyond the actual facts of the determination letter and consider closer cases.  Advances in technology enhance the ability of ministries to foster interaction among remote internet users, even in real time, thereby achieving a virtual assembly.  This use of technology may be especially meaningful to people interested in pursuing a religious faith in countries where doing so publicly is illegal or culturally suspect.  An on-line religious worship service may be the only church that some people can experience without fearing the loss of their lives or estrangement from their families.  In my opinion, the IRS should not impose its 14-factor test narrowly in an age that affords ministries the ability to facilitate real corporate worship through virtual congregational services.

The determination letter is Priv. Ltr. Rul. 2012-32-034 (May 16, 2012), reported this week in Tax Notes Today (electronic citation: 2012 TNT 156-27).

 

JRB

 

States Rely on Nonprofits for Help with Welfare

The Chronicle of Philanthropy reports that state governments increasingly are soliciting assistance from charities and other nongovernmental organizations to comply with their federal welfare spending commitments under the Temporary Assistance for Needy Families (TANF) program. Last year, says the story, thirteen states sought help from nongovernmental entities to meet their obligations under the program, and seventeen states report that they will “tap nonprofit groups for welfare funds in the future.” The United Way, YMCA, and Shriner’s Hospital for Children are named as primary supporters of the states needing welfare assistance.

The story is another reminder of the significant role that nonprofits serve in assisting the most vulnerable in society, especially when governments are struggling to maintain social services in a weak economy. Future discussions of how to promote fiscal responsibility at the federal level (including debates over federal income tax reform) should reflect appreciation for the relationship between dwindling state revenues and the resulting reliance of state and local governments on nonprofits.    

JRB

California AG Sues Veterans Aid Charity

In Help Hospitalized Veterans Charity Accused of Diverting Donations, the Los Angeles Times reports that California Attorney General Kamala D. Harris has sued a Riverside County charity supporting programs for military veterans and active-duty personnel. The organization, Help Hospitalized Veterans, has allegedly expended funds for excessive salaries and pensions and engaged in other inappropriate conflict-of-interest transactions. The AG’s lawsuit requests the recovery of $4.3 million of the charity’s assets and removal of several officers and board members. The story further states that administrative inefficiency has previously been a concern of critics of the charity:

In 2011, the tax-exempt group reported revenue of $45 million, including $30 million in cash donations. But the watchdog group CharityWatch says only 35% went to programs for military personnel, compared with the 65% that many similar groups report.

The Times states that the charity’s longtime president, now-retired Roger Chapin, was unavailable for comment.

JRB

NY AG Investigates Political Activity of Tax-Exempt Organizations

The NY Times reports that New York Attorney General Eric T. Schneiderman has stepped up his inquiry of politically active tax-exempt organizations by requesting tax returns and other financial documents from these groups.  According to the article, the almost two dozen targeted entities include both right-leaning groups such as Crossroads Grassroots Policy Strategies (Crossroads GPS) and American Action Network and left-leaning groups such as Priorities USA Action and Patriot Majority USA.  All of these entities claim tax-exempt status as social welfare organizations under Internal Revenue Code section 501(c)(4), which permits them to avoid publicly disclosing their donors unless they engage in certain types of election-related activity.  The NY Times reported earlier this summer that AG Schneiderman had begun this investigation, with an apparent focus then on the U.S. Chamber of Commerce (a section 501(c)(6) organization that also generally is not required to publicly disclose its donors).

LHM

Drennan on Charitable Naming Rights

William Drennan (Southern Illinois) has published Where Generosity and Pride Abide: Charitable Naming Rights, 80 U. Cincinnati L. Rev. 53 (2011).  Here is a portion of the introduction:  

This Article asserts that the economic substance of a charitable contribution rewarded with naming rights is part gift and part purchase.  Data from other naming situations suggests that the lion‘s share of a naming philanthropist‘s total transfer to charity is an unrequited gift, but the data also suggests that a portion purchases a return benefit.  Accordingly this Article proposes that Congress should continue to allow deductions for the gift portion, but reverse course and prohibit income tax deductions for the naming portion. This Article also explores implementation issues.

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Komen CEO and President Both Step Down

We previously blogged that the drama at Susan G. Komen for the Cure was like watching a train wreck in slow motion.  Now the Associated Press reports that both Nancy G. Brinker, the founder and CEO of the organization, and Liz Thompson, its president have stepped down, along with two board members.  Ms. Brinker will continue in a fundraising and strategic planning role.  The departures follows Komen's decisions more than six months ago first to end donations to Planned Parenthood and then to restore that funding.  After the political firestorm that erupted from those decisions at least half-dozen other high-ranking executives stepped down and participation in Komen events declined according to the AP report.

Addiitional coverage:  CNN; The Hill; Huffington Post; New York Times.

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NVSQ Publishes August 2012 Issue

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

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

Articles

• Evelyn Brody, U.S. Nonprofit Law Reform: The Role of Private Organizations

• Woods Bowman, Howard P. Tuckman, and Dennis R. Young, Issues in Nonprofit Finance Research: Surplus, Endowment, and Endowment Portfolios

• Gordon Liu and Wai-Wai Ko, Organizational Learning and Marketing Capability Development: A Study of the Charity Retailing Operations of British Social Enterprise
  
• Hyung-Woo Lee, Peter J. Robertson, LaVonna Lewis, David Sloane, Lark Galloway-Gilliam, and Jonathan Nomachi, Trust in a Cross-Sectoral Interorganizational Network: An Empirical Investigation of Antecedents

• Kyu-Nahm Jun and Ellen Shiau, How Are We Doing? A Multiple Constituency Approach to Civic Association Effectiveness

• Stephanie Moulton and Adam Eckerd, Preserving the Publicness of the Nonprofit Sector: Resources, Roles, and Public Values

Research Note

• Douglas Houston and Paul M. Ong, Determinants of Voter Participation in Neighborhood Council Elections

Book Reviews

• Russell N. James III, Book Review: Donor-Centered Planned Gift Marketing

• Book Review: Voices From the Voluntary Sector: Perspectives on Leadership Challenges

• Lindsey M. McDougle, Book Review: Leadership in Nonprofit Organizations: A Reference Handbook

• Kelly LeRoux, Book Review: Politics and Partnerships: The Role of Voluntary Associations in America’s Political Past and Present

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