Nonprofit Law Prof Blog

State & Local "Charitable" Exemption Standards Continue to Differ with Feds'

It appears that the difference between the Internal Revenue Code defintion of "charitable" and that applied by state and local taxing authorities continues to affect nonprofit organizations, this time outside of the health care arena.  As reported by The Chronicle of Philanthropy, two organizations in Kittery Maine are disputing the town's revocation of their property tax exemptions on the basis that their art and dance activities do not comport with Maine's "charitable and benevolent" standard.

(For additional coverage, see "Kittery art organizations to fight town tax in court" (Seacoastonline)).

NAM 

Continued Fallout in the IRS's 501(c)(4) Debacle

As we have noted in other postings, Paul Caron’s TaxProf Blog is daily covering the controversy surrounding the IRS’s processing of applications for tax exemption filed by purported section 501(c)(4) organizations.  Here are a few developments from recent headlines:

• House GOP seeks new IRS probe (Washington Post):  "whether the embattled Internal Revenue Service targeted conservative groups, this time after the organizations were already approved for tax-exempt status."
• Rep. Issa Asks IG for Broader IRS Review (Wall Street Journal):  House Republicans asking Treasury Inspector General to investigate IRS's treatment of conservative organizations after their exemptions were granted.
• IRS scandal inspires week of GOP bills (Pittsburgh's Tribune-Review):  House Republicans call it their "Stop Government Abuse Week" with bills that address government services and response times, a Taxpayer bill of Rights, and repeal of the Affordable Care Act.
• House panel accuses IRS' Werfel of stonewalling probe (Fox News):  House Oversight and Government Affairs Committee accuses Acting IRS Commissioner for the "systematic manner" in which the IRS has "attempted to delay, frustrate, impede and obstruct" the Committee's investigation. 

NAM

Charities and "Conscience Laundering" for the Wealthy

In a candid New York Times Op-Ed entitled "The Charitable-Industrial Complex," Peter Buffett (musician and son of Warren Buffett) discusses the concept of "conscience laundering" - "feeling better about accumulating more [wealth] than any one person could possibly need to live on by sprinkling a little around as an act of charity."  However, Buffett opines that the system that "creates vast amounts of wealth for the few" and leads to charitable acts and giving by the wealthy nevertheless "just keeps the existing structure of inequality in place."   It is an interesting read.

The New York Times published responses to the Op-Ed, cumulatively entitled "Doing a Better Job of Doing Good."

NAM

Tax or Penalty? The Assessable Payment under the Affordable Care Act

Riley Lovendale (Boston College, J.D. 2014 expected) posted Tax Versus Penalty, Round Two, Fight!  Intepreting the PPACA's Assessable Payment as a Tax for Federal Funding Costs Allowances to SSRN.  Here is the abstract:

The Patient Protection and Affordable Care Act (PPACA), significant health care reform enacted in 2010, imposes an “assessable payment” on certain employers that fail to offer affordable health insurance to their employees. The ambiguity of the exaction’s title poses a planning problem for some nonprofits receiving federal grant funds with restrictions imposed by the Office of Management and Budget’s Circular A-122. Circular A-122 permits these restricted grant funds to be used for “taxes,” but not for “penalties.” On June 28, 2012, the U.S. Supreme Court, held in National Federation of Independent Business v. Sebelius that the PPACA’s individual mandate’s “shared responsibility payment” could, for constitutional purposes, be interpreted as a tax. This Note argues that the PPACA’s assessable payment should be interpreted as a tax by applying the Supreme Court’s recent tax versus penalty analysis and analyzing the exaction’s characteristics and effect on employer behavior. This interpretation will provide organizations with predictability in planning and ensure that Congress does not escape political accountability for imposing taxes by using the ambiguous term “assessable payment.”

NAM

Carpenter v. Commissioner Revisited - Federally-Deductible Conservation Easements Must be Extinguishable Only in a Judicial Proceeding

In Carpenter v. Commissioner, T.C. Memo 2013-172 (Carpenter II), the Tax Court denied the taxpayer’s motion for reconsideration and supplemented its opinion in Carpenter v. Commissioner, T.C. Memo. 2012-1 (Carpenter I). The court clarified that Treasury Regulation § 1.170A-14(g)(6)(i)—the "extinguishment" regulation—sets forth the conditions under which federally–deductible conservation easements can be permissibly extinguished, namely, in a judicial proceeding upon a finding that continued use of the property for conservation purposes has become impossible or impractical. The court specifically rejected the argument that the extinguishment regulation is merely a safe harbor, explaining: "To make our position clear, extinguishment by judicial proceedings is mandatory. Therefore, we reject petitioners’ argument that [the extinguishment regulation] contemplates any alternative to judicial extinguishment."

The Tax Court also rejected the taxpayers’ argument that the First Circuit’s opinion in Kaufman v. Commissioner, 687 F.3d 21 (1st Cir. 2012) (Kaufman III), was an intervening change in law that required the Tax Court to reconsider its holding in Carpenter I that conservation easements extinguishable by mutual agreement of the parties do not satisfy the extinguishment regulation. The Tax Court explained that Carpenter is appealable to the Tenth Circuit rather than the First Circuit and Kaufman III addressed legal issues different from the one present in Carpenter in any event. In particular, Kaufman III addressed the proper interpretation of Treasury Regulation § 1.170A-14(g)(1) (the "general enforceability in perpetuity" regulation) and Treasury Regulation § 1.170A-14(g)(6)(ii) (the "proceeds" regulation), neither of which were at issue in Carpenter.

The Tax Court’s holdings in Carpenter I and II are consistent with IRS General Information Letter dated September 18, 2012, in which the agency advised that, while state law may provide a means for extinguishing a conservation easement for state law purposes, the requirements of IRC § 170(h) and the extinguishment and proceeds regulations must nevertheless be satisfied for a contribution to be deductible for federal income tax purposes.

The Tax Court’s holdings in Carpenter I and II are also consistent with public policy. To ensure consistent protection of the federal investment in conservation easements and the conservation values they are intended to “protect in perpetuity” for the benefit of the public, the high threshold for extinguishment set forth in Treasury Regulation § 1.170A-14(g)(6)(i) must apply uniformly to all federally-deductible easements, regardless of the parties to the easements or the states in which the easements are created. Uniform application of the extinguishment requirements also ensures that taxpayers will be treated equitably—that easement donors benefiting from sizable deductions will not be able to more easily escape the perpetual restrictions placed on their property in some states than in others. Requiring that the decision to extinguish a federally-deductible perpetual conservation easement be made by a court as opposed to the parties to the easement ensures that the decision will not be made solely by the parties who stand to benefit, financially or otherwise, from the extinguishment. And requiring that the extinguishment decision be made by a court as opposed to a state or local official, agency, committee, or administrative board helps to ensure that the decision to terminate federally-deductible easements will not be influenced by the short-term and often short-sighted political, economic, and development pressures to which state and local actors can be subject. Finally, the already substantial complexities associated with valuing federally-deductible conservation easements would be greatly exacerbated if the easements were subject to extinguishment pursuant to different processes and procedures, which, even if tied to state and local laws or ordinances, would vary over time as local politics and priorities change.

The easiest and most prudent way to comply with the extinguishment requirement appears to be to include a provision in the conservation easement stating that the easement can be extinguished in whole or in part only (a) in a judicial proceeding, (b) upon a finding by the court that a subsequent unexpected change in the conditions surrounding the property has made impossible or impractical the continued use of the property for conservation purposes, and (c) with a payment of proceeds to the holder as provided in Treasury Regulation § 1.170A-14(g)(6)(ii) to be used by the holder in a manner consistent with the conservation purposes of the original contribution (i.e., the easement should carefully track the provisions of both Treasury Regulation § 1.170A-14(g)(6)(i) and -14(g)(6)(ii)). The easement should also comply with the related "restriction on transfer" regulation, Treasury Regulation § 1.170A-14(c)(2), which mandates that the instrument of conveyance limit the holder's ability to transfer the easement, whether or not for consideration, except in carefully prescribed circumstances. As an added precaution and to avoid any possible confusion, the easement might further provide that its provisions apply notwithstanding and in addition to any conditions that may or may not be imposed on the transfer or release or other extinguishment of a conservation easement under state law.

Nancy A. McLaughlin, 

Robert W. Swenson Professof of Law

University of Utah SJ Quinney College of Law

Recent New Jersey Law: Charitable Contributions Do Not a Resident Make

As reported in today’s State Tax Today (subscription required), New Jersey has recently passed legislation clarifying that charitable contributions are not relevant in determining the domicile of the donor under the New Jersey gross income tax.  Portions of the statement accompanying the Act include the following:

This bill clarifies in the New Jersey gross income tax statutes that donors' contributions to charities are not a factor in determining where a person is domiciled under New Jersey gross income tax for the purpose of defining who is a resident taxpayer or nonresident taxpayer.  This is the informal position taken by the New Jersey Division of Taxation since 2005 but this position has not since been officially communicated to taxpayers.  Whether a person lives in Florida or Arizona, giving to charities in New Jersey, in and of itself, should not subject the person to New Jersey income tax as a New Jersey resident. …

Taxpayers now make contributions to local, regional, and national charities via modern financial and communication networks. …This bill recognizes these changes in patterns of giving and wishes to encourage contributions to charities, regardless of the locations of the charities, from both New Jersey residents and nonresidents.  Although domicile is usually determined from all the evidence and circumstances, under this bill the Division of Taxation is formally instructed in statute to no longer consider a taxpayer's charitable contributions as relevant or applicable in determinations of domicile.

 JRB

Impact of Detroit Bankruptcy on Nonprofits

An article in The NonProfit Times discusses the likely effects of the City of Detroit’s filing for bankruptcy on local nonprofits.  The article cites a number of nonprofit leaders who have been working in the Detroit area through these recent years of economic hardship.  The general thrust of their comments is that local nonprofits have already made major adjustments to cope with the distressed economy, and that the mood is cautiously optimistic that they will continue to do so, even as the bankruptcy presents new challenges, and perhaps new opportunities.

JRB

House May Investigate Auditing of Section 501(c)(3) Groups

The Washington Times reports that House Republicans are considering “a major expansion of their investigation into the Internal Revenue Service’s targeting of conservatives” by looking into the government’s audits of nonprofits.  Some leaders of organizations exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code (i.e., charities) reportedly find the audits “fishy” because of the IRS’s basically contemporaneous special scrutiny of tea party groups seeking recognition of exemption under section 501(c)(4). The story says that charities audited for the first time during this period include the Billy Graham Evangelistic Association (the "BGEA"), the Clare Boothe Luce Policy Institute and the Family Research Council.

Readers, kindly indulge me as I express an earnest plea for maintaining a nonpartisan, legally informed perspective in this matter.  And, if it makes any difference, please understand that this perspective comes from someone who personally has long admired the leadership of the BGEA for their moral integrity and historic commitment to proclaiming the Gospel.

It is entirely appropriate for the IRS to audit a section 501(c)(3) entity to determine whether it is operating within the constraints imposed by Code section 501(c)(3).  In general terms, these constraints include a prohibition against political campaign intervention (such as publicly endorsing identified candidates for public office) and limitations on lobbying.  We can debate whether the law should be relaxed – and I have argued elsewhere that it should (somewhat).  But the IRS is charged with enforcing current law.  If the IRS discovers that a charity has engaged in public discourse of proposed laws or canddiates – and the Washington Times reports that BGEA did so in an election year – it is hardly unreasonable for the government to audit the organization to establish whether its activities complied with the law. Indeed, it is not uncommon for watchdog groups to alert the IRS when they have evidence that an entity may have crossed the line.  Further, because there are other requirements for tax exemption under Code section 501(c)(3) (e.g., the prohibition against private inurement), an audit should probe the organization’s compensation policies, other transactions with insiders, and other aspects of its internal affairs.  Naturally, the audit will feel intrusive.  It is.  It must be intrusive to be effective.  It will also be time-consuming.

I have no idea whether groups identified in the story were selected for audit for the wrong reasons.  Nor am I arguing that looking into the matter further is pointless.  But news that a handful of religious or politically conservative section 501(c)(3) organizations have been audited, particularly when they have made public statements about proposed laws or candidates in an election year, seems quite a bit different from allegations that section 501(c)(4) applications were systematically processed according to buzzwords that distinguished tea party groups from others. 

Section 501(c)(3)s and section 501(c)(4)s are subject to very different constraints on political activity.  I urge caution before greatly expanding the investigation and devoting more public resources to it if it appears that the section 501(c)(3) organizations in question were visibly active participants in the political process during an election year. 

Hat tip: TaxProf Blog

JRB

Most Recent "Nonprofit Advocacy Matters"

The National Council of Nonprofits has issued the July 15 edition of Nonprofit Advocacy Matters.  An outline of the contents of this issue follows:

Federal Issues

• Tax Reform
• Sequestration Spotlight
• Federal Workforce Giving

State Issues

• Charitable Giving Incentives: HI, ME, NC, OR
• Taxes, Fees, PILOTs: NJ, RI, TX
• Government-Nonprofit Contracting: CO, NY
• Parks Funding: NY
• Music Funding: NY

Advocacy in Action

Of the several stories of interest, one may foreshadow the continued viability of the charitable contributions deduction through federal income tax reform.  The story reports that a handful of states have either enacted or proposed to enact caps on itemized deductions for state income tax purposes, but have not subjected the charitable contributions deduction to those caps.  An exception is Maine, which has passed a budget limiting total itemized deductions (including the deduction for charitable gifts) to $27,500.  

 

JRB

“True the Vote” Amends Complaint in Suit against IRS

The Washington Post reports that “True the Vote,” a Houston-based voter watchdog group with tea party ties that has sued for determination of tax-exempt charitable status and damages for allegedly unlawful conduct by the IRS, has expanded its lawsuit in view of recent disclosures of the involvement of the IRS Office of Chief Counsel in the processing of applications for exemption by tea party groups.  According to the story, the lawsuit now names as a defendant the IRS Chief Counsel, William Wilkins, and also adds “five senior IRS employees — four of whom were working at headquarters, one of whom was based in Cincinnati.”  Further, the plaintiff’s complaint now alleges violations of the Administrative Procedure Act. 

It is important to note that this entity is not among the many tea party groups seeking recognition of federal income tax exemption under Internal Revenue Code section 501(c)(4).  Rather, this group has sought recognition of tax exemption as a section 501(c)(3) charitable and educational organization.  Interested readers can view a copy of the entity’s first amended complaint here. 

The organization appears to be on a mission to expose what it believes to be governmental misconduct spurred by the entity’s perceived tea party links, as both the amended complaint and the following excerpt from the Post suggest:

“This lawsuit is the only way to get all of the answers involving this national scandal,” True the Vote President Catherine Engelbrecht said in a statement. “Our goal is not a speedy settlement or a quiet Washington deal. We will sue, depose and expose every person who came near this illegal scheme to suppress voters’ First Amendment rights. The American people — not just True the Vote — deserve answers.”

JRB

Religious Charities Lobby for Continued Charitable Contributions Deduction

The Chronicle of Philanthropy reports that a newly formed coalition of religious charities recently went to Washington to persuade U.S. Senators not to eliminate the charitable contributions deduction in the midst of proposing significant federal income tax reforms.  The sense of urgency arises from a deadline imposed by Senators Max Baucus (Chairman, Senate Finance Committee) and Orrin Hatch (Ranking Member, Senate Finance Committee), who recently informed other lawmakers that the tax expenditures that will survive their efforts to reform the Internal Revenue Code must demonstrably “(1) help grow the economy, (2) make the tax code fairer, or (3) effectively promote other important policy objectives.”  The recently formed Faith and Giving Coalition made the case to lawmakers that the charitable contributions deduction meets that three-pronged standard.  The gist of their case, says the story, is that “charities save the government money by providing social services.”

While many religious charities indeed provide valuable social services, I believe the broader religious community should think twice before making its case to Congress for the continuation of the charitable contributions deduction primarily on the grounds that religious entities provide social services that save the government money.  The primary function of most religious charities is not to undertake activities that the state would provide in the absence of the religious entities.  Indeed, their primary function is quite the opposite – to provide something that the state cannot provide because of the Establishment Clause.  It does not follow, however, that either the charitable contributions deduction or federal income tax exemption is inappropriate because most religious charities do what the state cannot do.  As I have written elsewhere, there are fairly strong arguments that federal income tax exemption is appropriate for charities, and a plausible (though less compelling) case for the charitable contributions deduction, apart from a desire to “subsidize” charitable donees through the tax system.  This observation does not mean that government should ignore the general social services provided by charities, including religious ones.  But it does imply that other policy factors are also relevant in determining how the charitable contributions deduction should fare in tax reform.    

JRB

WSJ: Nonprofit “Worker Centers” Buttress Union Formation

According to a recent piece in the Wall Street Journal (subscription required), a new type of nonprofit entity is being used to mobilize workers to form unions and support employees.  The story explains that unions often support the formation of these “worker centers,” which build community support for organizing laborers by offering language classes, helping workers with wage claims, and even lobbying lawmakers on their behalf.  Operated properly, they reportedly fall short of qualifying as "labor organizations" because they have no continuing bargaining relationship with employers, thereby freeing them from constraints imposed by national labor laws.  According to the story, more than 200 worker centers now exist in the United States, and they have been effective in assisting immigrants, domestic workers, day laborers and taxi drivers.

JRB

IRS Chief Counsel’s Office’s Involvement in Section 501(c)(4) Controversy

As we have noted in other postings, Paul Caron’s TaxProf Blog is daily covering the controversy surrounding the IRS’s processing of applications for tax exemption filed by hopeful section 501(c)(4) entities, particularly what may well have been an unprecedented process reserved solely for tea party and similar groups.  It is not always easy to see through the fog generated by partial facts, extensive spinning, and wishful thinking promulgated by observers speaking from all sides of the controversy.  Moreover, the sheer volume of titles appearing in news sources can obfuscate what is most significant.

One piece of congressional testimony that does strike me as significant has emerged over the past few days.  As reported in the online version of the Washington Post, IRS attorney Carter Hull testified that the chief counsel’s office for the Internal Revenue Service contributed to the development of the agency’s controversial guidelines for reviewing “tea party” cases.  Hull reportedly testified that his superiors told him that the chief counsel’s office “would need to review some of the first applications the agency screened for additional scrutiny because of potential political activity.”

While the Post story notes that the Chief Counsel for the IRS, William Wilkins, was appointed to his position by President Obama, an article in the National Review Online points out that “the officials from the chief counsel’s office who participated in the August 2011 meeting operated far below him [i.e., Wilkins] in the chain of command.”  These facts hardly point directly to the White House, or even to anyone appointed by the President.  They are, however, a far cry from the initial narrative that assigned blame to relatively low-level exemption agents in Cincinnati.  The latter article continues, “Why the chief counsel’s office became involved in the matter remains unclear, but witness testimony suggests it was [Lois] Lerner’s office that pushed to involve the agency’s top lawyers.”

As unpleasant as the continued coverage of this controversy may be for many, as anti-climactic as it may end up being for others, and as annoyingly partisan as the investigation has already become, I (for one) would still like to know exactly how the IRS settled upon its process of reviewing section 501(c)(4) applicants.  There must be more than one lesson for tax and nonprofits lawyers – public and private – that one can mine from the true facts.  

JRB

Woman Arrested for Larceny in Connection with Boston Marathon Victims’ Fund

CNN reports that 26-year-old Audrea Gause of Troy, N.Y., was arrested on a Massachusetts fugitive warrant on charges of larceny.  She reportedly received $480,000 from The One Fund Boston after claiming she suffered a traumatic brain injury from the recent Boston Marathon bombings.  An investigation concluded that her claimed treatments for injuries were fabricated.  Massachusetts Attorney General Martha Coakley is quoted as saying of Gause, "She was stealing money from the real victims of the Marathon bombing, and from the people who gave so generously to help them."   And she may not be alone.  Coakley further commented that the investigation is ongoing, and that others may be involved in Gause's allegedly fraudulent claims.

That cheats might set their sights on the Fund is obviously a function of its success in raising money.  The story reports that The One Fund Boston has begun to distribute nearly $61 million of donations to 232 eligible claimants.

JRB

Dent: Probing Corporate Governance Without Shareholders

George Dent (Case Western) has posted on SSRN Probing Corporate Governance Without Shareholders: A Cautionary Lesson From Non-Profit Organizations.  Here is the abstract:

For over 80 years, debate over corporate governance has centered on the balance of authority between the board and shareholders. One side in this debate advocates “shareholder primacy”, so that directors would actually be chosen by and accountable to the stockholders. The other side touts “director primacy” and keeping shareholders weak. This side claims that directors who are free of shareholder control would strive to maximize long-term firm value, and have the wisdom and independence to pursue this goal intelligently and conscientiously.

The boards of non-profit organizations (“NPOs”) are self-perpetuating: They are not answerable to shareholders because they have no shareholders. If director primacists are right, NPO boards should function as director primacists wish corporate boards would. The reality is quite the contrary. Commentators agree that NPO boards are generally worse than corporate boards. This brief article describes the functioning of NPO boards, discusses why they are so dysfunctional, and what lessons their example holds for corporate governance.

LHM

Nonprofit and Voluntary Sector Quarterly June 2013 Issue

The Nonprofit and Voluntary Sectory Quarterly has published its June 2013 issue.  Here is the table of contents:

From the Editors' Desk

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

Symposium: Faith-Based Organizations in Context, Edited by Jo Anne Schneider

• Jo Anne Schneider, Introduction to the Symposium: Faith-Based Organizations in Context

• Wolfgang Bielefeld and William Suhs Cleveland, Defining Faith-Based Organizations and Understanding Them Through Research

• Wolfgang Bielefeld and William Suhs Cleveland, Faith-Based Organizations as Service Providers and Their Relationship to Government

• İpek Göçmen, The Role of Faith-Based Organizations in Social Welfare Systems: A comparison of France, Germany, Sweden, and the United Kingdom

• Jo Anne Schneider, Comparing Stewardship Across Faith-Based Organizations

• Patricia A. Wittberg, Faith-Based Umbrella Organizations: Implications for Religious Identity

• Jill Witmer Sinha, Unintended Consequence of the Faith-Based Initiative: Organizational Practices and Religious Identity Within Faith-Based Human Service Organizations

Article

• Khaldoun AbouAssi, Hands in the Pockets of Mercurial Donors: NGO Response to Shifting Funding Priorities

Research Note

• Joanne G. Carman and Rebecca Nesbit, Founding New Nonprofit Organizations: Syndrome or Symptom?

Book Reviews

• David C. Hammack, Book Review: Civic Engagement in Postwar Japan: The Revival of a Defeated Society, by R. Kage

• Marne Bariso, Book Review: The Volunteer Management Handbook: Leadership Strategies for Success, by T.D. Connors

• Wesley E. Lindahl, Book Review: The Science of Giving: Experimental Approaches to the Study of Charity, by D.M. Oppenheimer and C.Y. Olivola

LHM

Plerhoples: Is Chick-Fil-A a Social Enterprise?

Alicia Plerhoples (Georgetown) has posted Is Chick-Fil-A a Social Enterprise?: The Place of Conservative Values within Social Enterprise Legislation on SSRN.  Here is the abstract:

This article examines whether recent social enterprise legislation (i.e., the benefit corporation and its various iterations) accommodates companies that have ideologically conservative social missions in addition to internal governance structures and operations that embrace corporate sustainability principles. The article examines whether the benefit corporation and the social and environmental standards employed to measure “general and specific public benefits” are ideologically neutral, and explores what normative values are incorporated into social enterprise legislation. This examination will be conducted through inquiring into whether Chick-fil-A, the popular U.S. fast food restaurant that donates to conservative causes and nonprofit organizations, and also embraces environmentalism and fair employment standards in its internal governance structure, could re-incorporate as a benefit corporation. The author argues that while the corporate legal form might be ideologically neutral, measurements of social and environmental benefits play a critical role in determining what constitutes sustainability and the public benefit produced. These measurements often incorporate ideologically liberal values and exclude conservative values.

LHM

Ji: Burning Man

Yuan Ji (Wilson Sonsini) has posted Burning Man: A Case Study of Altruism Thriving in a For-profit Organizational Form and the Rationales for LLC-to-Nonprofit Conversion, 9 Hastings Business Law Journal 449 (2013).  Here is the abstract:

Burning Man is a temporary city of over 50,000 citizens that exists for one week every year in Nevada’s Black Rock Desert. Burning Man is perhaps best known in popular culture for its celebration of interactive art, experimental community building, gift economy, and ritual burning of a large wooden structure in the shape of a man. The case study of Burning Man is used to illustrate that an altruistic organization, one that is ideologically committed to the provision of public goods and not driven by profit, can nevertheless thrive in a for-profit legal form while staying true to its mission. Depending on organization-specific conditions, the nonprofit form can be, but does not necessarily have to be, the best structure for the provision of altruism and public goods (or quasi-public goods). As an organization evolves and becomes more complex overtime, however, the organization form that best serves its mission can change as well. Still, the nonprofit form alone neither guarantees altruistic commitment nor is immune from abusive practices within the management or board of directors. This Article discusses the theories on nonprofit formation that make persuasive rationales for Burning Man’s conversion to a nonprofit structure; it also makes specific recommendations for better organizational accountability and transparency in the Project’s current and future operations.

LHM

Hackney: What We Talk About When We Talk About Exemption

Philip Hackney (LSU) has posted What We Talk About When We Talk About Exemption, 33 Virginia Tax Review (forthcoming).  Here is the abstract:

Under the Internal Revenue Code, certain nonprofit organizations are granted exemption from federal income tax (“tax-exemption”). Most tax-exemption rationales assume tax-exemption is a subsidy for organizations such as charities that provide some underprovided good or service. These theories assume there should be a tax on the income of nonprofit organizations but provide no justification for this assumption. This article contributes to the literature by examining the corporate income tax rationales as a proxy for why we might tax nonprofit organizations. The primary two theories hold that the corporate tax is imposed to: (1) tax shareholders (“shareholder theory”), and (2) regulate corporate manager control over large sources of wealth (“regulatory theory”). The shareholder theory supports the basic tax-exemption organizational structure preventing the distribution of earnings to private shareholders. However, the shareholder theory does not support tax-exemption for mutual benefit organizations such as business leagues because their members are arguably the equivalent of shareholders. The regulatory theory highlights that exempting an organization from income tax removes a regulatory regime. As a result of tax-exemption, organizations become subject to another regulatory regime with some federal oversight of political activity and self-dealing transactions. This article makes some tentative steps towards determining when that substitution of a regulatory regime might be appropriate. The article concludes the regulatory regime imposed on charitable organizations is sufficient to substitute for the regulatory role of the corporate income tax, but concludes that the regulatory regime for mutual benefits is lacking. This article submits it is time to revamp our tax-exempt structure for mutual benefit tax-exempt organizations.

LHM

Filistrucchi & Prufer: Nonprofits are Not Alike

Lapo Filistrucchi and Jens Prufer (both Tiburg Unviersity School of Economics and Management) have posted on SSRN Nonprofits are Not Alike: The Role of Catholic and Protestant Affiliation.  Here is the abstract:

There are no generally accepted results regarding the objectives, decisions, and economic outcomes of nonprofit organizations, as compared to forprodit or public firms. We posit that this inconclusiveness is due to a too broad definition of nonprofits and that different types of nonprofits exist. This conjecture is investigated by constructing a model in which nonprofits differ by religious affiliation and testing the resulting hypotheses on the observed behavior of German nonprofit hospitals. We find that Catholic and Protestant nonprofits adopt significantly different strategies in the market. This confirms our conjecture and the importance of religion for economic outcomes.

LHM