Nonprofit Law Prof Blog

Why the Northwestern Football Players Union Decision Isn't Going to Affect the Tax Treatment of Athletic Scholarships Any Time Soon

Though the press coverage of the decision by the NLRB hearing officer to permit Northwestern football players to unionize has quieted somewhat, I still get a number of phone calls every week from reporters asking whether this decision will affect the tax treatment of athletic scholarships.  My answer is "no."  Here's why I think this.

First, some background.  Section 117 of the Code provides an exclusion from gross income for "qualified scholarships" which essentially means scholarships that cover the cost of tuition, books and supplies.  Room and board is NOT included in this provision; hence scholarships for room and board already are included in gross income.  So room and board scholarships are already taxable.

With respect to the tuition/books/supplies scholarships, the argument that flows from the preliminary NLRB decision (it is being appealed to the full Board) is that by classifying the players as "employees" for purposes of the labor laws, scholarships will be taxable because they will be viewed as compensation for services rendered.  In fact, Section 117(c) contains an explicit provision that says that "scholarships" that are in reality compensation for services do not qualify for an exclusion from gross income.

This argument, however, misses several points.  First, in 1977, the IRS ruled that athletic scholarships qualified for the exclusion under 117 because the scholarship did not, in fact, represent compensation for services.  Rev. Rul. 77-263, 1977-2 C.B. 47.   The IRS decision was based upon the underlying structure and terms of the scholarship arrangement, NOT the status of the players as "students" vs. "employees."   The NLRB decision changes nothing about the underlying nature of the scholarship (the terms of athletic scholarships are set by NCAA rules); accordingly, there is no legal connection between the NLRB view of athletes as "employees" and the exclusion for athletic scholarships.  If the terms of the scholarship haven't changed materially, and the terms were the basis of the IRS's 1977 ruling, there is no reason for the IRS to revisit that ruling.

Second, the fact that one is an employee does not make one ineligible for a scholarship.  Indeed, section 117(d), which deals with "qualified tuition reductions" (a fancy name for a scholarship) explicitly contemplates that employees may be offered "tuition reductions" that are excluded from gross income.  In fact, colleges and universities routinely provide scholarships to employees: nearly all graduate research assistants and teaching assistants, many of whom are unionized, receive tuition waivers as part of their "package" with the university.  This package normally includes a (very small!) stipend.   The universities take the position that the stipend is compensation for services, and that the tuition waiver is an excludable "tuition reduction" under Section 117(d), a position that the IRS seems to be quite comfortable with.  In effect, the NLRB ruling that football players are "employees" places them in essentially the same position as grad RA's and TA's.  This analogy will be particularly apt when, as I think is inevitable, universities start paying stipends to the players in big-time sports.  But even now, one can argue that providing meals, training and room and board are the "compensation" elements of the athletic scholarship, and that the tuition/fee scholarship is just that - a scholarship, as it is with grad RA's and TA's.

Finally, there is no necessary connection between the tax law interpretation of a particular legal relationship and the interpretation of that relationship by other bodies of law.  Tax law is a specialized body of law unto itself.  For example, the definition of a "gift" under Section 102 of the Code is not dependent upon, or even related to, the common-law property definition of gift, as Justice Brennan specifically pointed out in the famous Duberstein case.  Similarly, the tax definition of "inheritance" is not dependent on state law definitions of "inheritance" - and so forth.  The fact that labor law might characterize a particular item as "compensation for services" does not control the tax definition of that item.

It is possible that the NLRB's action (again, if that action is upheld on appeal) might prompt the IRS to take an overall look at big-time college athletics and change its positions on many things in the athletic realm (including, for example, its long-standing position that athletics are not an unrelated business subject to taxation).  But I wouldn't hold my breath on this.  In the past, every time the IRS has taken tentative steps to tax certain items relating to college athletics, Congress has slapped the agency hard across the cheek.  Witness the sequence of events dealing with the IRS's private letter rulings that corporate bowl sponsorships were taxable advertising; Congress moved with almost lightning speed to enact a new corporate-sponsorship exclusion to the UBIT, Section 513(i).  Similarly, when the IRS took steps to tax payments for seating premiums by ruling that these items were not donations, Congress responded with Section 170(l) to provide that 80% of these payments were, in fact, deductible - allowing althetic boosters to deduct 80% of their payments for what are essentially "personal seat licenses" at athletic events.

So, is it possible that the NLRB action will influence the IRS to change its ruling on athletic scholarships?  Sure, it's possible - just as it is possible that the United States will mount a manned mission to Mars next year.  Just don't bet the house on it.  

John Colombo

Private Benefit Makes An Appearance in a State Property Tax Exemption Case

One of the most vexing doctrines in charitable tax exemption under Section 501(c)(3) of the Code is the "private benefit" doctrine.   Both Darryll Jones and I have written extensively about private benefit, but I still struggle to explain it to my students in my Exempt Organizations class.  The best I've been able to come up with is that "private benefit" refers to a situation in which a charity intentionally provides a benefit, usually (but not always) an economic benefit, to someone outside the charitable class under the guise of serving the charitable class, when in fact the service to the charitable class is secondary to the private benefit.  For example, an art gallery that acts as a sales agent for artists might argue that displaying art is for the educational benefit of the viewing public (the charitable class) when in reality it is all about selling the displayed art on behalf of participating artists (the "private benefit.")

I had not seen the private benefit doctrine used much (if any) in state property tax exemption cases - until now.  A recent decision by the Lane County (Oregon) Board of Commissioners to deny tax exemption to a gun club appears to invoke something very close to private benefit doctrine.   This story in The Register-Guard summarizes the case which involved a gun club that claimed exemption as a property “exclusively occupied or used as a public park or for public recreation,” under Oregon law.  The County Board, however, found that private members of the club received substantial benefits not available to the public, and that the club required its members also to be members of the NRA. According to the Board's legal counsel, “The result is that the NRA receives an indirect benefit that is derived from (the club’s) Lane County tax-exempt status.”   That statement is very close to the court's conclusion in the famous American Campaign Academy case, 92 T.C. 1053 (1989), where the court held that the "indirect" benefits to the Republican Party of forming a nonprofit school to train political operatives violated the private benefit doctrine, despite the fact that the school was open to all and graduates did not have to work on Republican campaigns (and at least some apparently did not do so).

I've never been a fan of American Campaign Academy, nor am I a fan of the amorphous balancing test that currently seems to be the rule for the federal private benefit doctrine.  Seeing it spread to the states in property tax exemption cases does not exactly fill me with joy, but perhaps the states will do better in defining the doctrine than the IRS has.

John Colombo

Brewer: "Gift Horses, Choosy Beggars" (plus the BNA Portfolio on Social Enterprise)

Cass Brewer (Georgia State) has posted Gift Horses, Choosy Beggars, and Other Reflections on the Role and Utility of Social Enterprise Law. Here is the abstract:

The U.S. law of social enterprise is growing rapidly. Since 2008, one-half of all U.S. states have modified their business law to establish special legal forms designed for social enterprise. Meanwhile, even with twenty-five states adopting special laws for social enterprise, the legal debate surrounding social enterprise continues. Rather than rehashing that debate, this essay sets forth the author’s personal perspective on the role and utility of social enterprise. The essay argues that, except in limited circumstances, social enterprise is superior to traditional philanthropy when it comes to solving longstanding humanitarian or environmental problems. U.S. business law thus should continue to evolve to facilitate social enterprise.

He also is a co-author (with Elizabeth Carrott Minnigh and Robert Wexler) for the just released BNA Tax Management Portfolio Social Enterprise by Non-Profits and Hybrid Organizations, No. 489-1st.

Lloyd Mayer

Choi: "Relational Sactions Against Non-Profit Organizations"

Albert Choi (UVA) has posted Relational Sanctions against Non-Profit Organizations: Why a Selfish Entrepreneur Would Organize a Non-Profit Enterprise.  Here is the abstract:

This paper examines how relational sanctions can affect organizational choice. An entrepreneur can set up either a for-profit or a non-profit organization in selling product or service to customers. While the entrepreneur can distribute all the profits from a for-profit organization to herself, she faces a non-distribution constraint with respect to a non-profit organization and has to convert a non-profit firm’s profits into private benefits (such as perquisites). Because realized quality is not verifiable and is subject to error, customers, in equilibrium, impose relational sanctions against the firm when low quality product or service is delivered. With the relational sanctions, for-profit and non-profit firms provide the same (expected) level of quality to the consumers. The size of the relational sanctions and the entrepreneur’s preference over the organizational form differ, however. When converting profit into private benefits becomes more difficult at the margin, i.e., conversion exhibits decreasing returns to scale, because temptation to shirk from investing in quality gets weaker (but still positive), a non-profit organization is subject to shorter (less severe) relational sanctions. Shorter relational sanctions, in turn, can make a non-profit organization’s long-run return to the entrepreneur (in terms of private benefits) higher than that from a for-profit organization (in terms of distributed profits). Hence, even if the entrepreneur has no altruistic motive and cares only about the returns she derives from the organization, she may still choose a non-profit form. The entrepreneur is more likely to organize a non-profit firm (1) as the correlation between investment and quality gets weaker; (2) as the non-distribution constraint gets stronger at the margin; (3) when a for-profit firm is subject to tax; or (4) and as the profit margin gets smaller due, for instance, to stronger competition in the market.

Lloyd Mayer

Eldar: "The Role of Social Enterprise and Hybrid Organizations"

Ofer Eldar (J.S.D. candidate & Ph.D. candidate, Yale) has posted The Role of Social Enterprise and Hybrid Organizations.  Here is the abstract:

Recent years have brought remarkable growth in hybrid organizations that combine profit-seeking and social missions. Despite popular enthusiasm for such organizations, legal reforms to facilitate their formation and growth – including, in particular, special enabling statutes for hybrid firms – have largely been ineffective. This failure stems in large part from the lack of a theory that identifies the structural and functional elements that make some types of hybrid organizations more effective than others. In pursuit of such a theory, this article focuses on a large class of hybrid organizations that has been effective in addressing development problems, such as increasing access to capital and improving employment opportunities. These organizations, which are commonly referred to as “social enterprises,” include microfinance institutions, firms that sell fair trade products, work integration firms, and low-cost sellers of essential goods and services such as eyeglasses, bed-nets and healthcare. The common characteristic of social enterprises is that they have a transactional relationship with their beneficiaries, who are either purchasers of the firms’ goods or services or suppliers of input (including labor) to the firm. The essence of the theory is that through these transactions, social enterprises gather information on their patron-beneficiaries’ ability to transact with commercial firms (e.g., workers’ skills, borrowers’ creditworthiness and consumers’ ability to pay). That information permits social enterprises to tailor the form and amount of subsidies to the specific needs of individual beneficiaries. This “measurement” function makes social enterprises relatively efficient vehicles for allocating subsidies as compared with more traditional donative organizations and with other forms of hybrid organization, in particular firms that pursue corporate social responsibility policies. The measurement function can serve as the basis for designing a new social enterprise legal form and subsidy policy to promote development.

Lloyd Mayer

Foohey: "Perspectives on Religious Organizations' Reorganizations"

Pamela Foohey (Illinois) has posted Perspectives on Religious Organizations' Reorganizations, to be published in the American Bankruptcy Law Journal.  Here is the abstract:

This Article, written in conjunction with the Empirical Studies in Bankruptcy panel hosted by the Section on Creditors’ and Debtors’ Rights at the AALS’ 2014 Annual Meeting, combines an analysis of documents submitted in connection with Chapter 11 cases filed by religious organizations with the results of in-depth interviews with these organizations’ leaders and their bankruptcy attorneys to assess whether reorganization has the potential to offer an effective solution to these debtors’ financial distress. The data indicate that Chapter 11 oftentimes can be beneficial for religious organizations. For instance, over 60% of the Chapter 11 cases discussed by attorneys ended productively in that the debtor confirmed a reorganization plan or entered into an agreement with its creditors that allowed the congregation to continue operating post-bankruptcy. Based on attorneys’ experiences, in the future, focusing on organizational structure, cash collateral, and sources of revenue may enhance the efficiency and effectiveness of these reorganizations.

The interviews also call attention to two aspects of these bankruptcies that were less obvious from an examination of court records alone. First, a subset of religious organizations may more likely to file under Chapter 11: smaller congregationalist and nondenominational Christian churches with a predominately minority membership base. Second, these churches’ secured creditors may negotiate in ways that lead these churches to turn to bankruptcy. Further research regarding the denominational and demographic skew of religious organization debtors and the role of secured creditors in funding religious organizations will help to refine our understanding of these institutions’ financial distress.

Lloyd Mayer

Kearns: "For Treasury Charity Starts at Home"

Deborah Kearns (Albany) has posted For Treasury Charity Starts at Home: Treasury's New Interpretation of the Fiduciary Income Tax Charitable Deduction, which the Virginia Tax Review just published.  Here is the abstract:

This Article challenges Treasury’s recent regulations narrowly interpreting the fiduciary income tax charitable deduction under IRC § 642(c). Treasury’s new interpretation highlights a fundamental tension in the federal tax system, which involves identifying transactions that are abusive versus transactions that take advantage of congressionally sanctioned tax incentives that were designed to further important public policies like charitable giving. For almost forty years, IRC § 642(c) had been liberally construed by Treasury, which was consistent with the legislative history and principles of statutory construction traditionally applicable to charitable deductions. Treasury’s new restriction on income ordering rules in charitable trusts overrides the legal norms historically applicable to charitable deductions and is contrary to the legislative history, case law interpreting charitable deductions and Subchapter J of the Internal Revenue Code. If left unchallenged, this new interpretation has the potential to erode congressionally sanctioned tax incentives, charitable and otherwise, which is cause for great concern. This Article examines the history of charitable deductions in the United States and the case law that has liberally construed the deductions for almost a century. The Article also examines the statutory framework of Subchapter J of the Internal Revenue Code and concludes that Treasury’s justification for its new interpretation of the deduction is without merit and that the regulations should be invalidated if challenged.

Lloyd Mayer

Nonprofit and Voluntary Sector Quarterly April 2014 Issue

Here is the table of contents for the just published April 2014 issue of the Nonprofit and Voluntary Sector Quarterly:

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

    Articles

• Kevin F. Forbes and Ernest M. Zampelli, Volunteerism: The Influences of Social, Religious, and Human Capital

• Nevbahar Ertas, Public Service Motivation Theory and Voluntary Organizations: Do Government Employees Volunteer More?

• Kelly LeRoux and Kelly Krawczyk, Can Nonprofit Organizations Increase Voter Turnout? Findings From an Agency-Based Voter Mobilization Experiment

• Bram Verschuere and Joris De Corte, The Impact of Public Resource Dependence on the Autonomy of NPOs in Their Strategic Decision Making

• Hyo Jung Kim, Hyun Jee Oh, and Esther Thorson, Embedding a Social Cause in News Features: The Effects of Corporate Sponsorship and Localization on Audience’s Attitudes Toward Nonprofit Coverage

• Thomas Longoria, Jr., Predicting Use and Solicitation of Payments in Lieu of Taxes

• Russell N. James III and Michael W. O’Boyle, Charitable Estate Planning as Visualized Autobiography: An fMRI Study of Its Neural Correlates

• Walter J. Mayer, Hui-chen Wang, Jared F. Egginton, and Hannah S. Flint, The Impact of Revenue Diversification on Expected Revenue and Volatility for Nonprofit Organizations

• Sangmi Choi, Learning Orientation and Market Orientation as Catalysts for Innovation in Nonprofit Organizations

     Book Reviews

• Jennifer Amanda Jones, Book Review: Measuring the Networked Nonprofit, by B. Kanter & K. Paine

• Howard Lune, Book Review: Charity Case: How the Nonprofit Community Can Stand Up for Itself and Really Change the World, by D. Pallotta

• Michael Hammer and Chao Guo, Book Review: The State of the Nonprofit Sector, 2nd ed, by L. Salamon

• Wolfgang Bielefeld, Book Review: Players in the Public Policy Process: Nonprofits as Social Capital and Agents (2nd ed), by H. J. Bryce

Lloyd Mayer

Yockey: "Does Social Enterprise Law Matter?"

Joseph Yockey (Iowa) has posted Does Social Enterprise Law Matter?, which will be published in the Alabama Law Review.  Here is the abstract:

Social enterprise laws are sweeping through the nation. Entrepreneurs can now organize under one of several new legal forms, including the “benefit corporation” form. In theory, these options will make it easier for socially minded firms to pursue a double bottom line of profit and public benefit — that is, to do well while doing good.

This Article tests that theory. In asking whether social enterprise laws matter, I find that the answer is “yes,” but not for the reasons most people think. The standard rationale for social enterprise laws is that they free managers from the “duty” to put profits ahead of social objectives. But that idea misses the point; existing corporate law is already flexible enough to permit most social/economic tradeoffs. Instead, I argue that social enterprise laws add value by creating a new institutional structure that will motivate the development of self-regulatory standards and provide a helpful coordinating mechanism for legal advisors and pro-social investors. The Article thus offers a unique way of thinking about social enterprise laws. Rather than simply provide new off-the-rack legal forms, these laws encourage a process of norm creation and private engagement that ought to drive the social enterprise movement forward. I conclude by offering firms and lawmakers several strategies to reinforce this dynamic.

Lloyd Mayer

The Rise of NGOs in China

The Economist earlier this month commented on the growth of non-governmental organizations (NGOs) in China ("Enter the Chinese NGO").  It estimates that there are approximately 2 million NGOs currently operating in China, about three-quarters of which are not officially registered, with many more likely to form in the near future.  The communist party's plan appears to be to try to keep them small and local, and therefore presumably not a challenge to the party's authority or power.  In a relatd, more detailed article ("Beneath the Glacier"), the Economist explores the reasons for the growth in Chinese NGOs and the wary response of the government to them (UPDATE: and quotes our blog's own Karla Simon).

Lloyd Mayer

Questions Raised About the Bernie Mac Foundation

Another day, another apparently badly run celebrity foundation.  The Chicago Tribune reported earlier this month that the Bernie Mac Foundation, established by the comedy star before his death to help fellow sufferers of sarcoidosis, has directed only 13 percent of its spending to charitable programs from 2007 through 2012.  A large portion of the funds appears to have gone to firms associated with the lawyer who is the Foundation's Treasurer, as well as for salaries paid to the two sisters of Bernie Mac's widow, who serves as the volunteer President of the Foundation.  While the Foundation's board originally had a number of unrelated members, specifically four doctors, they left the board shortly after Bernie Mac's death in 2008.

Lloyd Mayer

Treasury Issues Updated Priority Guidance Plan

Earlier this week the Treasury Department released its Third Quarter Update for the 2013-2014 Priority Guidance Plan.  Here are the items listed in the Exempt Organizations section:

1. Revenue Procedures updating grantor and contributor reliance criteria under §§170 and 509.
2. Revenue Procedure to update Revenue Procedure 2011-33 for EO Select Check.
3. Guidance under §501(c)(4) relating to measurement of an organization's primary activity and whether it is operated primarily for the promotion of social welfare, including guidance relating to political campaign intervention.  PUBLISHED 11/29/13 in FR as REG-134417-13 (NPRM).
4. Final regulations under §§501(r) and 6033 on additional requirements for charitable hospitals as added by §9007 of the ACA. Proposed regulations were published on June 26, 2012 and April 5, 2013.
5. Additional guidance on §509(a)(3) supporting organizations (SOs).  PUBLISHED 01/06/14 in IRB 2014-2 as NOT. 2014-4 (RELEASED 12/23/13).
6. Guidance under §4941 regarding a private foundation's investment in a partnership in which disqualified persons are also partners.
7. Final regulations under §4944 on program-related investments. Proposed regulations were published on April 19, 2012.
8. Guidance regarding the new excise taxes on donor advised funds and fund management as added by §1231 of the Pension Protection Act of 2006.
9. Regulations under §§6011 and 6071 regarding the return and filing requirements for the §4959 excise tax for community health needs assessments failures by charitable hospitals as added by §9007 of the ACA.  PUBLISHED 08/15/13 in FR as TD 9629 (FINAL and TEMP).
10. Guidance under §6033 on returns of exempt organizations.  PUBLISHED 01/13/14 in IRB 2014-3 as REV. PROC. 2014-11 (RELEASED 01/02/14).
11. Final regulations under §6104(c). Proposed regulations were published on March 15, 2011.
12. Final regulations under §7611 relating to church tax inquiries and examinations. Proposed regulations were published on August 5, 2009.
13. Notice under §501(r) containing a proposed revenue procedure that provides correction and disclosure procedures under which certain failures to meet the requirements of §501(r) will be excused for purposes of §501(r)(1) and 501(r)(2)(B).  PUBLISHED 01/13/14 in IRB 2014-3 as NOT. 2014-2 (RELEASED 12/30/13).
14. Notice under §501(r) confirming that tax-exempt hospital organizations can rely on proposed regulations under § 501(r) published on June 26, 2012, and April 5, 2013, pending the publication of final regulations or other applicable guidance.  PUBLISHED 01/13/14 in IRB 2014-3 as NOT. 2014-3 (RELEASED 12/30/13).
15. Revenue Procedure revoking Revenue Procedure 79–6 (which provided for the use of certain United States Department of Labor forms in place of certain portions of the Form 990) because it is no longer consistent with Form 990 filing requirements.  PUBLISHED 03/10/14 in IRB 2014-11 as REV. PROC. 2014-22.

Items 13 to 15 are identified as "additional projects" that did not appear in the initial plan issued last August, and item 15 is new to this update.

Lloyd Mayer

New York Appeals Court Rejection of Salary Cap for Nonprofit Contractors

According to an Associated Press report, the New York Attorney General's Office intends to appeal a decision by a New York trial court that the $199,000 salary cap imposed by executives at nonprofit contractors with the Health Department by executive order exceeded the Governor's authority.  Further coverage of the court decision in Agencies for Children's Therapy Services v. New York Dept. of Health can be found at the New York Nonoprofit Press.  That article notes that another trial court ruled in favor of New York and upheld the salary cap, so the matter will ultimately need to be resolved by a higher court.  It also notes that the salary cap also applies to nonprofits that contract with 12 other agencies.

Lloyd Mayer

American Academy of Arts and Sciences Self-Reports Excess Benefit Transaction after Internal Investigation

Those of you in the Boston area are probably aware of the simmering controversy regarding the allegation of unreasonable compensation paid to, and the allegedly embellished academic credentialsl of Leslie Berlowitz, former President of the American Academy of Arts and Sciences.  This Boston Globe story triggered an avalanche of consequences, including separate investigations by the Academy (the Report of which blames the President, but not the Board), the Massachusettes AG, the National Endowment for the Arts Humanities, the National Science Foundation, and ultlimately the President's resignation.  After the President's resignation, the Academy amended its 990's to report excess benefit transactions primarily because of the finding that the President exerted improper influence on the Academy's compensation committee and that the President caused the Board not to follow the 4958 safe harbor procedures that would have protected the organization from an allegation that it engaged in an excess benefit transaction.  The Report presents a nice case study for the nonprofit governance, determining reasonable compensation under IRC 4958, and the application of IRC 4958 as it relates to an insider's -- or a disqualified person's -- compensation.  You can read many of the source documents, including the Board's mea culpa to its Fellows, and the former President's response to the report, via this Boston Globe link.  The Boston Globe limits visitors to ten free articles so you can also access the full report here.

The other thing that seems apparent from the report is that you are more likely to be found to have engaged in an excess benefit transaction, or some other conduct frowned upon in the Code if you are just a plain old meanie!  

dkj

Haim Sandberg: From JNF to Viva Palestina -- UK Policy Towards Zionist and Palestinian Charities

From SSRN . . .

The classification of a charity's object as "political" and the legal attitude towards political activities of charities and NGOs may be tinged with political bias. The article aims to show how such a bias had and still have an influence on the legal attitude towards the objects of Zionist NGOs, on the one hand, and Pro-Palestinian NGOs, on the other. The article indicates that there is an historical link between legal positions adopted by UK regulatory authorities and judges towards the political nature of Zionist or Palestinian NGOs' objects and the respective degree of political support or reservation regarding Zionist or Palestinian national ambitions. It emphasizes the rather unknown but yet significant Zionist-Palestinian perspective of the traditional antipathy towards NGOs' political objects.

dkj

Arjya Majumdar: Zakat, Dana and Corporate Social Responsibility

From SSRN . . .

 

The tradition of giving finds itself in every religious text across the world. There seem to be few other principles which are so globally accepted. Whether it is the Zakat, the Islamic practice of giving and consequent self-purification, or the Dāna, the practice of giving in both Hinduism and Buddhism, the concept of gratuitous transfer of wealth to the less privileged strikes a common chord between the three most popular religions in Asia.

This paper seeks to first identify the traditions relating to charity within religious texts such as the Hadith, the Manusmriti and the Tipataka. In the absence of institutions, including the concept of the corporation, during the time when such religious texts were envisaged, the directions mandating charity are by default, applicable to individuals. This paper goes on to examine the creation of the modern-day corporation through the lens of independent corporate personality as well as a nexus of contracts.

Arguing further that -- in the absence of a large number of shareholders, Asian corporations tend to be family and individual driven -- such families and individuals may have a propensity to inculcate their individual traditions into inanimate and juristic bodies such as the corporations they run and control. As a result, this paper finally considers whether the tradition of giving, as mandated by religion may be a significant factor to boost Corporate Social Responsibility. While most Asian countries have some form of voluntary guidelines on corporate social responsibility, mandatory laws relating to CSR have been passed in Indonesia and India. A recent report even suggests that Asian consumers would be willing to spend more on products manufactured by socially responsible companies. This paper posits that a tradition of giving, spurred by religious mandate, does make CSR far more relevant in Asia.

dkj

Crowdfunding for Nonprofits: Solicitation or Matchmaking?

“Crowdfunding” appears to be all the rage.  Investopedia defines crowdfunding on the most basic level as the “use of small amounts of capital from a large number of individuals to finance a new business venture.”    In the earliest days, crowdfunding was basically a plea for money – see the artistic ventures funded primarily through Kickstarter.    The problem with that model, of course, is that one could not get equity in return for your contribution – after all, that starts to look an awful lot like a securities offering, and the SEC has issues with that.    The Jumpstart Our Business Startups (or, pithily, JOBS) Act of 2012 was designed in part to loosen the securities regulations on small business, so that there will be greater flexibility in the ability to offer equity in return for contributions through crowdfunding (or at least there will be when the SEC gets around to issuing regulations on the matter.)  

So what about nonprofits?  A recent article in TechCrunch, cited by the Chronicle of Philanthropy, notes the website Crowdrise recently received $24.0 million in financing.

Crowdrise.com (note: it’s a for-profit site) allows you to “create a fundraiser” for your event.  It appears that it isn’t limited to charities, although the site links to Guidestar.org in order to filter the bona fide Section 501(c)(3)s from the merely well-intentioned.   There seems to be a lot of fundraising teams for fun runs and the like, as well as fundraisers for sick individuals and medical expenses.  Some of these might qualify for a Section 170 deduction if given directly to the organization; other, such as the fundraisers for medical expenses, wouldn’t qualify for a deduction, no matter how well intentioned.    Crowdrise does state:

Your donation to a US-Based 501(c)3 charitable organization through CrowdRise is 100% tax deductible to the extent allowed by law. We will email you a receipt that meets all IRS requirements for a record of your donation.  If you are asked to provide a paper receipt for IRS purposes, please print out a copy of your email receipt. If you lose your receipt, email quintas@crowdrise.com and we'll send you a duplicate. Be sure to include your first and last name and the email address you used to make the donation. Donations to indviduals [sic] are not tax-deductible.

Crowdrise receives a transaction fee for each contribution made, which varies depending on the manner in which the transaction is consummated.

From a regulatory stand point, should we worry about this?  In the for-profit world, we have the SEC and its state law counterparts.  The IRS won’t (and shouldn’t) get involved, it seems to me, unless we are worried about charitable deduction issues.   That being said, is this high tech direct mail, and should it be regulated as such?  Take, for example, the Illinois Solicitation for Charity Act, which defines a professional fund raiser as one who receives “compensation or other consideration… on behalf of a charitable organization residing within this State for the purposes of soliciting, receiving or collecting contributions…”

Or is Crowdrise just an intermediary – it makes no legal representations that what is does is charitable or tax-deductible, necessarily.  I’d be curious to know how state regulators are approaching sites like Crowdrise from a solicitation regulation stand point, and how the Charleston principles would apply to such a website?

EWW

 

Massachusettes AG Sues Former Nonprofit President for Excessive Compensation; President and Board Should Expect Deficiency Notice Soon

In a complaint that should serve (unfortunately) as an excellent teaching prop for those of you teaching the tax law of exempt organizations, the Massachusettes Attorney General accused the former president of Falmouth College of engaging in acts that at the federal level can only be described as violative of the prohibitions against private inurement and excess benefits.  Acording to the Boston Globe:

Attorney General Martha Coakley sued the former president of a tiny Falmouth college on Tuesday, seeking to force him to repay the school millions that he allegedly squandered on excessive compensation, Mercedes automobiles, and a quarter-million-dollar timeshare in the Caribbean.In the lawsuit, filed in Suffolk Superior Court, Coakley also charged that President Robert J. Gee gave himself a $152,175 bonus in 2009, and then created false documents to make it appear that the school’s board members held a meeting to award Gee the money for his “superior job performance.’’ No such meeting ever occurred, according to the lawsuit.  During Gee’s tenure, the college he headed, the National Graduate School of Quality Management, bought an ocean-view compound with four houses that included a presidential home for Gee. Last year, the school sold those properties at a loss of at least $1.5 million.

As with campaign intervention, private inurement and excess benefit at this level is so obvious as to lack instructional value.  The complaint is useful to demonstrate the role of local AG's in regulating nonprofits.  And their is also a useful practical lesson.  In my experience, one of the enduring truisms of nonprofit governance is that the founder can never, ever, ever be trusted years down the road when his or her zeal for whatever mission provoked the nonprofit's founding has worn off but the nonprofit is still bringing in serious revenue.  It is a recipe for disaster and almost always leads to the founder treating the organization as his own private sugar daddy.  And the board members, probably all the President's golfing buddies, better get set for the notices that derive from IRC 4958. 

dkj

 

Campaign Intervention Results in Revocation

The Patrick Henry Center, a (c)(3) with no apparent raison d'etre other than campaign intervention,  has lost its tax exempt status because of, well . . . campaign intervention.  The USA Today reported the story last Friday.  The heavily redacted Final Determination is available here.  You have to step pretty far beyond the line for the Service to take the trouble to revoke exempt status.  This case is no exception to that rule.

dkj

Draft Form 1023-EZ (streamlined 501(c)(3) application)

An observant attorney noticed that Treasury and the IRS have submitted a short version of IRS Form 1023, the Application for Recognition of Exemption Under IRC § 501(c)(3), for review by the Office of Management and Budget under the Paperwork Reduction Act.  The Form 1023-EZ would be a streamlined, two-page form that the IRS estimates approximately 17 percent of applicants could use instead of the current, much longer Form 1023 (see the supporting statement filed with OMB).  The draft instructions for the new form state that the form would only be available to organizations that expect to be relatively small financially (no more than $200,000 in annual gross receipts and no more than $500,000 in total assets) and are not churches, schools, hospitals, supporting organizations, or a number of other rarer types of 501(c)(3) groups.  This would appear to make the form available only for small organizations that do not qualify by virtue of their activities as public charities, that is small organizations that are either private foundations or publicly supported.

Interestingly, the National Taxpayer Advocate in her 2007 Annual Report to Congress (see item 6 on page II-3 of the Executive Summary) recommended a separate Form 1023-EZ for use by smaller organizations.  The recommendation, however, would have only made the shorter form available to non-private foundations with annual gross receipts not normally more than $25,000.  (See Volume I, Section Two, page 535 of the full report.)

Hat Tip:  Charles ("Chip") Watkins

Lloyd Mayer