Nonprofit Law Prof Blog

The Economic Value of College Education by Major

If I were King of the world, I would allow for only a few majors at the undergraduate level.  Literature, Languages, History, Mathematics, Science, Art and Philosophy.  I would forbid students from majoring in jobs or careers.  On the other hand, I have a daughter going into her junior year in college and three more in line and they all need to get jobs to support me and my old bones one day.  Georgetown University's Center on College and the Workforce has an informative study out this month quantifying the economic value of a college education by major.   I intend to send this to all four of my daughters phones because they won't hear me unless they get it by text or snapchat or whatever other social media is out these days.   

 

 

Nonprofits Gain Access to Two New Unique Domains in the US and Abroad

        Public Interest Registry (PIR), administrator of the .org top-level domain, has launched two new domains that nonprofits all over the world may use: .ngo and .ong. This development is directly on target with creating more transparency and accountability for nonprofits as discussed earlier this week. Purchasers of the domains become members of PIR’s online directory, OnGood. As members, they may elect to set up profile pages and accept online donations. A Nonprofit Quarterly article discusses four reasons why nonprofits should consider registering with the new domains. Overall, this may serve as an important step toward making measurements of social impact more accessible to donors.

Khrista Johnson

White House Briefing Memos re: Exempt Orgs and Charitable Contributions

I think I would have been a much better and more engaged tax student back at UF if the internet had been around back then.  Sheeesh, I feel old as old dirt!  Anyway, the Washington Post has a story today about the Clinton Foundation, basically suggesting that former Secretary of State Hillary Clinton sold the influence of her office in exchange for large contributions to the Clinton Foundation.  The whole thing might well amount to something later on but if the accusation is that donors gave big money to the Clinton Foundation with specific hopes of currying favor or influencing State Department policies, I am fairly agnostic about it. . . "nonplussed" I guess.  Maybe I should be more concerned.  But judging by the absence of comments to the story, I think I am not unlike most people.  I read all the way to the bottom of the article anyway where I found this link to some interesting briefing memos prepared for Hillary Clinton when she was first lady.  The memos talk about proposals to reduce the private foundation excise tax, increase the charitable contribution limit, and Paul Newman's lobbying efforts with regard to his feeder organization (Newman's Own).  They brief the first lady on the policy pros and cons, and distributional effects, of changing those provisions within the context of the Taxpayer Relief Act of 199.  I like to see (and show my students) behind the scenes or inner workings of legislative proposals.  Today's students really have no reason to ever have a boring day in any tax class if you ask me.  

dkj

Californians Argue Over the Meaning of "Community Benefit"

According to this Fresno Bee article, The California Nurses Association (CNA) is up in arms regarding the extent to which California nonprofit hospitals generate community benefit.  CNA argues that federal law (see IRC 501(r)) does not sufficiently hold nonprofit hospitals' feet to the fire when it comes to proving their entitlement to tax exemption.  The article provides a link to a recently defeated bill (SB346) in the California legislature that would have strictly defined "community benefit."  The bill will be reintroduced, apparently, in the next legislative session.  Here is a summary of what the bill would require:

Existing law makes certain findings and declarations regarding the social obligation of private nonprofit hospitals to provide community benefits in the public interest, and requires these hospitals, among other responsibilities, to adopt and update a community benefits plan for providing community benefits either alone, in conjunction with other health care providers, or through other organizational arrangements. Existing law requires each private nonprofit hospital, as defined, to complete a community needs assessment, as defined, and to thereafter update the community needs assessment at least once every 3 years. Existing law also requires the hospital to file a report on its community benefits plan and the activities undertaken to address community needs with the Office of Statewide Health Planning and Development. Existing law requires the statewide office to make the plans available to the public. Existing law requires that each hospital include in its community benefits plan measurable objectives and specific benefits.

This bill would declare the necessity of establishing uniform standards for reporting the amount of charity care and community benefits a facility provides to ensure that private nonprofit hospitals and nonprofit multispecialty clinics actually meet the social obligations for which they receive favorable tax treatment, among other findings and declarations.

This bill would require a private nonprofit hospital and nonprofit multispecialty clinic, as defined, to provide community benefits to the public by allocating a specified percentage of the economic value of community benefits to charity health care, as defined, and community building activities, as specified. The bill would, by January 1, 2018, require a private nonprofit hospital or nonprofit multispecialty clinic to develop, in collaboration with the community benefits planning committee, as established, a community health needs assessment that evaluates the health needs and resources of the community. The bill would also require these entities, prior to completing the needs assessment, to develop a community benefits statement and a description of the process for approval of the community benefits plan by the hospital’s or clinic’s governing board, as specified. The bill would authorize the hospital or clinic to create a community benefits advisory committee for the purpose of soliciting community input. This bill would require the hospital or clinic to make available to the public a copy of the assessment, file the assessment with the Office of Statewide Health Planning and Development, and update the assessment at least every 3 years.

This bill would also require a private nonprofit hospital and nonprofit multispecialty clinic, by April 1, 2018, to develop a community benefits plan that includes a summary of the needs assessment and a statement of the community health care needs that will be addressed by the plan, and list the services, as provided, that the hospital or clinic intends to provide in the following year to address community health needs identified in the community health needs assessments. The bill would require the hospital or clinic to make its community health needs assessment and community benefits plan or community health plan available to the public on its Internet Web site and would require that a copy of the assessment and plan be given free of charge to any person upon request.

This bill would require a private nonprofit hospital or nonprofit multispecialty clinic, after April 1, 2018, every 2 years to annually submit a community benefits plan to the Office of Statewide Health Planning and Development, as specified, and would allow a hospital or clinic under the common control of a single corporation or other entity to file a consolidated plan, as provided. The bill would require that the governing board of each hospital or clinic adopt the community benefits plan and make it available to the public, as specified.

dkj

Charities Cashing in as Venture Capitalists?

        Continuing from yesterday’s post, it looks like donors are not the only ones looking for a return on their investment. Private foundations are acting more like venture capitalists these days. Today Fortune featured an article on the ability of foundations to make grants to start-up ventures that the IRS treats as regular charitable gifts in terms of tax treatment. Several of these transactions are occurring in the medical research area. What are the foundations receiving in return? According to the article, “the foundations typically take an equity stake, claim the rights to a portion of the company’s future sales, or require a payment when a drug achieves a clinical milestone.” Some nonprofits have actually earned returns totaling millions of dollars.

Khrista Johnson

The FIFA Indictments

I have been thinking about the impact of yesterday's indictment of numerous FIFA officials on the various organizations' tax statuses, both here in the United States and abroad -- particularly under the tax laws of Switzerland.  The FIFA matter would make for good class discussion, I think.  According to a DOJ Press Release issued this morning:

A 47-count indictment was unsealed early this morning in federal court in Brooklyn, New York, charging 14 defendants with racketeering, wire fraud and money laundering conspiracies, among other offenses, in connection with the defendants’ participation in a 24-year scheme to enrich themselves through the corruption of international soccer.  The guilty pleas of four individual defendants and two corporate defendants were also unsealed today.

The defendants charged in the indictment include high-ranking officials of the Fédération Internationale de Football Association (FIFA), the organization responsible for the regulation and promotion of soccer worldwide, as well as leading officials of other soccer governing bodies that operate under the FIFA umbrella.  Jeffrey Webb and Jack Warner – the current and former presidents of CONCACAF, the continental confederation under FIFA headquartered in the United States – are among the soccer officials charged with racketeering and bribery offenses.  The defendants also include U.S. and South American sports marketing executives who are alleged to have systematically paid and agreed to pay well over $150 million in bribes and kickbacks to obtain lucrative media and marketing rights to international soccer tournaments.

I did some preliminary checking and learned that FIFA is a complicated Swiss based international charitable organization comprising several other national and international nonprofit and tax exempt organizations, including the U.S. Soccer Foundation.  It seems rather axiomatic that when executives -- insiders and disqualified persons, likely -- use the organization's venue selection and contracting processes to extract bribes, kickbacks, and other illicit payments from third parties, the organization is being operated for private benefit.  I wonder, though, about the extent to which an umbrella organization's misdeeds can cause legal issues for one or more of its member organizations, such as the U.S. Soccer Foundation.  And even if the bribes and kickbacks constitute or indicate private benefit, would the organizations subject to U.S. law be able to point to their other activities to support an argument that whatever private benefit existed was substantially outweighed by their good deeds and therefore not fatal to tax exemption?  Anyway, the whole topic, along with all the exhibits and so forth available online would make for good discussion fodder in a class or seminar dealing with tax exemption in the international arena.  The L.A. Times has some useful articles on the subject.  

dkj

 

Return on Portfolios: A Concern for Donors Today?

        I have blogged often about the rise of a donor base that demands results from the nonprofits. My theory is that an efficient charitable market, where investment ends up in the hands of those charities that will put it to its most productive use, is crucial. Of course that necessitates reform to our US cross-border giving laws so that donors truly may have the ability to weigh the social impact (or return) associated with US versus non-US charities before deciding where to give. This was the subject of two parts of a three part series I have written. An efficient charitable market also requires the charitable sector to learn from the impact investing sector in terms of measuring and reporting social impact, which is the topic of my forthcoming final article in the series.

        CNBC dealt with the donor dilemma of where to give effectively earlier this month. It announced that well-known think tank in the nonprofit arena, Milken Institute, has developed the Center for Strategic Philanthropy (CSP), which is designed to help donors make better giving choices. The main arm of the CSP is the Philanthropy Advisory Service. As Executive Director of the CSP, Melissa Stevens, commented, donors "are spending so much more time on their philanthropy because they want to do it well." The need for providing donors with concrete information about return on their investments is no secret to other competitors in the space such as Rockefeller Philanthropy Advisors, Pembroke and the Giving Pledge. With over $250 billion being given annually in the US, there is plenty of room for advising according to area of expertise. The CSP has already laid claim to the medical research area. According to Stevens, donors are focusing on “maximizing the social return on their philanthropic portfolios,” a phrase which necessitates the development of an efficient charitable market. 

Khrista Johnson

Waterhouse-Wilson on LLC's and the Excess Business Holdings Tax

Elaine Waterhouse-Wilson's recent article deals with the excess business holdings tax (IRC 4943) as it relates to ownerships in LLC's.  Here is the abstract:

How much should charity and business intersect? Recent trends point toward a growing entanglement between the for-profit and nonprofit sectors, as evidenced by the growth of the social enterprise movement. The issue of the entanglement of business and charity is, however, not new; it was one of the primary concerns behind the enactment of the private foundation excise taxes in 1969, including the excess business holding excise tax of Code Section 4943. While Code Section 4943 has changed little since its original enactment, the business and investment world has changed substantially, specifically including the introduction and growth of the LLC as a business entity. This Article looks at the current treatment of LLCs under Code Section 4943 and considers various options for incorporating LLCs into the statutory framework. It then evaluates these options in light of the original concerns about the interaction between business and charity voiced in the debate over the 1969 excise taxes and echoed today in the evaluation of social enterprise as a viable means of accomplishing charitable goals. The article concludes with a recommendation for change to Code Section 4943 that would incorporate LLCs specifically, provides administrative clarity, minimize the possibility of abuse, and allowing for modern investment practices and innovation.

dkj

The Russian NGO Law and "the logs in our own eyes"

Accepted wisdom, lore, or legend has it that LBJ, in the dead of night when nobody was paying attention, inserted the prohibition against campaign intervention because he was running for Senatorial reelection and he wanted to shut down opposition emanating from a Texas nonprofit.  If that is true, we probably should have spoken up earlier and not deemed that action a harmless imposition on civil liberties.  In the age of the GWOT, I admit that I sometimes shake my head at die hard civil libertarians who object to "every little" imposition on individual liberties undertaken for our own good, according to our government.  I appreciate those impositions whenever I get on a plane.  The danger is that when we get used to letting the little impositions go unchallenged, we are just asking for trouble at home or elsewhere, now or some time in the future.  One day we wake up and all the little rights we took for granted are gone . . . .  and by then its too late to say anything. I will resist the urge to quote Martin Niemoller here. 

The U.S. and the EU are up in arms, and rightly so, I'm sure, about amendments to a 2012 Russian law giving "the Kremlin" more authority to crack down on "illegal activity" by NGO's.  U.S. laws are not so draconian in their punishment of political activities by NGO's but I still wonder whether we ought to deal with "the log in our own eye" while we are condemning Russia's NGO law.   I am not sure the same - that they are not draconian -- can be said of U.S. laws relating to NGO's suspected of allowing the use of their assets in support of terrorism.  I have not read those provision in a while but I recall being troubled by the "before the facts are established" authority Executive Order 13224 gave the government; authority, it seemed to me, to just swoop in and shut a charity down under the umbrella of fighting terrorism.  Whatever process was allowed under that order and subsequent laws comes only after the fact and presumably without use of funds previously frozen.  When I read about the Russian NGO law this weekend and all the resulting criticism, I wondered about our own laws.  For their part, and quite predictably, the Russians are claiming that in their recently amended NGO law they are doing no more than what the U.S. and many other countries have done in their  treatment of political activity and terrorist support groups masquerading as tax exempt charities.    

On Saturday evening, Josef Stalin  Vladirmir Putin signed amendments to Russia's highly criticized NGO law.  Here is a little history from Human Rights Watch:

 In 2012 Russia’s parliament adopted a law that required nongovernmental organizations (NGO)s to register as "foreign agents" with the Ministry of Justice if they engage in “political activity” and receive foreign funding. The definition of “political activity” under the law is so broad and vague that it can extend to all aspects of advocacy and human rights work.  Initially, the law required all respective NGOs to request the Ministry to have them registered and implied legal consequences for failure to do so. Because in Russia “foreign agent” can be interpreted only as “spy” or “traitor,” there is little doubt that the law aims to demonize and marginalize independent advocacy groups. Russia’s vibrant human rights groups resolutely boycotted the law, calling it “unjust” and “slanderous.”  In early March 2013 the Russian government launched a nationwide campaign  of intrusive inspections of hundreds of NGOs to identify advocacy groups the government deems " foreign agents" and force them to register as such.  After the inspection wave, at least 55 groups received warnings not to violate the law and at least 20 groups received official notices of violation directly requiring them to register as “foreign agents.” Also, the prosecutor’s office and Ministry of Justice filed at least 12 administrative cases against NGOs for failure to abide by the “foreign agents” law and at least six administrative cases against NGO leaders. Additionally, the prosecutors brought civil law suits against six NGOs for failure to register under the law.  Since the law entered into force, numerous rights groups challenged the prosecutor’s office and the Ministry of Justice in courts; most lost their cases. As a result, by February 2015 at least 12 groups chose to shut down rather than wear the shameful “foreign agent” label, including Association of NGOs in Defense of Voters’ Rights “Golos”, JURIX (Lawyers for Constitutional Rights and Freedoms), the Moscow School of Civic Education (Moscow), Kostroma Center for Civic Initiatives Support, Anti-Discrimination Center (ADC) Memorial, Side by Side LGBT Film Festival, Coming Out, “Freedom of Information” Foundation, the League of Women Voters and Human Rights Resource Center (Saint-Petersburg), Center for Social Policy and Gender Studies and Association “Partnership for Development” (Saratov).

According to this news report, the latest amendments provide sweeping authority to the government to respond to "undesirable" NGO's engaging in vaguely defined activities, including prison sentences: 

Under the law signed by president Vladimir Putin on Saturday evening, Russian prosecutors will be able to target foreign groups whose "undesirable activities" are deemed to threaten "state security" or the "basic values of the Russian state".  Such groups and their publications risk being banned in Russia, having their bank accounts blocked and violators face fines or prison terms of up to six years.  People cooperating with such entities would also be hit with fines and could be banned from entering Russia, according to the text, which sailed through the two chambers of Russia's parliament.  Critics have said the vague wording of the legislation, and a process that bypasses the court system, means that any group or business could be targeted.

I am not defending the Russian actions.  I'm just wondering whether we have done all we should to make sure our own laws are not as reactionary. 

dkj

 

CA Donor Lists are a Do according to Justice Kennedy

        Earlier this month, we covered the 9th Circuit decision that denied the Center for Competitive Politics (CCP) an injunction that would have restricted California Attorney General Kamala Harris from requiring a list of donors who had contributed more than $5,000 in a year. See Lloyd Mayer's post.

        Under current California law, nonprofit groups seeking donations from California are required to disclose donor names to the AG and to the IRS. The CCP and America for Prosperity have refused to surrender these lists asserting that their donors would be harassed. Harris has indicated that the lists would be kept confidential and used only for investigatory purposes.

        As an update, the Supreme Court has denied an emergency appeal from the CCP. The CCP filed the appeal with Justice Kennedy, who denied it without prejudice. David Keating, President of the CCP, has stated that the center will continue injunction efforts in the event Harris attempts to collect donor information. Interesting, Justice Kennedy is a proponent of free speech and free spending in terms of politics, two aims the CCP promotes; however, he is also in favor of disclosure laws. This case raises important First Amendment questions for the sector.  See LA Times.

Khrista Johnson

FTC and All 50 States File 148 Page Complaint Alleging Massive Fraud by Cancer Charities, Collect More than $100 Million in Restitution

I have not yet even begun to read the alleged details yet, but two days ago the Federal Trade Commission and all 50 states of the Union plus the District of Columbia filed a nearly 150 page complaint against four cancer charities alleging fraud and what amounts to massive examples of private inurement and excess benefit transactions.  What interested me most in the complaint were allegations pertaining to defendants' failure to "observe rudimentary corporate governance practices" used apparently to bolster the allegations of private benefit that run throughout the complaint.  I am going to give it a more thorough read and talk more about that later.  From the Press Release: 

The Federal Trade Commission and 58 law enforcement partners from every state and the District of Columbia have charged four sham cancer charities and their operators  with bilking more than $187 million from consumers. The defendants told donors their money would help cancer patients, including children and women suffering from breast cancer, but the overwhelming majority of donations benefitted only the perpetrators, their families and friends, and fundraisers. This is one of the largest actions brought to date by enforcers against charity fraud.

Named in the federal court complaint are Cancer Fund of America, Inc. (CFA), Cancer Support Services Inc. (CSS), their president, James Reynolds, Sr., and their chief financial officer and CSS’s former president, Kyle Effler; Children’s Cancer Fund of America Inc. (CCFOA) and its president and executive director, Rose Perkins; and The Breast Cancer Society Inc. (BCS) and its executive director and former president, James Reynolds II.

CCFOA and Perkins, BCS, Reynolds II and Effler have agreed to settle the charges against them. Under the proposed settlement orders, Effler, Perkins and Reynolds II will be banned from fundraising, charity management, and oversight of charitable assets, and CCFOA and BCS will be dissolved.  Litigation will continue against CFA, CSS and James Reynolds Sr.

. . . . . .

According to the complaint, the defendants used telemarketing calls, direct mail, websites, and materials distributed by the Combined Federal Campaign, which raises money from federal employees for non-profit organizations, to portray themselves as legitimate charities with substantial programs that provided direct support to cancer patients in the United States, such as providing patients with pain medication, transportation to chemotherapy, and hospice care. In fact, the complaint alleges that these claims were deceptive and that the charities “operated as personal fiefdoms characterized by rampant nepotism, flagrant conflicts of interest, and excessive insider compensation, with none of the financial and governance controls that any bona fide charity would have adopted.”  According to the complaint, the defendants used the organizations for lucrative employment for family members and friends, and spent consumer donations on cars, trips, luxury cruises, college tuition, gym memberships, jet ski outings, sporting event and concert tickets, and dating site memberships. They hired professional fundraisers who often received 85 percent or more of every donation.  The complaint alleges that, to hide their high administrative and fundraising costs from donors and regulators, the defendants falsely inflated their revenues by reporting in publicly filed financial documents more than $223 million in donated “gifts in kind” which they claimed to distribute to international recipients. In fact, the defendants were merely pass-through agents for such goods. By reporting the inflated “gift in kind” donations, the defendants created the illusion that they were larger and more efficient with donors’ dollars than they actually were. Thirty-five states alleged that the defendants filed false and misleading financial statements with state charities regulators.  In addition, the FTC and 36 states charged CFA, CCFOA and BCS with providing professional fundraisers with deceptive fundraising materials. The FTC and the attorneys general also charged the defendants with violating the FTC’s Telemarketing Sales Rule (TSR), CFA, CCFOA and BCS with assisting and facilitating in TSR violations, and CSS with making deceptive charitable solicitations.

The Press Release contains links to the complaint the proposed final orders against two of the four malefactors as well as stipulated orders resulting in restitution in excess of $100,000,000. 

dkj

Bankruptcy Court Allows Sale of Part of "Property," Subject to Conservation Easement

In re Strieter, No. Chapter 11, 2015 BL 136480 (Bankr. E.D. Mich. May 11, 2015), involved a conservation easement encumbering the whole of Parcel A and half of Parcel B (collectively, the “Property”). A U.S. Bankruptcy Judge held that the conservation easement deed, which provided that “[a]ny division or subdivision of the Property is prohibited” did not prevent the debtor from selling Parcel B separately from Parcel A (i.e., it did not mean that the Property could have only one owner). The parties agreed, however, that Parcel B could not be sold free of the conservation easement because it perpetually runs with the land.

Background

Ms. Streiter (the debtor) owned a 96-acre farm in Ann Arbor Michigan. For more than 70 years, the land had been divided into two parcels: Parcel A was 56 acres and Parcel B was 40 acres and included the debtor’s home and various outbuildings. In 2003, Legacy Land Conservancy (LLC) paid the debtor $195,000 for a conservation easement that encumbered all of Parcel A and approximately half of Parcel B.

In 2014, the debtor filed for Chapter 11 bankruptcy. As part of her efforts to reorganize, the debtor sought the Bankruptcy Court’s approval to sell Parcel B. LLC objected to the sale, arguing that the provision in the easement deed providing that “[a]ny division or subdivision of the Property is prohibited” meant that ownership of the Property could not be divided. The debtor, on the other hand, argued that the words “division” and “subdivision” related strictly to the land and not to ownership. The Bankruptcy Court agreed with debtor.

Analysis

The Bankruptcy Court explained that Michigan courts interpret easements using contract law principles and, if a contract or provision is unambiguous, it must be enforced as written. The court determined that, “[r]ead as a whole, the conservation easement prohibited uses of the Property that impair or interfere with the land's conservation values.” There was no language, said the court, that even suggested the easement was intended to restrict the Property, in perpetuity, to a single owner. To the contrary, said the court, “the easement expressly acknowledged the debtor's retention of ‘all ownership rights . . . In particular . . . the right to sell, mortgage, bequeath or donate the Property.’”

The court noted that the purpose of the easement was not frustrated by multiple owners because the easement runs with the land and specifically binds all subsequent owners to the same extent as the debtor. Accordingly, the court found that the provision in the deed that it be "liberally construed in favor of maintaining the Conservation Values of the Property" did not change its analysis.

The court also explained:

• if the words "division" and "subdivision" were intended to restrict ownership, the easement should have expressly stated as much—Michigan strictly construes restrictions placed upon the alienation of property,
• since at least 2010, LLC's model conservation easement had been redrafted to expressly prohibit multiple owners,
• because LLC drafted the easement, even if the court were to find the provision ambiguous, it would be strictly construed against LLC,
• the proposed sale of Parcel B would do nothing to further divide or subdivide the Property, given that the two parcels had been divided for more than 70 years, and
• the easement could only reasonably be interpreted one way: to prohibit division or subdivision the Property into smaller parts (for development or sale, etc.).

The court concluded that the sale was permitted, and the purchaser took Parcel B subject to the conservation easement.

Nancy A. McLaughlin, Robert W. Swenson Professor of Law, University of Utah S.J. Quinney College of Law

Carter: Tipping the Scales in Favor of Charitable Bequests: A Critique

Elizabeth Carter (LSU) has published Tipping the Scales in Favor of Charitable Bequests: A Critique, 34 Pace Law Review 983 (2014).  Here is the abstract:

The public policy favoring testamentary bequests to charities is well established in the law. However, that public policy can, and does, conflict with other equally well-founded public policies. When confronted with this conflict, courts are often dismissive or even hostile towards the parties seeking to challenge a testamentary bequest to a charity. I argue that the policy favoring charitable giving has gone too far and has, in some instances, undermined other important public policies. Specifically, courts and legislators have strengthened the charitable bequest policy without giving enough consideration to other, equally important public policies. This problem is not new. History shows that similar policy conflicts have arisen periodically since late antiquity, if not earlier. The parameters of the problem, however, are somewhat new. The governing law, available technologies, and familial relationships have certainly evolved since the time of late antiquity. This article examines how the public policy favoring charitable bequests conflicts with various aspects of the equally important public policies of testamentary freedom and family protection.

Part II considers the competing public policies of testamentary freedom, family protection, and charitable bequests, as well as the existing legal doctrines aimed at furthering these policies. Part III examines the social and legal origins of charitable bequests and the periodic attempts to balance charitable bequests with other important policy considerations. Part IV examines the role of the non-profit sector in America today. Specifically, Part IV considers the size and scope of the nonprofit industry, the legal and economic benefits the nonprofit industry enjoys, and the manner in which nonprofits solicit charitable bequests. Part V illustrates how the current law fails to strike the appropriate balance between the competing policies, as the current law is too favorable to charities and reform is needed. Part VI concludes.

Hat Tip: TaxProf Blog.

Lloyd Mayer

Fei et al.: Are PILOTS Property Taxes for Nonprofits?

Fan Fei (Michigan Economics), James Hines Jr. (Michigan), and Jill Horwitz (UCLA) have posted Are PILOTs Property Taxes for Nonprofits?.  Here is the abstract:

Nonprofit charitable organizations are exempt from most taxes, including local property taxes, but U.S. cities and towns increasingly request that nonprofits make payments in lieu of taxes (known as PILOTs). Strictly speaking, PILOTs are voluntary, though nonprofits may feel pressure to make them, particularly in high-tax communities. Evidence from Massachusetts indicates that PILOT rates, measured as ratios of PILOTs to the value of local tax-exempt property, are higher in towns with higher property tax rates: a one percent higher property tax rate is associated with a 0.2 percent higher PILOT rate. PILOTs appear to discourage nonprofit activity: a one percent higher PILOT rate is associated with 0.8 percent reduced real property ownership by local nonprofits, 0.2 percent reduced total assets, and 0.2 percent lower revenues of local nonprofits. These patterns are consistent with voluntary PILOTs acting in a manner similar to low-rate, compulsory real estate taxes.

Lloyd Mayer

Foohey: Secured Credit in Religious Institutions' Reorganizations

Pamela Foohey (Indiana University Maurer School of Law) has published Secured Credit in Religious Institutions' Reorganizations, 2015 University of Illinois Law Review Slip Opinions 51.  Here is the abstract from the SSRN posting:

Scholars increasingly assume that most businesses enter Chapter 11 with a high percentage of secured debt, which leads to a high percentage of cases ending in the sale of the debtor’s assets under section 363 of the Bankruptcy Code rather than with confirmation of a reorganization plan. However, evidence and discussions about “the end of bankruptcy” center on secured creditors’ role in the reorganizations of very large corporations. The few analyses of cross-sections of Chapter 11 proceedings suggest that secured creditor control is not nearly as omnipresent as asserted and that 363 sales are not as dominant as assumed.

This Essay adds original empirical evidence to the debate by highlighting how one subset of debtors — religious organizations — whose main creditors typically are secured lenders have used the reorganization process. By focusing on 363 sales and other indices of creditor control, plan proposal and confirmation rates, recoveries to creditors, and post-bankruptcy survival rates, this Essay establishes that the traditional negotiated Chapter 11 case is alive and thriving among these debtors. The data suggest that these cases preserved significant value for secured creditors, while distributing value to unsecured creditors. The results show that further empirical examinations of secured creditors’ role in Chapter 11 cases may yield insights that diverge from current understandings of how creditor control impacts modern reorganization, and what that control means for reforms of Chapter 11.

Lloyd Mayer

Frye: Social Technology & the Origins of Popular Philanthropy

Brian Frye (Kentucky) has posted Social Technology & the Origins of Popular Philanthropy.  Here is the abstract:

The prevailing theory of charity law holds that the charitable contribution deduction is justified because it solves market and government failures in charitable goods by compensating for free riding on charitable contributions. This article argues that many market and government failures in charitable goods are actually caused by transaction costs, and that social technology can solve those market and government failures by reducing transaction costs. Specifically, it shows that in the early 20th century, the social technology of charity chain letters solved market and government failures in charitable contributions and facilitated the emergence of popular philanthropy.

Lloyd Mayer

Galle: Law and the Problem of Restricted-Spending Philanthropy

Brian Galle (Georgetown) has posted Pay It Forward? Law and the Problem of Restricted-Spending Philanthropy, 2016 Washington University Law Review (forthcoming).  Here is the abstract:

American foundations and other philanthropic giving entities hold about $1 trillion in investment assets, and that figure continues to grow every year. Even as urgent contemporary needs go unmet, philanthropic organizations spend only a tiny fraction of their wealth each year, mostly due to restrictive terms in contracts between donors and firms limiting the rate at which donations can be distributed. Law has played a critical role in underwriting and encouraging this build-up of philanthropic wealth. For instance, contributors can typically take a full tax deduction for the value of their contribution today, no matter when the foundation spends their money, and pay no tax on the investment earnings the organization reaps in the meantime. 

What, if anything, justifies public support for “restricted spending” charity? This Article offers the first comprehensive assessment of that question, and supplies original empirical evidence on several key aspects of it. I argue that restricted spending sacrifices crucial information, introduces unnecessary agency costs, and on average transfers funds to times when they are less useful. While there is a place for large and long-lived philanthropic organizations in American society, that role does not require public support for restricted spending. As long as foundations can demonstrate their value to new donors, they will continue to thrive. I therefore set out a series of policy recommendations aimed at better reconciling nonprofit law and the principles that justify it. 

I support my claims with new evidence drawn from a data set of over 200,000 firm-year observations of private foundations. For example, I find that foundations earn about twice as much money per year as in earlier studies funded by foundation-industry lobbyists, and that they are growing three times faster than those earlier studies suggest. This finding implies that law could require a much higher annual “payout” from foundations. I also find that new laws introduced in about a dozen states since 2006 have significantly slowed foundation spending in the enacting states. And I offer simulations of several policy proposals for making foundations more effective at fighting recessions.

Lloyd Mayer

Hackney: An Examination of the IRS Tea Party Affair

Philip Hackney (LSU) has posted Should the IRS Never 'Target' Taxpayers? An Examination of the IRS Tea Party Affair, 49 Valparaiso University Law Review (forthcoming 2015).  Here is the abstract:

In 2013, the Treasury Inspector General for Tax Administration faulted the Internal Revenue Service for the appearance of impartiality because it used names and policy positions such as “Tea Party” and conservative ideology to pick applications for tax-exempt status for greater scrutiny. The Inspector General's review came after members of Congress accused the Service of "targeting" conservative organizations. This Article finds the Inspector General's claim lacks a firm foundation. The use of names to select organizations for closer review fits well within the discretionary space that both Congress and courts provide to the Service to collect revenue. However, a narrower legal and ethical claim is supportable: where an enforcement choice impinges on a fundamental constitutional right the Service should exercise a higher degree of care to ensure that its screening choices do not appear biased in an unconstitutional manner. Thus, this review finds the Inspector General's primary claim regarding it being inappropriate to use names to screen applications to be incorrect. However, it finds that the Service violated an ethical norm because it failed to bring a high level of care to a matter that at least impinged on a fundamental Constitutional right. The Article recommends that the Service continue using names to screen applications for tax-exempt status. However, the Article suggests the Service implement procedures to document an unbiased process when evaluating applications that raise questions of a fundamental Constitutional nature.

Lloyd Mayer

Murray & Martin: The Blossoming of Public Benefit Institutions (Australia)

Ian Murray (University of Western Australia) and Fiona Martin (UNSW Australia Business School) have published The Blossoming of Public Benefit Institutions - From 'Direct' Provides to Global Networks, 40(1) Alternative Law Journal (2015).  Here is the abstract:

Public benevolent institutions (‘PBIs’) form a class of not-for-profit (‘NFP’) entities that is entitled to various taxation concessions. The PBI concept was originally adopted in order to deliver selected tax benefits to a narrower group of NFPs than charities, given the wide legal meaning of ‘charitable’. As well as being eligible for income tax exemption like charities, PBIs can be deductible gift recipients (‘DGR’), which means that donors may be able to claim a tax deduction, and are entitled to fringe benefits tax (‘FBT’) exemptions, enabling more attractive employee remuneration packages. For decades, the Australian Taxation Office (‘ATO’) has insisted that PBIs must not only have purposes focused, narrowly, on the relief of poverty, sickness, destitution or helplessness, but that they must also directly provide relief to those suffering from such poverty, sickness, destitution or helplessness. The recent Full Federal Court decision of Commissioner of Taxation v Hunger Project Australia (‘Hunger Project’) clearly states that there is no such ‘direct’ requirement. The development is relevant for a range of state and federal taxes and is expected to have a large impact on federal revenue. This is due to the fact that the primary tax concessions relating to PBIs, the FBT exemption and DGR status, are currently in excess of $2 billion. The ‘cost’ of those concessions will likely increase with the broadening of the classes of entities that fall into the PBI category.

Lloyd Mayer

Newman: Contributions to College Athletic Booster Clubs

Joel Newman (Wake Forest) has posted Contributions to College Athletic Booster Clubs, LEXIS Federal Tax Journal Quarterly (March 2015).  Here is the abstract:

Not all transfers of value to qualified charitable organizations are deductible. When you buy a book from the college bookstore, your payment is not a contribution; you got what you paid for. If you give $300 to your local public radio station, and they give you a tote bag, you’ve made a charitable contribution, but you have to subtract the value of the tote bag from your deductible amount.

What if you make a substantial payment — say $2,000 — to a major college’s athletic booster club, knowing that, by virtue of that payment, you gain the right to purchase otherwise unavailable tickets to that school’s football games? Surely, the entire $2,000 should not be deductible. The deduction should be $2,000 minus the fair market value of the rights obtained. Congress says that the deduction should be 80 percent of the contributed amount, or $1,600, no matter which booster club it is. Is that fair? This essay will describe how we got to that 80 percent, and what we might do about it. Specifically, the essay describes how the secondary ticket market brokers, such as StubHub and Ticketmaster, could be used to value the rights obtained.

Lloyd Mayer