Nonprofit Law Prof Blog

How (Not?) to Crowdfund?

If you are interested in the nuts & bolts of the art market, I recommend Tim Schneider's blog and newsletter The Gray Market, which offers remarkably astute insights on "the economics, technology, and business practices of the fine art market" on a weekly basis.

But while I admire Schneider's work, I don't necessarily agree with all of his observations. For example, his August 19, 2015 post titled "The Wisdom(?) of the Crowdfund" suggests that crowdfunding may be incompatibly with the art market because "fine art is largely, if not entirely, a niche medium rather than a mass one." Now, Schneider is absolutely correct to observe a tension between the traditional art market model of selling unique or "semi-unique" objects at high prices and the typical crowdfunding model of pre-selling an indefinite number of reproductions at relatively low prices. And yet, as Schneider himself concedes, many fine artists, especially those selling digital works, effectively engage in a form of "crowdfunding" by pre-selling their works to a small number of collectors, and selling associated works at lower price points.

I would observe that Schneider assumes a market based on scarcity. And that's understandable, considering that the art market has always depended on scarcity! Hence, its peculiar relationship to intellectual property, especially copyright. Unlike other works of authorship, the market value of an artwork typically inheres in the tangible (unique or "semi-unique") "copies," rather than in the intangible underlying work of authorship. As a result, artists and owners of artworks typically welcome the reproduction of their artworks without compensation, because publicity increases the value of the unique object.

But why assume that has to rely on scarcity, just because it did in the past? Especially when new forms of artwork, especially digital works, are not intrinsically scarce, and the artificial scarcity imposed by "editioning" and similar practices is of dubious credibility or effect? In other words, Schneider is correct that crowdfunding is a poor fit for the traditional art market, which relied on scarcity. And he is correct to observe that artists will have to rethink their business model in order to use crowdfunding effectively. But I don't see why artists ought to depend on scarcity, if it isn't credible or enforceable. There's a reason the market for digital editions is ... anemic.

Sure, artists are notoriously (and rather ironically) "small-c" conservative when it comes to business, and expect to do things the way they've always been done. But maybe crowdfunding could help encourage some artists to see new ways of framing their work and reaching audiences. In many ways, I think it already has. Art used to be about scarcity, but any economist will tell you that scarcity is the problem, not the solution. Or to put it another way, Walter Benjamin famously argued that the "aura" or social value of art depended on its scarcity, or "uniqueness." And it turned out he was dead wrong! Too bad for him (although no one seems to have noticed...), and bully for us.

Brian L. Frye

Deaccessioning & "Private Choice"?

The art world is notoriously (and controversially) posh and awash in money. Over the summer, several commentators opined on whether or not those remarkably high prices and levels of investment reflect a bubble about to burst. But one player in the art world isn't about money, at least in theory.

The social and institutional norms of the art world prohibit museums from selling or "deaccessioning" works of art, except in order to purchase more works of art. The deaccessioning policy of the Association of Art Museum Directors (AAMD) is representative. Essentially, the argument is that museums hold artworks in the "public trust" and therefore cannot treat them like commodities by selling them, except in order to purchase more and better art.

Of course, as Donn Zaretsky of The Art Law Blog has observed over and over again, deaccessioning norms are both harmful and incoherent. They are harmful because they prohibit museums from selling artworks, even if the alternative is bankruptcy. For example, the Corcoran recently sacrificed its independence, which it almost certainly could have preserved by selling a few artworks. Moreover, they prohibit the sale of artwork, irrespective of consequences. For example, the art world establishment angrily objected to the City of Detroit selling artworks in the Detroit Institute of Art, even if doing so would enable the city to make pensioners whole. Even if you believe that holding artworks in the "public trust" is public good, it's hard to see why it should trump other public goods.

But the most curious aspect of deaccessioning norms is their incoherence. As Zaretsky has memorably and humorously observed, artworks are apparently held in the "public trust" unless they are not. It makes no sense to insist that artworks cannot be sold for one purpose, but can be sold for another. As Zaretsky observes:

Look, there are two coherent positions on this whole issue.

One is the one O'Toole sketches out here: works of art should not be converted into cash. They are records of human creativity that are held in the public trust. To sell them is an ugly deed.

That's a coherent position. It needs, in my view, to reckon with the kinds of counterargument that Michael O'Hare, for example, makes against it here. But it's not an irrational stance to take.

The other coherent position is O'Hare's: yes, these are enormously valuable things, and generally worth holding onto, but sometimes, depending on the circumstances, the benefits of selling one may exceed the costs. You may not agree with it, you may make a different value judgment, but it's clearly not an irrational view.

But what's not a coherent position is the one the AAMD (and the rest of art world establishment) takes -- that works of art are records of human creativity held in the public trust and cannot be converted for cash, except when the museum wants to use the proceeds for one particular purpose (out of the hundreds of possible purposes), in which event they somehow cease to be held in the public trust and suddenly can be converted into cash without controversy.

Or, put even more simply (and to sum up thousands and thousands of words I've written on this issue at the blog): they're either held in the public trust or they're not.

And, as I've also argued repeatedly, the museums themselves, by their own actions (routinely selling off works from their collections), tell us the answer is they're not.

Interestingly, while Zaretsky is memorably (and unfailingly humorously!) critical of the value and coherence of deaccessioning norms, he refrains from opining as to their motivation. In my experience, when people get very upset about a practice, but cannot provide a coherent explanation of why they are upset, there is usually something unspoken or unrecognized motivating their objections.

As any economist knows, incentives matter. So what are the incentives for deaccessioning norms? The art market depends on scarcity. For most works of authorship, scarcity is ensured by copyright. But the art world is unusual in that the scarcity of artworks is ensured by the fact that they are unique or artificially limited objects. In other words, the value of artworks is maintained by the fact that there is a limited number of works on the market. At least in part because a vast number of artworks are in the collection of museums, which are largely prevented from selling those works by deaccessioning norms.

How do museums obtain those works? Often by donation, typically from the very people who buy and sell those works for profit. The people who donate works to museums have a vested interest in ensuring that donated works stay out of the market, in order to ensure scarcity. In other words, participants in the art market want to ensure that they can capture any capital gains, rather than museums. Which tracks nicely with deaccessioning norms. Museums cannot sell artworks in order to capture capital gains, unless they immediately plow that money back into the art market.

In other words, I suspect that public choice theory may provide a useful model for explaining why art world insiders defend deaccessioning norms so forcefully and uniformly. Or rather, given that art museums are typically private, charitable institutions, we ought to call this a form of "private choice" theory? Or maybe even something worth analyzing under antitrust principles?

Brian L. Frye

Kickstarter, Benefit Corporations & Charities

The last decade has seen a lot of interest in hybrid business/nonprofit organizational forms, of various kinds. In the early 2000s, an assortment of people began advocating the creation of such hybrid organizational forms, and in 2008, Vermont became the first state to create one, the "low-profit limited liability corporation" or "L3C." The new form immediately attracted the attention of nonprofit law scholars. For example, I found Dana Brakman Reiser's Charity Law's Essentials (2009) an excellent early attempt to understand the emerging organizational forms in relation to existing law.

Since then, 31 states have passed legislation authorizing the creation of various kinds of "benefit corporations," or hybrid business/nonprofit organizational forms. And more than 1000 organizations have adopted the form. The defining feature of a "benefit corporation" or "B corp" is that its corporate purposes include providing a social benefit of some kind. 

Some scholars and commentators have argued that B corps and other hybrid forms are pointless, because business corporations can also make providing a social benefit part of their social purpose. But the demand for the B corp form suggests that they are mistaken. Perhaps the B corp form is seen as providing more certainty that the organization will maintain its focus on providing a social benefit. In any case, I could not help noticing that the B corp form seems to revive many of the values expressed by the post-war managerialist theory of corporation law, which is now largely forgotten.

Today, corporation law scholars typically assume that shareholder wealth maximization is the primary purpose of a corporation, but managerialist theory held that corporate purposes could include a wide range of values. On this point, I recommend Harwell Wells's article 'Corporation Law is Dead': Heroic Managerialism, the Cold War, and the Puzzle of Corporation Law at the Height of the American Century. While some of the corporatist values have been revived by corporate social responsibility theories, the structural arguments implicit in the B corp movement are unique.

In any case, I can't help but wonder whether the demand for the B corp form suggests that the managerialist theory had a point. Perhaps some people creating and investing in corporations believe that incorporating social benefits into the mission of the corporation is a valuable option. Or to put it another way, perhaps some entrepreneurs and investors want the option to choose to be a little bit charitable.

So, I was pleasantly surprised to learn that Kickstarter just became a benefit corporation. I personally found this interesting because I have previously written about the curious way in which Kickstarter looks like both a business and a charity. But I was surprised by the decision, because in the past Kickstarter's founders have been so adamant that Kickstarter is not about charity, but entrepreneurialism. As I have observed, charity and entrepreneurialism are complements, not opposites. Perhaps this new move reflects a recognition that Kickstarter is all about enabling people to be more altruistic, and that crowdfunding is important because it has enables altruism by lowering transaction costs on giving.

Brian L. Frye

 

Brian L. Frye Signing On

Greetings, Nonprofit Law Prof Blog readers! This is Brian L. Frye, signing on as a new "contributing editor." I am an Assistant Professor of Law at the University of Kentucky College of Law, where I teach classes on nonprofit organizations and intellectual property, among other things. My scholarship focuses on how the law affects artists and arts organizations. Again, among other things. Accordingly, my posts this week, and later this semester, will address nonprofit law in relation to the arts. I look forward to hearing from you.

Boy, Treasury's Been Busy... Prop Regs under Section 170

In the third piece of guidance issued over the last seven days, the IRS issued proposed regulations under Section 170(f)(8) last week.  On September 17, 2015, the IRS issued a notice of proposed rulemaking regarding the donee reporting exception to the contemporaneous written acknowledgement requirements for charitable contributions.

Code Section 170(f)(8) requires a taxpayer claiming a Section 170 charitable contribution deduction in excess of $250 to substantiate the contribution by a contemporaneous written acknowledgement received from the charity, which must include certain designated information and be provided in a timely manner (a.k.a, contemporaneously!).   You all are familiar with the “thank you for your contribution – you have received no goods and services in consideration for your contribution” letter.   That letter is designed to be the “contemporaneous written acknowledgement” or “CWA” required to be sent by the charity and retained by the donor for purposes of Section 170(f)(8) substantiation.  

However, the statutory language of Section 170(f)(8) contains an exception to the general rule disallowing contributions that are not substantiated by a CWA.   Under Section 170(f)(8)(D), a donor’s deduction will not be disallowed if the charity files a return (on a form and in a manner set forth in Treasury Regulations) that includes the information otherwise required to be disclosed on the CWA.

Even though this statutory language exists,  the preamble indicates that the IRS purposely never issued regulations implementing the donee reporting provisions of Section 170(f)(8)(D).   The “goods and services” letter methodology was working out well enough, and there had been no outcry for charity reporting.  Apparently, the issue has arisen in a litigation context, however, with donors who had failed otherwise to use the CWA substantiation methodology trying to save their deductions with alternative documentation – specifically (according the preamble, anyway) by having the charity file an amended Form 990.   

In the proposed regulations, the IRS states that Form 990 disclosure is not adequate for a CWA substitute under Section 170(f)(3)(D).  Accordingly, the proposed form to be filed by the charity would set forth all of the information required on the CWA, the name and address of the charity, and the name, address, and tax ID of the donee.  The charity must send a copy of this new  form to the IRS and to the donor (unlike the CWA, which just goes to the donor).  In each case, must be provided by February 28^th of the year following the year of contribution - which is earlier than the CWA, which is generally due by April 15th of the following year (unless the donor files his or her tax return earlier).

It's not obvious to me when a charity would elect to do this in lieu of the existing CWA letter - did the IRS make it purposefully difficult so that no charity would  use it?    In each case, the charity still needs to mail something to the donor – in the donee reporting case, the charity must also send the form to the IRS and sent earlier than the due date of the Form 990, so there really isn't any cost savings.    As a practical matter, it seems to me that these regulations do very little other than place a road block in front of individuals trying to litigate their way around a substantiation foot fault.

If you are interested, comments are due by December 16, 2015.

EWW

Breaking News! Final Regs on Equivalency Determinations

Good morning all!   I just got an alert in my mailbox that Treasury has issued final regulations on equivalency determinations - you may all recall the proposed regulations that were issued in 2012.

I'm in the process of printing out the final regs and comparing them to the proposed regs, so I'll update the post later today.  Bloomberg BNA's blurb on it says that the final regulations "incorporate the thrust of" the 2012 rules.   I'll try to get some links up as soon as I can find them in a non-subscription database, although I know you can get them in both Bloomberg BNA and Tax Analyst already if you have access.     Citation is T.D. 9740, RIN 1545-BL23. 

EWW

 Update at 6:30 p.m., 9/23/2015

I've not gotten all the way through the final regs to give you all a complete summary, but I wanted to mention a few highlights from the preamble:

• It appears that the Regulations expand the definition of  "qualified tax practitioner" for purposes of who can make equivalency determinations that can be relied upon in good faith.
• The Regulations appear to scale back the ability of a charity to rely on a good faith affidavit as the sole means of making an equivalency determination.     Briefly, it appears that you can rely on the information in good faith, but there needs to be an additional showing that the evaluation of the data and the equivalency determination based on that data occurred in a manner that demonstrates a knowledge of US tax law.   In theory, anyway, there are more qualified tax practitioners (including folks that may be in house at the foundation) to help with such a determination, so it shouldn't (in theory again) be a significant bar to international grant making.
• Some clarification on how long you can rely on written advice, which looks like (a) so long as there is no change in the law or otherwise for most things, except (b) two years for public charity determinations based on financials.
• It looks like there may be limited opportunity to share equivalency determinations, but it can't be foundation to foundation - it may be that the first foundation has to authorize the release of that information to a second foundation from its qualified tax practitioner because only there would there be reasonable reliance.   So not quite the equivalency determination banking that the sector wanted, but it may be a step in that direction.   
• Looks like donor advised funds can use these rules, at least for now, for purposes of compliance with Section 4966(d)(4).

EWW

 

The IRS Says It's Okay To Be Charitable - Notice 2015-62

Last week, the IRS issued Notice 2015-62 discussing the tax treatment of an investment made for charitable purposes that does not otherwise qualify for status as a “program-related investment” under Code Section 4944(c).  If you are reading this blog, you probably know that Code Section 4944 imposes a prudent investor-type rule on private foundations by imposing an excise tax on investments that jeopardize a private foundation’s charitable purposes.  There is an exception to this general rule under Code Section 4944(c) for program-related investments (PRIs).   For an otherwise charitably-motivated investment to qualify as a program-related investment, however, no significant purpose of the investment can be the production of income or the appreciation of property (among other things...).  

The news is awash with discussions of socially-responsible investing, impact investing, mission-related investing and the like - however, none of these types of investing are tax concepts.   Rather, they are ways that a foundation (or other endowment-type entity) can approach investing in a manner that considers charitable outcomes.  Such categories of investments do not necessarily qualify as "program-related investments." Rather, PRIs are a thing, as my students would say - a specific term of art used in the tax code for which an investment must specifically qualify.   As indicated above, in order to qualify as a PRI, no significant purpose of the investment can be for the production of income or appreciation of property.   Of course, many investments view charitable outcomes as one of many bottom line results, along side of the potential for profit.   Such charitably-inclined investments may fall into one or more of the categories of social investing, but they are not PRIs.

Notice 2015-62 clarifies the manner in which the prudent investor standard of Code Section 4944 treats the accomplishment of charitable purposes as a relevant factor when evaluating an investment that is NOT a PRI.   For many years, there was some question as to whether fiduciary standards would allow a foundation to settle for a lesser yield in order to accomplish other charitable goals – for example, universities divesting in South Africa companies during the apartheid era, the Catholic Church not investing in contraception or land mine manufacturers, or affirmative investments in emerging green energy technologies. (For more discussion on this topic, see this very awesome article by the very awesome Susan Gary:   It is Prudent to Be Responsible?  The Legal Rules for Charities that Engage in Socially Responsible Investing and Mission Investing).   

With the adoption of UPMIFA in 2006 by NCCUSL and UPMIFA’s subsequent adoption in almost all jurisdictions (what's up with that, Pennsylvania?), it became clear that most jurisdictions would allow for the consideration of charitable goals as an appropriate factor in evaluating an investment, so long as the overall determination was reasonable.  Notice 2015-62 adopts a similar standard for Section 4944, stating that “foundation managers may consider all relevant facts and circumstances, including the relationship between a particular investment and the foundation’s charitable purpose.”  

This Notice is certainly good news for private foundations involved in socially-responsible, mission-related, or impact investing.  Of course, the Notice does not solve all of a private foundation’s worries in this area.  A private foundation must still comply with Code Section 4944’s overall requirement that foundation managers exercise ordinary business care and prudence in selecting investments.  For state law purposes, UPMIFA does not necessarily cover every type of charitable organization; therefore a foundation needs to determine whether or not a different state investment standard might apply.   And of course, for excise tax purposes, only a program-related investment will be treated as a qualifying distribution for purposes of Code Section 4942.    

EWW

 

8th Circuit Rules ACA Opt-Out Provision May Violate RFRA

As reported (slightly imprecisely from my legal perspective) in Reuters, the United States Court of Appeals for the 8^th Circuit, parting ways with other appellate courts deciding the issue, has issued two rulings lending support to the position that the Affordable Care Act (“ACA”) violates the rights of religiously affiliated employers by forcing them to take action that they sincerely believe would constitute complicity in the provision of contraceptive coverage, including abortifacients.  The cases are Dordt College v. Burwell and Sharpe Holdings, Inc. v. United States Department of Health and Human Services.  This post will highlight language from Sharpe Holdings.

 

As many readers are aware, regulations under the ACA require nonexempt employers to provide their employees with insurance coverage for FDA-approved contraception, which, as the United States Supreme Court has recognized, includes drugs that may prevent a fertilized egg from attaching to the uterus.  The same regulations permit certain religious organizations that object to providing such coverage to opt out of the coverage by filing a form with their third party administrators or by notifying the Department of Health and Human Services of their objection. In Sharpe Holdings, the plaintiffs argued that “both the contraceptive mandate and the accommodation process impose a substantial burden on their exercise of religion in violation of the Religious Freedom Restoration Act of 1993 (RFRA).”  More precisely, the plaintiffs ”contend that the government is coercing them to violate their religious beliefs by threatening to impose severe monetary penalties unless they either directly provide coverage for objectionable contraceptives through their group health plans or indirectly provide, trigger, and facilitate that objectionable coverage through the Form 700/HHS Notice accommodation process.”  Accordingly, they petitioned the district court to “enjoin enforcement of the contraceptive mandate and the accommodation regulations against them.” The district court granted the requested injunctive relief.

 

The United States Court of Appeals for the 8^th Circuit in Sharpe Holdings affirmed the district court’s order granting injunctive relief.   The appellate court concluded that the district court “did not abuse its discretion in finding that [two nonprofits] were substantially likely to succeed on the merits of their claim that the contraceptive mandate and the accommodation process substantially burden their exercise of religion in violation of RFRA and that the current accommodation process is not the least restrictive means of furthering the government’s interests.”

 

In accepting the plaintiffs’ argument that the ACA regulations substantially burdened their exercise of religion, the court relied heavily on the Supreme Court’s Hobby Lobby decision:

 

As Hobby Lobby instructs, however, we must accept CNS and HCC’s assertion that self-certification under the accommodation process—using either Form 700 or HHS Notice—would violate their sincerely held religious beliefs. See Hobby Lobby, 134 S. Ct. at 2778; see also Hernandez v. Comm’r, 490 U.S. 680, 699 (1989) (“It is not within the judicial ken to question the centrality of particular beliefs or practices to a faith, or the validity of particular litigants’ interpretations of those creeds.”). It is not our role to second-guess CNS and HCC’s honest assessment of a “difficult and important question of religion and moral philosophy, namely, the circumstances under which it is wrong for a person to perform an act that is innocent in itself but that has the effect of enabling or facilitating the commission of an immoral act by another.” Hobby Lobby, 134 S. Ct. at 2778. As discussed above, Form 700 or HHS Notice will inform CNS and HCC’s TPA of its obligations to facilitate contraceptive coverage for CNS and HCC’s employees and plan beneficiaries and thus will play a part in providing the objectionable contraceptives. As in Hobby Lobby, CNS and HCC sincerely believe that the actions “demanded by the . . . regulations [are] connected to” illicit conduct “in a way that is sufficient to make it immoral for them to” take those actions. Id. CNS and HCC have drawn a line between actions they find “to be consistent with [their] religious beliefs” and actions they consider “morally objectionable.” Id. (citing Thomas, 450 U.S. at 715). And it is not for us “‘to say that the line [they] drew was an unreasonable one.’” Id. (quoting Thomas, 450 U.S. at 715); see also Priests for Life, slip op. at 12 (Kavanaugh, J., dissenting from denial of rehearing en banc) (“Judicially second-guessing the correctness or reasonableness (as opposed to the sincerity) of plaintiffs’ religious beliefs is exactly what the Supreme Court in Hobby Lobby told us not to do.”).

 

In holding against the government on whether the ACA regulations are the least restrictive means for furthering a compelling government interest, the 8^th Circuit emphasized the government’s burden of proof on the issue, and found that it “has not shown that these [several possible] alternatives [discussed in the opinion] are infeasible.”

 

JRB

Carnegie Hall’s Board Chair Will Step Down

Today’s news cycle features developments in the dispute over the governance of Carnegie Hall.  According to the New York Times, Ronald Perelman, who just this year accepted his position as Chairman of Carnegie’s Board, told his fellow trustees at a meeting yesterday that he would leave the Chair role next month, rather than seek re-election. His announced departure is tied to his concerns that Carnegie Hall’s governance practices are legally suspect, and that these concerns have not been adequately addressed.  Says the Times:

 

The climax came on Thursday afternoon at a joint meeting of the board’s executive and audit committees, when Mr. Perelman told his fellow trustees that he believed some of the laws governing nonprofits were not being followed at Carnegie and expressed frustration that no investigation into his concerns had been initiated, according to someone familiar with the proceedings, who was granted anonymity to describe what happened at a confidential meeting.

 

Mr. Perelman criticized board members for placing “a premium on avoiding tension and disagreement,” the person said, and told them that while he would serve out his term, he would not run for re-election as chairman at the board meeting next month. The board then agreed to hire a lawyer to examine his concerns, which involved how Carnegie vetted what Mr. Perelman called “related-party transactions” in looking at deals that posed potential conflicts of interest.

 

The Times further reports that one member of Carnegie’s Board speculated that Mr. Perelman would not likely have been re-elected as Chair, and that “the trustees had felt blindsided this summer” when Mr. Perelman briefly suspended Carnegie’s executive and artistic director, Clive Gillinson.  The same board member reportedly voiced that the board did not share Perelman’s view that Carnegie had governance or transparency problems, but that the board would investigate the matters raised.

 

JRB

GAO Report on American Red Cross Released; Federal Legislation Proposed

NPR reports that the “American Red Cross is facing new criticism today as government investigators and a congressman call for independent oversight over the long-venerated charity.”  NPR explains that Representative Bennie Thompson has introduced a bill called the American Red Cross Sunshine Act on the heels of the release of a report by the United States Government Accountability Office (“GAO”) that examined the charity’s operations.  The GAO report, says NPR, “finds oversight of the charity lacking and recommends that Congress find a way to fill the gap.”

 

The “Conclusions” section of the GAO report states as follows:

 

The nation’s disaster response system relies to a significant extent on the nonprofit sector, which harnesses the public’s generosity to provide funding for disaster response and recovery efforts. This approach can support the nation’s efforts to assist disaster victims, but it also has limited accountability for disaster assistance. The Red Cross, the organization most responsible for providing shelter and other mass care services to disaster victims, exemplifies this tension. It has been designated by law as an instrumentality of the United States and has a critical, formalized role in coordinating and providing disaster response services across the nation. At the same time it remains a nonprofit organization that generally makes its own decisions about what services to provide. This reliance on an independent organization can be effective if government and the donating public have confidence that [the] Red Cross is providing the services that are most needed in an effective and efficient manner. Further, in disasters in which the federal government is involved, the extent and effectiveness of the Red Cross’s activities could have a direct impact on the nature and scope of the federal government’s activities.

 

With regard to oversight, while the Red Cross has some internal evaluation processes in place, such as after action reviews and surveys of state emergency managers and other stakeholders, Red Cross officials told us that the results of their internal evaluations are typically not made available to the general public. The absence of regular, external evaluations of its disaster services that are publicly disseminated could affect the confidence of both the donating public and the federal agencies that rely on the Red Cross. This is especially true in light of questions raised by the federal government and others in recent years about the organization’s performance in disasters. Given the Red Cross’s status as an instrumentality of the United States and the critical responsibilities assigned to it by its federal charter and by federal policies, the federal government has a clear stake and role in ensuring that proper oversight takes place.

 

In a section entitled “Matters for Congressional Consideration,” the GAO report further recommends legislative action:

 

To maintain governmental and public confidence in the Red Cross, Congress should consider establishing a federal mechanism for conducting regular, external, independent, and publicly disseminated evaluations of the Red Cross’s disaster assistance services in domestic disasters in which the federal government provides leadership or support. This mechanism might involve annual evaluations of whether the services achieved their objectives or of their impact on disaster victims. This evaluation could be performed, for example, by a federal agency such as DHS, by an IG office such as the DHS IG, or by a private research firm under contract to a federal agency.

 

The American Red Cross Sunshine Act, according to its preface, would “enhance oversight of the American National Red Cross by the Government Accountability Office and Inspectors General at the Departments of Homeland Security, Treasury, and State,” and would require the Department of Homeland Security to conduct a pilot program with the charity to research and develop mechanisms to improve the charity’s preparedness and response capabilities through social media.

 

Additional Coverage: The Chronicle of Philanthropy

 

 

JRB

Governance Concern at Carnegie Hall

The New York Times reports that the Chairman of the Board governing Carnegie Hall, Ronald Perelman, is calling out the nonprofit’s executive and artistic director, Clive Gillinson, for operating without adequate transparency, and fellow board members for failing to exercise proper oversight of the iconic nonprofit.  These details appear in the story:

 

Mr. Perelman wrote to the board that he had initially grown concerned over “an inability to obtain a full picture of Carnegie Hall’s financial operations, especially as it related to profits and losses involving performances,” according to a copy of the email obtained by The New York Times. He wrote that he had become “troubled by the manner in which related-party transactions” — essentially deals presenting potential conflicts of interest — “were being identified, vetted and approved.”

 

The story further reports that, according to Perelman, although “an agreement had been reached last month to hire an independent lawyer to investigate his concerns” about governance, no investigation has yet begun, and that Perelman “was calling a joint meeting of the board’s executive and audit committees” to handle the matter.

 

JRB

Latest Nonprofit Advocacy Matters

In the latest issue of Nonprofit Advocacy Matters, published electronically by the National Council of Nonprofits, two entries caught my eye.  In one, it is reported that the United States Department of Labor has received nearly 250,000 comments to its proposed amendments to overtime regulations issued under the Fair Labor Standards Act (FLSA). The proposal would, in part, increase the minimum salary level that employers must annually pay their administrative/executive/professional employees in order to exempt the employers from paying overtime wages to those employees; the proposal would raise that minimum from $23,660 to $50,400. Readers interested in reviewing the full text of the proposal, as well as comments to it, may link to this website.

 

Another item of note in the recent Nonprofit Advocacy Matters is a description of how the State of Indiana “is experimenting with the creation of nonprofits to enable government to secure greater returns on investments and to fund key programs.”  Under one new state law, cities can create and fund special foundations with the proceeds of government property sales.  The charities can then invest in corporate stocks more liberally than can most governmental bodies. Secondly, the state has founded a nonprofit organization to raise money “from private investors to pay for public health initiatives.”  Noting that Indiana is one of the states that devote the least resources to public health programs, the piece explains that lawmakers hope the newly minted nonprofit will help redress the situation.  

 

JRB

Nonprofit Hospital Exercising Rights to Religious Accommodation Threatened with Lawsuit

The Washington Post reports that, after Catholic hospital Genesys Regional Medical Center denied a request from Jessica Mann to perform a tubal ligation following the future delivery of her baby by Caesarean section, Mann “sent a letter through the American Civil Liberties Union threatening legal action.”  The hospital denied the request, reports the Post, because “Catholic mandates forbid procedures that cause sterilization … and officials said she did not qualify for an exception.”  

 

Fellow law professor Robin Wilson of Illinois is quoted as saying that “[f]ederal law provides an ‘iron-clad’ exemption for medical providers who do not want to provide abortion or sterilization services.”  Professor Wilson is further quoted as articulating a reason for the statutory accommodation:

 

Wilson said judges must tread especially carefully in situations such as Mann’s, which are not acute emergencies.

 

“If it’s not an emergency, why should you wash out the religious character of that hospital?” she said. “You want a diversity of providers so people who have different values can actually find providers who match those values.”

 

The post reports that ACLU officials “argue that the federal protections cited by Wilson do not apply in the Mann case.”  The grounds for the ACLU’s argument are not entirely clear from the Post’s coverage.

  

JRB

Scientology Accountant Calls for Removal of Key Leader

The Tampa Bay Times is running a story that may interest those familiar with the legal battles involving the Church of Scientology.  According to the story, certified public accountant and former church attorney James J. Jackson, still a Scientology adherent, is seeking to remove David Miscavige from his position as Chair of the governing board of the Religious Technology Center (“RTC”).  The RTC reportedly owns the intellectual property rights in Scientology's practices.  The article is interesting on multiple counts, including its discussion of Jackson’s representation of leading scientologists and its description of the reorganization that the church undertook in the 1980s and the institutional culture that developed after the death of founder L. Ron Hubbard.  As to the attempted ouster of Miscavige, the Times states as follows:

 

Like many critics, Jackson sees the church's leader as a dictator steering Scientology toward ruin. Allegations over the years that Miscavige mentally and physically abused church staffers continue to yield public scorn, even though repeatedly denied by the church. While other detractors have tried to pressure Miscavige in civil court and on the Internet, Jackson is pursuing a novel, perhaps quixotic strategy: He believes Miscavige can be toppled by insiders.

 

After studying corporate bylaws the church presented to the IRS to gain tax exempt status and hiring three non-Scientology lawyers who specialize in matters regarding religious organizations, he argues Scientology's nearly three dozen trustees, directors and officers have the power — whether they know it or not — to exercise oversight over the lucrative corporate enterprise.

 

They have a legal right and responsibility to investigate, or even remove, Miscavige, Jackson says.

 

But can they do their job? Or is Miscavige running everything, as defectors have alleged?

 

"Fights over control of the board, failing to follow bylaws, all this is proper subject matter for a California court," said Mark Cohen of Fremont, Calif., one of Jackson's lawyers.

 

The Times further reports that Jackson has appeared in a video in which he calls upon the two trustees of RTC (besides Miscavige) to remove Miscavige from office.  The piece also links to various items of correspondence relevant to the controversy.

 

 

JRB

Zelinsky: John Oliver, Televangelists, And The IRS

In addition to our previous post on fellow blogger Lloyd Hitoshi Mayer's opinion piece regarding John Oliver's segment on the tax exemption of churches, Edward Zelinsky (Cardozo) posted to the Oxford University Press Blog, John Oliver, Televangelists, and the Internal Revenue Service:

John Oliver’s sardonic spoof of televangelists raises important issues that deserve more than comic treatment. Oliver’s satire was aimed both at the televangelists themselves and at the IRS. In Oliver’s narrative, the IRS acquiesces to televangelists’ abuse by granting their churches tax-exempt status and failing to audit these churches. The law defines the term “church” vaguely. The IRS’s allegedly lackadaisical approach, Oliver tells us, permits televangelical preachers to live luxurious lives replete with private planes and tax-free cash, financed by naive and exploited believers.

An initial problem with this critique is that the IRS does not write the Internal Revenue Code. Congress writes the Code, and the American people elect Congress. As Peter Reilly of Forbes observes, in section 7611 of the Internal Revenue Code, Congress constrained the IRS’s ability to audit churches. Oliver criticizes the resulting low audit rate of churches without explaining who is responsible for this low audit rate—namely, Congress.

There are competing interpretations of section 7611. This provision of the Internal Revenue Code might be viewed as a plausible effort to minimize church-state entanglement by constraining the IRS’s ability to audit churches. Alternatively, Code section 7611 might be understood as Congress bending to political pressures from churches. Both narratives might contain part of the truth.

In any event, the low audit rate of churches, which Oliver blames on the IRS, is the responsibility of Congress. For better or worse, Congress has made it more difficult for the IRS to audit churches than to audit other persons and institutions in Code section 7611.

Another bête noire of Oliver’s critique is the private planes used by some televangelists. However, a minister’s personal use of a church-owned plane is taxable income to him, just as a corporate executive’s personal use of a company plane is taxable income to him.

More generally, churches pay more taxes than many people believe (including, apparently, John Oliver). For example, ministers pay self-employment taxes while churches pay FICA taxes on the salaries of their nonclerical employees. In many states, churches are subject to the sales tax, either as buyers or sellers and sometimes in both capacities.

Churches do not pay federal and state income taxes on their basic operations. However, neither do other nonprofit organizations such as colleges, universities, hospitals, and private foundations. It would be interesting for Oliver to compare the lifestyles of the individuals who lead these tax-exempt institutions with the life-styles of the church leaders of whom Oliver is so critical.

Interestingly, one phenomenon which troubles Oliver—small donors sending cash contributions to televangelical churches—is not problematic from a tax perspective. Oliver obviously disapproves of these donors and their responsiveness to televangelists’ appeals. However, small donors’ contributions are typically not tax deductible. Contributions to churches and other charitable institutions are deductible by the taxpayer only if the taxpayer itemizes personal deductions on his Form 1040. This occurs only among more affluent donors whose deductible outlays exceed their standard deduction for income tax purposes.

For 2015, a single taxpayer’s standard deduction is $6,300, while the standard deduction for a married couple filing jointly is $12,600. Thus, the modest donations cited by Oliver, while large relative to the donors’ low incomes, are generally not tax deductible because donors with limited incomes typically do not contribute enough to itemize their deductions. The real beneficiaries of the Internal Revenue Code’s charitable deduction are upper-middle class and wealthy taxpayers. These affluent taxpayers typically do not contribute to churches, but to such secular entities as universities and museums.

 Finally, the legal issue of defining a church involves serious trade-offs that Oliver does not explore. Again, Congress, not the IRS, writes the tax law. Congress could, through the Internal Revenue Code, define “church” more restrictively to crack down on the kind of arrangements Oliver satirizes. However, a narrower definition of a “church” could also be used against nonconformist and unconventional religions—which, at times in our country’s history, would have included abolitionist churches, the Catholic Church, the Church of Latter Day Saints, and other now mainstream organizations. For that reason, as a society, we generally seek to minimize church-state entanglement, even though the resulting zone of religious autonomy can be exploited by the kind of ministers Oliver skewers.

Since at least Sinclair Lewis’s Elmer Gantry, evangelical preachers have been subject to the kind of criticism Oliver advances. The IRS, particularly in its handling of exempt organizations, is in many ways a troubled and poorly-managed agency. If we categorize Oliver’s skit as mere entertainment, it was, well, entertaining. However, Oliver evidently seeks to place himself in another tradition of American life, the tradition of Mark Twain, Ambrose Bierce, Will Rogers, and Mort Sahl. These humorists participated in important political discussions through their comedic commentary.

By the demanding standards of this tradition, Oliver’s satire of televangelists falls short.

[Hat tip:  TaxProf Blog] 

Nicholas Mirkay

Mayer on Churches and Taxes

Fellow blogger Lloyd Hitoshi Mayer, Professor of Law at the University of Notre Dame School of Law, has posted an interesting, brief opinion piece, What John Oliver Got Wrong (and Right) About Churches and Taxes, on America: The National Catholic Review.  He begins with the following:

 

One of the reasons I like “Last Week Tonight with John Oliver” is that it usually gets its law right. I was therefore looking forward to its piece on churches, especially since I had talked on background with Oliver’s staff and so knew it was coming. The piece was as funny as I expected, but unfortunately it also struck a few false legal notes that are worth clarifying.

 

Mayer critiques various aspects of the popular HBO show’s segment on churches, including its failure “to mention the long history of tax benefits for churches of all faiths,” but focuses on Oliver’s never having answered the question of why tax laws treat certain televangelists (the apparent object of Oliver’s scrutiny) “the same as other churches.”  Says Mayer:

 

The answer is simple and yet is never mentioned in his piece—the Constitution’s Establishment Clause.

 

The First Amendment states “Congress shall make no law respecting an establishment of religion . . . .” This means neither Congress nor the IRS can choose among theologies.  That is why the IRS has no choice but to recognize as religious any group that sincerely holds its beliefs and does not engage in illegal activities. Oliver sharply criticizes this standard, but what is the alternative? Do we want Congress or, horrors, IRS agents picking and choosing which theologies are “correct” and which are not? ….

 

This sincerely held belief standard is also not meaningless. With all due respect to Oliver’s attorney, his newly founded “church”—Our Lady of Perpetual Exemption—almost certainly would not survive IRS scrutiny. No one watching the piece could believe that there is a sincere religious belief at its heart, much less at the heart of its purported congregation of audience members. The IRS will probably leave it alone because ultimately any donations it receives will go to a bona fide charity (Doctors Without Borders).

 

Mayer concludes with the following words:

 

None of this is to defend the “prosperity Gospel” or the excesses of the televangelists that Oliver criticizes. But the government cannot and should not choose among theologies or treat churches differently because their members sincerely hold beliefs that are out of the mainstream or even ridiculous in the eyes of many. It is instead up to you and me and, yes, John Oliver to his credit, to bring the beliefs and practices of these ministries into the light so the harm they cause can be clearly seen by those who otherwise might be lured into giving to them.

 

JRB

Marshall Posts Paper on Charitable Choice

William P. Marshall, the William Rand Kenan, Jr. Distinguished Professor of Law at the University of North Carolina School of Law, has posted  Remembering the Values of Separatism and State Funding of Religious Organizations (Charitable Choice): To Aid is Not Necessarily to Protect on SSRN.  Here is the abstract:

 

When we are thinking about whether we have moved beyond separatism, the non-constitutional implications of this observation are worth considering. Does the current turn in constitutional law towards a more deferential approach to aid to religion programs mean that the policy arguments against such programs also should be discounted? Or should we remember the values of separatism in making legislative choices? This essay concludes that the values of separatism should continue to inform legislative judgment. To aid religion is not always to protect it, and the protection of religion and religious freedom fostered by separatism should not be forgotten even as the constitutional barriers to state aid to religion continue to subside.

Part I of this essay introduces this topic by discussing the values of separatism in their relation to current legislative attempts to provide state monies to religious institutions that offer social services -- legislative initiatives that popularly have been entitled “charitable choice.” Part II canvasses the constitutional background surrounding charitable choice and concludes that such programs would likely be found constitutional. Accordingly, the question of whether such programs should be adopted is more a matter of legislative choice than of constitutional mandate. Part III then addresses the legislative calculus. It begins by discussing why support for aid to religious programs is popular in the current political climate. The essay suggests that much of the political impetus behind such programs stems from the belief shared by many of defenders of religion that excluding religious institutions from the class of potential government beneficiaries reflects an anti-religious animus that warrants correction. The section contends, however, that this perception that anti-aid equates to anti-religion is misguided. The separationist objections to charitable choice noted in Part I demonstrate that the anti-aid position may be based on pro-religion values. Aid to religion does not always benefit religion. Remembering the values of separatism means understanding that government support of religion may harm, as well as assist, the religious mission.

 

 JRB

Cheever and McLaughlin Post Paper on Conservation Easements

Federico Cheever, Professor of Law and Director of the Environmental and Natural Resources Program, University of Denver Sturm College of Law, and Nancy A. McLaughlin, Robert W. Swenson Professor of Law, University of Utah S.J. Quinney College of Law, have posted An Introduction to Conservation Easements in the United States: A Simple Concept and a Complicated Mosaic of Law on SSRN.  Here is the abstract:

 

The idea of a conservation easement – restrictions on the development and use of land designed to protect the land’s conservation or historic values – can be relatively easily understood. More significant and more challenging is the complex body of state and federal laws that shapes the creation, funding, tax treatment, enforcement, modification, and termination of conservation easements. 

The explosion in the number of conservation easements over the past four decades has made them one of the most popular land protection mechanisms in the United States. The National Conservation Easement Database estimates that the total number of acres encumbered by conservation easements exceeds 40 million.

Because conservation easements are both novel and ubiquitous, understanding how they actual[ly] work is essential for practicing lawyers, policymakers, land trust professionals, and students of conservation. This article provides a “quick tour” through some of the most important aspects of the developing mosaic of conservation easement law. It gives the reader a sense of the complex inter-jurisdictional dynamics that shape conservation transactions and disputes about conservation easements. 

Professors of property law, environmental law, tax law, and environmental studies who wish to cover conservation easements in the context of a more general course can use the article to provide their students with a broad but comprehensive overview of the relevant legal and policy issues.

 

 JRB

Further Hospital Consolidation in Wake of ACA?

The Boston Globe reports that “Beth Israel Deaconess Medical Center and Lahey Health are negotiating a possible merger that would create a large health system to compete with the dominant Partners HealthCare.”  The article describes Beth Israel Deaconess as “a large academic medical center affiliated with Harvard Medical School that has built its network by acquiring hospitals in Milton, Needham, and Plymouth,” and Lahey Health as a hospital system including “Lahey Hospital and Medical Center in Burlington, a teaching hospital affiliated with Tufts University School of Medicine … and community hospitals in Beverly, Gloucester, and Winchester.”

 

Legal considerations bear upon both the impetus for hospital consolidations and their consummation.  The article explains as follows:

 

Hospital mergers in Massachusetts are reviewed by the Health Policy Commission, a state agency, which cannot block deals but can refer them to the attorney general.

 

The rekindling of merger talks shows the urgency both sides feel to grow to compete with Partners, the state’s biggest and richest health system. And in today’s shifting health care industry, many executives say a larger network of hospitals, doctors, and services is needed to successfully compete.

 

Hospital consolidation has accelerated around the country in recent years, spurred in part by the federal Affordable Care Act.

 

The law encourages providers to adopt new payment systems that reward them for keeping patients healthy, rather than rewarding doctors and hospitals for every patient visit, service, and procedure.

 

The article notes that the merger talks are in the “early stages” and that on two previous occasions Lahey and Beth Israel Deaconess attempted but failed to negotiate a merger to completion.

  

JRB

Judge Rules IRS Has Not Yet Established Reasonableness, Nor Has Plaintiff Yet Established Unreasonableness, of IRS Records Search in FOIA Dispute

United States District Judge Landya McCafferty of the District of New Hampshire has issued an order allowing a private citizens group to proceed in its Freedom of Information Act suit against the Internal Revenue Service.  The order sets forth the posture of the case, the gist of which appears in the following excerpts:

                     

In May of 2013, the Internal Revenue Service (“IRS”) became embroiled in a “targeting” scandal after it admitted that it had singled out politically conservative organizations by delaying and more closely scrutinizing their applications for tax-exempt status. In the wake of the scandal, Citizens for a Strong New Hampshire, Inc. (“Citizens”) filed a records request with the IRS pursuant to the Freedom of Information Act, 5 U.S.C. § 552 (“FOIA”). The request sought disclosure of correspondence between two New Hampshire politicians and certain high-ranking IRS officials. Now, Citizens has brought this lawsuit, accusing the IRS of conducting an inadequate search, unreasonably delaying its disclosure, and unlawfully withholding responsive documents.  Both parties have filed motions seeking summary judgment. …

 

The Complaint suggests that the targeting by the IRS of conservative organizations was spurred, in part, by Democrats in Congress. For example, in 2012, New Hampshire Senator Jeanne Shaheen was among several Democratic senators to co-sign a letter to the commissioner of the IRS, urging the IRS to investigate tax-exempt organizations that might be abusing their exempt status by engaging in partisan political activity. In June of 2014, Citizens made a FOIA request to the IRS, seeking “[a]ny and all documents or records of email or correspondence to or from New Hampshire Senator [] Jeanne Shaheen and Congresswoman Carol Shea-Porter [] to or from [three high-ranking IRS officials] between the dates of January 1, 2009 and May 21, 2013.” See FOIA Request (doc. no. 1-1). One of the three named IRS officials was Lois Lerner who, at the time, served as the Director of the Exempt Organizations Unit, which oversaw applications for tax exemption. …

 

Citizens alleges that the correspondence that it sought would have been of interest to voters in advance of the 2014 election. Citizens has brought a claim against the IRS for violation of FOIA, alleging that the IRS: (1) conducted an inadequate search; (2) unduly delayed its disclosure such that Citizens could not disseminate the results of the search to voters in advance of the 2014 national election; and (3) unlawfully withheld the 51 pages of responsive but purportedly exempt documents. Citizens seeks an order requiring the IRS to disclose the remaining 51 pages, a declaratory judgment that the IRS violated FOIA, as well as an award of fees and costs. The IRS denies the allegations and argues that it is entitled to judgment as a matter of law. Both parties now seek summary judgment. [footnotes omitted]

 

Having conducted an in camera review of the documents that the IRS claimed were exempt from disclosure, Judge McCafferty concluded that the IRS properly withheld 51 pages of materials (the general nature of which she summarizes in the order). More interestingly, Judge McCafferty denied both parties’ motions for summary judgment on the reasonableness of the IRS’s records search.  On the latter denials, Judge McCafferty summarized her findings as follows:

 

Put simply, there exist genuine issues of material fact as to whether the IRS conducted an adequate search, and the record does not entitle either party to summary judgment on this issue.

 

What does the order mean for the litigation?  Judge McCafferty explains as follows:

 

[N]either party is entitled to summary judgment on the issue of the sufficiency of the search, leaving the potential for a most unusual occurrence: a FOIA trial. See Margaret B. Kwoka, The Freedom of Information Act Trial, 61 Am. U. L. Rev. 217, 257-58 (2011) (calculating that, between 1979 and 2008, less than 1% of FOIA cases went to trial, and further observing that “[i]n recent years, it is fair to say there have been essentially no FOIA trials”). The court will schedule a conference with the parties in order to discuss next steps. The parties should be prepared to discuss, among other topics, the scope and logistics of a trial, the need for discovery, and the prospects of settlement.

 

Other Coverage: Tax Notes Today (Electronic Cite: 2015 TNT 170-3).

 

JRB