Nonprofit Law Prof Blog

Adena, Alizade, Bohner, Harke & Mesters on Quality Certifications for Nonprofits

Maja Adena, Jeyhun Alizade, Frauke Bohner, Julian Harke and Fabio Mesters have posted Quality Certifications for Nonprofits, Charitable Giving, and Donor's Trust: Experimental Evidence on SSRN with the following abstract:

In an experiment, we test the impact of quality certificates on donations to a charity. When presented with a quality certificate, participants chose higher donations by approximately 10%. This effect is significant for donations out of prize money and actual own money donations, and not significant but positive for own money intended donations. Moreover, this effect persists over time. We also find a negative but not significant effect of information about certificate fees. We find that the certificate increases trust in the nonprofit organization. There is some evidence pointing to the causal role of trust for donation probability.

-- Eric C. Chaffee

Wei on Nonprofit CEO Power

Qian Wei has posted CEO Power and Nonprofit Performance: Evidence from Chinese Philanthropic Foundations on SSRN with the following abstract:

CEO power and its implications have been largely neglected in research on nonprofit governance. This lack of attention is surprising considering the crucial role of CEOs and the importance of power analysis in understanding governance. This paper is an initial attempt to address this gap by developing a two-dimensional framework for conceptualizing CEOs structural power and strategic power in nonprofits and proposing several indicators to operationalize these two kinds of power. Drawing data from an original survey on 163 CEOs of Chinese foundations, this study is among the first to specifically assess how much power a CEO has and the relationship between a CEO’s power and nonprofit effectiveness. My findings suggest that CEOs structural power is positively associated with private donations while strategic power has a negative impact on nonprofits’ social performance.

-- Eric C. Chaffee

Alfieri on Anti-Poverty Campaigns

Anthony Victor Alfieri has posted Inner-City Anti-Poverty Campaigns on SSRN with the following abstract:

This Article offers a defense of outsider, legal-political intervention and community triage in inner-city anti-poverty campaigns under circumstances of widespread urban social disorganization, public and private sector neglect, and nonprofit resource scarcity. In mounting this defense, the Article revisits the roles of lawyers, nonprofit legal services organizations, and university-housed law school clinics in contemporary anti-poverty, civil rights, and social justice movements, in part by chronicling the emergence of a faith-based municipal equity movement in Miami, Florida. The Article proceeds in four parts. Part I introduces the notion of community triage as a means of addressing the impoverished and segregated aftermath of urban development in a cluster of postindustrial inner cities. Part II examines the First Wave of antipoverty campaigns launched by pioneering legal services and public interest lawyers and their evolving community triage models. Part III surveys the Second Wave of anti-poverty campaigns pressed by more client- and community-centered legal services and public interest lawyers and their alternative community triage paradigms. Part IV appraises the Third Wave of anti-poverty campaigns kindled by a new generation of legal services and public interest lawyers and their site-specific community triage approaches in the fields of community economic development, environmental justice, low-wage labor, immigration, and municipal equity in order to discern legal-political lessons of inner-city advocacy and organizing. Taken together, the four parts forge a larger legal-political vision imagined and reimagined daily by a new generation of social movement activists and scholars — a renewed vision of theory-driven, clinical practice tied to empirical research and experiential reflection about law and lawyers in action.

-- Eric C. Chaffee

Aprill: Section 501(C)(3) Organizations, Single Member Limited Liability Companies, and Fiduciary Duties

Ellen Aprill has posted her forthcoming article entitled "Section 501(C)(3) Organizations, Single Member Limited Liability Companies, and Fiduciary Duties" to SSRN. Here is the abstract:

Tax-exempt organizations, including section 501(c)(3) organizations and their philanthrocapitalists, use single member limited liability companies (SMLLCs) for a variety of purposes. Exempt section 501(c)(3) nonprofit organizations (which, for convenience, I will refer to as charities) that have a number of facilities, be they schools, hospitals, or real estate investments, may form a separate SMLLC for each of them, primarily to protect other assets from liability. Charities may wish to place activities with a high risk of tort liability, such as an overnight summer camp, in its own SMLCC. SMLLCs may be used to isolate unrelated business activities from related activities. They may be used to isolate risky investments from more conservative ones. Philanthrocapitalists may structure donations through SMLLCs. They may use them to control aspects of the tax exempt entity’s activities, as according to press reports, the Koch Brothers may do with some of their noncharitable tax-exempt entities.

A SMLLC leads a schizophrenic existence. An entity under state law, it is disregarded for most purposes under federal tax law. Furthermore, the leading theoretical approaches to LLCs and to nonprofit organizations stand in sharp contrast to each other regarding reliance on contract. These very different sets of applicable laws and theory allow for regulatory arbitrage, which involves takes advantage of inconsistencies between the applicable rules.

The potential for regulatory arbitrage is especially acute in connection with governance issues that arise when charities employ SMLLCs. On one hand, the extent to which an entity’s governing body has responsibility to manage an entity, including a SMLLC, and what fiduciary duties members of the governing body of the SMLCC owe to the entity, are assigned to state law, and some state laws permit LLCs to reduce or eliminate fiduciary duties of care and loyalty. In contrast, state law does not permit elimination of fiduciaries duties for charities. Moreover, charities are subject to federal tax as well as state entity law. Under federal tax rules, charities must serve a public purpose, and federal tax laws themselves apply requirements regarding self-dealing. In addition, the IRS has shown particular interest in the governance of tax-exempt organizations more generally.

This paper examines possible tensions between governance and fiduciary duties of the charity and of its SMLCC. It concludes that waiver of fiduciary duties is not appropriate for SMLLCs of charities, even if such waiver is permitted under state law. In the case of SMLLCs of charities, moreover, the issues related to fiduciary duties have important consequences for the tax law. The paper thus argues that, as it has in analogous situations, the IRS should issue guidance ensuring that the governing body of a section 501(c)(3) has control of all aspects of its activities, including those conducted by any SMLLC. This guidance should be explicit as to what control of a SMLCC entails. While the recommendation made is a specific one, it underscores the importance of adhering to the special rules to which nonprofit tax-exempt charities are subject in order for these entities to fulfill their particular role they have been assigned in our society.

 

Michigan Supreme Court: Personal Property Tax Exemption Applies Regardless of Nonprofit Status

On May 1, the Michigan Supreme Court ruled for-profit college Sanford-Brown College Grand Rapids was not required to pay property taxes on its personal property.  Two Michigan statutes exempt property owned by charitable and educational institutions from taxation. Section 211.7n exempts real property owned by "nonprofit theater, library, educational, or scientific institutions," while section 211.9(1)(a) exempts personal property owned by "charitable, educational, and scientific institutions." Note that the word nonprofit is missing from the latter section. (It is unclear whether this omission was intentional or not.)

The Michigan Supreme Court unanimously ruled that the language in section 211.9(1)(a) was "unambiguous. This statute allows the exemption of personal property from taxes imposed on institutions that are educational in nature. Conspicuously absent from the statute is any language indicating that the tax exemption applies only to nonprofit entities." The College's obligations to pay real property taxes were unaffected by the ruling, but now the College shares the same personal property tax exemptions as any charitable or nonprofit educational institution in the State.

(h/t: @StateSupremes)

@JosephWMead

Amarante: Why Don't White Supremacists Pay Taxes?

Eric Franklin Amarante (UNLV) posted an essay entitled "Why Don't White Supremacists Pay Taxes?" to SSRN. Here is the abstract:

Many white supremacist groups enjoy tax-exempt status. As such, these hate groups do not have to pay federal taxes and people who give money to support these groups may take deductions on their personal taxes. This recognition not only results in potential lost revenue for government programs, but it also serves as a public subsidy of racist propaganda and operates as the federal government’s imprimatur of white supremacist activities. This is all due to an unnecessarily broad definition of “educational” that somehow encompasses the activities of universities, symphonies, and white supremacists. This Essay suggests a change in the Treasury regulations to restrict the definition of educational organizations to refer only to traditional, degree-granting institutions, distance learning organizations, or certain other enumerated entities. With this change, we would no longer allow white supremacists to call themselves charities, remove the public subsidy of such reprehensible organizations, and eliminate the government’s implicit blessing of hate groups.

Through Twitter, Sam Brunson (@smbrnsn) and David Herzig (@professortax) briefly responded to this argument:
Here's a link to their forthcoming article, "A Diachronic Approach to Bob Jones: Religious Tax Exemptions after Obergefell."  Last December, Eugene Volokh weighed in to conclude that it would be unconstitutional viewpoint discrimination for the IRS to deny tax exemption on the ground that a group engages in hate speech:

But the IRS can’t deny tax exemptions on the grounds that a group “hold[s] views that millions of Americans may find abhorrent” — or “espouse[s] values that are incompatible with most Americans” — whether those views are socialist, Islamist, pro-abortion, anti-abortion, pro-illegal-immigrant, anti-immigrant, pro-gay-rights, anti-gay-rights, white nationalist, black nationalist or anti-nationalist.

-Joseph Mead

President Trump's Executive Order on Johnson Amendment

It is rare to for nonprofit law to be in the federal spotlight as vividly as it was last week when President Trump signed an Executive Order on "Free Speech and Religious Liberty." Section 2 of the EO addresses the Johnson Amendment (which prohibits partisan political activity by 501c3 nonprofits):

Sec. 2.  Respecting Religious and Political Speech.  All executive departments and agencies (agencies) shall, to the greatest extent practicable and to the extent permitted by law, respect and protect the freedom of persons and organizations to engage in religious and political speech.  In particular, the Secretary of the Treasury shall ensure, to the extent permitted by law, that the Department of the Treasury does not take any adverse action against any individual, house of worship, or other religious organization on the basis that such individual or organization speaks or has spoken about moral or political issues from a religious perspective, where speech of similar character has, consistent with law, not ordinarily been treated as participation or intervention in a political campaign on behalf of (or in opposition to) a candidate for public office by the Department of the Treasury.  As used in this section, the term "adverse action" means the imposition of any tax or tax penalty; the delay or denial of tax-exempt status; the disallowance of tax deductions for contributions made to entities exempted from taxation under section 501(c)(3) of title 26, United States Code; or any other action that makes unavailable or denies any tax deduction, exemption, credit, or benefit.

During the signing ceremony, President Trump explained: 

“Under this rule, if a pastor, priest or imam speaks about an issue of political or public importance, they are threatened with the loss of their tax-exempt status, a crippling financial punishment. Very, very unfair. But no longer... This financial threat against the faith community is over... So you’re now in a position where you can say what you want to say. And I know you’ll only say good and what’s in your heart. And that’s what we want."

Before the final text of the order was released, commentators raised numerous objections to the order that was anticipated: a broad commitment not to enforce the Johnson Amendment against religious groups. However, the text of the signed order says nothing concrete in terms of legal or policy. Indeed, the ACLU initially promised a lawsuit, but ultimately backtracked, concluding that the order "signing was an elaborate photo-op with no discernible policy outcome." Undeterred, the Freedom from Religion Foundation is going ahead with its planned lawsuit, reading between the lines of the EO to perceive a clear "stop enforcement" signal to the IRS.

 @josephwmead