Nonprofit Law Prof Blog

On Twitter and Charitable Exemption

On Friday, David Herzig (EY) proposed a thought experiment about what Elon Musk could do in his acquisition of Twitter:

So, how could one solve for this problem? Well, what if the take private proposed by Mr. Musk is done through a newly formed true Public Charity. And if one know the charitable rules like I do, then one would know that in the first year, Mr. Musk could do all the funding. 3/

— David Herzig (@professortax) May 27, 2022

His proposal led to some interesting discussion--could Twitter qualify as a 501(c)(3)? After all, newspapers and other journalistic organizations have been doing it for the last couple decades. Most recently, the Chicago Sun-Times converted from a for-profit newspaper into a nonprofit, tax-exempt one.

As I've thought about it, I see two major impediments to the idea of Twitter itself become a tax-exempt organization.

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Abely, The Uncertain Role of Reliance in the Enforcement of Charitable Subscriptions

Christine Abely (New England Law) has posted The Uncertain Role of Reliance in the Enforcement of Charitable Subscriptions, 26 Lewis & Clark L. Rev. (2022) to SSRN. Its abstract reads:

In cases where charitable promises are made and later retracted, the Restatement (Second) of Contracts provides conflicting guidance as to how a court should factor in reliance by the charity when considering whether to enforce the promised donation by way of promissory estoppel. Specifically, the text of § 90(2) within the Second Restatement provides that a charitable subscription is binding “without proof that the promise induced action or forbearance.” The adoption of this provision represented a departure from the requirement of reliance historically necessary for the enforcement of most types of promises by promissory estoppel. According to the Second Restatement, however, reliance remains relevant to the determination of whether enforcement of a promise is necessary to avoid injustice, which is a required element to enforce a charitable subscription pursuant to § 90(2). Namely, Comment b to § 90, discussing the character of reliance protected, notes that enforcement of the promise must be necessary to prevent injustice, one factor of which is the nature and extent of reliance; such reliance “need not be of substantial character in charitable subscription cases.” Comment f states that for charitable subscriptions where recovery is rested on reliance, “a probability of reliance is enough,” although American courts “have found consideration in many cases where the element of the exchange was doubtful or nonexistent.” Moreover, Illustration 17 to Comment f describes a situation where reliance does in fact support enforcement of a charitable subscription.

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Global Study Shows Impact Investing Interest Is Growing

Earlier this week, IFA Magazine published an article entitled “Interest in Impact Investing at All-Time High Worldwide” in which it referenced a global study.  In the United States, the percentage of individuals who find impact investing appealing has jumped from 51% to 61% since 2020.  Perhaps most interestingly, millennials have registered the largest interest in impact investing across numerous countries: 67% in the UK, 66% in the U.S., and 68% in Australia.  What makes this relevant is that many commentators have noted there will be a large scale shift of wealth to millennials by baby boomers in the coming years.  This begs the question whether millennials will choose to invest in benefit corporations and forego traditional charitable giving avenues.

The study also noted that the environment was the largest concern internationally.  For example, 34% of those in the UK, 30% in Australia, and 34% in Germany were concerned primarily about climate change.  Americans were chiefly concerned with health care.  The top concern for 25% of U.S. individuals surveyed were health, including disease prevention and cures.   Finally, the study also noted the growing concern about greenwashing in the U.K.  Greenwashing is the practice of using marketing spin to deceive the public about how environmentally friendly a company’s products, aims, and policies are. It will be interesting to see what U.K. policies are put into place to stop this practice.

 

Khrista McCarden

Hoffman Fuller Associate Professor of Tax Law

Tulane Law School

 

Giving to Ukraine & the Importance of Nonprofit Efficiency and Transparency (Top-Ranked Charities)

Last month, an article in Fortune noted that Ukraine so far has received more than 600 grants totaling almost $900 million. The article’s source for this information is Candid, an information services company specializing in nonprofits.  In fact, Candid provides updates on a Philanthropic response to the war in Ukraine page as donations are made.  The article stated that charities, such as Bloomberg Philanthropies, the IKEA Foundation, and the American Red Cross have donated $25 million, $22 million, and $12 million, respectively. Celebrities and others have also made large donations to Ukraine.  Ryan Reynolds and Blake Lively donated $1 million to Ukrainian refugees through the United Nations refugee agency in late February. Netflix co-founder Reed Hastings donated $1 million to Razom, a 501(c)(3) aiding Ukraine. Other celebrity donors have raised significant sums for Ukraine, including Ashton Kutcher and Mila Kunis who raised over $30 million and Bethenny Frankel —a former Real Housewives of New York star who raised $85 million for Ukraine.

The article also references Congress’ approval of The Ukraine Supplemental Appropriations Act, 2022 in March, which provides $13.6 billion in emergency funding, which includes $3.5 billion for military supplies alone.

The author notes that these figures raise the question of how much the war is costing Ukraine.  According to Ukrainian Prime Minister Denys Shmyhal, Ukraine is spending approximately $4 billion each day on war.  Russia’s war expenses are believed to be over $20 billion per day according to Consultancy.org.

Clearly, Ukraine needs any funds that are donated to end up in the hands of those charities that will put them to their best possible use.  I have written about the need for efficiency in terms of charitable giving (an "efficient charitable market"), and this issue is brought into sharp focus in considering the current plight of Ukraine.  The need for transparency is brought into sharp focus as well.  Organizations such as Charity Navigator, CharityWatch, and BBB Wise Giving Alliance are helping donors find appropriate relief efforts.  Charity Navigator has compiled a list of top nonprofits seeking to advance relief and recovery efforts in Ukraine.  CNBC recently published a list of over 30 organizations that are highly-rated in terms of financial efficiency and transparency by category.  

 

Khrista McCarden

Hoffman Fuller Associate Profesor of Tax Law

Tulane Law School

NY Attorney General Sues Diocese to Recover Pensions for St. Clare's Hospital Workers

Yesterday, New York Attorney General Letitia James filed a lawsuit against the Roman Catholic Diocese of Albany, its leadership, and others, for their alleged negligent and intentional actions that resulted in depriving over 1,100 former employees of St. Clare’s Hospital of their pensions.  The press release describes the lawsuit and history.

The complaint alleges that New York Not-for-Profit Corporations Law and New York Estates, Powers & Trusts Law were violated when the Diocese (1) decided to remove the pension plan from federal protections; (2) failed to adequately fund, monitor, or insure the pension; and (3) ultimately failed to administer the pension.

Attorney General James seeks to hold the Diocese accountable for these failures and to recover the pensions that the former hospital workers lost.

As a result of the alleged breaches of fiduciary duties, over 1,100 former employees lost their retirement benefits.  These former employees include St. Clare’s Hospital nurses, lab technicians, social workers, EMTs, orderlies, housekeepers, and other essential workers.

The lawsuit resulted from a 2019 investigation by Attorney General James after the Diocese terminated the pension that had been in place since 1959.  That investigation unearthed numerous and systemic violations of the Diocese’s fiduciary duties of care, loyalty, obedience, and disclosure to St. Clare’s Corporation, which ultimately resulted in depriving former employees and vested pensioners their promised retirement benefits. 

The Future of Impact Investing

Last week, I had the great honor of serving as the keynote speaker for the Pennsylvania Bar Institute’s Nonprofit Conference.  My presentation addressed the rise of impact investing or what is commonly referred to as the third-sector.  In 2015, I published an article on impact investing in the University of Pennsylvania Journal of Business Law, and I have remained deeply interested in the area, largely because of its potential to address many of the world’s global problems, such as economic inequality and extreme poverty, racial injustice, human trafficking, and other crises.

A recent article in the Stanford  Social Innovation Review addresses the likely trajectory of impact investing over the next 30 years.  Interestingly, the authors note that a little over 10 years ago, JPMorgan, the Rockefeller Foundation, and the Global Impact Investing Network (GIIN) released a report estimating that impact investing would “reach between $400 billion and $1 trillion in assets under management by 2020,” which was viewed as doubtful.  However, in 2020, the impact investing market reached $715 billion.  With such an unexpected rise in only ten years, the authors decided to address how far the market might climb from 2020 to 2030.  I was pleased to see they focused on the UN Sustainable Development Goals (SDGs) in their analysis.  In my own work, I have emphasized the need to ensure philanthropic funds are directed towards those charities that are making the best measurable strides in terms of SDGs.  The authors point out that there is a $2.5 trillion annual gap in funds necessary to achieve the SDGs by 2030.  Clearly, traditional avenues and methods of charitable giving are unlikely to work.  The authors go on to discuss how the COVID-19 pandemic has made it even more difficult to achieve the SDGs because governments were forced to shift resources and accumulate new debt in order to confront attendant challenges, including greater inequalities. 

 

Khrista McCarden

Hoffman Fuller Associate Professor of Tax Law

Tulane Law School

Ukraine Update: Crowdfunding's Key Role; IRS Notice on Employee-Leave Donations

Two recent news stories underline the importance of crowdfunding for supporting Ukraine and Ukrainians. The N.Y. Times reports that Ukrainian appeals to private individuals and companies have led to contributions of numerous items that have military applications, including drones, night vision scopes, body armor, rifles, and ammunition. The Chronicle of Philanthropy reports that the Ukrainian government is enhancing its crowdfunding efforts to keep support flowing even as the Russian invasion of Ukraine passes the three-month mark.

And even the incredibly busy IRS has taken the time to ease ways of supporting Ukraine. Notice 2022-28 provides guidance on how employers can adopt leave-based donation programs to aid citizens and residents or Ukraine, individuals presently in Ukraine, or refugees from Ukraine. Importantly it states:

Employer leave-based donation payments made by an employer before January 1, 2023, to section 170(c) organizations to aid victims of the further Russian invasion of Ukraine (qualified employer leave-based donation payments) will not be treated as gross income or wages (or compensation, as applicable) of the employees of the employer. Similarly, employees electing or with an opportunity to elect to forgo leave that funds the qualified employer leave-based donation payments will not be treated as having constructively received gross income or wages (or compensation, as applicable). 

Lloyd Mayer

10th Circuit Upholds Denial of Exemption Under 501(c)(15) for Small Captive Insurance Company

UPDATE: The IRS celebrated its victory in this case by publicly stating the case "upholds its long-standing position regarding abusive microcaptive insurance transactions. Taxpayers should be alert to these schemes, normally peddled by promoters, as they will ultimately cost them." It encouraged parties to such transactions to seek professional tax advice.

In Reserve Mechanical Corp. v. Commissioner, the U.S. Court of Appeals for the Tenth Circuit upheld the Tax Court's decision affirming the IRS' decision that the company did not qualify as tax-exempt status under section 501(c)(15). Here is the court's summary of the decision:

Reserve Mechanical Corp. appeals the decision of the Tax Court affirming the decision of the Commissioner of Internal Revenue that it did not qualify for an exemption from income tax as a small insurance company and that the purported insurance premiums it received must therefore be taxed at a 30% rate under I.R.C. § 881(a). We hold that the record supports the Tax Court’s decision that the company was not engaged in the business of insurance. The court had two grounds for deciding that Reserve was not an insurance company. First, it determined that Reserve had not adequately distributed risk among a large number of independent insureds—a hallmark of any true insurance company. Virtually all the insured risk was that of one insured, a company that had the same ownership as Reserve itself. To appear to distribute risk, Reserve entered into an insurance pool with other purported insurance companies, each owned by an affiliate of its insured, but the arrangement lacked substance and the pool itself did not distribute risk. Second, the Tax Court determined that the policies issued by Reserve were not insurance in the commonly accepted sense. For example, the premiums were not the result of arm’s-length transactions and were not reasonable, and Reserve was not operated in the way legitimate insurance companies operate. In addition, Reserve argues that if it was not an insurance company, the premiums it received must be treated as nontaxable capital contributions. We also reject that argument.

The decision is significant in part because there are number of other, similar cases, on appeal involving other companies, and the possibility of more IRS action in this area with this victory for the government to support them. For a detailed analysis, see this Forbes article.

Lloyd Mayer

Bremer Trust Decision: One Trustee Removed, Two Retained; Trust Allowed to Consider Sale of Bank

The Minnesota Star Tribune reports that a state court judge has order the removal of one of the trustees for the Otto Bremer Trust, but has also refused the Minnesota Attorney General's request to remove two other trustees. The judge also held the trustees acted properly by considering whether sell the bank Bremer Financial (commonly known as Bremer Bank). The story provides a copy of the 103-page opinion. 

I have not had a chance to review the opinion - busy grading exams this week - but here is a helpful analysis from the law firm of Nilan Johnson Lewis.

Lloyd Mayer

 

Trump Organization & Donald Trump's Presidential Inaugural Committee Pay $750,000 to DC

District of Columbia Attorney General Karl A. Racine announced earlier this month that "the Trump Organization and Donald Trump’s Presidential Inaugural Committee (PIC) will be required to pay $750,000 to the District to resolve allegations that the PIC, the Trump International Hotel, and the Trump Organization illegally misused nonprofit funds to enrich the Trump family. Those funds will then be redirected to two nonpartisan nonprofit organizations – Mikva Challenge DC and DC Action – that promote civic engagement of youth in the District."

The payment settles a lawsuit filed by the AG alleging that Inaugural Committee provided improper benefits to the Trump Organization and Trump family members in a variety of ways, including by overpaying for event space, throwing a private party, and repaying a Trump Organization debt. The Consent Motion for the settlement includes language common to such docuoments stating that the resolution is made "without it being in any way deemed or construed as an admission of wrongdoing, unlawful conduct, or liability on the part of Defendants." 

Coverage: NPR, Reuters, Washington Post.

Lloyd Mayer

BLM Global Network Foundation Under a Microscope as It Releases Form 990

The BLM Global Network Foundation has recently attracted a steady stream of stories raising questions about its finances and transparency, especially after New York Magazine reported it had bought a $6 million house. The organization has now released its first Form 990 since obtaining IRS recognition under section 501(c)(3) and separating from its fiscal sponsor, which it first shared exclusively with the Associated Press. Numerous other news outlets have reported on the filing, including New York Magazine, the N.Y. Times, and the Times of London.

The filing reveals that BLM Global Network Foundation raised almost $80 million and spent a little under $38 million, including $26 million in grants mostly to other section 501(c)(3) organizations. Besides the house, it held the rest of its almost $42 million in assets in publicly traded securities ($32 million) and cash. It only had two employees during calendar year 2020 and only one voting member of its board of directors as of the end of its fiscal year on June 30, 2021. The above news reports state it now has three directors, which still is relatively small for a public charity with tens of millions of dollars in revenues, expenses, and assets, as well as a very high public profile. 

Not surprising given these small numbers of employees and board members, the Foundation paid numerous outside organizations for services. But as the above news reports detail, many of the organizations were owned and run by people with close ties to Foundation insiders, including over $2.1 million paid to a consulting firm owned by a now board member, almost $1 million paid to a limited liability company owned by the father of the founder and former executive director's child, and over $800,000 paid to a security firm owned by the brother of the founder and former executive director. While the Form 990 says a conflict of interest policy is in place, the Foundation would be well advised to also institute a bidding process for selecting vendors to ensure that ones with connections to insiders are not unduly favored (and improve the optics of these relationships).

The press coverage has attracted scrutiny from two state Attorneys General. In Indiana, the Indianapolis Star and other outlets report that AG Todd Rokita has sued the Foundation for allegedly failing to responding to requests for information. In Ohio, the above AP story reports that AG Dave Yost has also opened an investigation.

Lloyd Mayer

Lu, "Fundamental National Public Policy" and Critical Race Theory in a Delicate Democracy

Lynn D. Lu (CUNY) has published Who’s Afraid of Bob Jones? “Fundamental National Public Policy” and Critical Race Theory in a Delicate Democracy in the CUNY Law Review. Here is the abstract:

Calls to defund critical race theory aim to freeze civil rights progress where it stood decades ago with the formal prohibition of intentional race discrimination in federally funded programs. In the notorious case of Bob Jones University v. United States, 461 U.S. 574 (1983), the U.S. Supreme Court confronted the federal tax exemption for public charities and ruled that the Internal Revenue Service (IRS) properly withheld tax-exempt status from otherwise qualifying private religious schools that denied admission to students based on race. In particular, the Bob Jones Court recognized the “fundamental national public policy” against racial segregation as a compelling government interest outweighing any burden on private schools’ religious exercise. However, the Court left unresolved vital questions of how (or indeed, whether) to allocate public resources affirmatively to foster diversity, equity, inclusion, or accessibility in democratic society.

This Article examines the lessons of Bob Jones for civil rights advocates as informed by critical race theories that have developed amid a federal-court retreat from enforcement of antidiscrimination norms. It also explores the case’s symbolic value for conservatives motivated to prevent its expansion, even as the Bob Jones Court narrowly constrained its own decision’s impact by refusing to engage a number of crucial substantive questions: namely, the role of pluralism in enforcing civil rights against First Amendment claims, the viability of race-conscious remedies for racial discrimination, and the visibility of economic justice in civil rights claims. This Article ultimately concludes that the legal reorientation critical race theorists have helmed in the wake of Bob Jones remains crucial for identifying and challenging ongoing power disparities in and through every level of democratic government and society.

Lloyd Mayer

2022 Outstanding Nonprofit Lawyer Awards

The ABA Nonprofit Organizations Committee has announced its annual Outstanding Nonprofit Lawyer Award recipients.  They are:

Vanguard Award: Beth Kinglsey

Outstanding Lawyer Award: Samuel Maizel

Outstanding In-House Counsel Award: Lisa Johnsen

Outstanding Young Lawyer Award: Judith Kim

Outstanding Young Lawyer Award: Jason Qu

Congratulations to all of the recipients! You can read more about the awards and recipients here.

Samuel D. Brunson

Nonprofits in a Post-Roe World

In the aftermath of the Dobbs leak, there has been a lot of discussion about what a post-Roe world would look like. Understandably, the vast majority of that discussion has surrounded women's autonomy and reproductive rights, and what other rights we might lose under Alito's reasoning.

It may be worth taking a look at who would be shaping a post-Roe world. And at least one major player, it seems, might be the Foundation to Abolish Abortion, a Texas-based 501(c)(3).

FAA seems to be a fairly new organization; it received its exemption in 2020. And for 2019 and 2020, it reported less than $50,000 in gross receipts.  It hasn't provided any significant amount of information to Guidestar or Propublica, but as best I can tell, it is exempt as an educational organization. (If anybody has a copy of FAA's Form 1023, I'd love to see it! I tried to submit a request, but I'm not clear on whether the request went through or not.)

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SCOTUS opines on charitable solicitation laws in Austin v. Reagan

The recent Supreme Court ruling in Austin v. Reagan National Advertising was about billboard signs, but the majority had a lot to stay about regulation of charitable solicitation. The case here was about whether a law that distinguished between on-premises and off-premises advertising was content-based or content-neutral. Applying the Court’s decision in Reed v. Gilbert, the Fifth Circuit held the distinction was content-based—and thus subject to strict scrutiny—because it required the reader to determine who the speaker was and what the speaker was saying. The Supreme Court reversed, saying the key question is whether the government’s restriction is based on “substantive” content, and a location-based distinction doesn’t qualify.  Thus, the Court held that the distinction was content-neutral and subject only to intermediate scrutiny. Read more for what the Court said -- and didn't say -- about regulation of charitable solicitation.

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Charter Schools, Race, and Polygamy

Yesterday, Fox 13 in Utah ran an exposé of Vanguard Academy, a public charter school in West Valley City, UT (which seems to be a suburb of Salt Lake City). The charter school is run by the Kingston family, a Mormon fundamentalist group.

(As a quick aside, Mormon fundamentalism has become a popular culture thing again, largely because of Hulu's "Under the Banner of Heaven." While this blog post is basically not at all about Fundamentalist Mormonism, it's worth noting that there isn't a single fundamentalism; there are disparate groups. Moreover, it's a distinctly modern thing---fundamentalism arose as aa direct response to modernism. Finally, though the polygamy aspects of Mormon fundamentalism swamp discussion of other aspects, honestly, the economic system many of these groups adopt is at least as interesting.)

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