Nonprofit Law Prof Blog

Adediran: Nonprofit Board Composition

Atinuke O. Adediran (Fordham) has published Nonprofit Board Composition. 83 Ohio St. L.J. 357 (2022). Here is the abstract:

This Article addresses a critical gap in the literature and current debates about the composition of nonprofit boards. The law of fiduciary duties and nonprofit governance best practices do not provide sufficient guidance on how to compose boards to empower the communities they serve. And even as the corporate sector is seizing on current important moments to debate the inclusion of employees and racial and ethnic minorities on corporate boards, nonprofit boards are largely left out of these debates.

The Article introduces the concept of board capital, which originated from the for-profit management literature, but has gained a stronghold in the nonprofit boards’ literature, to provide guidance on how to compose boards of nonprofit organizations that serve vulnerable, often minority communities. Board capital comprises financial, social, and human capital and highlights the importance of having board directors who as a group, possess the skills, knowledge, and professional and personal experiences to not only provide legal and finance expertise, and funding, but also provide strategic advice informed by knowledge of the client population.

The Article supports its normative assertions with the empirical example of the 9000+ boards of directors of public interest legal organizations (PILOs). Empirical findings show that boards in these legal nonprofit organizations are largely assembled to focus on legal expertise and fundraising at the expense of social capital affinity with communities served, and human capital skills and characteristics to understand the needs of the client population and be racially and ethnically diverse. A majority of the boards comprise law firm and corporate lawyers who can be far removed from the legal and social issues the organizations represent. For other nonprofit organizations, many board members come from the business sector. This misplaced emphasis may be undercutting nonprofits’ abilities to serve their stated mission effectively. Board members are more likely to hew to their own expertise and abilities to raise financial capital. Boards of directors also tend to replicate themselves, which undermines human capital knowledge of the client population and racial and ethnic diversity. The Article makes suggestions for increasing human capital, particularly expertise on the client population and racial diversity on nonprofit boards. It also addresses board capital implications for for-profit boards.

Samuel D. Brunson

Cowgirls and Funding Abortion Rights

Last December, I wrote a series of posts about charitable DAOs. (Brief recap: DAOs--decentralized autonomous organizations--are basically crypto-based business organizations that try to replace human governance with smart contract governance.) When I wrote them, I was thinking mostly hypothetically (though I've been informed that there are people actively pursuing charitable DAOs.) Yesterday, I saw a (now 2-month-old) story in the Washington Post about CowgirlDAO, a DAO formed to raise money to fund abortion rights groups.

The format isn't precisely a charitable DAO, at least as best as I can tell. Rather, the DAO sells  “Computer Cowgirls,' a set of NFT art to negate its power. The kitschily dressed cowgirls moved with an empowerment swagger, subverting farmhand and cheerleader cliches." It then donates that money (or, rather, the ethereum used to purchase the NFTs) to abortion rights groups.

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Family Research Council Is Now a Church

A little over a week ago, ProPublica reported that the Family Research Council filed with the IRS to be treated as an association of churches for tax purposes.

Is the FRC an association of churches? Not in any colloquial sense; rather, it's an advocacy group that, in its words, works to "advance faith, family, and freedom in public policy and the culture from a biblical worldview" (which it does, according to SPLC research, largely by denigrating and attacking the LGBTQ community). It claims to meet 11 of the IRS's 14 criteria for qualifying as a church, though many of those claims seem like a stretch.

And its worth noting at this point that FRC isn't the only organization to claim (and obtain) church status where the claim of being a church is a stretch. It has become an aspiration model for activist organizations. And why?

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Tax Exemption and Abortion

Over the last decade or so, we've seen a movement demanding that the IRS strip the tax exemption from churches that discriminate against LGBTQ individuals. Those demands are rooted in the Supreme Court's Bob Jones decision, which held that the requirements for tax exemption implicitly include not violating a fundamental public policy. The demands generally assume (or, sometimes, explicitly say) that LGBTQ rights have become a public policy, sufficiently embraced by government as to meet the "fundamental" standard. (David Herzig and I have written a little about this, including here.)

For various reasons (including especially that Bob Jones has only been expanded beyond racially-discriminatory private schools in the rarest of circumstances), these assertions have had rhetorical, but not legal, power. And I assumed they were rooted in the post-Bob Jones era.

But in researching a new project (I'm currently finish a draft of a book on Mormonism and the tax law, hopefully arriving sometime next year!) I learned that this kind of rhetorical activism predates 1983. In fact, in the early 1970s, the Feminist Party filed a complaint with the IRS asserting that the Catholic Church should lose its tax exemption. Why? Because of its involvement in the abortion debate.

Of course, it didn't ground the complaint in fundamental public policy. Instead, it claimed that the Church violated the tax law's restriction on lobbying.

The Feminist Party's complaint proved exactly as effective as later complaints in the LGBTQ context. Still, it's interesting to see tax exemption wielded as a pressure point on religious institutions before Bob Jones expressly made that a constitutional requirement, and it's interesting today to see it in the context of a reemergent abortion debate.

Samuel D. Brunson 

Heminway: The Fiscal Sponsor Alternative to Nonprofit Incorporation

Joan MacLeod Heminway (University of Tennessee) has published Choice of Entity: The Fiscal Sponsorship Alternative to Nonprofit Incorporation, 23 Transactions: The Tennessee Journal of Business Law 526 (2022). Here is an excerpt from the conclusion:

    This short article explores the potential use of fiscal sponsorships as a means of incentivizing and systematizing the activities of nonprofit projects without the need to form a separate legal entity. The appeal of attracting funders who desire a federal income tax deduction for their contributions and the desire to conduct operations that are tax-exempt under U.S federal law may be core reasons for conducting a nonprofit project through a nonprofit corporation. Yet, nonprofit corporations may be a less than appealing choice of entity for certain nonprofit projects after considering other factors.

     Specifically, the time and expense involved in both entity formation and maintenance and federal income tax compliance activities may make nonprofit incorporation under state law a suboptimal choice for certain nonprofit projects. Moreover, many nonprofit project founders and promoters do not need the structural and governance attributes that nonprofit corporate law provides. This may be especially true for discrete or one-off nonprofit projects that involve a single founder or promoter (or a small number of founders and promoters)—which often is the case for creative enterprises (like the Vita Brevis project in Boston). If

● the founders or promoters of this kind of nonprofit project can identify a §501(c)(3) organization with a corporate purpose that incorporates the substance of the nonprofit project and

● that §501(c)(3) organization is willing to serve as a fiscal sponsor for the nonprofit project under terms satisfactory to the founders and promoters of the nonprofit project,

then incorporation as a nonprofit corporation may not be necessary for the nonprofit project to secure federal income tax deductibility for funders and a federal income tax exemption for its income.

Lloyd Mayer

Schwartzel: Was It Wise to Try to Implement Trust Law Reforms Through UPMIFA?

C. Boone Schwartzel has posted Was It Wise to Try to Implement Trust Law Reforms Through the Uniform Prudent Management of Institutional Funds Act?, 14 Estate Planning & Community Property Law Journal 179 (2021). Here is the abstract:

This article explores two main topics. First, it generally discusses the Uniform Prudent Management of Institutional Funds Act’s new definitions and expanded scope, and then examines whether under the Act, as a matter of law, restrictions imposed in a gift instrument between a “donor” institution and a second, affiliated institution it controls must be respected and enforced (and the fund assets treated as “donor restricted”) even though generally accepted accounting principles may take a different view.

Second, the article examines UPMIFA’s new statutory remedies that empower courts and charitable institutions to modify much more easily a donor’s outdated or “wasteful” restrictions. UPMIFA’s remedies are loosely patterned after controversial reforms of trust law’s equitable deviation and cy pres doctrines, as promulgated in the Uniform Trust Code and the Restatement (Third) of Trusts, that loosen their historical ties to the donor’s original charitable intent and virtually eliminate cy pres’ “general charitable intent” requirement. There are important public policy issues and constitutional law questions concerning the wisdom and validity of these reformed trust law remedies, and especially as implemented in UPMIFA.

Lloyd Mayer

Charitable Solicitation Update: New California Rules for Charitable Crowdfunding; Article on Cause-Related Marketing

California is working on the implementation of its new charitable crowdfunding law, which has an effective date of January 1, 2023. The Attorney General's office has now released proposed regulations, with comments due by July 12th. For a summary of the proposed regulations, see this Adler & Colvin blog post. For more general coverage of the law's adoption, see this For Purpose Law Group blog post.

In other solicitation developments, researchers at the University of Michigan recently published a study titled How does regulatory monitoring of cause marketing affect firm behavior and donations to charity?, International Journal of Research in Marketing (online 2022; hard copy publication pending). Here is the abstract:

Cause marketing (CM) typically involves for-profit firms donating part of their sales revenue to a charity, with the hope that this will increase their revenue. We argue that it is important for a regulator to monitor firms’ CM activities, and to assess how differences in the enforcement of CM laws impact the CM practice by firms. Our analytical model uses a Stackelberg leader–follower game that endogenizes the regulator’s decision to enforce CM. The firm then decides whether to truthfully declare or overstate the amount it contributes to charity (and if overstate: by how much). We find the following results in equilibrium under different conditions: (i) CM campaigns are a win–win–win situation – they increase profit for the firm while being truthful, generate larger donations for the charity, and generate a cause marketing surplus for the regulator, resulting in doing well while doing good, (ii) the best response of the firm is to be strategic, even when the regulator is strict with monitoring, (iii) the regulator itself decides not to monitor CM, even though it knows that this results in untruthful behavior by firms. When we endogenize the extent of overstatement, we find that the firm tends to be strategic by overstating donation percentage, whether the regulator is strict or not. As the proportion of unsophisticated consumers (who believe a firm’s claims, whether truthful or not) increases, the donation proportion decreases in general, and the overstatement level increases when the regulator is lenient and decreases when the regulator is strict. In equilibrium, the regulator is strict if the market size is large, and lenient otherwise. A survey with consumers supports key modeling assumptions regarding consumers' lack of knowledge of CM laws.

Lloyd Mayer

Conservation Easements Update: ProPublica Story, Articles on Valuation and Enforcement

ProPublica published a story on the government battle against syndicated conservation easements titled The Tax Scam That Won't Die. The discouraging sub-title is "The IRS, the Justice Department and Congressional Republicans and Democrats are all trying to put an end to syndicated conservation easements. But with lobbyists like Henry Waxman helping lead the resistance, the efforts have had little effect." It concludes: "The use of the scheme continues unabated. Along the way it has cost the U.S. Treasury billions in lost taxes, according to the IRS."

Conservation easements also continue to attract academic interest, with two recent articles of note. Alan Feld, Theodore S. Sims (both Boston University), and Jacob Nielsen (now at Ropes & Gray) have posted Green, or Greed? A Fresh Perspective on the Valuation of Conservation Easements, Tax Law Review (forthcoming). Here is the abstract:

Charitable contributions of "conservation easements" have since 1980 allowed high-income taxpayers to shelter income from taxation through overvalued deductions. Overvaluation has increased dramatically in the past 20 years: a 2016 study of all easement decisions since 1980 reported that while overvaluation had averaged by a factor of two before 1994, it averaged by a factor of ten for decisions between 1994 and 2016. SOI data disclose that aggregate easement contributions deducted on Schedule A grew from $2.26 billion in 2015 to $6.5 billion in 2018 (the most recent year available). A recent report by supporters of conservation easements acknowledges that "neither the [IRS] nor the courts have sufficient resources to effectively police valuation abuse."

Most of the concern has been with "syndicated conservation easements" ("SCEs"), and most proposed remedies to easement overvaluation focus on SCEs. We show, however, that exactly the same traits that produce overvalued SCEs -- allowing charitable deductions based on "fair market" value, which sanctions deducting unrealized appreciation without taxing the corresponding gain, combined with the unavoidable need to value contributed easements through as manipulable a process as appraisal -- have facilitated abusive overvaluation of non-syndicated easements too. That combination can leave an easement contributor better off than if she had done anything else with the land, including selling it for its (true) fair market value. The only effective solution to easement overvaluation is to restrict the deductibility of easement contributions attributable to unrealized gain. To that end we propose limiting charitable contributions of easements granted with respect to recently acquired property initially to cost, much as Congress has previously done with other contributions of appreciated property that are vulnerable to abuse, while allowing that limitation to evolve with real estate values over time. We also propose an upfront excise on unrealized appreciation in contributed easements, to increase the salience to prospective contributors of the risks of overvaluation.

In addition, Jimmy Godin has published A Sand County Tax Shelter: Syndicated Conservation Easements and Their Toll on the American Taxpayer, 2022 Utah Law Review 213 (2022). Here is the abstract:

The conservation easement is a powerful tool for conserving private land in the United States and beyond. Among the many incentives for encouraging conservation easement donations are tax deductions, which largely depend on the conservation value of the donated land. But groups of wealthy taxpayers, accountants, attorneys, and appraisers are manipulating the conservation easement tax framework and receiving large tax deductions for conservation easements that are practically worthless in a conservation sense—transactions known as 'syndicated conservation easements.' Syndicated conservation easements have generated substantial controversy, in part because they cost American taxpayers billions of tax dollars annually. While the Internal Revenue Service, the United States Department of Justice, members of Congress, and conservation groups are attempting to crack down on syndicated conservation easements, their efforts to curb the practice remain ineffective. This Note first examines the conservation easement tax framework and considers the ways in which it enables syndicated conservation easements. Next, this Note describes the measures taken against syndicated conservation easements and analyzes how such measures have fallen short. Finally, this Note contemplates more effective ways to uncover syndicated conservation easements and curb such transactions entirely. Specifically, the Internal Revenue Service must streamline its auditing efforts to focus on appraisals, while the United States Department of Justice must impose harsher penalties on those involved in syndicated conservation easements. Similarly, Congress must create a more effective system for appraisal oversight and should enact legislation that alters the existing tax framework in a way that disincentivizes wealthy taxpayers from engaging in syndicated conservation easements altogether. Lastly, individual conservation groups must work together to create a more uniform set of standards and practices for conservation easement donation, while state legislators should strive to create uniformity in state conservation easement tax law.

Lloyd Mayer

Contribution Data: Giving USA 2022 Report; IRS Noncash Contributions Statistics

The GivinG USA Foundation published its annual Giving USA report on charitable giving in 2021. According to the Indiana University Lilly Family School of Philanthropy, which researches and writes the report, here are some of the highlights:

• Total charitable giving grew by 4.0% to $484.85 billion, with $326.87 billion or slightly less than 70% coming from individuals. The remaining giving came from foundations ($90.88 billion), bequests ($46.01 billion), and corporations ($21.08 billion).

• The largest recipient area remained religion at $135.78 billion, followed by education at $70.79 billion, human services at $65.33 billion, and foundations at $64.26 billion, with lesser amounts to public-sector benefit organizations (e.g., United Ways and national donor-advised fund sponsors), health, arts, international affairs, and environmental.

Separately, the IRS Statistics of Income Office released spreadsheets with data on Noncash Charitable Contributions by individuals for tax year 2019. Highlights include:

• Over 3.9 million returns reported over 12.5 million noncash charitable contributions on Form 8283, with a total fair market value of over $96.5 billion.

• Donated investments accounted for almost half of the value donated ($45.0 billion), with real estate (including land and easements) accounting for an additional $33.9 billion and other categories such as clothing, household items, and art/collectibles making up the rest.

Lloyd Mayer

Cross-Border Philanthropy: Nicaragua Shuts Down 101 Groups; Report on Developments in Asia

The Associated Press reports that in late June the Nicaraguan government closed an additional 101 nonprofit organizations with the approval of the country's congress, bringing the total shut down over the past four years to over 750. The claimed basis for the most recent closures is an alleged failure to comply with a 2020 "foreign agent" registration law. This recent group includes the local branch of Missionaries of Charity, an organization established by Mother Teresa. Hat tip: Chronicle of Philanthropy.

Separately, Give2Asia released a report on Unlocking Cross-Border Philanthropy in Asia, with contributions from the Asia Philanthropy Circle and the King Baudouin Foundation, and support from the Bill and Melinda Gates Foundation. Here is a description of the report:

This study focuses on a very specific idea that more private funders in Asia are committed to solving some of the most pressing issues facing the region and looking beyond their own countries and territories to make meaningful change. This idea is at the heart of a growing discussion around whether and how regional philanthropy within Asia will develop as wealth increases.

Prior to this study, the authors had an idea of the landscape of cross-border giving based on prior research, informal conversations, and our accumulative grantmaking experiences in several markets. This study aims to assess these assumptions by exploring the nuanced perspectives of a diverse group of philanthropic stakeholders and their respective markets. It will also expand our existing knowledge to more potential markets in the region.

Broadly, the study aims to answer two key questions

Is there appetite and need for infrastructure that supports cross-border giving within Asia?

If so, what locations, institutions, and services might be involved to build such infrastructure?

Hat tip: Philanthropy News Digest.

Lloyd Mayer

Dealing with Insiders and True the Vote

In May this space covered the scrutiny the BLM Global Network Foundation was receiving in light of press reports about various transactions, including with parties connected to Foundation insiders. The month of June saw a similar report but relating to the other end of the political spectrum. Reveal, a nonprofit news outlet, reported on True the Vote and a remarkable similar set of circumstances - a sudden influx of funds tied to current events, a founding individual operating a nonprofit with limited oversight from others, and questionable financial transactions with parties connected to insiders. In this case, those transactions allegedly include an apparent loan to the founder in violate of Texas state law and hundreds of thousands paid to a company created by a former board member with business and possibly personal ties to the founder. And as was the case with BLM Global Network Foundation, some of the sharpest questions came from supporters, in True the Vote's situation a donor who made a multi-million dollar contribution in the wake of the 2000 election and then sued (unsuccessfully so far) over the use of the contributed funds.

Lloyd Mayer

N.Y. Times: "76 Fake Charities Shared a Mailbox. The I.R.S. Approved Them All."

N.Y. Times, led by Pulitzer Prize-winning reporter David Fahrenthold, has been gathering information about the IRS exemption application process. In a story over the holiday weekend, it reported on a single individual who created dozens of fake charities and obtained IRS recognition of tax-exempt status for them, even after being warned about the scam by the American Cancer Society. The story highlights what nonprofit legal experts have long known - the application process has essentially become a registration process, particularly for applications submitted using the Form 1023-EZ. Combined with the less than 0.2 percent examination rate for exempt organization returns, and the very limited and inconsistent level of resources states devote to overseeing charities, it should be no surprise that fraudsters often use purported charities to enrich themselves, banking on the halo effect of IRS recognition to fool donors.

Lloyd Mayer

IRS Data Book 2021 EO Information (Including Examination Rate of < 0.2%)

The 2021 IRS Data Book, covering the fiscal year that ended on September 30, 2021, contains its usual treasury trove of information about exempt organizations. Notable facts include:

• There are 1,980,571 tax-exempt organizations, nonexempt charitable trusts, and split-interest trusts (Table 14), of which 1,828,187 are recognized under IRC section 501(c) (1,431,266 under section 501(c)(3)) and 42,697 under IRS section 527 (political organizations).

• The IRS closed 94,466 applications for recognition of exemption (Table 12), approving 81,583 (86.4%), disapproving 84 (0.1%), and resolving 12,793 (13.5%) in other ways (including withdrawal, lacking required information, or incomplete). The vast majority (90,461 or 95.8%) of the applications were under IRC section 501(c)(3), with the next closest categories being approximately a thousand applications each under section 501(c)(4) and section 501(c)(6).

• The IRS also received 3,334 notices of intent to operate under Section 501(c)(4) (Table 13), of which it rejected 465 for a variety of reasons, including that notice was not required because of a previously filed annual information return or application for recognition of exemption, or the organization was exempt under a section other than 501(c)(4).

• The IRS examined (Table 21) only 1,383 Forms 990, 990-EZ, and 990-N, an additional 203 Forms 990-PF, 1041-A, 1120-POL, and 5227, 748 Forms 990-T, and 301 Forms 4720. This compares to 1,360,719 exempt organization returns filed in 2020 and 1,722,803 filed in 2021, which figures include all of the above forms except for Forms 1041-A and 1120-POL This means even taking into account examination lag the examination rate was less than 0.2%.

Lloyd Mayer