Nonprofit Law Prof Blog

The Other Newman Foundations

As I wrote on Monday, two of Paul Newman's daughters are suing the Newman's Own Foundation. Central to their allegations is that the Foundation was supposed to contribute at least $400,000 to each of the daughters' own foundations, which would allow the daughters to themselves to be philanthropists.

Instead, after Paul Newman's death, the Foundation allowed the daughters to direct $400,000 of Foundation giving (a number, they allege, that has now been cut and will be cut more in the future). The complaint illustrates one (noncharitable) goal of these types of perpetual foundations, because even without the cuts, though, the directed giving doesn't comply with all of Paul Newman's goals:

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Newman's Own Tax Provision

I'm pretty sure it was the salsa (mild, because my parents don't do spice), though it may have been the ranch dressing (a break from our usual Hidden Valley Ranch), that introduced me to Paul Newman. It was only later that I fell in love with The Sting and Butch Cassidy and the Sundance Kid. First, though, came the Newman's Own brand.

In the early 1980s, Newman started making and selling food. Initially, he wanted 100% of the company's profits to go to charity. When he died in 2008, Newman left the stock in his for-profit company to the Newman's Own Foundation, a private foundation (that, as I discussed yesterday, is the target of a lawsuit by two of Paul Newman's daughters).

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Susan and Nell Newman Sue Newman's Own Foundation

Early last week, Susan and Nell Newman, daughters of the late Paul Newman, sued the Newman's Own Foundation. You can read the complaint here.

I'll spend some time this week going into more detail about the Newman's Own suit. The short version, though, is that the daughters allege that the Newman's Own foundation was supposed to make grants of at least $400,000 to each daughter's private foundation so that the daughters could direct some of the charitable money themselves (and pay themselves salaries).

They allege that almost immediately after their father's death, NOF stopped making donations directly to their foundations (in violation of their father's wishes and directive) and, instead, allowed each daughter to choose the recipients of $400,000 of money and that, more recently, NOF has cut that amount in half.

The suit asks for damages of about $1.6 million, as well as a declaratory judgment that NOF contribute $400,000 annually to the daughters' charitable foundations going forward.

It will be interesting to watch what happens in this dispute.

Samuel D. Brunson

Douglas: Banding Together: Law Versus People Power in the United States

Benjamin Douglas (Ashcraft & Gerel) has posted Banding Together: Law Versus People Power in the United States, 53 New Mexico Law review (forthcoming 2023). Here is the abstract:

This paper interrogates legal obstacles to forming member-directed, value-supporting associations in the U.S. I examine laws governing political parties, labor unions, nonprofit organizations, and other economic associations, and how law inhibits the scope for internal democracy, the expression of values, or the capacity to build power. This is one key ingredient preserving our system of spectator democracy, where citizens cheer for their designated faction and oppose the rival faction, but seldom actively participate.

Lloyd Mayer

Fleischer: The morality of charitable bequests

Miranda Perry Fleischer (San Diego) has a chapter titled The morality of charitable bequests in a the new book Inheritance and the Right to Bequeath: Legal and Philosophical Perspectives (Routledge 2022). Here is the abstract for the chapter:

Although discussions of inheritance law and policy focus on private bequests to family members, decedents also bequeath large sums to charity – roughly $42 billion in 2020 in the United States alone. The place of charitable bequests has largely been overlooked in the philosophical literature, which tends to approach inheritance as the transfer of wealth between generations of the same family. Most theorists simply assume, with little discussion, that charitable bequests raise different policy concerns and should be given favourable treatment. This chapter explores the interaction of charitable bequest-giving and two common concerns of inheritance law and policy, namely equality of opportunity and the hereditary transmission of political and economic power over others. It argues that charitable bequests are not equal when it comes to alleviating such concerns, and in fact, some charitable bequests exacerbate them. To that end, priority should be given to charitable bequests that further the head start of the least-advantaged and that do not perpetuate family control over assets.

Lloyd Mayer

"Gilded Giving 2022: How Wealth Inequality Distorts Philanthropy and Imperils Democracy"

The Institute for Policy Studies has published Gilded Giving 2022: How Wealth Inequality Distorts Philanthropy and Imperils Democracy. Here is the introduction:

As inequality has grown in the United States, our nation’s charitable system is in danger of becoming a taxpayer-subsidized platform of private power for the ultra-wealthy. This poses risks to the independent nonprofit sector and our society as a whole.

Since our first edition of Gilded Giving 2016: Top Heavy Philanthropy in Age of Extreme Inequality, we have shown that charities are receiving shrinking amounts of revenue from donors at lower- and middle-income levels, and that they are more reliant on larger donations from smaller numbers of wealthy donors. And we have shown that wealthy donors tend to pour their dollars into foundations and donor-advised funds — charitable intermediary vehicles they control — rather than into public operating charities (i.e. active nonprofits on the ground).

This updated edition of Gilded Giving describes the extent of the capture of our charitable sector by the wealthy, the risks this poses, and how it has been exacerbated by the pandemic and other external factors. We also propose strong reforms that would reverse these trends and realign our charitable system to serve the public interest.

Hat Tip: EO Tax Journal.

Lloyd Mayer

Overall College Endowments Post Losses, But Largest Show Slight Gain

Bloomberg reports that Wilshire Trust Universe Comparison Service data shows U.S. college endowments declined by a median of 10.2% before fees in the twelve months through June 2022. But the largest funds, with more than $500 million in assets, reported a gain just under 1.0%. And this is after a very strong positive median return of 27% for U.S. college endowments for the 12 months ending in June 2021. 

Hat tip: TaxProf Blog.

Lloyd Mayer

Nonprofits Driving Increased Local News Coverage

The Institute for Nonprofit News reports that nonprofits are driving an increase in local news coverage based on its fifth annual survey. Here is the Executive Summary:

The 2022 INN Index Report shows that the nonprofit news sector largely weathered the threats and disruption of the COVID-19 pandemic and continues a growth cycle of more than a decade.

Growth can be measured across a variety of indicators, including the numbers of INN members, total revenue, philanthropic revenue, staffing size and audience reach. Collectively, these measures describe a robust field, increasing in capacity and influence. Beyond individual organizations’ growth, growing coordination in reporting and networked content distribution expand the impact of this journalism beyond the size and number of newsrooms.

Going deeper, the Index shows that growth is differentiated. For example, gains in philanthropic support to nonprofit news is most densely concentrated among larger national and global organizations.

Smaller, local news organizations are driving growth in the number of nonprofit news outlets. Roughly 4 in 10 nonprofit news organizations are local, up from about 2 in 10 in 2017. Based on these trends, INN projects local outlets will make up the majority of nonprofit news organizations in 2024.

The Index also demonstrates challenges that could slow growth and merit attention in coming years. These include: the capacity to attract and retain diverse staffs, especially beyond a cluster of newsrooms primarily focused on serving communities of color; access to philanthropic support for smaller and emerging newsrooms; and the cultivation of market-based revenue where it is possible and aligns with the public service mission.

This data is particularly timely given layoffs at numerous local news outlets owned by Gannett, the nation's largest newspaper chain, after a quarterly loss and drop in revenue.

Hat tip: NiemanLab.

Lloyd Mayer

"Millions donated after Uvalde shooting still haven't reached victims and families"

As appears to often be the case after a high-profile disaster or tragedy, organizers who collected funds for victims of the Uvalde school shooting are struggling with how best to distribute those funds to benefits the victims and their families. The Texas Tribune reports on the challenges relating to several different pots of money:

• At least $16 million flowed into GoFundMe accounts and local nonprofit organizations, under the umbrella of the Uvalde Together We Rise Fund that is overseen by a 10-member committee. The committee has held two town hall meetings and is researching how best to get the funds to needy families, including how to minimize negative tax consequences for them. The Fund's website now includes a draft protocol for distribution of the amounts raised.

• Texas Governor Greg Abbott announced an allocation of $5 million for a social services center to help grieving residents, with the first step being a temporary tent for counseling sessions. The county has also approved the purchase of a building to house the center. The governor also allocated $1.25 million to the local school district for counseling.

• According to the article, assistance is also available from other sources, including the state attorney general's Crime Victims' Compensation Program (but only certain costs are covered, and only $36,213 had been paid out relating to the Uvalde shooting as of August 15th), the Community Council of South Central Texas, and the state Department of Housing and Community Affairs (the latter two sources have provided more than $400,000 in gas cards, hotel stays, mortgage assistance, and utility assistance).

Lloyd Mayer

"Casa Ruby bank accounts frozen as D.C. investigates nonprofit's collapse"

The Washington Post reports that a District Columbia court has granted the request of the D.C. Attorney General to temporarily freeze the bank accounts of nonprofit Casa Ruby, an LGBTQ rights and support organization.  A pop-up announcement on the group's webpage says that the group is still open and all of its services are available. But the August 3rd article states that the group shut down most of its operations in July.

The attorney general's request came after an earlier Washington Post article reporting that the group's last board member had resigned in April and numerous bills, including wages owed to several employees, had not been paid. The group's founder and executive director resigned last fall, but according to these news reports maintained control over the group's funds and now is in her home country of El Salvador. The resignation followed shortly after a decision by the D.C. Department of Human Services not to renew an $850,000 grant to the nonprofit, which presenting a significant portion of the group's multi-million dollar a year budget. 

Lloyd Mayer 

NY Annual Charity Filings Move Online & IRS Revises Form 990-N Online Filing Process

Two recent examples of nonprofit reporting moving slowly into the 21st century. First, as of September 19, 2022 the New York Attorney General's Charities Bureau will require all annual filings to be submitted online. The website provides an instructional video and an interactive online checklist for charities unfamiliar with the online submission process. Second, earlier this week the IRS announced that Form 990-N filers will need to use the IRS authentication platform to submit this form. This requires either an active IRS username or an account with ID.me.

Lloyd Mayer

Federal District Court Denies Motions to Dismiss in Elite Universities Financial Aid Antitrust Case

Earlier this week, the U.S. District Court for the Northern District of Illinois denied motions to dismiss filed by various universities relating to antitrust claims brought against them. The antitrust claims relate to the schools' participation the "568 Presidents Group" and, through that group, the use of the "Consensus Approach," which the court described as "a set of common standards for determining a family's ability to pay for college." (Full disclosure: one of the defendant universities is my employer, the University of Notre Dame.)

In Carbone v. Brown University, the court found that the defendant schools did not fall within the Improving America's Schools Act of 1994 section 568 antitrust exception because the plaintiffs had plausibly alleged that the defendants do not admit all students on a need-blind basis, particularly waitlisted and transfer students and, for some schools, children of wealthy past or potential future donors. The court also found that the plaintiffs' alleged "Market for Elite, Private Universities" based on U.S. World & News Report rankings and excluding public universities and liberal colleges was sufficient to state a claim under section 1 of the Sherman Act. The court also rejected arguments for dismissal based on an asserted lack of sufficiently alleged antitrust injury and standing and based on the statute of limitations and, for some schools, based on other grounds.

Lloyd Mayer

Two Federal District Courts Hold That Tax Exemption = Federal Financial Assistance Under Title IX

In two separate decisions last month, U.S. District Courts in California and Maryland separately held that private high schools were subject to Title IX (of the Education Amendment Act of 1972) because their federal tax exemption under IRC section 501(c)(3) constituted "federal financial assistance" for purposes of Title IX.

In E.H. v. Valley Christian Academy, the minor plaintiff brought suit under Title IX (among other claims) based on the defendant school's alleged refusal to play football against the school she attended if she played on her school's team, for which she had successfully tried out. The defendant school moved to dismiss the Title IX claim on various grounds, including that it did not receive "federal financial assistance" as required to be covered by Title IX. The U.S. District Court for the Central District of California denied the motion to dismiss in this respect, concluding that the defendant school did in fact receive federal financial assistance both through receiving a federal paycheck protection program (PPP) loan and through its tax-exempt status. Here is the relevant section of the decision on the latter point:

In addition, E.H. alleges that Valley Christian's tax-exempt status is a form of federal financial assistance that would subject the institution to Title IX. FAC ¶ 32. Defendants respond that it is not “enough for [E.H.] to add that, as tax-exempt entities, First Baptist and Valley Christian derive financial assistance ... from ... the United States government.” Mot. at 8 (internal quotations omitted). The Ninth Circuit has not yet addressed whether tax-exempt status confers “federal financial assistance” under Title IX. The parties provide conflicting case law from other circuits in support of their contentions. See Johnny's Icehouse, Inc. v. Amateur Hockey Ass'n,134 F.Supp.2d 965, 972 (N.D. Ill. 2001) (holding that “tax exempt status, without more, is . . . insufficient to subject it to the antidiscrimination requirements of Title IX”); compare with McGlotten v. Connally, 338 F.Supp. 448, 461 (D.D.C. 1972) (finding tax exemption constitutes federal financial assistance in the context of Title VI litigation); Fulani v. League of Women Voters Educ. Fund, 684 F.Supp. 1185, 1192 (S.D.N.Y. 1988) (concluding that defendant received “Federal financial assistance” within the meaning of both Title VI and Title IX because it received both direct grants and tax-exempt status). Absent any controlling precedent nor “strong legislative history to the contrary,” the Court finds that “the plain purpose of the statute is controlling. Here that purpose is clearly to eliminate discrimination in programs or activities benefitting from federal financial assistance. Distinctions as to the method of distribution of federal funds or their equivalent seem beside the point, as the regulations issued by the various agencies make apparent.” McGlotten, 338 F.Supp. at 461. Accordingly, the Court holds that Valley Christian's tax-exempt status confers a federal financial benefit that obligates compliance with Title IX.

E.H. v. Valley Christian Acad., 2:21-cv-07574-MEMF (GJSx), 9-10 (C.D. Cal. Jul. 25, 2022)

In Buettner-Hartsoe v. Baltimore Lutheran High School Association, five former students of the defendant school brought suit under Title IX (among other claims) based on the alleged failure of school officials to adequately address allegations of sexual assault and verbal sexual harassment of the plaintiffs by male students. The defendant school moved to dismiss the Title IX claim, or in the alternative for summary judgment in its favor on that claim, on the grounds that it did not receive federal financial assistance. The U.S. District Court for the District of Maryland denied the motion, concluding that the defendant school received federal financial assistance by virtue of its tax-exempt status, stating: "In light of the Supreme Court's holdings in Regan, Grove City College, Smith, and Cannon, as discussed supra, this Court holds that § 501(c)(3) tax exemption constitutes federal financial assistance for the purposes of Title IX. Enforcing the mandates of Title IX in schools with 501(c)(3) status aligns with and protects the principal objectives of Title IX: 'to avoid the use of federal resources to support discriminatory practices' and 'to provide individual citizens effective protection against those practices.' Cannon, 441 U.S. at 704." Buettner-Hartsoe v. Balt. Lutheran High Sch. Ass'n, No. RDB-20-3229, 11 (D. Md. Jul. 21, 2022). The court also noted that the defendant school had received a PPP loan, but not until 2020, while most if not all of the allegations related to behavior occurring before 2020.

Lloyd Mayer

EOs Paid $210 Million in Excise Taxes on Excess Executive Compensation in 2021

Earlier this month the IRS released a spreadsheet showing the excise taxes reported by charities, private foundations, and split-interest trusts on Form 4720 for calendar year 2021. It included two notable figures relating to new excise taxes enacted by Congress in 2017.

First, 516 tax-exempt organizations reported owing $210 million in IRC section 4960 excise taxes on excess executive compensation (over $1 million annually paid to covered employees, plus certain excess parachute payments). This compares to only 302 tax-exempt organizations reporting owing $96 million in such taxes for calendar year 2020, likely reflecting increased awareness among tax-exempt organizations and their advisors about the tax as opposed to a large jump in the amount of excess executive compensation. The IRS has also made compliance with this tax a compliance focus, stating that "[o]n-going review of filing data shows there continues to be a high volume of exempt organizations that paid compensation of over $1 million to at least one 'covered employee' but did not report IRC Section 4960 excise tax on Form 4720" (see Tax Exempt & Government Entities – Compliance Program and Priorities).

Second, 33 tax-exempt organizations reported owing $68 million in IRC section 4968 excise taxes on investment income of certain private colleges and universities. This compares to fewer than 10 organizations reporting owing less than $3.2 million in such taxes for calendar year 2020. Given the relatively high profile of this new tax, and the fact that only colleges and universities with very large endowments relatively were affected, it is unclear why there was such a large increase in both the number of organizations reporting the tax and the amounts owed.

Lloyd Mayer

IRS Releases Final Regulations for EO Information Sharing with States

The IRS yesterday released final regulations under IRC section 6104(c) relating to how states may obtain non-public tax-exempt organization information from the IRS, including involving final and proposed denials and revocations of tax-exempt status. Only one comment was submitted in response to the 2011 (yes, 11 years ago) proposed regulations, issued in response to statutory changes made by the Pension Protection Protection Act of 2006. According to the Preamble to the final regulations, there is only one clarifying substantive change to the proposed regulations (as well as several non-substantive clarifying changes). The substantive change was to make it clear that the agent-contractor disclosure prohibition applies both to IRS disclosures and to appropriate State officer (ASO) disclosures.

One interesting piece of information from the Preamble is that the IRS now has section 6104(c) information sharing agreements with nine ASOs, all of whom are State tax officers responsible for administering State tax laws. The Preamble also indicates the IRS is hopeful that the issuance of final regulations will facilitate additional such agreements. That said, the requirements states must satisfy under section 6104(c) to access non-public information are relatively strict, and the final regulations necessarily have to reflect the strictness of the statutory scheme.

Coverage: Bloomberg Tax; Tax Notes (subscription required).

In Southeastern Louisiana: 'Community Lighthouses' Powered by the sun and Volunteers

With so much "bad news" in the news, it is always good to hear of something good happening. Today's Religion News Service (RNS) newsletter has just such a story.

According to the RNS story, during the blackout caused by Hurricane Ida, enthusiastic church volunteer, Ida St. Cyr, lost something she treasures greatly -- her independence, afforded by the electric wheelchair she expertly maneuvers over bumpy city sidewalks.

RNS reports that after Ida, St. Cyr, who has multiple sclerosis, was housebound. She did her best to conserve power on her wheelchair, going only to the end of her block or sitting on her porch after the storm made landfall last August 29. It took 10 more days before all of the habitable homes in New Orleans had electricity again. With the lights out and nothing open in her Broadmoor neighborhood of New Orleans, St. Cyr states that life “was not fun.”

One year later, a project launching in southeast Louisiana aims to help people like St. Cyr who are especially vulnerable during extended power outages as the warming climate produces more extreme weather including bigger and wetter hurricanes. And what is that project?

“Community Lighthouses,” outfitted with roof solar panels and a battery pack to store energy [that] can serve as electricity hubs after a disaster, enabling neighbors to recharge batteries, power up phones or store temperature-sensitive medications.

These lighthouses are being sponsored by Together New Orleans, a non-partisan network of churches and groups that tries to fix community problems. According to organizer Broderick Bagert, these groups

felt “impotent and powerless” as the city struggled to deliver basics like collecting garbage in Ida’s aftermath. They realized that local governments couldn’t handle everything alone.

Bagert continued: “You can spend a lot of time saying… 'Why don’t they?,' but you start to realize the real question is ‘Why don’t we?’”

The RNS newsletter continues:

More than just energy hardware, each lighthouse needs a team of volunteers to study their areas, learn who has health problems and who needs medication refrigerated or depends on electric wheelchairs for mobility. While people with means can evacuate ahead of a hurricane, about one in four people live in poverty in New Orleans, and not everyone can afford to flee. Hurricanes are also forming more quickly due to climate change, making it more likely that people can find themselves stuck in a disaster zone.

Bagert believes that each lighthouse should be able to connect with all of its neighborhood’s vulnerable people within 24 hours of an outage.

The pilot phase anticipates 24 sites — 16 in New Orleans and eight elsewhere in Louisiana. Together New Orleans has thus far raised nearly $11 million of the anticipated $13.8 million cost with help from the Greater New Orleans Foundation, the city, federal funding and other donations.

This sounds like a very worthwhile project. It will bring together people of different religious and political persuasions to fix community problems. I wish them well. We need more of this in today's America.

Prof. Vaughn E. James, Texas Tech University School of Law  

  

 

Philanthropy News Digest: University of Haifa Receives $121.5 Million for Scholarship Funds

The Philanthropy News Digest is reporting that the University of Haifa in Israel has announced gifts totaling $121.5 million from Giving Pledger Elie Horn to establish two scholarship funds. Mr. Horn, who lives in Sao Paulo, Brazil, is the Syrian-born Brazilian Jewish founder of Cyrela Brazil Realty, Brazil's largest real estate company. Through their foundation (The Elie and Susy Horn Foundation), Horn and his wife, Susy, have supported Jewish communities and causes around the world in countries including Israel, Korea and Belarus.

The gifts include $120 million over 20 years in support of Ahavat Olam (Eternal Love) scholarships for students interested in pursuing in-depth studies in Jewish religion, heritage, and history. Scholarship recipients participate in enrichment courses and activities in fields promoting pluralistic Judaism, Jewish culture and heritage, and Jewish history. The remaining $1.5 million from Horn and his sister, Joyce Horn, which will be matched by the university, is earmarked for women who face difficulties financing their studies. The new scholarships will be available for the 2022-23 academic year.

The Philanthropy News Digest reports that in a press release, University of Haifa president and professor Ron Robin stated, "I’m proud that we are able to offer these scholarships and to help a large and diverse circle of candidates, particularly after two difficult years due to the COVID-19 pandemic. The University of Haifa promotes social mobility, and thanks to these new scholarships we will be able to make higher education accessible to wider circles who might otherwise have chosen not to pursue academic studies due to financial considerations. We are tremendously grateful to Mr. Elie Horn for his historic gift, and we look forward with excitement to the upcoming academic year.”

Prof. Vaughn E. James, Texas Tech University School of Law

Miami Herald Story on FPL Supporting Spoiler Democratic Candidate Through Dark Money

The Miami Herald has an interesting look at how Florida Power and Light used different means to support candidates in a Florida state senate race, including PACS and social welfare organizations. 

From the story:

"A strong Democratic challenger was threatening to unseat a friendly Republican incumbent in a Gainesville-area state Senate race in 2018. FPL, one of the country’s largest utilities, needed to make sure the GOP held onto the seat.

So FPL used a shadowy nonprofit group to secretly bankroll a spoiler candidate, a longtime Democrat named Charles Goston, according to new documents obtained by the Miami Herald. Running as a no-party candidate in the general election, Goston helped split the liberal vote, siphoning off enough votes from the Democratic challenger to swing the race to the GOP incumbent.

The documents show that FPL sent $200,000 to the nonprofit, a Washington D.C.-based group called Broken Promises, in the fall of 2018. Within five weeks, Broken Promises had donated $20,000 to Goston’s political committee and spent roughly $115,000 on mailers and advertising supporting him. Best of all for FPL: Because of its nonprofit status, Broken Promises didn’t have to disclose its donors — meaning the cash was untraceable. No one would know that FPL had paid to secretly manipulate a state election in favor of Republicans. Voters were in the dark about who funded Goston and why."

Read more at: https://www.miamiherald.com/news/politics-government/state-politics/article264196761.html#storylink=cpy 

Philip Hackney

Representatives Ask IRS About Church Status of Family Research Council

Propublica reported a few weeks ago that the IRS had granted church status to a right-wing think tank, the Family Research Council. Sam Brunson blogged on here about why FRC might be interested in obtaining this special status.

Now, 40 Democratic representatives from the US House have sent a letter to the Treasury Department and the IRS asking them to explain this decision. Here is the letter.

"We are writing to express concern regarding the Family Research Council’s (FRC) tax-exempt status as an “association of churches.” In addition, we request a review of the existing Internal Revenue Service (IRS) guidance related to political advocacy organizations self-identifying as “churches” to obtain the status of churches, integrated auxiliaries, and conventions or associations of churches.

As you know, Congress has enacted many special tax rules that apply to churches and religious organizations. Under Section 501(c)(3) of the Internal Revenue Code (Code), churches are tax exempt organizations and are not required to file IRS Form 990, which provides transparency on tax-exempt organizations’ board members, key staff salaries, donations, and large payments to contractors. Further, there are special limitations on how and when the IRS can conduct an
examination of churches. In accordance with section 7611 of the Code, the IRS cannot conduct tax inquiries of churches without approval from a “high-level Treasury official.”

Philip Hackney

Eric Amarante publishes States as Laboratories for Charitable Compliance: An Empirical Study

George Washington Law Review just published Eric Amarante's article States as Laboratories for Charitable Compliance. The
abstract reads as follows:

Each year, the Internal Revenue Service (“IRS”) awards 501(c)(3), taxexempt status to thousands of organizations that do not meet the statutory requirements for charities. This is because the IRS, facing increasingly severe budget cuts, adopted a woefully inadequate application process that fails to identify even the most obvious of unworthy applicants. To illustrate this problem, this Article reviews the formation documents of 500 charities that received 501(c)(3) status in 2018 using this new application process. The results of this study are dramatic as they are upsetting: In Florida, only 41.11% of the charities in the study met the statutory requirements necessary for 501(c)(3) status. In Ohio, that number is 33.33%, meaning that two-thirds of the organizations using the new application process were incorrectly awarded 501(c)(3) status.

The worst performing state in the study, Idaho, boasted only 22.08% of organizations meeting the statutory test. As unworthy charities proliferate, the public may lose faith in the entire charitable regime. As trust dissipates, donations are likely to follow, and the charitable sector may lose a vital revenue stream. It is not an exaggeration to say that this potential loss of donations represents an existential threat to the entire charitable sector. With a change in budgetary priorities unlikely in the foreseeable future, it is unwise to wait for the IRS to curb this threat. Rather, it is prudent to identify another way to increase regulatory compliance in the charitable sector. This Article proposes a cost-efficient mechanism for states to fill the regulatory void
left by the IRS. To identify this mechanism, this study identified two states with procedures that resulted in high levels of regulatory compliance: Maryland and North Carolina. Approximately 94% of the organizations formed in Maryland met statutory requirements, while that number was 80.68% in North Carolina. By replicating the procedures in Maryland and North Carolina, other states will not only ensure higher levels of regulatory compliance, but also may help restore the public’s trust in the charitable sector.