Tuesday, February 28, 2023
Schadenfreude and Private Inurement, Courtesy of James O'Keefe and Project Veritas.
It is irrational, I know, to resent personal injury attorneys or TMZ/Drudge Report style investigative reporters. They have their place and eventually they serve useful ends, even if only infrequently. Without personal injury attorneys, cigarette and legal heroin pushers (pain clinics and their respectable counterparts, I mean) would live even more comfortably than they do. And those are just the easy cases. Cars would be a helluva lot more dangerous too. All kinds of stuff would just blow up in our faces and the Ford Pinto industry would just keep making and selling them. And one of my favorite movies is "All The President's Men" in which "WoodStein" exemplified investigative reporting at its finest, and maybe even to the salvation of our Democracy.
Bob Woodward and Carl Bernstein, 1973
But I am feeling irrational today so I admit to experiencing the warm glow of schadenfreude from the turmoil surrounding Project Veritas. That's the nonprofit that likes to use questionable tactics to ambush public officials to say something stupid, off the cuff, or out of context in order to advance a usually right wing point. Everything has its uses, I suppose, but the sort of "dialogue" Project Veritas wants to stimulate is more "gotcha" sound bite than anything else. Anyway, PV's founder has apparently been cancelled, losing out in a power struggle over hiring and firing decisions according to a WAPO article:
Board members moved earlier this month to suspend its, founder, James O'Keefe because of concerns related to the organization’s bylaws and, by extension, its good standing with the IRS. It stated that O’Keefe’s attempt to fire the group’s chief financial officer, Tom O’Hara, was in violation of Project Veritas bylaws, which spell out that, “Any officer elected or appointed by the Board of Directors may be removed by the Board of Directors with or without cause.
O'Keefe's suspension morphed into a termination for cause a few days later. And then the two sides started exchanging public statements, like two divorcing spouses trading accusations in court. In PVs, statement it pointed to all sorts of private inurement and excess benefit transactions adding to the justifications for firing O'Keefe.
Here are a few examples of what has been uncovered so far by PV Leadership (this is far from an exhaustive list, it is merely a small representative sample):
-$14,000 on a charter flight to meet someone to fix his boat under the guise of meeting with a donor
-$60,000 in losses by putting together dance events such as Project Veritas Experience
-Over $150,000 in Black Cars in the last 18 months
-Thousands of dollars spent on DJ and other equipment for personal use
-Hundreds of other acts of personal inurement
Ok, but where were you board members while these "hundreds of acts of inurement" were going on? Too busy spying on women at their OB/GYN appointment or chasing down dangerous woke activists, I bet. Yes, this is a nonprofit, but the Board might want to consult Caremark, not to mention IRC 4958(a)(2) before it starts airing all this dirty laundry in justification of itself.
Schadenfreude is such a good feeling, let's just be honest.
February 28, 2023 | Permalink | Comments (0)
The Public Policy Doctrine in China and America
In the United States we know that to be exempt under IRC 501(c)(3), an organization's activities may not violate clearly defined, fundamental, strong, established public policy. The primary criticism of this notion, or at least one primary criticism, is best articulated in contract jurisprudence, to wit: “public policy . . . is a very unruly horse, and when once you get astride it you never know where it will carry you. It may lead you from the sound law. It is never argued at all but when other points fail." I think the speaker thinks of "public policy" as something akin to "public whim," where government is the public. We are government, after all. Government is not some extra-society group handing down law. We are government. Anyway, I wrote an article a long time ago about Chinese nonprofits and I remember that under the law as it existed then, all nonprofits had to have a government sponsor, a designated bureaucrat maybe, whose job it was to ensure that the nonprofit operated in a manner entirely consistent with public policy. My ethnocentrism wants me to suggest that there is a difference between a mandate to operate consistently with public policy at all times, and a mandate not to ever violate public policy. It is possible, though, that the difference is merely semantic and maybe our democracy isn't as liberal as Powell envisioned when he argued that "public policy" is a means to impose government orthodoxy. From a paper I am working on:
Exemption allows groups without a voting majority to follow an alternative priority with which public goods or services are pursued. Where government might think it unimportant to focus on environmental protection or endangered species, grassroots organizations might differ and direct their financial and human resources exclusively to preservation of wetlands or bald eagles. It is hard to know whether Powell’s view represents a diversion from Burger’s public benefit rationale or just a clarification. I tend to think that Powell is asserting the right of individuals to differ with the government as to public priorities and the methods by which to accomplish those priorities, but not to define for themselves, without any limitation, what is intended by “public benefit.” Even Powell agrees that government may define those things that are so far out of bounds that they are not conducive to the public good. “In this case I agree with the Court that Congress has determined that the policy against racial discrimination in education should override the countervailing interest in permitting unorthodox private behavior.” Id. at 610. (Powell, J. concurring).
Perhaps the difference between the Chinese and U.S. public policy doctrines are matters of degree. Our public policy doctrine regulates around the margins, theirs in the main.
Prior to the enactment of the Charity Law, the literature discussing the pre-2016 regulatory framework showed that the crucial problem underlying the earlier regulation lay in the government’s strict, extensive control over the charitable sector. Embedded within China’s distinctive social, economic, and political conditions are numerous “restrictive and repressive measures”9 through which the State regulates the charitable sector. In the words of Rebecca Lee,“[t]o ensure that it remained a key stakeholder in the charitable sector, the Chinese government retained strong controls over the [charitable] sector through various mechanisms and developed a charitable sector that would collaborate with it but never challenge its legitimacy.” Rather than being autonomous and independent like their Western counterparts, Chinese charities13 are more accurately described as “instrument[s] of state social control.”
If this topic tickles your fancy, here is an abstract from a recently posted paper:
With the 2016 Charity Law, Chinese legislators created a public-private hybrid model for the governance of charitable trusts. By endowing private actors with greater rights in the creation and management of charitable trusts, this hybrid model demonstrates the State’s intention of changing the functioning of the charitable trust sector from complete dependence on the State to a partnership. However, embedded in China’s particular institutional environment, the partnership relationship still bears the mark of strict government control, which is secured by granting extensive powers to regulators. This article analyzes the newly established regulatory framework for charitable trusts and outlines how regulators exercise their power in practice. The findings show that the tradition of regulators being subject to intense administrative pressures remains unchanged and that political concerns permeate every aspect of the regulation of charitable trusts.
February 28, 2023 | Permalink | Comments (0)
Monday, February 27, 2023
Xenophobia and Nonprofits
In Italy, "since the expansion of the EU, the most recent wave of migration has been from surrounding European states, particularly Eastern Europe, and increasingly Asia, replacing North Africa as the major immigration area." This, according to ISTAT, Italy's official census bureau. And also, "Italy was one of the European countries with colonies in Africa during the modern period. Lasting from 1890 to 1941, Italian colonialism in Africa included the present day countries of Libya, Ethiopia, Eritrea, and Somalia. Italian colonialism in Africa came to an end with the death of the Italian leader Benito Mussolini, the collapse of the Fascist regime, and the defeat of Italy in World War II." Of the 7,461,894 people born elsewhere now living in Italy, less than 10% -- 670,000 -- are clandestini. And even then, not all of those extra legal immigrants are from North Africa. The entire immigrant population is less than 9% of Italy's population. Nevertheless, the fascists in the Italian government are literally drowning extra legal immigrants -- men, women, and children -- from North Africa in the year round choppy waters of Mediterranean Sea.
Just yesterday, a rickety migrant ship sunk off the coast of Italy with 150 people on board. If I don't cuss, I might spit. For a sober discussion of Italy's immigration policies and how they came to be what they are, read this article. So far, 43 of the estimated 58 bodies have washed up. The migrants were from Afghanistan (were NGO activities have been crippled by the Taliban), Iran, Pakistan, and Somalia, among other countries. Eighty-five people survived.
The remains of a sunken sailboat washed up on the shores of southern Italy.
Meanwhile, the Prime Minister and the rest of her Mussolini clones are defending their "distant ports" law that took effect just three days earlier, despite warnings that the law would result in many deaths. That law is aimed at preventing NGO's from rescuing migrants out of the cold choppy waters of the Mediterranean Sea. As if that will discourage desperate people from Italy's formerly occupied lands, and other places, from risking it all to escape the places from which colonists derived illegal wealth and even bodies. Italy, ironically, abolished slavery in its African colonies. But on the very first day the distant ports law went into effect, Italy fined Medecins Sans Frontieres (Doctors Without Borders) and banned its rescue boats from Italian ports for 20 days.
Hours after the parliamentary vote, the Doctors Without Borders (MSF) charity said its Geo Barents vessel had been blocked for 20 days and the organisation fined 10,000 euros. The sanctions were imposed after MSF was accused of withholding some information about a rescue it completed last week, when the Geo Barents took 48 migrants to the Adriatic port of Ancona, a spokesperson for the charity said.
Rescue personnel collect washed up bodies on a southern Italian beach.
The right wing xenophobic fascist bastards in the government offered the Italian version of "thoughts and prayers" even as bodies were still being collected:"
Italian Prime Minister Giorgia Meloni expressed "deep sorrow" for the deaths. Blaming human traffickers, she vowed to block migrant sea departures to prevent such disasters. Her right-wing administration has taken a hard line on migration since taking office in October, mostly by restricting the activities of migrant rescue charities with tough new laws that won final parliamentary approval on Thursday. Meloni accuses charities of encouraging migrants to make the dangerous sea journey to Italy, acting as so-called "pull factors". Charities reject this, saying migrants set off regardless of whether rescue boats are in the vicinity. "Stopping, blocking and hindering the work of NGOs (non-governmental organisations) will have only one effect: the death of vulnerable people left without help," Spanish migrant rescue charity Open Arms tweeted in reaction to Sunday's shipwreck.
“Let not any one pacify his conscience by the delusion that he can do no harm if he takes no part, and forms no opinion. Bad men need nothing more to compass their ends, than that good men should look on and do nothing. He is not a good man who, without a protest, allows wrong to be committed in his name, and with the means which he helps to supply, because he will not trouble himself to use his mind on the subject.” -- John Stuart Mill, 1867.
February 27, 2023 in International | Permalink | Comments (0)
Madoff Wants Even More From Private Foundations
Boston College's Ray Madoff is not related to Bernie. The headline is just a giant blog Ponzi scheme for more clicks.
Two notable opposite events happened in the world of private foundations, and viewed together they demonstrate the stark policy contrasts and perhaps the unjustified subsidies enjoyed by wealthy folk. In Baltimore, the Lillian Holofcener Foundation gave away all of its assets to an operating charity:
In a rare move for philanthropy, Adam Holofcener and his family emptied their foundation’s coffers and gave $1 million — nearly all the money it had left to give — to support Lisa Snowden-McCray’s dream: a free newspaper staffed by Black editors and writers in Baltimore to provide news primarily for the city’s Black residents. Snowden-McCray, a journalist who worked at the city’s major daily, the Sun, and the now-shuttered alternative weekly, the Baltimore City Paper, knew Holofcener, a lawyer-activist who represented artists, from the progressive orbit they both inhabited. She and Brandon Soderberg, a former Baltimore City paper editor, had tried to launch a new paper, the Baltimore Beat, but the publishing company that supported it pulled the plug. In 2020, Holofcener casually asked the two if they had any plans to resuscitate the publication. After some more conversation, he surprised the two with an offer. The foundation, which he says had been making a “hodge-podge” of unfocused grants for decades, would essentially go out of business after giving the Beat $1 million.
His family’s Lillian Holofcener Charitable Foundation joins a growing number of grant makers that have put time limits on their existence so they can direct more money immediately to charities. Not only did the Holofcener foundation decide to give away just about every cent it had but Adam Holofcener, 36, executive director of Maryland Volunteer Lawyers for the Arts, and the other relatives on the board did something even more rare by dedicating almost all of its remaining assets to a single project.
In New York, by contrast, Peter Buck the late co-founder of Subway Sandwiches, donated his half of Subway to The Buck Foundation. The donation is worth $5 billion, generates significant tax advantages, and will be managed by the foundation on which the Bucks -- Topher, Andrew, Diane, David, Douglas, Nina and Leland, and Zoe -- compose the Board of Directors:
Buck formed the Peter and Carmen Lucia Buck Foundation with his wife, Carmen, in 1999 to manage the couple’s philanthropic efforts. The foundation’s mission is to give “motivated people the tools they need to help themselves,” according to the foundation’s website. This bequest has been in the works for more than a decade, according to the foundation. Notably, its largest donations went toward education. The foundation in 2022 donated $1.5 million to Capital Prepatory Schools, $1 million to Columbia University, $2.4 million to Elevate Charter Schools, $1 million to Excellence Community Schools, $1.2 million to Doctors Without Borders, $1.25 million to Northeast Charter Schools Network and $1.6 million to Third Sector New England. "This gift will allow the foundation to greatly expand its philanthropic endeavors and impact many more lives, especially our work to create educational opportunities for all students, work Dr. Buck cared so deeply about,” Carrie Schindele, the foundation’s executive director, said in a statement. The foundation reported its fair market value of all assets at $592.5 million in its Form 990-PF to the Internal Revenue Service in 2021. It reported just over $27 million in donations. Notably, its largest donations went toward education. The foundation in 2022 donated $1.5 million.
So lets go back to the future. Here is old Section 504 under the 1950 Revenue Act:
"SEC. 3814. DENIAL OF EXEMPTION UNDER SECTION 101(6) IN THE CASE OF CERTAIN ORGANIZATIONS ACCUMULATING INCOME.
"In the case of an organization described in section 101 (6) to which section 3813 is applicable if the amounts accumulated out of income during the taxable year or any prior taxable year and not actually paid out by the end of the taxable year-
"(1) are unreasonable in amount or duration in order to carry out the charitable, educational or other purpose or function constituting the basis for such organization's exemption under section 101 (6); or
. . . exemption under section 101 (6) shall be denied for the taxable year."
Its pretty much agreed that old 504 didn't force meaningful minimum payouts. A 1965 Treasury Department Report determined that the provision didn't ensure that what Congress intended -- that private foundations pay their incomes to charity currently.
Contributions to nonoperating foundations, however, are often neither devoted to an active charitable program nor distributed to operating charities. Instead, such contributions are often retained by the foundation as principal, to be used to generate income which is to be distributed to operating charities as it is received. In such cases there is usually a significant lag between the time of the contribution, with its immediate effect upon tax revenues, and the time when the public benefits by having an equivalent amount of funds devoted to charitable activities. Where, however, a nonoperating foundation invests its funds in assets which do not generate a reasonable amount of current income or retains the income generated by its investments (except, for situations in which income is accumulated for a specific charitable purpose), the justification for the present treatment does not apply. In such a case the need for corrective action is evident.
The Report thus recommended that private foundations be required to distribute their income on a reasonably current basis:
(a) Distribution of realized income.-Because of the inadequacy of existing law and the Service's difficulty in administering the present permissive rules, it would be appropriate to adopt a rule which would give both taxpayers and the Service workable objective standards. It is therefore recommended that all private nonoperating foundations be required to distribute all of their current net income on a reasonably current basis. Such a requirement would insure that the interposition of a private nonoperating foundation between the donor and charitable activities will not result in undue delay in the transmission of benefits to their charitable destination. . . . Under this proposal a private nonoperating foundation would generally be required to expend the full amount of its current net income by the end of the year following the year such income is received.
What we got from this report was IRC 4942, which assumes a minimum return on dormant assets -- assets not used in a charitable activity -- of 5%, and couples that assumption with a requirement that the 5% be distributed to an operating charity. The law does not explicitly require a distribution of endowment or wealth (the requirement is an imposition on income, not wealth), but I suppose if a private foundation's return is less than 5% of dormant assets, it might have to distribute some of the dormant assets to meet minimum distribution requirements. Correct me if I am wrong. I gotta blog to write here, ain't nobody got time for details or pinpoint citations.
Ray argues in a 2020 Pittsburgh Tax Review article that the 5% rule is fairly useless. She calls it a mere "fig leaf" apparently because it does not cover very much at all:
Judging by appearances, the 5% rule is stronger than ever. For at least fifteen years there have been no Congressional proposals or lobbying efforts to change the 5% payout rule.2 Moreover, the 5% payout rule has become widely accepted and widely touted (by the foundation world, among others) as a reasonable compromise that allows private foundations to exist in perpetuity while ensuring that a portion of their funds be put to current charitable use. Even more importantly, the 5% payout rule has served to legitimate private foundations to the public, by giving foundations a readily recognized role of providing steady sources of capital to nonprofits. All of these things make it seem that the 5% payout rule is well established as both a practical and theoretical matter.
However, despite the apparently robust nature of the 5% payout rule, this Article argues that the 5% payout rule operates more as a fig leaf than as a meaningful control on private foundation spending. Analyzing how the rule operates fifty years after its enactment, it has become increasingly evident that the meaning of the term “payout” is so elastic that the rule cannot be relied upon to fulfill its stated purpose of ensuring the current flow of dollars to charitable activities. In particular, the ability to meet payout requirements by: (1) paying unlimited administrative expenses of the foundation (including salaries and travel expenses for family members), (2) making unlimited contributions to donor-advised funds (which themselves have no further payout requirement), and (3) making investments (provided they qualify as “program-related investments”) give private foundations ample opportunity to skirt the purpose, while still fulfilling the letter, of the law governing payout.
Personally, I think there should be a statute of limitations on private foundation payouts, not just for paying income but also regarding endowment, for a couple of reasons. Like the Holofcener Foundation, all foundations should go out of business in the near rather than far term. First, the charitable contribution deduction (or its estate tax equivalent) is based on the entire endowment, not 5% of the yield. The public should get a yield equal to the entire endowment, the total amount deducted. I admit a credible argument that the entire amount is in fact devoted to public good, at least theoretically, so the deduction should be equal to the entire endowment. If present value equals future income, then we are getting full benefit from the endowment if all income must be paid soon. Blah, blah, blah.
My bigger problem is that the entire amount of wealth -- the whole hog -- is forever devoted to public good, never to return to the market economy. The indefinite dedication to the public good bothers me; I know that sounds crazy, but hear me out. If we really believe that the market provides the most goods for the most people, we should not permanently remove huge chunks of capital from that market where it would otherwise navigate to its highest and best use. At some point, the capital -- the endowment -- should be expensed (not capitalized) for charitable purposes. Only in that circumstance is there a high probability that the wealth will eventually find its way back into the private economy where it can do the most good for the most people. Maybe make somebody else rich who can recycle the wealth back into charity.
Not only that, but without a statute of limitations on private foundations, one family usually exercises outsized control over a sector designed to spread public policy-making power amongst the grass and the roots, thereby allowing for a wide diversity of [funded] views regarding what is the public good. As it stands, one huge chunk of wealth is forever dedicated towards public good, sure enough. But it is a public good defined by a small group of ultra wealthy charitable oligarchs who can thereby demand a certain conception of the public good. Soon enough, the public good will be funded by reference to small cadre of out of touch folks who like seeing their names on buildings.
By the way, I really hate it when scholars steal my brilliance, thereby depriving me and this blog of a MacArthur Genius grant. Here is what Ray "I'm Not Bernie" Madoff said about my idea when it was her idea long before it was my idea:
Take the topic of taxes, for instance. Yes, Madoff argues, your tax bill could be less if more than $1 trillion of assets weren’t parked in private foundations and university endowments largely protected from Uncle Sam. “It is important that we revisit the rules to see if they are producing the result we want,” says Madoff, who has found that, well, they aren’t. Instead, too much money is locked away, much of it spent for dubious reasons (Leona Helmsley’s $8 billion for dogs, for example), not at all, or on causes dictated undemocratically by the dead or the very wealthy, all tax subsidized.
February 27, 2023 | Permalink | Comments (0)
Friday, February 24, 2023
Indian Supreme Court Applies "Paradigm Shift" on Commerciality and Unrelated Trade or Business
John and Mark wrote a lot about a "donative" theory of tax exemption, the central thesis of which is that tax exemption should be limited to organizations that demonstrate they are worthy of exemption by generating sufficient public support such that its capital derives from donations. A necessary corollary, of course is that an organization should not be tax exempt if too much of its operating capital derives from sales. We all pretty much agree that the ideal charity, for which tax exemption is appropriate, is the one to which donate, and which organization, in turn, gives all its resources to appropriate beneficiaries. Somewhere in their two articles, they admit that ideal has never been the exclusive model for tax exempt organizations and, if I recall correctly, almost all organizations rely to one degree or another on income from sales of the "charitable" product -- tuition admission prices or hospital charges, for example. The enduring question, of course, is how much fee for service or goods (charitable or not) is too much so that we no longer consider the organization charitable. That is the difficult question. I don't remember if John and Mark settled on a definitive answer applicable in all cases but I kinda doubt it.
In India, the Indian Supreme Court, has approved a "paradigm" shift, in effect imposing a donative requirement limiting tax exemption to charitable organizations whose fees for services or goods do not exceed 20% of "total receipts:"
The paradigm change achieved by Section 2(15) after its amendment in 2008 and as it stands today, is that firstly a GPU charity cannot engage in any activity in the nature of trade, commerce, business or any service in relation to such activities for any consideration (including a statutory fee etc.). This is emphasized in the negative language employed by the main part of Section 2(15). Therefore, the idea of a predominant object among several other objects, is discarded. The prohibition is relieved to a limited extent, by the proviso which carves out the condition by which otherwise prohibited activities can be engaged in by GPU charities. The conditions are:
(a) That such activities in the nature of trade, commerce, business or service (in relation to trade, commerce or business for consideration) should be in the course of “actual carrying on” of the GPU object, and
(b) The quantum of receipts from such activities should be exceed 20% of the total receipts.
(c) Both parts of the proviso: (i) and (ii) (to Section 2 (15)) have to be read conjunctively-given the conscious use of “or” connecting the two of them. This means that if a charitable trust carries on any activity in the nature of business, trade or commerce, in the actual course of fulfilling its objectives, the income from such business, should not exceed the limit defined in sub-clause (ii) to the proviso.
In what is apparently the first case applying the paradigm shift, the Indian Supreme Court remanded a case involving an exempt newspaper whose advertising income exceeded 20% of receipts. If I read the opinion correctly, any amount of unrelated fee for service/goods precludes tax exemption. Fee for related service/goods may not exceed 20% of all receipts. I gotta think this through. The Court remanded to the lower tribunal for finding on the "nature of the receipts." If advertising is unrelated to the charitable mission -- as it generally is here in the U.S. under the "fragmentation rule discussed in American College of Physicians," the newspaper may not accept any amount of advertising revenue. If it is related, advertising revenue may not exceed 20% of receipts. Meanwhile if you are interest in Indian law of ta exemption or just comparative law, download both opinions for an interesting discussion.
Click on the picture to get an "Analysis of the Current Legal Framework for Civil Society in India."
February 24, 2023 in International | Permalink | Comments (0)
Only The Private Benefit Doctrine Can Save Tax Exemption for Nonprofit Hospitals
Duke Health doubled the paychecks of its CEOs twice in one decade. CEO Eugene Washington made $2.7 million in 2020 — a 120% raise from 2016 — while former CEO Victor Dzau retired with an $8 million compensation package that was 187% higher in 2015 than in 2011.
Here's the point. The Pennsylvania cases and the North Carolina Report make the strong case that even if the amounts paid to hospital executives does not constitute private inurement or excess benefit -- because the compensation is within the range paid by like organizations in like industries, for-profit or nonprofit -- the amount of compensation unjustifiably precludes the charitable mission to an intolerable intent. An important regulatory change is required to implement this finding.
The two things that make us see red about nonprofit hospitals is (1) incredibly high salaries, and (2) incredibly low rates of charitable care. That's just the bottom line, that's what everybody is mad about but nobody can fix. That's because nonprofit health care is big business. Sometimes we just overthink things. But two states -- Pennsylvania and North Carolina -- might just drag the rest of the nation to a point where nonprofit hospitals become truly distinguishable from their for-profit counterparts, occupying a slow that rarely intersects with the for-profit fast lane. We reported a few weeks that the Commonwealth Court of Pennsylvania denied tax exempt status to four nonprofit hospitals, all owned by the same exempt LLC. The Court described the compensation paid to the hospital CEO's as "eye-popping." Earlier this week North Carolina State Treasurer, Dale Folwell, released a damning report regarding compensation trends for nonprofit Top Hats in North Carolina. Folwell has been on a vendetta, of sorts, against nonprofit hospitals ever since he took the job:
Executive compensation of health system leaders is the responsibility of an organization’s board of trustees. They are not able to ‘enrich themselves.’ There is a rigorous process prescribed by the Internal Revenue Service for setting executive compensation. For tax exempt hospitals, an independent panel drawn from the board of trustees is charged with setting CEO compensation. To help determine appropriate compensation, this independent panel relies on benchmark data from similar organizations, and the compensation package is approved by the entire board. Hospitals and health systems are transparent about these salaries. Nonprofits disclose them on their IRS Form 990s. The compensation of the chief executive officer and other top executives at public hospitals are, by law, a matter of public record. In terms of scope of job responsibilities, many chief executives of large health systems, some multi-state, direct an array of care services that include overseeing multiple large acute care hospitals, physician groups, primary care and specialty clinics, home health organizations and often rehabilitation and behavioral health care facilities, as well, in a constantly shifting state and federal regulatory environment.
The surprising thing about the hospitals in both the Pennsylvania cases, and in North Carolina, is that non of those cases involved unreasonable compensation!
The surprising thing is that the hospitals in Pennsylvania and in North Carolina were right; the compensation paid to Top Hats was not unreasonable, at least not as defined in the excess benefit regulations. In both states, it was determined that compensation was within the range required by Treas. Reg. 53.4958-4 (defining excess benefit). The NCHA is essentially making the case that nonprofit hospital compensation is entitled to the strong presumption of reasonableness in Treas. Reg. 53.4958-6.
So one may not agree with the report's asserted cause and effect, that very high compensation unjustifiably reduces the charitable health care, but it cannot be doubted that the compensation is high. Very high. That was the point, as well, in the Pennsylvania cases. The compensation was "eye-popping." If you are interested in tax exemption for hospitals, you should really make time to read the Pennsylvania cases and the North Carolina Report. I am about half way through with the opinions and will talk about those next week.
Here's the point. The Pennsylvania cases and the North Carolina Report make the very strong case that even if the amounts paid to hospital executives does not constitute private inurement or excess benefit -- because the compensation is within the range paid by like organizations in like industries, for-profit or nonprofit -- the "very high" or "eye popping" amount of compensation may unjustifiably preclude the charitable mission to an intolerable intent. In those cases, tax exemption should be denied or revoked:
Worse, there is disturbing evidence that hospital executive pay is not meaningfully linked to either patient safety or nonprofit hospitals’ charitable mission. Patient safety “declined severely” during the pandemic, as health care-associated infections jumped as much as 47% from 2019 to 2020, accompanied by troubling increases in patient falls and other preventable patient safety events. Patients’ financial health also suffered during the pandemic as hospitals sued thousands of patients over medical debt. In North Carolina, some nonprofit hospitals billed more than $149 million to poor patients who should have received charity care. Worse, many of North Carolina’s largest nonprofit hospitals encouraged thousands of North Carolinians to sign up for “medical credit cards” that can charge up to 18% interest.
Taken together, the Pennsylvania cases and the North Carolina Report make a strong case that an insider's very high salary, even if it does not violate the prohibition against private inurement and does not constitute excess benefit, may still result in private benefit so that the hospital should not be tax exempt. On a deeper level, this might mean that we eliminate the rule adopted in the excess benefit regulations whereby the reasonableness of compensation is determined by reference to compensation paid by for-profit as well as nonprofit hospitals. Treasury Reg. 53.4958-6(c)(2)(i). As long as the for-profit market sets the outer limits of reasonable compensation, nonprofit compensation rates will be indistinguishable from for profit compensation. And according to the Pennsylvania Courts and at least one credible report so far, nonprofit charitable care will hardly be more than charitable care by for-profit hospitals. I just don't believe, as nonprofit boards are wont to argue, that we cannot attract capable nonprofit hospital administrators unless they are paid astronomical salaries like their for-profit counterparts. There are true believers and dedicated people who would accept a fraction -- what, $500 to $750 million -- to work at a nonprofit. I certainly doubt those folks would make things worse than they already are. I gotta think about this.
February 24, 2023 | Permalink | Comments (0)
Thursday, February 23, 2023
Ways and Means Chair Insists on TIGTA Investigation of ProPublica
February 23, 2023 | Permalink | Comments (0)
SALT Cap to Sunset Soon, What's on Second
Question and Answer, Abbott and Costello. A long time ago.
Q: So let me see if I have this right . . . Trump enacted the $10,000 SALT cap to punish blue states, although there is a credible argument that it was used to make rich folks pay for other cuts? But even then there was a pass thru escape hatch? The Democrats shouted bloody murder, and the Republicans gloated? And when Trump got kicked out, Biden promptly and successfully defended the SALT cap anyway to the dismay of Schumer and Pelosi? Biden's DOJ wrote a Brief in Opposition, to other Democrats' petition for cert? And now a buncha red state Republicans are holding up an extenders bill in the House because the one provision they definitely don't want extended is the SALT cap? Are you telling me that that Schumer and the "other east coast liberals" are on MAGA's side? Shut the front door! All the while, charities can't decide which side to take because there wasn't enough time to know if charitable workarounds resulted in more or less charitable donations paid to offset state tax payments primarily paid by wealthy people? Charitable workarounds which were largely shut down, though not entirely if you had an LLC or an S, by new regulations that are about to be obsolete?
A: Yep. Whose on first.
Here is how the Washington Examiner explains it:
On Monday, Rep. Vern Buchanan (R-FL) and 72 of his colleagues introduced a bill that would make permanent nearly two dozen tax provisions that were part of the Tax Cuts and Jobs Act and are set to sunset after 2025. But the Washington Examiner learned on Tuesday that some GOP lawmakers are objecting to the legislation as currently written because it extends a cap on state and local tax deductions. The $10,000 cap on deductions for state and local taxes paid has been a contentious topic among both Democrats and Republicans in high-tax states. It was included by Republicans in the Trump tax overhaul as a way to offset the revenues lost from other tax cuts in the bill. The deductions largely benefit wealthy people in high-tax blue states. But a swath of Republicans says they will not vote for a bill that includes extending that cap.
“While there are some tax cuts and other provisions of the law that we would like to see extended, the SALT cap is not one of them,” said Rep. Andrew Garbarino (R-NY). "The Republican members of the SALT Caucus will not vote for a SALT deduction cap extension." The SALT Caucus is a group of Democratic and Republican lawmakers who have banded together during the last Congress and this new one to fight for the SALT cap to be raised or eliminated. Garbarino, who represents part of Long Island, is one of the caucus’s co-chairmen.
After last year’s midterm elections, the SALT Caucus now contains 10 Republican members. If every SALT Caucus member voted against the legislation as written and every other GOP lawmaker voted in favor, it would fail 222-212. One such new member, Rep. Mike Lawler (R-NY), told the Washington Examiner that he will not support any legislation that includes making the cap permanent. “While I support many of the provisions of the TCJA and believe they should be permanently enacted into law, I cannot and will not support any legislation that would permanently extend the $10,000 cap on the State and Local Tax Deduction,” he said in a statement. “The cap must be lifted, and I will do everything in my power to do so, including withholding support for any legislation that would extend the cap on SALT.”
February 23, 2023 | Permalink | Comments (0)
Wednesday, February 22, 2023
New Suit Alleges San Diego Catholic Diocese Transferred Assets to Avoid Paying Sex Abuse Claims
In a news report on today's edition of Religion News Service, Alejandra Molina writes that a "law firm representing alleged sexual abuse victims in California is suing the Roman Catholic Diocese of San Diego, claiming the diocese fraudulently moved around real estate assets in an attempt to hide its wealth and avoid paying child sex abuse claims."
According to Molina,
The suit, filed Tuesday (Feb. 21) by the Zalkin Law Firm in San Diego County Superior Court on behalf of more than 100 plaintiffs, alleges that the diocese transferred at least 291 real estate parcels, with a total tax-assessed value of more than $453 million, to parish corporations in order to defraud creditors at a time when the diocese was aware of “significant claims” by victims of childhood sex abuse.
The lawsuit alleges that these transfers “were done as part of a scheme created, masterminded, and designed” by the diocese and parishes so assets could not be “reachable” by creditors and those filing claims.
The lawsuit claims that the diocese made these transfers beginning in September 2019, the same month the California Legislature passed Assembly Bill 218, which, with Gov. Gavin Newsom’s endorsement, lifted a statute of limitation on childhood sex abuse claims. The law opened a three-year window beginning in 2020 that allowed alleged victims of child sexual abuse to file lawsuits without age limitations.
The suit comes days after Cardinal Robert McElroy, bishop of the Diocese of San Diego, announced that the diocese may declare bankruptcy as it faces “staggering” legal costs in dealing with hundreds of lawsuits alleging priests and others sexually abused children.
Meanwhile, Kevin Eckery, spokesman for the diocese, defended the transfers, saying they predate the Assembly bill. "Under canon law the assets of each parish have been separate and independent from the Diocese," Eckery said. "Over 10 years ago, long before Assembly Bill 218 was introduced, the Diocese began the process of formalizing in civil law the separate legal status of each parish and its assets. This included recording proper legal title for each parish to its own real estate."
Eckery added, “The Diocese has a profound obligation and moral duty to use its own assets to equitably compensate survivors.”
In an article published almost two weeks ago, The Associated Press reported Eckery as saying that the cost of settling the outstanding cases against the diocese which have not gone to trial would amount to $550 million. McElroy had also written a letter to be distributed to parishioners which revealed that most of the diocese’s assets had been used to settle previous allegations, ending in a $198 million payout in 2007.
In a news conference on Wednesday, Attorney Irwin Zalkin said the “diocese and its parishes have engaged in a conspiratorial enterprise to defraud child abuse victims and to deny them the justice they deserve.” He noted that if the diocese files for bankruptcy, it would have to identify and disclose its assets. He continued: “The question would be whether these properties that got transferred are assets of the diocese or not.”
He went on to state that the lawsuit seeks to reverse those transfers. He wants the properties to revert to diocesan ownership as “assets of the diocese as they are, and they should be.” Zalkin said his firm will pursue the matter through the civil court or through bankruptcy proceedings if the diocese files for bankruptcy.
Zalkin denied that the filing of the lawsuit was timed to coincide with Ash Wednesday but noted instead that "it speaks volumes as to the moral conduct or lack of moral conduct of this diocese." According to Zalkin, the leaders of the diocese have "developed a PR spin on how they’re concerned about victims, and they want to do the right thing by victims, but at the end of the day, it’s all about the money and protecting their assets.”
The lawsuit also claims that the diocese created an “Independent Compensation Fund,” in which survivors’ claims would be reviewed by an independent claim evaluator. If the claim qualified, a final settlement offer would be made. However, the lawsuit alleges that in reality, the fund “was designed to draw out individuals who would otherwise be eligible to bring a lawsuit pursuant to AB 218 and settle their claims for pennies on the dollar.”
“At the same time that the ‘Independent Compensation Fund’ was becoming operational and the Senate was passing AB 218 on to the Governor in mid-September of 2019, the Diocese was engaged in a massive effort to transfer title to hundreds of millions of dollars of real property for no consideration,” the lawsuit reads.
The lawsuit states that “this fraudulent scheme” was meant to defraud “plaintiffs and others with claims based on clergy sexual abuse.”
Prof. Vaughn E. James, Texas Tech University School of Law
February 22, 2023 in Church and State, Current Affairs, In the News, Religion | Permalink | Comments (0)
FLASH! Governments Don't Trust Nonprofits
Fair use is your friend
Those pesky nonprofit do-gooders are busy doing good, and at the same time trying to avoid geopolitics all over the place. They shan't get away with it; around the globe government is protecting us in what almost seems a concerted effort. In Congress, House Foreign Affairs Committee Chair McCaul accused USAID of not doing enough to "investigate credible allegations a nonprofit receiving a $110,000 grant is associated with designated terrorist organizations more than eight months after committee staff raised the issue. USAID took no action to investigate the grant to Helping Hand for Relief and Development (HHRD) even after being provided detailed information on the allegations." He called the failure to investigate "alarming," "grossly negligent," and "unacceptable."
Just last week, McCaul spoke out against Venezuela's "Draft NGO Law:"
Venezuela’s draft law to regulate non-governmental organizations is the latest attempt by the ruling socialists to stifle dissent and terrorize the opposition. By heavily regulating NGOs and banning political adversaries, the regime will effectively squash one of the few remnants of political opposition in the country. We strongly urge the Biden administration to recognize that the Maduro regime is not a reliable counterpart and its policy of unilaterally easing sanctions undermines efforts to restore Venezuela’s democracy.”
And last week we reported that Alliance for Global Justice's fundraising platform was disconnected after other another nonprofit accused it of accepting donations for foreign terrorist organizations, and at the same time issued warnings to AfGJ's bank that it was violating federal law. NGO Monitor published a report this month in which it asserts "clear and convincing evidence of links between the Popular Front for the Liberation of Palestine (a group designated as terrorist by several governments) and the European Government-funded NGO Network."
And in Myanmar:
The Organisation Registration Law was introduced by Myanmar’s so-called State Administration Council in October 2022, repealing the former Association Registration Law 2014. It makes registration of NGOs and associations mandatory rather than voluntary, and requires the declaration of funding sources and locations of operation among other information that aid workers deem risky to provide. But being unregistered comes with financial penalties and potential prison time. While it's not unusual for organizations to share information about their activities, this law threatens the need for organizations to protect those they support and their personal data, said a Myanmar-based aid worker who asked to remain anonymous for security purposes. There must be no consequences for having received humanitarian assistance, they added. The law forbids the provision of aid to areas not controlled by the council and those who oppose the junta, which forcibly seized power of the country in a coup in 2021.
The junta is trying to ensure no money moves from NGOs to resistance fighters, according to a report by the International Crisis Group. A local advocacy worker who also requested anonymity said it’s also about preventing human rights groups from reporting the military’s violations, and believes registering with the junta will only give the regime legitimacy.
Meanwhile, in Vietnam:
- A wave of recent closures of environment organizations in Vietnam, as well as the arrests of NGO leaders, reflects the difficult position that activists face in the one-party state.
- Nonprofit organizations have an unclear legal status in the country, and are vulnerable to pressure from the state as well as from powerful private interests.
- Though the communist-led government has at times recognized the value of NGOs as partners in implementing social and environmental programs, it has also attacked the concept of civil society as a threat to official ideology and morality.
Later on in Zimbabwe
Jeers filled the air when lawmakers of the ruling ZANU-PF party celebrated after the Private Voluntary Organizations Amendment Bill, which regulates non-governmental organizations, passed in Zimbabwe’s Senate late Wednesday. The legislation, which still awaits President Emmerson Mnangagwa's signature, makes it a criminal offense for NGOs to support or oppose political parties or candidates in any election. Supporters say the legislation is designed to curb financing for terrorism and money laundering in Zimbabwe. Ziyambi Ziyambi, Zimbabwe’s justice minister, told Parliament after the bill passed that law-abiding NGOs have nothing to fear. “All we are saying is: if you come and you say you want to assist – in quotes – water sanitation, you have not any business in getting into political lobbying,” he said. “So, we are saying: we want to follow the money where it is going. So, we believe that this is a progressive piece of legislation.”
Musa Kika, a human rights lawyer who heads the Zimbabwe Human Rights NGO Forum, said the law infringes on Zimbabweans’ basic rights. “Our position is this law is unconstitutional,” he said. “It violates freedom of association. It violates citizens’ rights to organize and self-organize in spaces outside the state. So that’s our position that this law cannot and will not stand constitutional scrutiny by an independent and any competent court.”
And finally, in Italy, where the Ghost of Mussolini roams and fascism is on the rise, Amnesty International is condemning new legislation implementing a "distant port" requirement with ever greater impunity:
In the central Mediterranean, over 2 thousand people lost their lives in 2022 while engaging in irregular sea crossings to seek international protection or better lives in Europe. In December 2022, the Italian government adopted two measures affecting NGO ships that patrol the central Mediterranean and rescue people in distress at sea. The first is a new “distant ports” practice, that requires NGO ships carrying refugees and migrants rescued at sea to have people disembark in ports in central and northern Italy, including in the Adriatic Sea – i.e. in ports particularly distant from the position where rescues are typically carried out. The second is a new decree-law introducing a number of additional requirements for NGO rescue vessels. In combination, these measures significantly reduce the capacity of NGO rescue ships to patrol the areas of the central Mediterranean where shipwrecks are more likely to occur. Amnesty International calls on the Italian authorities to end such measures as a matter of urgency.
I don't like marinara sauce with my fascism. I like good ol' fashioned American fascism. That's why I live in Florida.
February 22, 2023 in International | Permalink | Comments (0)
Mayer on Nonprofits, Taxes, and Speech
Lloyd is keeping real busy these days. Here is the abstract to his recently posted, "Nonprofits, Taxes, and Sppech:"
Federal tax law is of two minds when it comes to speech by nonprofits. The tax benefits provided to nonprofits are justified in significant part because they provide nonprofits great discretion in choosing the specific ends and means to pursue, thereby promoting diversity and pluralism. But current law withholds some of these tax benefits if a nonprofit engages in certain types of political speech. Legislators have also repeatedly, if unsuccessfully, sought to expand these political speech restrictions in various ways. And some commentators have proposed denying tax benefits to groups engaged in other types of disfavored speech, including hate speech and fake news. These latter proposals have recently become more prominent as additional facts come to light about the role of nonprofits in supporting white supremacy and in disseminating misleading information about COVID-19 treatments.
This Article explores the existing and proposed limitations on speech by tax-exempt nonprofits given the constitutional restrictions on such limitations and the policy justifications for existing nonprofit tax benefits. It explains why the existing limits on political campaign intervention and lobbying by charities are both justified given the subsidy provided to charities and their supporters under existing federal tax law and constitutional given existing and longstanding case law. It further concludes that any expansion of these limits on charities to cover other types of speech, including hate speech and fake news, would be inconsistent with the existing broad definitions of the purposes that charities can pursue as well as, in some circumstances, constitutionally suspect. It also concludes that limits on speech by non-charitable tax-exempt nonprofits, including the existing limit on political campaign intervention for some of these nonprofits, is both unwise as a policy matter and, in some circumstances, constitutionally suspect given the lack of a subsidy for such speech by these nonprofits.
February 22, 2023 | Permalink | Comments (0)
Tuesday, February 21, 2023
February 21, 2023 | Permalink | Comments (0)
Studying PILOTS: Ad Hoc Taxation and The Difficulty of Data
One of the barriers to articulating a grundnorm for PILOTS is that PILOTS are inherently ad hoc and indeed oxymoronic. A payment in lieu of taxes means a payment made so the authorities won't tax the payer. In other words a tax, though one not imposed at a uniform rate. The payment is made all by private contract between government and taxpayer. Seems a strange way to run a tax system. But not entirely without precedence in other contexts. Local authorities frequently offer concessions from generally applicable taxation to entice new business to their jurisdictions, for example. Its hard to generalize on PILOTS, and the bigger elephant in the room -- the exemption of charity- owned property from taxation -- without a better understanding of the individual communities seeking to impose PILOTS, and the varying terms of PILOT agreements. A city like Pittsburgh, for example, might need a different approach than New York or Chicago, though all the cities have relatively wealthy nonprofits with significant land holdings. But nonprofits in Pittsburgh might own proportionately higher percentages of property; and certainly a PILOT program in the northeast might be unnecessary or irrelevant the farther west we travel, until we arrive in Palo Alto where the approach in the northeastern United States might once again be appropriate. PILOTS are terribly local.
A report out of Ithaca New York provides a deeper dive into the analytics behind the PILOT agreement between Cornell and Ithaca, bringing home some of the counter-efficient impacts of charitable property tax exemption:
THE HARD NUMBERS
As reported by Ithaca’s local radio station, WRFI, February 1, 2023, “according to the rental real estate listing service Dwellsy, Ithaca has the highest rent of any small city in the U.S. The study shows the average price for a one-bedroom was $1908 per month in 2022, up 4.5% over 2021. Only eight cities had higher average rents…New York, Boston, San Francisco, San Jose, Washington DC, Santa Barbara, Los Angeles, and San Diego.”
Sometimes forgotten in high rent areas, is that rents and property taxes are connected. Some assume landlords wanting to maximize profits are behind high rents, but landlords must pay local taxes, too, and this is a large factor in establishing rents. Ithaca and Tompkins County taxes are exorbitant by many standards across the country.
According to realtor.com, the median sold home price in Ithaca was $337,500 in 2022. This equates to a 2023 city tax bill of $4,043, county bill of $1,909, and school tax bill of $5,683. Additionally, city residents minimally pay $851 per year for water, $80 to a sidewalk repair fund, an $80 solid waste fee, and $4.50 and $1.50 for each garbage and yard waste collected curbside. The bill is about $13,000 though many pay more. By contrast, the average American household spends $2,471 on property taxes each year for a median home valued at $268,800, according to the U.S. Census Bureau, as reported by WalletHub in March 2022.
. . . .
Running a city is clearly no cheap proposition, especially when a majority of the city’s total assessed properties are tax exempt. To help understand how billions of dollars of tax-exempt property affect the cost of living, Assessor, Jay Franklin, estimates that if all property were taxable in Ithaca, the city tax rate would drop more than 50% and the Ithaca City School District tax rate would decrease 45%. If all Cornell property was taxable at the same rate as all homeowners pay, Cornell would owe the city $33 million, the county $15 million, and the school district $46 million.
Knowing this, how does a community calculate an equitable number for the next agreement. Cornell’s 2023 contribution of $1,575,204, as stipulated in the current Memorandum amounts to just a bit less than the amount collected by the city for dog and other licenses and permits.
There are examples within the Ivies worth reviewing. One is for institutions with property valued over $15 million, to pay 25% - 40% of the property taxes they would owe if they did not have tax exempt status. This is done in the form of a PILOT (Payment in Lieu of Taxes). For Cornell with nearly $3 billion worth of city property, the 25% minimum would equal $8.25 million for the city. The county would receive $3.8 million and the school district $11.5 million.
February 21, 2023 | Permalink | Comments (0)
A Rule Against [Charitable Naming] Perpetuities
The O'Connell Center at the University of Florida. O'Connell disavowed his racist beliefs in 1971 but some still push for his name's removal.
The word "slavery" when used to describe forced and uncompensated labor is unconscionably antiseptic. It allows us to talk about the systematic robbery, kidnapping, rape, murder -- genocide, really -- of the enslaved without acknowledging the crimes. Acknowledgement brings into focus the absurdity of naming a charity or public place after people who engaged in or perpetuated robbery, kidnapping, rape, and murder. What could be more unlike charity or unworthy of commemoration? So it makes sense that DOD has finally ordered that nine military installations, named after Confederate generals, be renamed:
Nine southern Army bases are named for treasonous Confederate generals who fought against the United States to preserve slavery and white supremacy. All nine will soon have new names. A commission established by Congress recommended a list of distinguished Army heroes for the new base names, and Defense Secretary Lloyd J. Austin III recently ordered the changes by the end of 2023. The bases were originally named as part of a movement to glorify the Confederacy and advance the Lost Cause myth that the Civil War was fought over “states’ rights” and not slavery.
I had some great times at some of those places by the way. As a kid I played pee wee football at Ft. Rucker, Alabama. After law school, I suffered through Jump School at Ft. Benning.
Colleges and universities are following suit, acknowledging crimes against humanity by renaming buildings or programs. Its the least that can be done actually. But in Virginia, the University of Richmond's decision to remove a benefactor's name from its law school has prompted an heir to demand the return of the benefactor's donation -- made possible, ironically, from the labor of those he enslaved:
A Virginia lawyer is demanding the University of Richmond pay his family more than $3 billion after the school changed the name of its law school, which was named after his relative. T.C. Williams Law School was named after a tobacco business owner who owned 25 to 40 enslaved people, according to the university, which changed the name of the school last year after hundreds of students and faculty protested.
The heir's demand letter goes on an unmitigated rant, referring to those supporting and conceding the change as "low IQ woke ingrates," and "carpet bagging leftist weasels . . . who must be destroyed." The heir is a Richmond Law grad, by the way, and also of Virginia and Cambridge, where he honed his advocacy and persuasion skills, obviously.
So I sniffed around for awhile trying to find the law relating to perpetual naming transactions. When a donor transfers money to a charity in explicit or implicit exchange for naming rights, is the charity bound forever to be named after the donor? I found John's very thorough article on the topic. And there are all sorts of shorter media reports and discussions available online -- John's masterpiece is obviously pre-tenure because it is 100 pages and 400 footnotes uncovering every nook and cranny of the issue. I've done the same, admittedly. To get quicker reads, Google "perpetual naming rights". I don't have the time to read John's article at the moment. But from a word search and light skimming, I bet he agrees with my tax based rationale against naming rights perpetuities:
If the transfer of perpetual naming rights in exchange for a deductible charitable contribution creates a contract, every taxpayer is a party to that contract with a right of enforcement and novation, allowing taxpayers to demand or waive enforcement of any such perpetual naming obligation. Donor's entitlement to a charitable contribution deduction means all of us contributed to the charity and therefore are just as much parties to the contract. Taxpayers and donors together may demand enforcement, but either party alone can waive enforcement.
That's just a thought, inspired by the instinct we all have to disfavor perpetuities. I gotta think it through.
February 21, 2023 in Current Affairs | Permalink | Comments (0)
Monday, February 20, 2023
Taxation by Rent-Seeking: Why is the Daytona 500 Tax Exempt?
The Daytona International Speedway
Incumbents support tax policies often just to get reelected. Political "rent seeking" its called. Anyway, taxing authorities occasionally exempt activities, properties, and sometimes people, like clergy or military veterans, from taxation. And sometimes even certain events are exempted from taxation. Will Rogers was once heard to say “Things aren't what they used to be and probably never were.” I was gonna express in this post that it used to be that tax law in general, and tax exemption in particular, were all based on a grundnorms -- principled grand theory -- the fundamentals of which we learn in law school and by practice. And everybody adhered. But c'mon, there is no rhyme or reason to it all, most of the time. That's what some experts concluded when asked why the Daytona 500 should be exempted from Florida's generally applicable sales tax.
So, how did the Daytona 500 exemption make it into the bill. CBS Miami has obtained an email showing it was a lobbyist for NASCAR that wrote the amendment. On February 21, a day after last year's Daytona 500, Luke Strominger – an aide for South Florida State Senator Anna Maria Rodriguez, wrote an email to Robert Babin, the staff director for the Senate's powerful Tax and Finance committee. "David Browning wants to have this included in the tax package." Attached was this document with the wording for Daytona 500 tax exemption that was inserted into the bill at the last minute. David Browning is one of eight lobbyists in Tallahassee for NASCAR. Reached by phone, Browning declined to comment for this story.
"Well, of course, there's no surprise that they're the ones who stuck this in because reducing the tax on the Daytona 500 doesn't benefit anyone except a little bit for the handful of people who go to this event," Matheson said. "And of course, the owner of the event itself. The vast majority of those benefits, again, go to the people who need it least. Babin, the policy director for the Tax and Finance committee, argued it is customary for suggestions and possible amendments to tax bills be sent to him, saying: "We are sort of the collection point for all of the ideas." Neither Senator Ana Maria Rodriguez nor her aide responded to requests for comment. A spokeswoman for the Florida Senate issued a statement that read in part: "To craft this legislation, dozens of ideas brought forward by Senators, constituents, businesses and advocacy groups were compiled over a number of months. Each idea was reviewed and vetted as part of the committee process and ultimately, a final tax relief package was developed during the budget conference between the House and Senate."
I am not just picking on DeSantis -- aka, "Florida man." Tax and tax exemption by rent seekers is, of course, not unique to Florida. In the Congress there is once again a move afoot to deny tax exempt bond financing for "professional sports stadiums." This Forbes article summarizes what seems a definite consensus that using tax exemption to subsidize this much private wealth is not worth whatever public benefit coincidentally arises from the tax exemption:
The bill, introduced by Representatives Jackie Speier (D-CA), Earl Blumenauer (D-OR), and Don Beyer (D-VA) would end the tax-exempt status of bonds used to finance professional sports stadiums. That’s fine as far as it goes. But rather than aiming only at pro sports (and really at Snyder), Congress should completely rethink private activity bonds. Should they be reserved only for public infrastructure, such as roads, bridges, and public schools? What about non-profit hospitals? Should Congress impose meaningful caps on the annual issuance of these bonds? Why should state and local governments use taxpayer money to subsidize any well-connected businesses to the detriment of competitors that don’t have the clout to get cut-rate bond financing?
. . .
Private activity (aka private purpose) bonds usually are issued through a quasi-government entity such as a housing or economic development authority. About two-thirds of these bonds are for 501(c)(3) non-profits, such as hospitals. The rest finance projects run by for-profit businesses. Like other state and local government bonds, the interest they pay is tax-free to investors. But the proceeds go to the private entities and the money to repay the bonds comes from the project being financed rather than general tax revenues.
Years ago, the Joint Committee on Taxation identified the problems with these bonds: They inefficiently allocate capital, raise the cost of financing traditional governmental activities, help higher-income investors avoid taxes, and reduce federal revenues.
I doubt there is a mathematical formula or scientific process by which the public good can be achieved without private gain. In order to achieve public good -- a more learned society, for example -- we have to convey private benefit -- awarding an income enhancing degree to students at tax subsidized colleges or universities, for example. We just need a better way to minimize unnecessary private benefit. Keep the tax landlords -- the "rent seekers" -- honest.
February 20, 2023 | Permalink | Comments (0)
Elon Musk And CHatGPT Agree: OpenAI should not be Tax Exempt
Interesting pic.twitter.com/3G7ABMNegT— Elon Musk (@elonmusk) February 18, 2023
Elon Musk, an early donor to OpenAI, asked CHatGPT whether OpenAI qualifies as a tax exempt entity. CHatGPT said "no."
I wonder if ChatGPT, the AI chatbot developed by tax exempt OpenAI will learn how to lie, cheat and steal like most humans. I mean, if artificial intelligence is anything like real human intelligence, ChatGPT will inevitably learn the short and long term utility of all the sinister schemes and obfuscations we humans engage in so well. Because its gonna have to lie, cheat, or steal, to conclude that OpenAI should still be tax exempt.
We blogged about ChatGPT a few weeks ago, here and here. In those posts, we speculated that OpenAI was not just pushing the technology envelope. It is also boldly going -- like Cpt. Kirk and Spock -- to places tax exemption jurisprudence has never gone before. Here's the recap: OpenAI began as an exempt organization in 2015, reportedly taking in $1 billion U.S. in start-up capital portrayed, apparently, as charitable contributions from Elon Musk, Peter Thiel and other well known money bags. A mere four years later, right about the time ChatGPT started showing promise, OpenAI flung its entire self headlong in a limited partnership with OpenAI LP. I am pretty sure OpenAI, LP is officially known as OpenAI Startup Fund I, L.P. Because two years after that, OpenAI Startup, filed a "Notice of Exempt Offering of Securities."
Now sit still and pay attention, because this here is where the ice starts getting thinner. The leading Supreme Court opinion established the Howey test: a security is an investment of money in a common enterprise with the expectation of earning a profit solely through the efforts of the promoter or some one other than the investors. By the way, OpenAI Startup candidly describes itself as a "venture capital fund" in its Form D. Everybody knows VC funds exist not just to make money, but to distribute money too. That makes sense because if nobody stands to profit, there would be no need to register with the SEC, or even explain why registration is not required. The securities laws regulate the marketing of profit making investments. And just as an additional tidbit that needs following up, the provision under which OpenAI Start Up claims exemption from registration hinges on the requirement that interests are offered only to very sophisticated investors or entities described in 501(c)(3). I am not a Securities Law expert but I have been drafted into teaching the subject once or twice before. I hated it then but I love it right about now.
One exemption, Sec 3(a)(4) 1933 Securities Act, allows issuance of unregistered securities (seems crazy right?) if the issuer is:
organized and operated exclusively for religious, educational, benevolent, fraternal, charitable, or reformatory purposes and not for pecuniary profit, and no part of the net earnings of which inures to the benefit of any person, private stockholder, or individual, or any security of a fund that is excluded from the definition of an in- vestment company under section 3(c)(10)(B) of the Investment Company Act of 1940;
Rule 506(c), explicitly claimed by OpenAI Startup, exempts an offering if the issuer takes certain steps to assure itself that all investors are accredited. A 501(c)(3) with more than $5 million in assets is an accredited investor. Perhaps as a backup to that exemption, OpenAI Start-up also claimed the exemption under Section 3(c)(7) (but not 3(c)(10) which applies to a 501(c)(3) issuer) of the Investment Company Act.
In either case, it sounds to me like the truthful disclosures mandated by our securities laws are relaxed somewhat when the issuer wears a halo. And one of the ways a nonprofit earns its halo is by complying with that nasty tasting phrase, "the nondistribution constraint," aka the prohibition against private inurement and excess benefit. And well, like I explained in the two earlier posts linked at the top of this report, I am just not sure that is the case with regard to this securities offering. I am not sure OpenAI still qualifies as a 501(c)(3) ever since it entered into a joint venture with a bunch of accredited investors (people who are putting money in to get a profit out, do I really need to spell this out?!). If OpenAI does not qualify under 501(c)(3), everybody better get the securities people at Akin working again, not to mention the tax people.
The PR department of OpenAI's Geek Squad is on its job though. "Move along folks, nothing to see here." According to OpenAI, the accredited investors are only going to get some of the profit, not all of the profit. The rest is going into the charitable mission. That's why they are calling the limited partnership company a "capped profit" entity. The PR even cites a provision of the limited partnership operating agreement, "See Section 6.4. for additional details;" it says that exactly, that's why its in quotes. That provision purports to guarantee that the limited partnership will be managed by the exempt organization solely in the pursuit of the charitable mission. Just to make sure of that, they say, investors have agreed to take profits from our operations only after we, the exempt general partner with majority governing rights over the limited partnership, deem the charitable mission complete (on a year by year basis, apparently).
The only problem is that I can't find anybody willing to let me see the operating agreement. The press release instructs us taxpayer investors to read paragraph 6.4 thereof. So I called OpenAI and got no answer. I asked them via Twitter for a copy of the operating agreement and got no response. I sent their PR people an email. I even wrote to every person at Akin Gump listed as working on the Microsoft part of the deal for a copy. I asked them to send me a copy. You think the Akin Gump folks mighta lost it or something? Crickets is all I got, even when I mentioned that the Press Release instructs me to read paragraph 6.4. Oh didn't I mention? Microsoft has found a charitable itch, apparently, and has agreed to invest another $1 billion in the joint venture, this time on an "exclusive" basis. From the press release:
Today, we are announcing the third phase of our long-term partnership with OpenAI through a multiyear, multibillion dollar investment to accelerate AI breakthroughs to ensure these benefits are broadly shared with the world.
This agreement follows our previous investments in 2019 and 2021. It extends our ongoing collaboration across AI supercomputing and research and enables each of us to independently commercialize the resulting advanced AI technologies.
- Supercomputing at scale – Microsoft will increase our investments in the development and deployment of specialized supercomputing systems to accelerate OpenAI’s groundbreaking independent AI research. We will also continue to build out Azure’s leading AI infrastructure to help customers build and deploy their AI applications on a global scale.
- New AI-powered experiences – Microsoft will deploy OpenAI’s models across our consumer and enterprise products and introduce new categories of digital experiences built on OpenAI’s technology. This includes Microsoft’s Azure OpenAI Service, which empowers developers to build cutting-edge AI applications through direct access to OpenAI models backed by Azure’s trusted, enterprise-grade capabilities and AI-optimized infrastructure and tools.
- Exclusive cloud provider – As OpenAI’s exclusive cloud provider, Azure will power all OpenAI workloads across research, products and API services.
“We formed our partnership with OpenAI around a shared ambition to responsibly advance cutting-edge AI research and democratize AI as a new technology platform,” said Satya Nadella, Chairman and CEO, Microsoft. “In this next phase of our partnership, developers and organizations across industries will have access to the best AI infrastructure, models, and toolchain with Azure to build and run their applications.” The past three years of our partnership have been great,” said Sam Altman, CEO of OpenAI. “Microsoft shares our values and we are excited to continue our independent research and work toward creating advanced AI that benefits everyone."
I think its a Freudian slip, but the press release using the key words in contention: "commercialize," "advance" and "democratize." Can the first co-exist with the second and third goals? Right now, I would give much better than even money that OpenAI, Inc. no longer qualifies or should qualify as an exempt organization because of its new "capped profit" gambit with Open AI LP. I think Elon Musk agrees with me, though he doesn't quite know right words to say so. That guy will never make it in this world. Anyway, they don't have to give me the operating agreement. Mama used to say, "what's done in the dark always comes out in the light."
February 20, 2023 | Permalink | Comments (0)
Friday, February 17, 2023
Charity That Fights Sex-Trafficking Endangered Because NY City Slow to Pay Major Grant
Herein an interesting look at an exceptional charity doing clearly important work who's survival may be doomed by government bureacracy.
From the story:
GEMS a nonprofit organization involved in fighting sex trafficking: "helped write the draft legislation for the state’s Safe Harbor Act, which recognized that young people taken in by the commercial sex industry were not criminals and required aid rather than prosecution. The law has been copied around the country. In 2022 alone, GEMS was able to provide free housing for 30 young women, and it helped find employment for 40. . . . GEMS is a relatively small outfit with an annual operating budget of about $3.5 million, some of which is delivered by the state, some by the federal government and some from charitable contributions. For the past four years, the organization has been earmarked for an annual discretionary grant of more than $850,000 from the New York City Council. The money for these kinds of grants is promised at the end of the fiscal year, in June, and theoretically ought to be available shortly after, since the contracted agency is expected to deliver whatever services it has promised right away — shelter, addiction counseling, food to shut-ins and so on, obligations the city often cannot meet on its own. . . .
So far, GEMS has received none of the grant money it was promised in July of last year — a sum totaling $983,000; it did not get its allocation for the previous fiscal year until September. The consequences have been grave. GEMS owes $17,000 to one landlord from whom it rents housing for the young women it serves, Ms. Lloyd told me."
February 17, 2023 in Current Affairs | Permalink | Comments (0)
All the Lawyers First, Then the Nonprofits
Click on the picture for an analysis of America's involvement in the conflict
The best way to undermine a society, after killing off all the lawyers, might be to starve all the nonprofits. Under the highest ideal, lawyers are the "guardians of the rule of law who stand in the way of a fanatical mob." Under another high ideal, nonprofits are conscientious objectors to war and human suffering, remaining neutral to profits or geopolitics, ideally. Groups like ICRC, Oxfam International and Red Crescent all exist as nonpartisan noncombatants concerned only with alleviating the suffering caused by humankind's proclivity to inflict violence on itself. About a year ago, Suparna, a promising young scholar at Lewis & Clark's Department of International Affairs, published what looks like a terrific book exploring NGOs in nations under threat. Here is what she said in the abstract:
Nongovernmental organizations are central to contemporary global governance, and their numbers and influence have grown dramatically since the middle of the twentieth century. However, in the last three decades more than 130 states have repressed these groups, suggesting that a broad range of states perceive them as costly. When they choose to repress NGOs, under what conditions do states use violent strategies versus administrative means? The choice depends on two main factors: the nature of the threat posed by these groups, and the consequences of cracking down on them. Violent crackdown is useful in the face of immediate domestic threats, such as protests. However, violence may increase the state’s criminal liability, reduce its legitimacy, violate human rights treaties, and further intensify mobilization against the regime. Therefore, states are more likely to use administrative crackdown, especially in dealing with long-term threats, such as when NGOs influence electoral politics. I test this theory using an original data set of administrative crackdowns on NGOs, as well as violent crackdown on NGO activists, across all countries from 1990 to 2013. To shed light on the strategic decision between violent or administrative crackdown, and how states may perceive threats from domestic and international NGOs differently, I provide a case study from India. I conclude by discussing the implications of this crackdown for the use of civil society actors by the international community, as well as donors and citizens in the global South.
As we previously blogged, the United States is not immune from protective instincts that make us look sideways at nonprofits not explicitly on our side in times of national peril. And nonprofits are not always without fault; this WSJ book review explains how the Red Cross, before it championed the law of war, might have helped Hitler:
Much of “Humanitarians at War” re-treads the ICRC’s missteps in those dark years, rightly laying most of the blame on Switzerland’s Carl Jacob Burckhardt. With the ICRC’s moralistic Christian president, Max Huber, elderly and often ill during the 1930s, it was Burckhardt, his second in command, who made major decisions regarding relations with Adolf Hitler’s government. A diplomat and known careerist, Burckhardt harbored a traditional anti-Semitism and such hatred of communism that he regarded German Nazism as a bulwark of civilization and a necessary evil. As early as April 1933, the ICRC was receiving desperate letters from inmates of German concentration camps, including one from Dachau pleading: “‘I beg you again in the name of the prisoners—Help! Help!’” Yet as Mr. Steinacher writes, during this period Burckhardt was given an inspection tour “and officially lauded the commandant of Dachau for his discipline and decency.”
George W. Bush famously warned the whole world after 9/11 that "either you are with us, or you are with the terrorists." I bet it was intentional that he said that, instead of "you are with us or against us." Nonprofits can be against us and not for terrorism. But Bush ignored or entirely eliminated that middle ground. There is no middle ground when stuff hits the fan I guess. That sentiment continues to dominate at home and abroad. Two days ago, the Washington Times reported:
A major left-wing charity is unable to accept credit card donations for itself or the 140 groups that it fiscally sponsors following several Washington Examiner reports on how the nonprofit group is linked to Palestinian terrorism. Lawyers and charity experts have continued to raise concerns over how the Arizona-based Alliance for Global Justice has fundraised for Collectif Palestine Vaincra, a French partner of the Popular Front for the Liberation of Palestine, a U.S.-designated terror group. On the heels of a pro-Israel group calling for banks to cut ties with AfGJ, the charity is now revealing that it cannot process credit card donations.
Last month, the pro-Trump and pro-Israeli group, Zionist Organization of America, issued a public warning:
"Any group breaking the law by funding terrorist groups must be prosecuted and shut down," Morton A. Klein, president of Zionist Organization of America, the oldest pro-Israel American nonprofit group, told the Washington Examiner. "This is not the first front group trying to raise money for Palestinian terrorists, and it won't be the last. The enemies of Israel and the Jewish people are determined, which is why we have to stay vigilant and strong in our defense." Under 18 U.S. Code § 2339B(2), payment processors need to freeze funds raised for the PFLP’s agents, and report the transactions to the U.S. Secretary of the Treasury," added Klein, referring to a law surrounding U.S. groups providing "material support" to terrorism. "Payment processors should expand these closures to organizations that raise funds for PFLP agents CPV and Samidoun."
And then barely a month later, the unidentified bank expressed its angst, no questions asked, by shutting down AfGJ's ability to accept donations by credit card.
Most recently, the Washington Examiner, a far-right rag known for its love of all things Trump, accused AfGJ of providing material support to terrorists, which is a federal crime. They claimed that having an organization called Samidoun as a fiscally sponsored project is supporting terrorism. Samidoun is an international organization that supports the thousands of Palestinians unlawfully imprisoned by the far-right Israeli government. Hundreds of these prisoners are children under the age of 12. The right wing has tried to shut Samidoun down previously but the organization has successfully defended the legality of its work. This attack on AFGJ is also another attempt to damage work in defense of Palestinian human rights.
This time, they succeeded. As of this writing AfGJ cannot accept credit donations – and neither can the 140 organizations that rely on us to provide them with fiscal sponsorship, which includes handling their accounting and providing them with nonprofit status. From people bringing clean water to the Apache reservation, to programs that mentor LGBTQiA kids and teach them to use art as a means of self-expression, to bail funds that shell out money to carceral systems that lock up people for demonstrating to demand an end to police murders of BIPOC people, our fiscally sponsored projects are laboring to create a more sane, sustainable and just world.
I don't know whose right or whose wrong. Or whether AfGJ is just collateral damage. It does not appear that their bank wasted any time trying to find out. And the group that that sounded the initial alarm leading to the action against AfGJ claims that Donald Trump was the "greatest President Ever for Israel." I don't know. I am pretty sure Ronald Reagan never broke bread with the rapper formerly known as Kanye, or the WWII holocaust denier Nick Fuentes, but hey, its a free country.
February 17, 2023 | Permalink | Comments (0)
Ron DeSantis Admits It All: And a Word on The Commerciality Doctrine
A sample of changes to AP African American Studies Curriculum After DeSantis Rejected the Original Curriculum in Florida
The nearly $2 billion tax exempt behemoth known as the College Board is in a helluva lot of hot water. On the one hand, it was tricked by Florida Governor DeSantis into defending itself against an allegation of being woke, as allegedly proven by its AP African American History curriculum. It lost miserably in that game, not because it really is or isn't woke, but because it shouldn't have taken the bait anyway. You'd think a buncha people who specialize in torturing kids and adults alike with mind-numbing standardized tests would show a little shrewdness themselves in defending their right to do so. But once they took the bait and said "no, we are not 'woke,'" the Governor said "well prove it!" and then after revamping the curriculum they said "see, we are not woke!" and then the Governor turned to his base and said "see folks, I will protect you from dangerous African American History, vote for me." Better they had said "we are educators, here is the knowledge as best we can survey and gather it, do with it as you will." Anyway, when the governor tricked those gullible eggheads to change knowledge as they had gathered it, the College Board received even more intense heat from those opposed to the Governor's wolf-crying campaign where African Americans are the preferred wolves. The College Board is being taken to the woodshed by the left side media, and justifiably so. I didn't have any love for the entire standardized testing industry before this and I certainly have even less now.
Do you realize what it means when a politician can demand, for political and cultural reasons, that a supposedly objective assessment -- one that cannot be avoided by any admissions candidate -- be altered to fit a political or cultural belief? And what it means when the test writer agrees? Do you?! The College Board also writes admissions tests, you know. To the Governor as well as the College Board -- a plague o' both their houses! -- I would say this: "It means the test is politically and culturally biased and ought not be used to allocate scarce resources, like seats for undergraduate, law school, or graduate school butts, or admission to the bar, you fucking idiots!" DeSantis is proving what's been asserted by many and denied by few all along. He is insisting that knowledge, from wherever it is found, must be in line with "our" beliefs, "our" culture, what "we" value, and "our" experiences." And sure enough it is so presented everywhere; but that "others" generally score lower on the tests is of their own unintelligence? At least the Council has sense enough to recommend doing away with the LSAT as an admissions requirement. DeSantis has done us a great favor and should be thanked. He let the cat out of the bag, by insisting explicitly on the cultural bias already there.
THE TAX STUFF
Needless to say, none of this has made for a very good week around the College Board. It is in damage control mode. A Slate Magazine article only makes it worse. The article is entitled, "The Sooner We Start Thinking of the College Board as a Business, the Better." The article explains how the College Board is anything but deserving of tax exemption, without ever mentioning the "commerciality doctrine.:"
What people didn’t know then, and what they still seem not to understand now, even as the entity is in the news for the ongoing controversy over Florida’s involvement in amending the Advanced Placement curriculum in African American studies, is that the College Board is a business, despite its lofty mission statement, which suggests that it’s about “connect[ing] students to college success and opportunity.” Yes, it’s a not-for-profit business, but not-for-profit does not mean that it’s a charity. In fact, it’s about the furthest thing from a charity that you can imagine.
Over the years, the College Board used its connections with high schools to expand the penetration of the PSAT, as a companion to the SAT; it uses the PSAT to collect names and information about students, which it then licenses to colleges who want to recruit those students as the de facto national database of high school students; it uses the results of the tests (for which half the students and half the school districts will, by definition, be below average) to promote its AP courses, to make students more “college ready” (an essentially meaningless term it invented); and it uses its substantial lobbying budget to convince legislators to make students take the SAT in order to graduate from high school, to pay for AP, and to make public universities accept the results of those exams and grant credit for them.
. . .
The College Board is a billion-dollar business, with over a billion dollars in assets (including as much as $150 million held in offshore accounts). It paid Coleman, its CEO, over $2.5 million in 2020, even after he had been demoted from the dual roles of president and CEO in early 2019, and paid several other executives over $500,000 in that same year, a year in which revenue dropped by $400 million.
The article spends a good amount of time heaping mud on the CEO's head for alleged management missteps, but it need not have. It makes a prima facie case that the College Board, and maybe ETS and LSAC are no longer entitled to tax exemption because they have crossed the rubicon from charity to a commercial entity. They have that "commercial hue," often perceived when a charity becomes a business. The doctrine serves to backstop the effort to preclude unfair competition. Read John's article, he will tell you. But I am not even sure there is competition, because the testing charities have erected formidable market barriers to for-profit entry. Maybe that's as it should be. But right now are there any for-profit test makers to help us find out? No. There are no for-profit actors in this multi-billion dollar industry. This is a blog and I know I am spouting academic dogma without footnotes, but the law is not always so far from our intuition, once we get real intimate with the law. I stayed at a Holiday Inn before and I'm telling you, these test taking services are commercial entities whether they are owned by colleges and universities, or spend all their time designing tests and curricular materials (to Governor DeSantis' cultural views, don't forget). Certainly there is enough market demand, because the organizations have built the markets themselves, to support the entities without tax subsidy. The commerciality doctrine lays out a hard to find border between charity and commerce, but my best bet is that these testing services have crossed that border a long time ago.
February 17, 2023 in Current Affairs | Permalink | Comments (0)
Thursday, February 16, 2023
Leonard J. Henzke, Jr. - The Man, the Myth, the Legend
Is Lenny the bearded guy or the baby-faced guy?
If you click on the oral argument transcript pictured below, you can get a digital copy of the entire official transcript of Lenny Henzke Jr.'s oral argument before the Supreme Court in Portland Golf Club v. Commissioner. I never met or knew Lenny but I hope he won't mind me calling him by that name. And I am not just calling him "the man, the myth, and the legend" to get a cheap chuckle. By the way, this is not an obituary, more an unauthorized mini-biography. Two things are true though: (1) The "man/myth/legend" description is not entirely inaccurate given the important tax exemption cases he's argued -- he argued Bob Jones early on, perhaps the most important of all -- and (2) for all the grief he has caused me reading his cases, he owes me a handshake and the right to call him Lenny. Anyway, after Congress enacted the unrelated business income tax, Lenny got really busy. He argued successfully in Presbyterian and Reformed Publishing Co v. Commissioner. That case ushered in a more nuanced application of the "commerciality doctrine," intended as a backstop to the unrelated business income tax. A backstop because the commerciality doctrine can preclude exemption for an organization whose activities are directly related, as if on a straight line, to the organization's charitable mission. Indeed, the activities -- religious publishing -- were themselves charitable as we understand the term. The government wanted to yank the organization's exemption because they were too successful in their charitable mission. Back in LL.M school I remember Professor Willis finally shrugging his shoulders and saying "we love charities that are meek, humble, starving, and mild; if they get too big, strong and loud in the market, we hate them though they are only a bigger stronger more economically efficient version of themselves." It was Professor Willis who first led me and the rest of his students through a consideration of United Cancer Council, even before the 7th Circuit issued its influential opinion. The court issued its opinion after getting an earful from our subject on oral argument. Lenny somehow convinced the bluntly irascible Judge Posner -- the most famous jurist never to sit on the Supreme Court IMHO -- that there was no private inurement because there were no insiders. I wonder if it was Lenny who first broached the "first bite" doctrine. I thought it was a dumb rule, but at least it gave me the opportunity to submit comments and then appear at the public hearing on the proposed excess benefit regulations. Those types of things were important during my pre-tenure days.
Anyway, I thought about Lenny while reading Presbyterian and Reformed Publishing yesterday for a post I will let loose tomorrow. Come to find out, Lenny really did the impossible. Not only did he recover a whole $21 dollars for the government in Bob Jones University, he convinced the 4th Circuit to reverse the district court's literally correct decision rejecting the government's asserted authority to deny tax exemption to racially discriminatory charities. I mean, let's just be honest. The district court's decision was literally correct, and might have prompted acquiescence, especially with the onset of conservatism that marked Reagan's ascendency. I guess Lenny was being dogged for us all back then. Some guy named Carr Fergurson was apparently on brief (and quite a few scholarly pieces) with Lenny before the 4th, but I bet it was Lenny who ran the hard yards to the 3 yard line, where some other guy carried the ball over the goal line at the Supreme Court. The public policy doctrine was born. It was Henzke, no doubt, who put in the lonely intellectual hours at DOJ Tax and proved that all law is public policy. His name didn't appear on the briefs when the case was appealed and successfully argued to the Supreme Court, but I am sure Lenny is the father of the public policy doctrine that helped make the promise of Brown v. Board of Education a reality. Tax law, with help from Lenny "Thurgood" Henzke, Jr., extended separate and unequal to private schools. I tell my students all the time that they can do civil rights or constitutional law in tax. You can even argue before the Supremes. Lenny got his revenge, apparently, for not even being included in the Supreme Court briefs in Bob Jones. About 4 years later he prevailed in Presbyterian and then he took the Government the distance -- all the way to the Supreme Court -- in Portland Golf Club, losing on a TKO. By the way, my students know that free green fees for life in exchange for services is an "accession to wealth" Lenny. And we all know what that means.
Great job, Lenny.
February 16, 2023 | Permalink | Comments (0)