Wednesday, November 20, 2019
Tyler (Chief Executive Officer of Directory of Social Change) has this op-ed about the UK Charity Commission's urging charities to behave:
IT IS NOT THE JOB OF CHARITIES TO BEHAVE! (Yep, I’m a woman shouting!) Charities effect change by being disrupters, campaigners, advocates, activists. There wouldn’t be animal welfare laws without animal charities shouting; there wouldn’t be child protection laws without children’s charities getting angry; there wouldn’t be clean air legislation without health charities badgering politicians. So long as we’re not breaking any laws, it’s entirely up to us how we behave. And if we don’t get it right, we’ll be punished by our donors, supporters and beneficiaries. Their voices are way more important than those of a hectoring, ill-informed, populist, increasingly politicised commission. And we know them better than it does.
Saturday, November 9, 2019
On November 7, New York Supreme Court Judge Saliann Scarpulla ordered President Trump to pay $2 million in resitution to charity for his breach of his fiduciary duties as an officer and director of the Trump Foundation. The link attached to ordered above is the Judge's actual order. Since this is written up a lot in other places, like here by David Fahrenthold who has been the best chronicler of the Foundation, I only provide resources here for digging deeper into the case.
To fully comprehend what has happened to the Trump Foundation, President Trump, and his children, you have to read more than the order. They all entered into a series of stipulations with the NY AG Letitia James. The stipulations spell out a series of significant admissions of wrongdoing made by President Trump and his three children who sat on the board. The press release issued by the NY AG does a nice job of summarizing all that has taken place. I recommend reading all three.
If interested in seeing all of the evidence held by the NY AG you can go to the NY Supreme Court and search in the case index for the index number of the case (451130/2018). That should take you here, which if it works would save you the time of searching the case index. More information can be found from CREW who did a FOIA search that yielded the Form 4720s and checks filed by the Foundation with the IRS.
I have written about the matter on The Conversation here. In that piece I try to grapple with whether there are any situations in history that place this occurrence in proper historical context. If you get a chance to look at that, and have thoughts about the choice, let me know what you think.
Thursday, November 7, 2019
Pennsylvania bears watching on hospitals and tax exemption.
Pennsylvania's Northumberland County Board of Assessment just denied a request on October 30 for property tax exemption for some hospitals UPMC acquired a few years ago. UPMC, headquartered in Pittsburgh in the old US Steel building, bought Susquehanna’s Sunbury and Lock Haven hospitals from for-profit Quorum Health in 2016.
Apparently no specific reason was sited for the denial. From the article:
“There was testimony during the hearing that indicated that some parcels, or portions of the parcels, were utilized for purposes that likely are not exempt. UPMC felt all of the parcels were exempt,” Mr. Garrigan wrote in an email.
“When questioned by the Board, UPMC gave an indication as to the approximate breakdown of the parcels by use, but there was little documentary evidence provided at that time to backup these percentages.”
UPMC has 30 days to appeal.
The healthcare giant recently entered into a 10 year agreement with Highmark for Highmark to be allowed to use the UPMC provider network. This came on the heels of the Pennsylvania AG bringing a complaint sounding in state charitable nonprofit law to force UPMC to enter into such a relationship with Highmark.
Tuesday, November 5, 2019
The Salt Lake Tribune, a major paper of Salt Lake City, announced recently it converted its operation into a tax exempt charitable organization. The newspaper received its determination letter from the IRS on Oct 29.
From the Tribune: "The move from a for-profit model was spurred by Tribune owner Paul Huntsman, who, in agreeing to turn Utah’s largest paper into a nonprofit, is giving up his sole ownership."
“The current business model for local newspapers is broken and beyond repair,” said Huntsman, who also serves as The Tribune’s publisher. “We needed to find a way to sustain this vital community institution well beyond my ownership, and nonprofit status will help us do that. This is truly excellent news for all Utah residents and for local news organizations across the country.”
This is not a new move. Both the Philadelphia Inquirer and apparently the Tampa Bay Times have made operational changes to be strongly associated with a nonprofit. As a result of the crash of the news industry generally, many have been long considering such a move. St. Louis Tribune thus is not new, but it is a suggestion that the trend might be getting stronger.
Richard Schmalbeck of Duke Law School has written academically about the issue here. Sam Brunson, one of our co-bloggers, wrote comprehensively about the Salt Lake Tribune conversion and its practical tax legal implications here. This remains an issue worth following.
Wednesday, October 30, 2019
On Monday, former House Speaker Paul Ryan launched the American Idea Foundation. The American Idea Foundation is a nonprofit, exempt under section 501(c)(3), and plans to focus on Ryan's legislative interests from his years in Congress, including poverty, economic opportunity, and "evidence-based approach[es]" to solving other problems.
At this point, of course, there's not much to say about the American Idea Foundation. It just launched, and hasn't filed any 990s or actually done anything. And, in fact, it's not completely clear to me what the Foundation plans on doing. It doesn't look like it plans on doing its own research; rather, it plans to identify successful organizations, and maybe education policymakers about what they're doing?
Tuesday, October 29, 2019
Chronic Disease Fund and Patient Access Network Foundation, the two nonprofits that paid the fine, are pubic charities, exempt under section 501(c)(3). Their charitable mission? To help poor individuals with chronic diseases get the medication they need by paying their out-of-pocket costs for the medication. The allegations that they settled claim that seven pharma companies used the nonprofits as flow-throughs, essentially donating money to the nonprofits, which would then help patients pay for those drug companies' medicines.
The problem? The Anti-Kickback Statute prohibits drug companies from subsidizing copayments from patients on Medicare. Drug companies can donate to nonprofits that subsidize these out-of-pocket expenses, but the nonprofits must operate independently from their donors; here, the allegation was that CDF and PANF didn't act independently. And, while neither admitted wrongdoing, they did settle.
Friday, October 4, 2019
In its October 1st edition, The Chronicle of Philanthropy published Can Philanthropy Save Democracy? -- an interesting read. The number of grant organizations that are funding efforts to strengthen the democratic process is on the rise. According to the article, "Foundation support nationwide for democracy projects jumped 34 percent in 2017, to $553 million, according to Candid, which tracks grant-maker activity. Those are the most recent figures available, but all signs suggest that spending is on the rise." As the article points out, these efforts have no political or ideological limitations or consensus for that matter; donors are as varied as George Soros and Charles Koch.
The bi-partisan Democracy Fund, which supports a wide assortment of democracy efforts, was created by eBay founder and philanthropist Pierre Omidyar in 2014 "to help ensure that the American people come first in our democracy." Its president, Joe Goldman, believes philanthropic organizations and individuals have a mandate to reverse the "weakening of important American institutions." While large donors and foundations have traditionally steered clear of political involvement, Goldman opines that the landscape is evolving:
Historically it was perfectly appropriate for some funders to say, "Look, my role is technocratic. My role is to stay out of politics" . . . But there are points in time when the threats are such that we all need to stand up for our values. Our democracy has gone through many challenging periods, but we are definitely in a crisis point. People recognize we are in a bad spot. . . A lot rides on the outcome. . .
Whether you care about the environment, housing, or the national debt, these issues are all fundamentally affected by the degree to which our political system is healthy and functioning.
As part of this uptick in funding, Omidyar has more than tripled the Democracy Fund's annual grant-making budget to $50 million.
Believing that a "strong philanthropic response to something new and worrisome going on in America" as a result of the 2016 election cycle, Protect Democracy was created by former White House lawyers under President Obama. Protect Democracy's website describes itself as a "nonpartisan, nonprofit organization dedicated to fighting attacks, from at home and abroad, on our right to free, fair, and fully informed self-government." The organization's budget has grown from a meager $400,000 to over $10 million annually. One of its co-founders, Ian Bassin, explained the need for such nonprofits as Protect Democracy:
A lot of work has gone into things like gerrymandering, voting rights, and campaign finance. . . There hasn’t been nearly as much time thinking about how we make sure that our fundamental system of checks and balances is strong and able to withstand modern autocratic movements. We need to make sure we’re spending resources there as well.
The Ford Foundation, Carnegie Corporation of New York, and other established grantmaking organizations have stepped up their funding of efforts to strengthen democracy. According to the article, Ford’s "democracy budget" is about $25 million a year, recently committing an additional $5 million to support accurate census efforts. Carnegie anticipates making $7 million in grants supporting voting rights and related issues in its current fiscal year, an increase of $5.2 million over the prior year. The article reports that increased funding has also focused on strengthening journalism to boost democracy; funders including The Knight Foundation, The Hewlett Foundation, The MacArthur Foundation, and Craig Newmark (founder of Craigslist).
Friday, September 6, 2019
Treasury just released Proposed Regulations under Code Section 6033 regarding donor disclosure (technically, it is filed but not yet published - it is scheduled to be published on September 10), which addresses the issue of what information an exempt organization must disclose about its donors.
If you are late to the story, a little recap is in order:
- Section 6033(b)(5) provides Section 501(c)(3) organizations must provide donor information for "substantial contributors."
- Treasury Regulation 1.6033-2(a)(2)(ii)(f) states that any organization required to file an annual information return must provide information regarding donors who give more than $5,000 during the year.
- On July 17, 2018, Treasury issued Revenue Procedure 2018-38, which states that, effective as of Dec. 31, 2018, exempt organizations that are not exempt under Section 501(c)(3) do not have to file the Schedule B with donor information, but they should keep the information and make it available upon IRS request. Section 501(c)(3) organizations must still provide this information as required by Section 6033(b)(5). See a more detailed description from KPMG here.
- Not everyone was particularly pleased about this and, not surprisingly, litigation ensued.
- On July 30, 2018, in Bullock v. IRS, the U.S. District Court for Montana (Bullock being the Governor of Montana; the state of New Jersey also was a plaintiff) determined that Treasury did not follow proper procedure under the APA in issuing the Rev Proc. The District Court held that the Rev. Proc. was really an amendment to Treasury Regulation 1.6033-2(a)(2)(ii)(f), and therefore was a "change in existing law or policy" (i.e., it was a legislative rather than interpretive rule) that required APA notice and comment. Accordingly, it was set aside.
- These new regs specifically respond to the Bullock v. IRS (in fact, it mentions it by name on page 10) by issuing these Proposed Regulations, which are subject to notice and comment.
While I've not held the proposed regulations and the Rev Proc up to each other side by side quite yet, it does appear that the Proposed Regulations are essentially similar to the Rev. Proc, expect for the request for notice and comment. Because the Proposed Regs are not yet officially published, there is no official due date for the comments, other than 90 days from the date of publication. If they hold true to their word, it would be 90 days from Sept. 10.
Wednesday, September 4, 2019
In an article entitled "He Ran an Empire of Soap, and Mayonnaise. Now He Wants to Reinvent Capitalism", today's New York Times profiles Paul Polman, the current CEO of Unilever. Under Mr. Polman's tenure, Unilever has stopped issuing quarterly guidance, which is an interesting turn for those of you who follow corporate finance and securities law. The interesting part for this blog, however, is that Polman stopped focusing on short term results and started looking at long term changes, including "a very bold objective to decouple [Unilever's] growth from our environmental impact." In the article, he says "we need to decarbonize this global economy if we want to keep it livable. We need to find an economic system that is more inclusive." To that end, part of the reason Unilever turned down a bid from Kraft Heinz was the significant difference between the two companies on these types of issues of corporate social responsibility and double bottom line thinking.
A few issues came to mind for me as I read this. First, with regard to benefit corporation status, I said to myself, "Interesting that Unilever was able to go there without being a benefit corporation and under, presumably, standard fiduciary duty rules of engagement." The answer to that is that Unilever is apparently two different organizations: Unilever NV is organized in the Netherlands and Unilever PLC is organized under the laws of England and Wales, according to their website , so they may in fact be working under different rules - I'd be curious if anyone knows what fiduciary duty standards apply in these jurisdictions.
Of course, not all benefit corporations are B Corps, and vice versa, so just for fun, I then hit the Google with "Unilever B Corp." My first hit was "Unilever, Multinationals, and the B Corp Movement," featuring a video from none other than .. Paul Polman. Apparently, Unilever will be working with B Lab to look at barriers to B Corp status for mulinationals as part of a new Multinationals and Public Markets Advisory Council. Unilever owns a number of B Corp certified subsidiaries, including Ben & Jerry's and Sir Kensington's, an "upstart condiments maker" according to one industry blog (I'm not really sure what an upstart condiment is ... anyone had Sir Kensington's? Looks pretty good though....)
The other connection I made harkens back to my post from yesterday, and specifically the book Winner Take All that I mentioned yesterday. One of the themes of Winner Take All was that business elites like to talk about CSR, impact investing, double bottom lines, and all of the jargon that accompanies philanthro-capitalism because it is safe and familiar. Everyone around them comes from a similar business background, so a lack of diversity of thought and training is reinforced. This leads to the singular thinking that business methods can solve social problems, and there are no countervailing voices to say, "Hey, wait a minute..." In the best case scenario, this is myopia. In the worst case scenario, business solutions to social issues are "win-win" - at least to the business - and forestall efforts to reallocate resources away from the business sector to governments in order to address these issues. My problem with Winner Take All is that it was extraordinarily dismissive of those who were involved in philantho-capitalism as being entitled, self-indulgent, or greedy. I think the picture is far more nuanced then that, and it was interesting to read the profile of Mr. Polman through that lens.
Friday, August 23, 2019
The newspaper business has been a dying business for some time now. It has been hard to make ends meet. As a result of that challenge some newspapers have considered converting to charitable entities with tax exemption. Some have made the conversion.
The Philadelphia Inquirer, a long and storied institution, made that choice three years ago. How's it faring? NiemanLab provides a good look
From the story: "The Inquirer was once arguably the nation’s premier metro daily, with a 700-strong newsroom, bureaus around the world, and a run of 17 Pulitzer Prizes in 18 years. But it suffered through a miserable stretch between 2006 and 2016, with five different owners (and two bankruptcy auctions). When that last owner, Gerry Lenfest, decided three years ago to donate the paper into nonprofit ownership — what would become the Lenfest Institute for Journalism — it sparked a lot of hope and excitement in a depressed industry."
The Inquirer "brought a new twist, too, a public benefit corporation model. The nonprofit Lenfest Institute is the sole owner of the for-profit Inquirer."
I recommend a review of the article. It gets fairly wonky in terms of income tax exemption rules that have been challenges for this structure.
Perhaps the bottom line though is: "Or as that memo to staff put it: “Being owned by a not-for-profit entity makes us unique among our industry peers, but it does not make us immune from the challenges facing the local newspapers across the country.”
Philip Hackney, Associate Professor of Law, University of Pittsburgh School of Law
Tuesday, August 20, 2019
America's CEO's came out, through the Business Roundtable, with (from my perspective) an odd new statement yesterday that shareholder primacy should no longer guide their mission as for-profit corporations. Instead, it highlights the importance of other values like: “value for customers,” “investing in employees,” “diversity and inclusion,” “dealing fairly and ethically with suppliers,” “supporting the communities in which we work,” “the environment.”
It's odd because from a legal and practical perspective, I don't see the institution of the for-profit corporation as able to make this change. These entities are structured to first, second, third, and last maximize profit.
Fortune Magzine wrote about the statement here.
This post is obviously not directly about nonprofits. But, I think for watchers of nonprofits and philanthropy this is an interesting moment. My sense is this is related to two different trends. The first and maybe the most important is the growing sense of inequality worldwide. This is perhaps a primary function and is there to be a PR appeaser to those types of concerns, but maybe is at least a signal that they are aware of the democratic concerns. The second though is the very real trend of new businesses choosing to form as benefit corporations. This suggests that many think it at least important for for-profit corps to be viewed as sustainable, genuinely good, and a part of the community. Whether driven by employees, consumers or the larger public this seems to be a real trend.
Why do I think this relates to nonprofits? Because these moves begin to tread on nonprofit territory. What that will mean for the nonprofit brand long term will be interesting to watch. Nonprofits have long been involved in for-profit spaces like health clubs or program related investments. The latter have been growing through things like "impact investing." Now, for-profits increasingly see a need to be mission directed like the nonprofit world.
Anyway, no major thoughts on this other than this moment is worth sticking a pin in for those in the nonprofit space as well. What it will mean remains to be seen, but I think this trend will cause an impact in the nonprofit world that we are just not able to appreciate yet.
Philip Hackney, Associate Professor of Law, University of Pittsburgh School of Law
Monday, August 19, 2019
The Economist had an interesting story this past week on some of our largest charities - charities associated with drugmakers.
Perhaps you have also noticed the tendency that when you go to buy an expensive brand drug that despite the fact that you have insurance, there is still an expensive co-pay involved. However, there are sometimes charities that can help you with that co-pay depending on your circumstances. You might have wondered why they do that.
Well, the Economist has investigated.
From the story: "According to public tax filings for 2016, the last year for which data are available, total spending across 13 of the largest pharmaceutical companies operating in America was $7.4bn. The charity run by AbbVie, a drugmaker that manufactures Humira, a widely taken immuno-suppressant, is the third-largest charity in America. Its competitors are not far behind. Bristol-Myers Squibb, which makes cancer drugs, runs the fourth-largest. Johnson & Johnson, an American health conglomerate, runs the fifth-largest. Half of America’s 20 largest charities are affiliated with pharmaceutical companies.
Not everyone qualifies for their help. Unsurprisingly, pharma-affiliated charities fund co-payments only on prescriptions for drugs that they manufacture. There is often an income threshold, too, which excludes the richest Americans—though it is usually set quite high, at around five times the household poverty line. They are prohibited from funding co-payments for those on Medicaid (which helps the poor) and Medicare (which helps the elderly) by the anti-kickback statute, which prevents private companies from inducing people to use government services. Those patients can accept co-pay support from independent charities, such as the Patient Advocate Foundation."
I am a bit troubled by the idea of the IRS granting and maintaining exemption for a charity that is associated with a for-profit that only pays for drugs that the for-profit provides. I have not investigated any of these enough to come to any conclusion. However, the fact that this is now a significant part of the charitable environment, and it is associated with a major public policy suggests to me that Congress needs to give real thought to how this system fits in with charity and with prescription drugs generally. More reasoned thought is needed. The IRS needs to do its best job in assessing whether these organizations meet the requirements of charity, but given the significant policy domains this issue crosses, it's probably not the best place to answer such questions.
As it is now, it appears that Pharma has cobbled together a financial solution to a problem they faced as a business, that happens to involve "charity," rather than that Pharma is seeking to do charitable things that deserves the moniker.
I have not personally seen any guidance or determ letters from the IRS on this matter. If anyone has one, would love to see what the IRS has concluded on the matter.
Philip Hackney, Associate Professor of Law, University of Pittsburgh School of Law
Thursday, August 8, 2019
As published in The Chronicle of Philanthropy, a recent survey conducted by the Nonprofit Research Collaborative revealed that approximately 75% of charities surveyed achieved their 2018 fundraising goals, and 63% stated that their donations increased from the previous year. While consistent with the results of last year's survey on 2017 fundraising, charities and fundraisers alike were prepared for potentially significant drops in fundraising dollars due to the Tax Cuts and Jobs Act of 2017 (TCJA). Of the charities surveyed, 26% reported that the TCJA did not affect their fundraising, with 17% stating the new tax law had a negative impact on their fundraising results.
Online surveys of individual donors revealed that 56% reported that their giving in 2018 was the same as 2017, beating out pessimistic forecasts based on TCJA. Although a recent "Giving USA" report found that charitable donations decreased 1.7% in 2018, a majority of the fundraisers (60%) in the survey referenced above were optimistic that their fundraising efforts would yield greater donations in 2019 than the prior year.
Wednesday, July 10, 2019
I just want to piggy-back quickly on the great blogging done by Darryll Jones on the hospital financials and pay issue - clearly, there is a lot of attention currently being paid to hospital expenses. The hospital income part of the balance sheet has also been getting a great deal media attention as of late, as noted in Darryll's post on the ProPublica article below. On June 26, the Wall Street Journal piled on with, "When Patients Can't Pay, Many Hospitals Sue," discussing the aggressive collection tactics of nonprofit hospitals. The article does mention that the Affordable Care Act included limitations regarding debt collections, but that lawmakers may be currently looking into additional debt collection or charity care limits, noting that
...Congressional and state lawmakers from both political parties say nonprofits hound low-income patients with aggressive collection efforts, even as they enjoy tax-exempt status and their senior executives bring in salaries that rival for-profit organizations....
While I am dubious that nonprofits should pay less in compensation because they are nonprofits (and I am absolutely not biased on this as a employee of a nonprofit LOL), the link between aggressive collection efforts and executive salaries is clear in the minds of the public and lawmakers. For an interesting follow up on the article, the opinion page as of July 7 has the insights of a number of doctors as well.
Friday, June 28, 2019
Propublica has been doing great investigative work where they team up with local reporters to do some in depth reporting. They provide a nice recent look at Methodist Le Bonheur Healthcare, a nonprofit tax-exempt hospital, in Memphis Tennessee.
The story documents the collection practices that Senator Grassley might be interested in as he starts up an investigation into nonprofit hospitals again.
The story states: "From 2014 through 2018, the hospital system affiliated with the United Methodist Church has filed more than 8,300 lawsuits against patients, including its own workers. After winning judgments, it has sought to garnish the wages of more than 160 Methodist workers and has actually done so in more than 70 instances over that time, according to an MLK50-ProPublica analysis of Shelby County General Sessions Court records, online docket reports and case files."
The primary focus of the story seems to be on the hospital's efforts to collect from its own employees: "It’s not uncommon for hospitals to sue patients over unpaid debts, but what is striking at Methodist, the largest hospital system in the Memphis region, is how many of those patients end up being its own employees. Hardly a week goes by in which Methodist workers aren’t on the court docket fighting debt lawsuits filed by their employer."
Furthermore, they look at the hospital's financial assistance policies. It's not clear whether they meet the Internal Revenue Code CHNA rules in section 501(r) applicable to nonprofit hospitals after the Affordable Care Act: "Methodist’s financial assistance policy stands out from peers in Memphis and across the country, MLK50 and ProPublica found. The policy offers no assistance for patients with any form of health insurance, no matter their out-of-pocket costs. Under Methodist’s insurance plan, employees are responsible for a $750 individual deductible and then 20% of inpatient and outpatient costs, up to a maximum out-of-pocket cost of $4,100 per year."
Tuesday, June 11, 2019
University of Alabama returns $21.5 Million Gift, Citing Attempts to Improperly Influence Academic Decisions
On June 7, the University of Alabama voted to return more than $20 million in donations from Hugh Culverhouse, Jr. Culverhouse initially claimed that the refund was retaliation for his comments on Alabama's recent abortion legislation. In response, the University recently released emails from the donor in which he repeatedly cited his large donations as entitling him to influence administrative appointments, faculty hiring and firing, decisions about student admissions, and other issues. In one passage, he writes:
You seem to think the quid pro quo is I give you the largest sum and commitment in the school's history and you have no return consideration as your end of the transaction."Thanks for the money--Good-Bye."
Other places, he insults the dean of the law school, describes applicants for a chair position as "mediocre" and unacceptable, and demands free rein to wander the law school and attend classes without restriction.
Joe Patrice at Above the Law offers a different take, suggesting that the University's decision was simply because it had a philosophical disagreement about what constitutes quality education, implying that the law school has chosen a path towards mediocrity. Patrice suggests that the University "interpreted [everything Culverhouse wrote] through a sinister lens." Patrice concludes: "At least the school seemingly wasn’t trying to cut him out over his opposition to the Alabama abortion law. Too bad they were actually trying to kick him to the curb for other ill-considered reasons."
New HistPhil Post: "Fairbairn v. Fidelity: The Lawsuit That Reflects Rising Concerns About The DAF Boom"
The lawsuit features a philanthropic twist: the complaint centers not around how their own money was invested but rather around how the money they donated to charity was handled. This twist provides a window into the evolving and rapidly expanding use of once-niche giving vehicles – donor-advised funds – and in doing so highlights the philanthropic minefield they present.
Read the rest here.
Wednesday, June 5, 2019
About a week and a half ago, MacKenzie Bezos signed the Giving Pledge, promising to give away at least half of her almost $37 billion wealth either over the course of her life or in her will. With her signature, she's joined more than 200 other people, from around the world, in making this promise.
In the first instance, I think this commitment to philanthropy is tremendously laudable. She recognizes that she has a disproportionate share of assets, and that she has a moral obligation to share those assets with those who don't have her fortune:
We each come by the gifts we have to offer by an infinite series of influences and lucky breaks we can never fully understand. In addition to whatever assets life has nurtured in me, I have a disproportionate amount of money to share. My approach to philanthropy will continue to be thoughtful. It will take time and effort and care. But I won’t wait. And I will keep at it until the safe is empty.
Still, I have a couple questions. The first is, as a practical matter, how she'll give. After all, the bulk of her wealth is in Amazon stock. And she gave her ex-husband voting control over her Amazon stock. I don't know exactly what that looks like, but I imagine there are some limitations on her ability to liquidate (or donate) that stock.
The second is, how quickly will she give? Half of $37 billion is $18.5 billion. If she donates to a private foundation, she can only deduct up to 30% of her contribution base (which is, roughly, her adjusted gross income). If she gives directly to a public charity, she can still only deduct up to 50% of her contribution base (or 60% if she gives cash before 2026). In other words, to fully deduct her charitable contributions, she would have to earn at least roughly roughly $37 billion.
Now, it absolutely may be that she's not worried about fully deducting her contributions. (Facebook founder Zuckerberg and Priscilla Chan certainly don't seem to be.) Or maybe she'll wait until her death, when charitable donations are excluded from her estate, to fully make her contributions. (Of course, actuarial tables put her expected death about 34 years in the future, so that would be charity delayed.)
Which brings us, briefly, to yesterday's Chronicle of Philanthropy, which reports that the Giving Pledge has not, contrary to its original expectations, turbocharged charitable giving. While more than 200 people have signed, the vast majority of the wealthy have not. Nor has it inspired increased generosity by non-wealthy Americans. Charitable giving stood at about 2% of GDP before the introduction of the Giving Pledge, and it has continued there since.
That's not to say, of course, that Bezos's pledge is insincere, that she's not actually planning on giving away more than half her money, or that she won't do it during her lifetime. It is to say that, while the Giving Pledge is theoretically nice, though, if we want to increase charitable giving, or if we want to reduce income inequality, the Giving Pledge isn't the solution.
Samuel D. Brunson
Tuesday, June 4, 2019
A couple months ago, I presented a work-in-progress on donor-advised funds to my colleagues at Loyola (a work-in-progress I hope to finish and post on SSRN soon). That evening, I got an email from one of those colleagues. It turned out that that same night, some donor-advised fund sponsored a bunch of the programming on WBEZ, our local NPR station, and the words donor-advised fund now meant something to my colleague.
Fast-forward to last Friday. A New York Times story popped up on my phone which, serendipitously, was about donor-advised funds. More specifically, it was about a lawsuit that, according to the Times, may cool donor enthusiasm for DAFs.
As a quick summary: commercial DAFs are essentially low-cost replacements for private foundations. They're often run by big mutual fund companies, which established a public charity. Donors donate to the charity, and the charity keeps their donations in separate accounts. The donor has given up ownership and control over the donation (and thus gets a deduction), but can advise the sponsoring organization about how to invest and distribute her donation.
And, as a legal matter, it's clear that the donor has given up the ownership and control. As a practical matter, though, I assume that donors have a lot of influence over their donations. If the sponsoring organization were to start going rogue, it's probably fair to assume that donors would be less excited to give their money to that particular sponsoring organization.
But, again, as a legal matter, the sponsoring organization, not the donor, has control. And that's where the lawsuit the Times mentions comes in. According to the Fairbairns' complaint, in 2017, they donated 1.93 million shares of Energous stock--which is publicly traded on the NASDAQ--to Fidelity Charitable. They wanted Fidelity to eventually distribute their donation to charities that combat Lyme disease.
The Fairbairns allege that Fidelity promised them four things to induce the donation:
- Fidelity would use state-of-the-art methods for liquidating large blocks of the stock;
- It wouldn't trade more than 10% of the daily trading volume of Energous shares;
- It would allow the Fairbairns to set a floor on the price it would accept; and
- It wouldn't start selling Energous shares until 2018.
Fidelity didn't do, well, any of those things. According to the complaint (which Fidelity admits is true), it sold all of the shares on December 29, 2017. The Fairbairns claim that the sale drove the value of the stock down by 30%. And why do they care?
The complaint gives two reasons:
It turns out, according to the complaint, that the 2017 changes to the tax law meant that the Fairbairns couldn't defer a sizeable tax hit any longer. Moreover, a couple days before the donation, the value of Energous stock jumped 39%. By making this donation, they managed to avoid paying taxes on the appreciation, and could, at the same time, offset their deferred income.
Now here's the thing about the lawsuit: by donating to Fidelity (rather than donating directly to their Lyme disease charity or donating to a private foundation), the Fairbairns had given up their legal right to control both the investment decisions and the distribution decisions. So instead, the complaint alleges that Fidelity misrepresented what they would do to induce the Fairnairns' investment, that it breached an enforceable agreement about how it would deal with their donation, that it was estopped from doing what it did, and that it was negligent in the manner it liquidated the stock.
Will this affect donors' willingness to provide charity through donor-advised funds? I honestly don't know. Frankly, investors should be aware that their right to advise is limited. On the other hand, large donors prefer to have control and, while a private foundation is more costly and provides a lower ceiling on deductibility, if they really want the control, perhaps they should give through foundations (or, heaven forbid, directly to active charities).
Samuel D. Brunson
Wednesday, May 29, 2019
With summer here and the day-to-day craziness mostly (!) under control, I have the luxury of a few moments of just … thinking. It’s easy to get wrapped up in the text of the Code, the most recent case law, or the scandal du jour (I’m looking at you, NRA). But I rarely have the time to step back and take a wider scope on things.
At this particular moment, it is courtesy of Twitter, which seems somewhat antithetical to big thoughts (literally, given the word count), but one never knows from whence inspiration may come. In the matter of just a few days, a number of Twitter posts came across my feed that connect indirectly in my mind to a larger questions of the role of charity in a democracy.
Twitter post number 1. Nonprofit Quarterly posted an article on its website entitled “The Road Less Traveled: Establishing the Link between Nonprofit Governance and Democracy.”
This article discusses how best practices in nonprofit board governance increase the representation of the various communities served by a nonprofit. The failure to follow these best practices results in a “’democratic deficit’ in board governance- that is, an absence of democratic structures and processes.” Addressing the democratic deficit doesn’t just benefit the charity – it benefits our democracy writ large: “Wider constituent participation in nonprofit governance will not only help citizens develop civic skills and democratic values … .”
Twitter post number 2. The second Twitter post links to a Nonprofit Quarterly podcast that discusses “No White Saviors,” a movement that discusses the impact of race on hierarchy and power in the international charitable economic development space.
This links a Nonprofit Quarterly podcast that discusses “No White Saviors,” a movement that discusses the impact of race on hierarchy and power in the international charitable economic development space. “Those with power hav[e] the resources and capability to make decisions on what should the outcome should be for vulnerable populations.” Podcast at 6:42.
Twitter post number 3. The third post is an interview with Phil Buchanan of The Center for Effective Philanthropy, posted on vox.com, where he responds to criticism of that wealthy philanthropy is undemocratic (set for the more fully in his book, Giving Done Right).
In the interview, Buchanan is quoted as saying:
The structural critiques are important and they play out in our democratic politics. But in the meantime, here we are. We have significant wealth that’s been accumulated in this country. We have endowed private foundations that don’t even have a connection on the board to the original donor. These are institutions that are focused on a mission. They’re focused on the public good. I like working in the day to day, in the practical reality, where there are people with decision-making power to allocate these resources. I want to help them to do it effectively.
I think all of these pieces raise interesting views on the role of power and money and the role of the charitable sector in a democracy. At the end of the Buchanan interview, he specifically asks if we should be subsidizing all of this through the tax code, and specifically the Section 170 charitable deduction (spoiler alert: he says yes, and expand it to non-itemizers).
I’m more interested, however, in the Section 501(c)(3) implications on all of this. Since Section 501(c)(3) is the section that creates the boundaries between that which is charitable (at least, charitable in tax terms) and that which is not, does it make sense for those rules to play a role in policing this issue. One could view the 1969 passage of the private foundation excise taxes as the historical pre-cursor for this discussion, as at least part of the background of that legislation was to minimize the benefit to and the influence of the most wealthy through charitable vehicles. My thoughts aren’t fully formed on this, but I found it an interesting crossing of the Twitter streams in a very short 48 hour period. Any musings and other big thoughts are, of course, most welcome.