Nonprofit Law Prof Blog

Politico Story on Leonard Leo

There is a new story up on Leonard Leo in Politico today by Heidi Przybyla, who has had some significant scoops on Leo and the Federalist Society. It's worth a read for understanding some of the turmoil that seems to be going on in the background of the Federalist Society regarding its relationship with Leo.

This blog's Lloyd Mayer is quoted within.

This story seems to be the irony that Leo runs the Federalist Society as a 501(c)(3), which is prohibited from any political campaign intervention. Nevertheless, it appears that he uses those connections from the (c)(3) to further political interests in many ways. 

One notable scoop here is that though Trump did rely upon the list provided by Leo as a member of the Federalist Society, no one from Federalist Society other than Leo controlled the names provided.

From the story:

"Interviews with people familiar with the internal workings of the Federalist Society, including two board members, paint a picture of a symbiotic relationship in which Leo uses his connection to the vast network of scholars in the society to earn credibility with donors, who then contribute to dark money operations that engage in the kind of partisanship the society officially eschews.

Leo’s political activism and his use of donor money to enhance his own wealth have prompted increasing tensions between him and his fellow co-chair, Northwestern University Law Professor Steven Calabresi, and Meyer, who has been executive director or president for more than 30 years, according to three people familiar with the society. But they said Leo’s ties to the conservative donor base fans fears that a rift would leave the society struggling for funds, while members also worry that any breach in the facade of the conservative legal movement would only empower the liberals that all sides disdain.

Leo’s business empire and his leadership position at the society “easily gets blurred,” creating “a public relations problem,” said professor Lloyd Hitoshi Mayer, an expert on nonprofit organization advocacy at the University of Notre Dame."

Philip Hackney

Expose on Giving Back Fund and Relationship to Damar Hamlin Charity

Sportico has up a fascinating look into an athlete/celebrity fundraising operation called Giving Back Fund that had entered an arrangement with money donated to charity in honor of Buffalo Bill's Safety Damar Hamlin. 

From the story: "The nonprofit’s ongoing relationship with the NFL Players Association proved instrumental in delivering Hamlin’s haul. GBF hosts a philanthropic resource website for the union and Don Davis, the NFLPA’s senior director of player affairs, told Sportico that the partnership has been positive. . . . 

However, a rare peek behind its glittery curtain reveals an organization in strife and falling short of its sterling reputation. Recently, this has included a falling out between GBF and its longtime outside counsel, the resignation of multiple board members and a whistleblower complaint by a current employee about GBF founder and CEO Marc Pollick—the primary source of discontent.

“We will always seek to improve, but I can share unequivocally that this organization operates with integrity and compassion and has truly made the world a better place,” Pollick told Sportico in a statement. “I know an organization doing good isn’t necessarily the news you’re looking for, but it is our news, and we are very proud of it.”"

Worth a read.

Philip Hackney

Crowdsourcers, Ginni Thomas group, Uses Fiscal Sponsorship Via CRC

Interesting story out of the Washington Post this week looking at the use of fiscal sponsorship by a Ginni Thomas related group called Crowdsourcers, formed ostensibly to counter the left, via the Conservative nonprofit Capital Research Center (CRC), a group focused on uncovering dark money groups on the left. 

From the story: "A little-known conservative activist group led by Virginia “Ginni” Thomas, the wife of Supreme Court Justice Clarence Thomas, collected nearly $600,000 in anonymous donations to wage a cultural battle against the left over three years, a Washington Post investigation found.

The previously unreported donations to the fledgling group Crowdsourcers for Culture and Liberty were channeled through a right-wing think tank in Washington that agreed to serve as a funding conduit from 2019 until the start of last year, according to documents and interviews. The arrangement, known as a “fiscal sponsorship,” effectively shielded from public view details about Crowdsourcers’ activities and spending, information it would have had to disclose publicly if it operated as a separate nonprofit organization, experts said.

 

The Post’s investigation sheds new light on the role money from donors who are not publicly identified has played in supporting Ginni Thomas’s political advocacy, long a source of controversy. The funding is the first example of anonymous donors backing her activism since she founded a conservative charity more than a decade ago. She stepped away from that charity amid concerns that it created potential conflicts for her husband on hot-button issues before the court."

 

Also:

 

"Philip Hackney, a former IRS attorney who is now an associate law professor at the University of Pittsburgh, said such arrangements are not uncommon or improper. He said they do allow the start-up group to avoid having to disclose information that independent nonprofits must reveal in annual tax filings, such as its officers or details about its spending.

“You would be able to keep names and salaries off of any documents,” he said.

Indeed, Thomas’s title in Crowdsourcers is not a matter of public record and could not be determined."

Philip Hackney

Nonprofit NIMBYs

Growing up, I could count on a field trip to Balboa Park almost every school year. At least by the time I was in high school, we'd split into groups and walk around the grounds, probably slipping into an art museum or maybe the Museum of Us (which I'm pretty sure was called the Museum of Man when I was a kid), or the surprisingly engaging Railroad Museum. The high point (at least to a kid--it's been a long time since I've been there) was almost inevitably the Air and Space Museum.

It turns out that the various institutions at Balboa Park have come together with the Balboa Park Cultural Partnership, a 501(c)(3) organization that, according to its 990, exists to "advancing Balboa Park cultural organizations through collaboration and advocacy."

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Our Fraying (Private) Social Safety Net

Yesterday the Washington Post reported that Bread for the City, a D.C. nonprofit that provides, among other thing, food, clothing, health care, and even legal services to struggling residents of D.C., is going to shut down for the next month or so.

The shutdown is not because it lacks funding, or because of problems with its physical infrastructure, or because it has achieved its goals. It's closing to give its workers a break, time to breathe and recover after three years of nonstop work helping people get through a pandemic and all that came with it.

The Post points out that, for front-line workers at social safety net nonprofits, burnout is very real and very present. They have more people to help with fewer resources that, thanks to inflation, won't buy as much.

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Silicon Valley Bank and Nonprofits

Professor Darryl Jones does an incredible job covering the waterfront of nonprofit and tax-exempt issues on this blog. So much so that I had to go back to make sure he hadn't covered this particular issue.

See, the effect of Silicon Valley Bank's implosion and collapse on the tech industry has been well-documented. But I was curious if it would have any effect on tax-exempt and nonprofit organizations. And it turns out the answer is yes. In fact, there were potentially two consequences, one of which has been resolved, but the other which has not.

One issue for nonprofits is similar to a major issue for for-profits: nonprofits deposited money in Silicon Valley Bank, sometimes in excess of the $250,000 insured by the FDIC. That meant that any delay in accessing their accounts risked impacting nonprofits' ability to pay their employees. But a couple days after California regulators closed Silicon Valley Bank, the FDIC announced that it would pay an advanced dividend to uninsured depositors and eventually allow them to get at their full deposit. Like their for-profit counterparts, then, nonprofits that had deposit accounts with SVB would be made whole.

But nonprofits faced an additional issue, one that has not yet been resolved. Because Silicon Valley Bank not only made loans to startups, it made loans and donations to nonprofits. These loans weren't a huge part of its portfolio--as of last year it had loaned about $1 billion (or less than 2% of its outstanding loans) to nonprofits--but nonprofits were counting on money it had pledged to contribute going forward. SVB had been especially important in funding the construction of affordable housing.

At this point, SVB isn't going to be providing those loans or making those donations, and nonprofits are left to scramble to find funding to finish their projects.

Samuel D. Brunson

The Mormon Church v. the SEC

About a week and a half ago, the SEC announced that it had charged Ensign Peak Advisors and the Church of Jesus Christ of Latter-day Saints (the Mormon church) with violating Section 13(f) of the '34 Act and Rule 13f-1. Ensign Peak agreed to settle and pay a $4 million fine for failing to file Form 13F for about 22 years, while the Mormon church agreed to settle the allegation that Ensign Peak acted with its knowledge and direction and pay the SEC $1 million. On this blog we're usually more focused on tax (and, on occasion, state nonprofit) issues than we are securities regulation, but this is a big deal securities reg story involving nonprofits, so it's worth a little time to dig into and understand.

But before we dig into the story, it's worth laying some groundwork:

The Players:

The Mormon church is organized as a Utah corporation sole and, unsurprisingly, is exempt from tax under section 501(c)(3). (In fact, I'm putting the finishing touches on a book about the Mormon church and taxes, which will probably be published at the end of this year or sometime in 2024.) The church has a strong preference for centralization and hierarchy; in the U.S., the Utah corporation owns basically all of its property (unlike other denominations, which often incorporate different regions or congregations separately). The Mormon church is tremendously wealthy; just before the pandemic, a whistleblower alleged that it had $100 billion of invested assets (an amount that presumably didn't include, for instance, land it uses for church buildings).

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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.

Molina continues:

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

 

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.

 

darryll jones

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."

2/17/23

Philip Hackney

 

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.  

darryll jones

Four PA Hospitals Lose Property Tax Battle

Four formerly for-profit hospitals in Pennsylvania purchased in 2017 by an LLC recognized as a charitable organization by the IRS just lost appeals regarding whether they were exempt from property tax under Pennsylvania law.  

From the Bloomberg story:

"The “eye popping” compensation paid to executives at four hospitals owned by Tower Health LLC disqualifies the nonprofits from charitable tax-exempt status, a Pennsylvania appeals court ruled in four related cases. . . . 

The Pennsylvania Commonwealth Court ruled Friday that the hospitals failed to prove they’re entitled to the tax exemption. It reversed the ruling in favor of Pottstown Hospital, finding that Tower Health’s large executive salaries and 40% bonus incentives tied to the hospital’s financial performance show that the hospital had a private profit motive rather than a charitable purpose."

Pennsylvania requires charities to be "institutions of purely public charity" to qualify for exemption. The PA SCT in Hospital Utilization Project v. Commonwealth adopted what is known as the HUP test, which has 5 criteria:1. Advances a charitable purpose; 2. Donates or renders gratuitously a substantial portion of its services; 3. Benefits a substantial and indefinite class of persons who are legitimate subjects of charity; 4. Relieves the government of some of its burden, and 5. Operates entirely free from private profit motive.

The cases involved are:  Pottstown Sch. Dist. v. Montgomery Cty. Bd. of Assessment Appeals , Pa. Commw. Ct., No. 1217 C.D. 2021, 2/10/23 ; Phoenixville Hosp., LLC v. Chester Cty. Bd. of Assessment Appeals , Pa. Commw. Ct., No. 1281 C.D. 2021, unpublished 2/10/23 ; Brandywine Hosp., LLC v. Chester Cty. Bd. of Assessment Appeals , Pa. Commw. Ct., No. 1279 C.D. 2021, 2/10/23 ; and Jennersville Hosp., LLC v. Chester Cty. Bd. of Assessment Appeals , Pa. Commw. Ct., No. 1286 C.D. 2021, unpublished 2/10/23 .

Philip Hackney

Pittsburgh Announces Audit of Nonprofit Property Tax Exemptions

In late January, the city of Pittsburgh Mayor Ed Gainey announced that it will review whether the cities many nonprofits qualify for property tax exemption. The call notes that about one third of city property is exempt from taxation.

From the story:

"Mayor Ed Gainey signed an executive order Tuesday, allowing the finance and law departments to start looking into charitable organizations.

City leaders said the biggest concern is one-third of the City of Pittsburgh property is exempt, and the city loses millions of dollars. Now non-profit organizations must pass the Pennsylvania Purely Public Charity test.

Mayor Ed Gainey said, among the requirements, the organization must advance a charitable purpose, operate entirely free from a private profit motive and donate a substantial part of its services.

Mayor Gainey said this does not include religious institutions. However, this could impact certain health systems, universities and other organizations."

Here is a report from 2022 on the tax exempt properties in Pittsburgh. Pittsburgh conducted such a review ten years ago in 2013.

Philip Hackney

Feb. 12, 2023

 

$100 Billion (Redux)

So Wednesday, David Nielson, the whistleblower who sent a complaint to the IRS about the Mormon church's tax-exempt investment arm a handful of years ago, sent a revised and significantly polished update to the Senate Finance Committee.

For context: Ensign Peak Advisors is an investment company. Its sole (as far as I can tell) client: the Church of Jesus Christ of Latter-day Saints (that is, the Mormon church). It manages something in the range of $100 billion of the church's assets. And also, Ensign Peak Advisors is a tax-exempt organization.

Mr. Nielson has argued for a variety of reasons that it should not be exempt (because, among other things, it fails the organizatonal and operational tests (and in this round he added a private inurement claim).

Reading through this round, I think I understand his assertions. And I think they boil down to his misunderstanding certain transactions and terms of art. But I gave a more fulsome analysis of my thoughts on Twitter.

(He also makes some securities law claims, claims that I'm not qualified to comment on and which, honestly, also probably depend intimately on the underlying facts.)

Samuel D. Brunson

Photo by Ken Lund. CC BY-SA 2.0

Bartelby The Law Scrivner: IRS Chief Counsel Hiring Notice

You, too, can be Bartleby The Scrivner

You might not get rich, and I am just joking about Bartleby.  Starting out at or making a career at IRS Chief Counsel is not so much like Bartleby's job.  Bartleby, himself, was a "law-scrivner."  Granted, he lost his entire mind but at least he got to work in a Wall Street Law Office.  There is precedent, actually, for getting unbelievably rich out of Chief Counsel's Office.  Consider Jerry Reinsdorf, who started out as an IRS attorney.  After buying both franchises,  he managed to underpay every player on the Chicago Bulls and Chicago White Sox, including Jordan, Pippen and Frank Thomas!  He is a billionaire now.  In fact, one of the best places to start a tax law career is Chief Counsel's Office.  Here is a press release from earlier this week:

 

WASHINGTON – The Internal Revenue Service’s Office of Chief Counsel today [Feb. 8, 2023] announced plans to hire additional attorneys to assist the agency in enhancing the taxpayer experience and addressing high-end, complex noncompliance.

“We’re immediately seeking motivated attorneys to accomplish this highly challenging work,” said William Paul, Principal Deputy Chief Counsel/Deputy Chief Counsel (Technical). “We invite you to consider joining our team if you’re an attorney who’s interested in litigation, giving legal advice on complex tax matters or working on published tax guidance to assist the public in understanding the tax laws.”

Chief Counsel’s litigation positions offer a broad range of experiences that frequently involve complex issues with a national scope. Chief Counsel attorneys work to publish guidance to promote taxpayer understanding of the tax laws. And Chief Counsel’s litigators and guidance/advisory teams work together in an engaging and dynamic environment.

“Our jobs can help you build your career in all of these areas,” said Drita Tonuzi, Deputy Chief Counsel (Operations). “And we work hard to provide new attorneys with support and assistance in these efforts: our training and mentoring programs are some of the best.”

Some of the numerous advantages to joining IRS Chief Counsel include workplace flexibility, a collegial environment and an important mission to serve America’s taxpayers fairly and with integrity by providing correct and impartial interpretation of the Internal Revenue laws and provide the highest quality legal advice and representation for the IRS.

Attorney positions are available in dozens of cities around the country. The full list of job openings is always easily accessible by searching for IRS Chief Counsel on USAJOBS.gov The first announcements are already posted and can be viewed at the links below: 

•  Large Business & International Positions
•  Small Business/Self Employed Positions
•  Technical Positions

To learn more about these opportunities, visit IRS Office of Chief Counsel | IRS Careers.

This September, Chief Counsel will begin recruiting current law students pursuing a law degree or an L.L.M. in taxation and recent law school graduates into its Honors Program. To learn more about Chief Counsel’s programs, please visit http://www.jobs.irs.gov/counsel or follow the IRS, Office of Chief Counsel on LinkedIn.

 

darryll jones

Opera, Justice, and Nonprofit Support

Last night, my family and I went to see "The Factotum," a world-premier opera set in and around a Black barbershop on the South Side of Chicago. (It's actually the second opera we've seen this week--Sunday we saw "Hansel and Gretel.") Inspired by The Barber of Seville, the opera was written by two friends who met at the Governor's School for the Arts in Virginia. It brings to the stage Black voices, Black writers, Black performers, and a facet of the Black experience. Oh, and also musical styles, including hip-hop, barbershop, R&B, gospel, and jazz, without ever sacrificing operatic technique or style.

The writers and the performers definitely have the chops for this--one of the writers/lead characters has starred in "The Barber of Seville" itself, as well as the recent "Fire Shut Up In My Bones" (which I wish I had seen--I love Terrance Blanchard--but alas). His co-writer has moved to DJing, among other things.

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A Foundation's Final Grant

About a month ago, the Chronicle of Philanthropy wrote about the Lillian Holofcener Charitable Foundation. The short of it is, the foundation took essentially its last $1 million and made a single grant to support a free newspaper written by Black journalists primarily for Black residents of Baltimore. The family's reasoning?

The move is an attempt to counter the idea that “any giving is good giving,” Holofcener says. If the foundation, named after his grandmother, had distributed grants over several years to select nonprofits, the philanthropy would still maintain control over the city’s nonprofits competing for the funds. he says. A better way to give, he says, was for the foundation to give up control of how the money was used and leave those decisions to the Baltimore Beat staff.

“It was very important that not only were we giving all the money away but that we were losing the money,” he says. “It’s as important to disempower ourselves as it is to empower them.”

This move runs counter to the common narrative (and practice) of charitable foundations. The tax law requires foundations to spend at least five percent of their assets annually, basically because foundations seem to want to exist (and grow) forever, and Congress feared that without some minimum distribution amount, they would continue to grow their money, making few if any grants.

This represents a massive departure from that philosophy, and also from the (still trendy?) effective altruism. Rather than saving charitable dollars for some future life-changing moonshot, rather than believing they could manage their money better than a charitable organization, the Holofcener Foundation found a current organization addressing a current issue and trusted it to use the money in an effective way.

While I have no illusions that this represents the start of a sea change in donor behavior, it is exciting to see a move that runs contrary to conventional practices, with a focus on now rather than some distant and uncertain future.

Samuel D. Brunson

Turkey, Syria, and Disaster Relief

By now, you've undoubtedly read about the earthquakes in Turkey that killed at least 5,100 people in Turkey and Syria and left an estimated 150,000 people without homes in Turkey alone. 

Governments, including several countries in the EU, the United States, Russia, and Israel, are stepping up with disaster relief. But for an earthquake that has affected an estimated 23 million people, there cannot be too much help.

And charitable organizations are stepping up, allowing individuals and corporate entities to step up. The Turkish and Syrian Red Crescents are looking for donations and volunteers. The International Blue Crescent Relief and Development Foundation says it needs tents, heaters, blankets, MREs, thermal clothes, and first aid kits. Plenty of other charitable organizations are also raising funds to provide relief for the victims of the earthquakes.

And this fundraising strikes me as absolutely critical. With a massive disaster like this, we need the government, the private, and the public sector to step up. A couple things to think about when deciding how and where to help:

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Hospital Mergers and Protests

Last time I blogged here, I did a number of posts about sketchy conduct by nonprofit hospitals. The New York Times and the Wall Street Journal did some great investigative journalism about that.

Last week, on Twitter, I came across a thread about another hospital issue: the proposed merger of Minnesota's Fairview Health Services and South Dakota's Sanford Health.

Apparently the two tried to merge in 2013 to, let's say, less-than-stellar results. And how is this attempt going? Not much better. On Friday, medical professionals and med students at the University of Minnesota medical school rallied against the proposed merger. Protestors seem to have two objections. The first is, they don't want the University of Minnesota's health care system controlled by an out-of-state entity.

More importantly, they point to the fact that mergers in the nonprofit health care industry almost inevitably lead to consolidations, job loss, and loss of care for patients who use the health care system. And it's hard to argue that they're wrong: the Times's reporting shows precisely that happening as a result of the mergers and consolidations it looked at.

Will the merger happen? Well, it's failed before. It's deeply unpopular. But we'll have to wait and see.

Samuel D. Brunson

Merger and acquisition law by Nick Youngson CC BY-SA 3.0 Pix4free

CHaTGPT and Whole Hospital Joint Ventures, Part I

Here are a few paragraphs from an interesting Axios article entitled,  How a Silicon Valley Nonprofit Became Worth Billions:

There are various different ways to make hundreds of millions of dollars, but historically "starting a nonprofit" has not been one of them. Silicon Valley, however, has managed to find a way, at ChatGPT creator OpenAI.

Why it matters: OpenAI pivoted from nonprofit to for-profit status in 2019, a mere four years after it was founded with $1 billion of donations from Elon Musk and others. It's now reportedly in talks to raise $10 billion from Microsoft, much of which is likely to go straight into shareholders' pockets.

The bottom line: OpenAI is a very valuable for-profit company, expertly using hype cycles to maximize the value of its shares.

It has lost the moral high ground, however — and everybody who who funded it while it was a nonprofit has the right to feel a bit aggrieved that they were unwittingly providing seed capital to make Sam Altman and his colleagues even richer than they already were.

In other words, a nonprofit dedicated to advancing the science of artificial intelligence had an initial valuation (as determined by donors) of at least $1 billion.  It is now projecting "net revenues" in the trillions (though that may be an exaggeration, who knows), thanks really to public funded (via tax exemption and deductible charitable contributions) and owned technology.  The nonprofit has converted to a for-profit -- which means net revenues have evolved into profits and donors into investors. The donors -- now investors -- stand to get rich.  Is this right or wrong? This is Part I of a two part post.  Part II comes tomorrow.  

Let's go back to the future to figure this out.  Remember, during the heyday of "managed care," how nonprofit hospitals felt negative economic impacts from insurance companies.  Insurance companies shifted from a fee for service model to a capitation fee model.  Under the former model, health care providers were compensated for each service or treatment ordered up for the patient.  Obviously, a fee for service model allowed for over-consumption of health services on demand.  The fact that health care provider compensation was based on the number of services provided, that they made more money if they ordered more tests or treatments, and the fear of malpractice liability for missing something meant that health care services would be over-prescribed.  There were no limits on health care demand because doctors and patients were essentially permitted to treat healthcare like an "all you can eat" buffet.  Meanwhile, unchecked demand hiked prices and a significant minority were unable to pay for healthcare.  A capitation fee model, where a healthcare providers get only a flat fee per patient (rather than per service), injects market discipline by putting health care providers at risk of loss for over prescribing.  Insurance companies capped what they would pay on a per patient basis, so health care providers might lose money by ordering all sorts of tests or treatments.  Capitation pays one fee per patient no matter how few or many treatments are provided. 

Nonprofit hospitals -- including medical school hospitals --  felt the pinch most of all because they depended on patient revenues (over and above donations) to "cross subsidize" very expensive research or experimental treatments.  Those hospitals might have even charged their non-indigent patients higher fees than those patients might have paid at a for-profit hospital.  Generally speaking, for profits don't have the imperative to get more money to fund expensive research or experimental treatment. Anyway, all of this lead to an increase in formal partnerships between nonprofit health care and for-profit physician practice groups, for example.  The idea boiled down to giving a for-profit partner (the physician practice group) a cut of the nonprofit hospital's revenue, thereby incentivizing that group to use the hospital services.  By doing so, nonprofit hospitals hoped to increase patient volume and revenue sufficient to fund research and expensive experimental procedures.  EO Heads exploded everywhere and eventually the Service issued rulings on so called "whole-hospital" and "ancillary" joint ventures, both of which imposed requirements intending to ensure that in a partnership between a nonprofit hospital and a for-profit entity (either a for-profit hospital or a physician practice group, typically), the nonprofit would continue operating for public rather than private benefit (by subordinating any profit incentive to the charitable purpose), and that literally allowing a for-profit partner to pocket a variable share of the revenue generated by the nonprofit the nonprofit was not engaging in private inurement or excess benefit.  Note the green lines in the picture below.  It shows that the nonprofit hospital is sharing profits with a physician group that has invested in the exempt hospital's operations.  It was this literal economic reality of private inurement -- the for-profit, in exchange for an investment just like a normal shareholder, was taking a share of subsidized profits, just like a normal shareholder -- that lead the Service to coin the phrase "private inurement, per se," discussed at footnote 178 of this article.  

The fretting and gnashing of teeth has pretty much died down since the Service issued its joint venture rulings, perhaps reflecting the changes in insurance reimbursement and hospital patient care practices since the enactment of Obamacare.  I think pretty much everyone felt like few other nonprofit endeavors generated the vast amount of revenue (and the temptation to line private persons' pockets) that nonprofit hospitals do, so there hasn't been much attention paid to the issue since the early 2000's.  

But the arc of the nonprofit universe is long and apparently bends towards . . . well, astronomical wealth.  OpenAI is not a health care organization.  It is a scientific research corporation whose purpose is to develop open source Artificial General Intelligence (AGI).  It was founded when Elon Musk and other rich people "contributed" over $1 billion to support OpenAI's research towards publicly available AGI.  OpenAI is getting a whole lot of attention these days because it has apparently developed AGI known as CHaTGPT, which is touted as artificial intelligence technology that can think (and learn) like a human who never forgets anything and, on top of that, can store and retrieve unlimited information.  Theoretically, a student, or even a professor for that matter, can order up a paper or dissertation on Rawlsian philosophy and whether tax exemption is consistent with that philosophy, for example.  CHaTGPT can spit out the product in short order and that is one of the relatively benevolent uses.  More heads are exploding now!  Open AI is now worth upwards of $30 billion.  And in an explicit move to harness investor capital, OpenAI has entered into a "capped profit" partnership with an entity known as OpenAI Ltd.   OpenAI is the general partner, and private investors are the limited partners.  Google is one of the limited partners, having put up another $1 Billion in investor capital.  In addition to a profit share, Google will be entitled to exclusive use of the technology developed by the partnership.  Open AI calls the partnership a "capped profit entity" because investors are explicitly limited to returns no greater than 100 times their capital contribution.  Net revenues -- or profits -- beyond investor return (the founders are claiming profits will be in the trillions) are devoted to the nonprofit general partner's charitable mission.  One billion times 100 equals $100 billion, by the way.  

So, let's summarize what happened here:

1.  A nonprofit forms to develop remarkable and potentially very valuable open source technology.  We all help pay for their work via tax exemption and charitable contribution deductions so it makes sense that the technology should be open source.

2.  The nonprofit lands a huge charitable donation, generating tax deductions for the donors.  Ok, so far so good, this is how its supposed to work.

3.  The nonprofit successfully develops incredible, tax subsidized technology generating tremendous investor interest.  Fine.

4.  The nonprofit drops the technology into a subsidiary entity (a limited partnership), and sells shares in that entity to private investors who, like any other private investor, expect and are contractually entitled to profits from the exploitation of the technology.  Wait, what?

5.  And by the way, in exchange for Google's investment, Open AI promises Google an exclusive license to the incredible technology.   Who said you could do this?!

In other words, Open AI has entered into a "whole hospital joint venture" and as part of the deal has promised a major investor exclusive access to its tax subsidized intellectual property.  This post is already pretty long, so in my next post I will provide brief analysis and opinion as to whether this arrangement ought to be carefully examined by the Service.

darryll jones