Nonprofit Law Prof Blog

Can Philanthropy Save Democracy?

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).

Nicholas Mirkay

Ongoing Congressional Scrutiny of Syndicated Conservation Easements

In a follow-up to a March blog entry  regarding Congressional scrutiny of syndicated conservation easements, Senate Finance Committee Chairman Chuck Grassley and Ranking Member Ron Wyden announced in mid-September that subpoenas were issued for documents relevant to their bipartisan investigation of syndicated conservation-easement transactions.  Wyden stated in the announcement: 

As we’ve both said all along, conservation easements have very legitimate purposes. We need to protect those purposes and protect the American taxpayer. If a handful of folks can game the system for profit, then we’re all left holding the bag. We expect fulsome cooperation with our investigation, and it’s unfortunate we’ve had to resort to compulsory process. Ultimately, when Congress makes an inquiry, it needs to be answered. It’s not optional.

Timothy Lindstrom, Esq., associated with the Land Trust Alliance, provided the following explanation of syndicated easements:

Let’s say a man named John donates a conservation easement on his farm to a land trust. His appraiser valued the farm at $3 million before the easement and $2 million after the easement. Therefore, the easement is worth $1 million, which would be the amount of the tax deduction available for the donation. John doesn’t have sufficient income to use this deduction. He wants to sell the deduction to someone who can use it.

Federal tax law does not allow the donor of a conservation easement, or of any other property for that matter, to transfer the deduction generated by the donation to someone else. A federal tax deduction is personal to the donor. If the donor can use the deduction, fine; if not, it disappears. In other words, John can’t sell his deduction.

This is simple. However, some legitimate conservationists, and some not-so-legitimate tax shelter “facilitators,” are using limited liability companies and other so-called “pass-through” entities to try to “syndicate” tax deductions — in essence, to sell them — in ways that an individual, such as John, cannot accomplish. These deals are anything but “simple.”

Lindstrom acurrately points out that not all syndications are "shams," but advocates for syndications that allocate tax deductions to be scrutinized.  Syndications that fail to comply with complex allocation rules for pass-through entities and/or utilize inflated easement appraisals, according to Lindstrom, threaten "the viability of the tax benefits for conservation easements and the credibility of the voluntary land conservation effort."

Nicholas Mirkay

 

IRS Audit of the NRA's Tax-Exempt Status Requested

In a follow-up to a previous post this week The NRA and Russia:  How a Tax Exempt Organization Became a Foreign Asset, Senate Minority Leader Chuck Schumer and Senate Finance Committee ranking member Ron Wyden called for an IRS examination of the NRA's ongoing tax-exempt status in a October 2nd letter to IRS Commissioner Chuck Rettig.   The request comes on the heels of the Senate Finance Democrats' release last week of a report on the organizations's interactions with Russian nationals.  Schumer and Wyden stated in the letter:  "Given this report's concerning findings and other allegations of potential violations of tax exempt law by the NRA, it is incumbent on the IRS to fully investigate the organization's activities to determine whether the NRA's tax exemption should be disallowed."  

The NRA is a tax-exempt under section 501(c)(4) of the Internal Revenue Code as a social-welfare organization.  The organization also has affiliated entities that are tax-exempt under sections 501(c)(3) and 527 of the Code.

Schumer and Wyden assert in their letter that the findings of the report raise concerns of whether the NRA's activities violated the statutory social welfare requirements, including the use of tax-exempt resources for non-tax-exempt purposes.  "In light of the continued efforts of Russia to undermine American democracy, IRS must use its full authority to prevent foreign adversaries from again exploiting tax-exempt organizations to undermine American interests," Wyden and Schumer wrote.  The NRA and Senate Republicans take issue with the report and its findings.

As we previously blogged, the New York and District of Columbia attorneys general are conducting their own investigations about whether the NRA is complying with state tax laws. 

[Sources:  Politico, The Hill]

Nicholas Mirkay

Aprill: A Tax Lesson for Election Law

Ellen P. Aprill (Loyola LA) published A Tax Lesson for Election Law in the September 30th edition of Tax Notes.  The following are the introductory paragraphs of the article:

An August 22 deadlock by the Federal Election Commission regarding a request for an advisory opinion highlights the complicated role that tax law plays in regulating campaign finance. It underscores important differences between section 501(c)(3) and (c)(4) organizations not only under section 501(c), but also under section 527. Moreover, because the resignation of the FEC vice chair has left the commission without quorum and thus unable to act, tax regulation of campaign finance has increased importance.

On May 31 the Price for Congress committee (the Price committee) filed a request with the FEC for an advisory opinion regarding transfer of remaining campaign funds from former legislator Price’s campaign committee. The committee asked for approval to transfer some, although not all, of its remaining almost $1.8 million to a section 501(c)(4) social welfare organization (the 501(c)(4)). The request prompted passionate debate and deep division but no resolution by the FEC commissioners when it was discussed on July 25 and again on August 22.

As proposed, the 501(c)(4) would “engage in research, education, presentation, and publications with respect to health, budget, and other public policy matters.” Although unlike section 501(c)(3) organizations, a 501(c)(4) is permitted to lobby without limit and to engage in considerable campaign intervention, the request stated that this 501(c)(4) “will not attempt to influence legislation nor participate or intervene in any political campaign.” The Price committee also proposed that any transferred funds be placed in a separate account and not be commingled with other assets of the 501(c)(4). To comply with applicable election law regarding private use by former candidates, neither the transferred funds in this special account nor income generated from these funds would be used to provide Price, any members of his family, or former employees of the Price committee or of Price’s government offices with compensation, gifts, or material reimbursement, or “to influence any election.” Price, however, would serve as the organization’s president and chief executive officer, albeit without any compensation. The Price committee anticipates that he would “speak, write, publish, or otherwise make appearance to present the work” of the 501(c)(4).

Under election law, campaign funds can be contributed “to an organization described in section 170(c) of the Internal Revenue Code” as well as “for any other lawful purposes.” Under tax law, a 501(c)(4) would not be described in section 170(c) because that provision describes organizations that are eligible to receive tax-deductible charitable contributions, and a 501(c)(4), unlike a 501(c)(3), is not such an organization. 

In responding to the Price committee request, however, FEC draft advisory opinion 19-33-A, issued on July 17, did not read the reference to section 170(c) as limiting transfers to organizations eligible to receive deductible charitable contributions. The draft opinion explains that if an organization engages in educational activity and constrains itself from lobbying and campaign intervention, it is described in section 170(c) for purposes of campaign finance law, even if it is not eligible to receive tax-deductible contributions.

At the July 25 FEC meeting, Chair Ellen L. Weintraub objected strongly: “If we were to approve this advisory opinion, it would extend the ‘personal use’ exemption to 501(c)(4) organizations in a way that the commission has not done before.” Republican members disagreed, and the FEC postponed its decision. . . . 

At its meeting on August 22, however, the FEC “was unable to render an opinion by the required four affirmative votes and concluded its consideration of the request.” The Price committee will now have to decide whether to proceed without an FEC advisory opinion. The commission’s lack of sufficient commissioners for a quorum, however, prevents any possible enforcement action. 

Whatever the Price committee decides, its choice of a 501(c)(4) rather than a 501(c)(3) raises several issues under applicable tax law and its interaction with election law. In short, transfers to a 501(c)(4) rather than a 501(c)(3) offer advantages regarding IRS transaction costs and oversight, but also involve some income tax risks to the former candidate. The Price committee request also reminds us of some of the inadequacies of our regulation of campaign financing, both through tax law and election law. . . .

Nicholas Mirkay

Educational Tax-Exempt Status = Academic Freedom

In September 25 letters to the presidents of Duke, Harvard, and Villanova universities and Sarah Lawrence College, Senate Finance Committee Chair Chuck Grassley raised concerns and sought information on the current culture of academic freedom on their respective campuses.  In a recent op-ed published by the Wall Street Journal,  Grassley raised concerns about the current state of academic freedom in higher education, opining that students' demand for "safety" from "harm" is eroding academic freedom and the very point of higher education.  In each of the letters Grassley elaborated further:

Unfortunately, over the past year I have read a variety of media reports discussing incidents in higher education involving faculty suffering difficulties with or expressing concerns about teaching or researching topics that might challenge or encourage critical thinking about the conventional wisdom or a popular ideology of the day. . .  Students who can work and think critically for themselves are best equipped to tackle the most difficult challenges we face and participate fully and effectively in our democracy. 

A fundamental piece of this democracy-enabling purpose is that college and university professors should be free to teach and research – and students should be free to learn – to the best of their abilities in defiance of an undiscerning "instinct to believe what others do."  The United States’ higher education has long been the envy of the world for its ability to do just that. This letter respectfully requests information regarding the university’s commitment to creating such an educational environment in which its faculty can teach topics and take positions on matters that defy conventional wisdom and challenge orthodoxies in necessary but perhaps uncomfortable ways. . . .

With respect to tax-exempt status, Grassley quoted Bob Jones University vs. United States:  "Charitable exemptions are justified on the basis that the exempt entity confers a public benefit -- a benefit which the society or community may not itself choose or be able to provide, or which supplements and advances the work of public institutions already supported by tax revenues."  He further agreed with a description of tax-exempt purpose as to higher education being "fundamental to fostering the productive and civic capacity of [the Nation's] citizens."

The requested responses from the four institutions are due by October 25, 2019.

[See also Tax Notes dated September 30, 2019, Tax-Exempt Higher Ed Must Allow Academic Freedom]

Nicholas Mirkay

Liberty University: Allegations of Possible Self-Dealing, Lax Board Oversight

A lengthy Politico article details numerous alleged concerns relating to Liberty University and its President, Jerry Falwell Jr. Included in the story are a number of allegations that are likely familiar to readers who have dealt with family-run nonprofits before:

• The hiring of a company started by the son of the President to manage properties owned by the University, including a shopping center.

• The promotion by University employees of a nearby hotel, in which the son of the President may be "a silent shareholder."

• University loans to friends of the Falwell family, at least one of which may not have been repaid.

• Assertions by unnamed University officials that the school's board of trustees rarely question decisions by the President, even relating to significant financial transactions.

In addition, the story reports certain facts indicating that the University may have tried to influence a poll that aided then candidate Trump, raising political campaign intervention concerns. 

It should be noted that President Falwell denies that he or the University has engaged in any wrongdoing, and called on the FBI to investigate a criminal conspiracy at the University after the Politico story was published. In the meantime, the University's accreditor is reportedly asking for more information relating to the allegations in the story.

Lloyd Mayer

CRS Updates Report to Reflect Possible Impact of 2017 Tax Changes on Charitable Contributions

The Congressional Research Service has updated its Tax Issues Relating to Charitable Contributions and Organizations report (R45922). Most notable is this passage from the Summary, reflecting the possible impact of the 2017 tax law changes:

Comparing giving levels in 2017 and 2018 provides some insight into the possible impacts of the 2017 tax revision on charitable giving and the charitable sector. Compared to 2017, 2018 contributions from individuals and bequests declined as a percentage of GDP (by 6% and 5%, respectively), while corporate contributions were virtually unchanged and foundation contributions rose by 2%. In 2017, an estimated 80% of individual contributions benefited from the tax subsidy for itemized deductions. Surveying the literature can also provide some insight regarding the effect of tax subsidies on charitable giving. Based on statistical estimates of the responsiveness of individual giving to tax subsidies, a decrease in individual giving of around 3% to 4% might be expected from the 2017 tax revision. Limitations in the data make the effect on estates difficult to estimate, but it could be a decrease of up to 8%; the small share of bequests in total giving, however, would lead even that effect to reduce overall charitable giving by less than 1%.

Lloyd Mayer

Courts Dismiss Two Lawsuits Brought By SPLC-Designated Hate Groups

While the recent House Ways and Means Oversight Subcommittee hearing focused on whether current tax benefits provided to charities also subsidize hate speech, readers may remember that a different controversy arose a couple of years ago when several groups identified as "hate groups" by the Southern Poverty Law Center (SPLC) filed lawsuits challenging that identification. Federal district courts recently dismissed two of those lawsuits, one against SPLC and the other against Amazon for using the SPLC labels.

In Center for Immigration Studies v. Cohen et al., the nonprofit Center for Immigration Studies (CIS) filed suit against two SPLC leaders, Richard Cohen (now former SPLC President) and Heidi Beirich (currently SPLC Intelligence Project Director), alleging a RICO violation. The U.S. District Court for the District of Columbia dismissed the lawsuit earlier this month, concluding that "plaintiff has
not sufficiently alleged a predicate offense or a pattern of racketeering." More specifically, the court found that while SPLC's designation of CIS as a hate group was "debatable" under the facts alleged in the complaint, it was not fraudulent and so did not constitute wire fraud, the asserted RICO predicate offense. The court also found that the complaint only alleged a single scheme, which was insufficient to constitute a pattern of racketeering.

Coverage: Yahoo! News.

In Coral Ridge Ministries Media, Inc., d/b/a James Kennedy Ministries v. Amazon.com, Inc. et al., the nonprofit (Coral Ridge) sued not only SPLC but also Amazon.com, Inc. and AmazonSmile Foundation because they allegedly excluded Coral Ridge from receiving donations through the AmazonSmile charitable-giving program because of the SPLC's "hate group" designation. The U.S. District Court for the Middle District of Alabama in a lengthy opinion dismissed the lawsuit earlier this month for several reasons. First, the court dismissed the state defamation claim and federal Lanham Act claims against SPLC because it concluded that Coral Ridge was a public figure (which Coral Ridge conceded) and given the debatable meaning of the term hate group Coral Ridge could not prove it was false as assigned to Coral Ridge, much less that the designation actually was false, or that SPLC had made the designation with actual malice, as required under the First Amendment for the claims to be sustained. (The court also rejected the Lanham Act claims on statutory grounds.) Second, the court dismissed the Civil Rights Act Title II claims of religious discrimination against the Amazon defendants. While the court found that whether the Amazon defendants were places of public accommodation within the meaning of Title II to be a difficult issue of first impression, it ultimately did not reach that issue. Instead, it concluded that even if they were places of public accommodation the denial of Coral Ridge's ability to receive donations through the AmazonSmile program was not a denial of "goods, services, facilities, privileges, advantages, [or] accommodations" within the meaning of Title II because the AmazonSmile program is not open to the public because the program is limited to certain section 501(c)(3) organizations. The court also concluded that Coral Ridge failed to plead sufficient facts to support either a claim of intentional discrimination or a claim of disparate impact on religious or Christian groups.

Coverage: AL.com; South Florida Sun Sentinel.

Lloyd Mayer

How Not to Invest in For-Profit Businesses: Praying Pelican Ministries

Public details are a bit scarce, but according to press reports a three-year investigation by Minnesota Attorney General Keith Ellison has raised questions about a nonprofit's investment of nearly a $1 million in for-profit companies owned by the nonprofit's CEO. Praying Pelican Ministries started a for-profit coffee shop in 2013 in order to raise money, with the CEO as the sole shareholder of the business (even though the board had approved the investment subject to the nonprofit being a 49% owner). After investing nearly $800,000 in the business, the coffee shop was sold for $16,000, with the sales proceeds used to pay off the shop's creditors. During approximately the same time period, the nonprofit referred participants in its mission trip to a  travel agency owned by - you guessed it - the CEO. The nonprofit also paid nearly $140,000 to the agency in purported reimbursements, but a later audit revealed that in fact the agency was obligated to repay this amount to the nonprofit.

In the wake of the investigation and the AG's allegations that they had violated their fiduciary duties in numerous ways, the CEO and four board members resigned earlier this year. Earlier this month the AG filed in court a stipulation and proposed order (agreed to by the nonprofit and its new leadership), which if accepted by the court would require the nonprofit to revise its policies and leadership. The "Petition for Order Approving Assurance of Discontinuance" is available here. At least at this point, no criminal charges have been filed.

Coverage: Duluth News Tribune; Star Tribune. Hat Tip: Nonprofit Quarterly. 

Lloyd Mayer

New Proposed Regulations on Donor Disclosure

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.

Eww 

Of Soap, Mayonnaise, and Double Bottom Lines

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.

EWW

 

 

 

The Chronicle's Nonprofit Reading List

 I found this helpful list of recommended nonprofit readings on the Chronicle of Philanthropy website:

https://www.philanthropy.com/article/Catch-Up-on-Books-Recommended/247018?cid=cpfd_home

I have read a few of them, have a couple of others on my Nook awaiting my attention (with summer reading time coming to an end and the new semester ... they may be waiting a while), and others that I'm about to add to the stack.   I read Winner Take All - I think the central point was important, but found the author's approach to be so judgmental as to overwhelm his argument.  I just started Just Giving, and am looking forward to finishing that as part of an article I'm writing (slowly...) on endowments.   I think the next up will be Uncharitable.

I'd love to hear any thoughts others might have on these books, and if there are any that you all might add to the list.

 

EWW

Philadelphia Inquirer Three Years a Nonprofit. How is it Faring?

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

For Profit Corporations with a Social Purpose?

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

Pharma Charities?

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

Business Group Lobbying & Advocacy Spending Exceeded $1 Billion in 2017

According to the group MapLight, "corporate trade organizations and nonprofits spent $535 million on lobbying in 2017 and as much as another $675 million on unregulated efforts to influence public policy." MapLight is a section 501(c)(3) organization "that reveals the influence of money in politics, informs and empowers voters, and advances reforms that promote a more responsive democracy." The group based its findings on a two-month review of the tax returns from almost 100 trade organizations and nonprofits, finding that dozens of such organizations raise eight or nine-figure amounts each year to support their activities. 

Lloyd Mayer

University of Pittsburgh Medical Center Settles Dispute with Competitor and AG

I previously blogged about Pennsylvania Attorney General Josh Shapiro's attempt to modify consent decrees governing the relationship between the University of Pittsburgh Medical Center (UPMC) and Highmark (a health insurer and health care provider). I recently learned that days before the decrees were set to expire, UPMC and Highmark agreed to "give many Highmark insurance members in-network access to UPMC doctors for the next 10 years," access that was set to expire with the decrees. The Pittsburgh Post-Gazette news report linked to in the previous sentence notes that the Highmark CEO credits the AG with helping broker the talks that led to the agreement, and also that the AG planned to withdraw his lawsuit against UPMC. For those interested in the details of the long-running dispute involving UPMC, Highmark, and the AG's office, this news story also has a helpful timeline.

Lloyd Mayer

NRA Mess Continues to Expand

Here are the most recent National Rifle Association (NRA) developments:

• In July, the Attorney General for the District of Columbia issued subpoenas to both the NRA and its related charitable foundation focusing on whether the organizations violated DC's nonprofit laws. The foundation is chartered in the District of Columbia. More specifically, the AG's office said: ""We are seeking documents from these two nonprofits detailing, among other things, their financial records, payments to vendors, and payments to officers and directors." Coverage: ABC News; Washington Post.

• Earlier this month, the New York Attorney General issued subpoenas to 90 current and former NRA board members. The NRA is chartered in New York. While the AG's office did not provide any details, the subpoenas come in the wake of reports regarding financial transactions with numerous board members or entities owned by them. Coverage: CNN; N.Y. Times.

• Also earlier this month, the Washington Post reported that the NRA had considered purchasing a $6 million mansion for its chief executive officer, Wayne LaPierre. The NRA ultimately did not proceed with the purchase, but the details regarding the decisions related to the purchase are disputed by NRA officials and its former outside ad agency.

Lloyd Mayer

The Debate Over Donor-Advised Funds: New Research & New Data

There have been several notable recent additions to the donor-advised fund (DAF) debate. In June, H. Daniel Heist (U. Penn Social Policy & Practice) and Danielle Vance-McMullen (DePaul School of Public Service) published Understanding Donor-Advised Funds: How Grants Flow During Recessions, Nonprofit and Voluntary Sector Quarterly (2019). Here is abstract:

Donor-advised funds (DAFs) are becoming increasingly popular in the United States. DAFs receive a growing share of all charitable donations and control a sizable proportion of grants made to other nonprofits. The growth of DAFs has generated controversy over their function as intermediary philanthropic vehicles. Using a panel data set of 996 DAF organizations from 2007 to 2016, this article provides an empirical analysis of DAF activity. We conduct longitudinal analyses of key DAF metrics, such as grants and payout rates. We find that a few large organizations heavily skew the aggregated data for a rather heterogeneous group of nonprofits. These panel data are then analyzed with macroeconomic indicators to analyze changes in DAF metrics during economic recessions. We find that, in general, DAF grantmaking is relatively resilient to recessions. We find payout rates increased during times of recession, as did a new variable we call the flow rate.

Earlier this month Candid (formerly the Foundation Center and GuideStar), released the results of a community foundation survey. Included in those results is the following information regarding donor-advised funds maintained by the surveyed foundations (citations omitted):

Product Mix: On average, donor advised funds make up more than a third of assets for community foundations larger than $250M. Although DAFs continue to grow, they don't appear to comprise significantly more of respondents' asset bases than in previous years.

Total Donor Advised Fund Assets, Gifts, and Grants: Aggregate community foundation donor advised fund (DAF) asset, gift, and grant totals all saw a higher rate of increase in FY18 than the field as a whole. DAF grantmaking grew at a higher rate (4%) than assets and gifts (2% each).

Donor Advised Fund Flow Rate: The "flow rate" of DAFs compares a given year's grantmaking total with its gift total, dividing grants by gifts. This metric may help capture the activity of donors who contribute to their DAF and grant from it that same year. As with distribution rate and other measures of DAF activity in this survey, data is collected in the aggregate by sponsoring community foundation. Data collection on the account level would be necessary to analyze the activity of individual DAF holders. 39% of FY18 Columbus Survey respondents had a DAF flow rate of over 100%, meaning that they granted out more from DAFs than they received that year. 

Distribution Rates: DAFs at community foundations tend to be highly active grantmaking vehicles; more than half (53%) of all survey respondents granted more than 10% of their DAF assets out in FY2018. Larger community foundations, which as noted above tend to carry more non-endowed assets, also have the highest distribution rates.

Hat tip: Nonprofit Quarterly.

Finally, a piece in the Nonprofit Quarterly written by Alfred E. Osborne, Jr. (UCLA Anderson School of Management and also Fidelity Charitable Board Chairman) titled Fidelity Charitable 2019 DAF Grants Spike: How Donor-Advised Funds Changed Giving for the Better triggered a response (in the comments) from Al Cantor raising issues about Fidelity Charitable's influence over news coverage of it that is worth reading along with the main article.

Lloyd Mayer

Post-TJCA Charitable Deductions

Yesterday, the Chronicle of Philanthropy reported that both the number of taxpayers who took the charitable deduction and the amount of charitable deduction claimed dropped precipitously from 2017 to 2018. Specifically, in 2017, about 24 percent of taxpayers claimed charitable deductions (for a total of about $147.3 billion). In 2018, the percentage of taxpayers deducting their charitable contributions dropped to 8.5 percent, for a total deducted amount of $93 billion.

I'll note here that this doesn't mean that charitable giving dropped 27%. In fact, according to Giving USA, charitable giving in 2018 rose 0.7% in current dollars over giving in 2017 (though it dropped 1.7% when adjusted for inflation). It just means that where, in 2017, 35% of charitable giving was deducted, in 2018, only about 22% was deducted.

The Chronicle reported on the general decrease in taxpayers taking itemized deductions at every income level. I thought I'd look at how post-TCJA charitable deductions compared to pre=TCJA charitable deductions at five different income ranges.

I used the IRS's Late-May Filing Season Statistics by AGI for 2018 and 2019. Remember, the top-line numbers are that in 2017, 23.73% of tax returns took deductions for charitable giving. In 2018, that dropped to 8.43%.

For taxpayers with less than $50,000 in AGI, deductions dropped from 7.2% in 2017 to 1.82% in 2018.

Between $50,000 and $100,000, the decline was from 33.43% to 10.04%.

Between $100,000 and $250,000, the decline was from 66.96% to 23.81%.

Between $250,000 and $1 million, the decline was from 87.43% to 49.75%.

And above $1 million, the decline was from 86.8% to 67.75%.

Samuel D. Brunson