Nonprofit Law Prof Blog

Minnesota Appeals Court Upholds Removal of Otto Bremer Trust Trustee

In this space we have previously reported on first the Minnesota Attorney General seeking to replace the trustees of the Otto Bremer Trust, and then on the decision by a Minnesota trial court to remove one trustee but not two others. That decision led to an appeal by the removed trustee, and last week the Minnesota Court of Appeals upheld the removal.

Applying an abuse of discretion standard, the appellate court found that the district court had properly removed the trustee for a "serious breach of trust" arising from self-dealing in the form of misuse of the Trust's assets, violations of his duty of loyalty for allowing his personal interests to significantly and negatively impact his decisions and behavior as a trustee in the form of inappropriate and abusive behavior, and a violation of his duty of information by refusing to disclose his designated successor's identity to the Attorney General until forced to do so while testifying at trial. The appellate court further found that the district also properly removed the trustee because it was in the best interest of the Trust and its beneficiaries given these continual breaches of his duties that rendered the removed trustee unfit to administer the Trust.

Media Coverage: Minnesota Lawyer; Pioneer Press; Star Tribune. 

Project Veritas Admits Excess Benefit Transaction

From the N.Y. Times

Project Veritas, the right-wing group known for its sting operations, reported in its latest filing to the I.R.S. that it provided a prohibited “excess benefit” last year to its founder, James O’Keefe.  Every year, the I.R.S. asks nonprofits to report if their executives received undue or excessive benefits. In its 2021 filings with federal and state regulators, Project Veritas said yes, reporting $20,512 in excess benefits to Mr. O’Keefe.  In those tax filings, submitted in November and posted online by charity regulators in Hawaii, Project Veritas did not describe the benefits.  On Monday, the executive director of Project Veritas, Daniel Strack, said the spending related to Project Veritas staff who accompanied Mr. O’Keefe when he starred in an outdoor production of "Oklahoma!" staged at a farm in Roseland, Va. “The disclosure on our 990 pertains to Project Veritas staff helping film behind the scenes and staff who were on site to accommodate James,” Mr. Strack wrote in a statement issued through a spokesman, referring to the filing with the I.R.S.  As a result, the group said, Mr. O’Keefe had incurred a tax equal to 25 percent of the excess benefit, or $5,128. Mr. Strack, through the spokesman, said the tax “has been paid.”

Hmmmmm. You can read the organization's 990 here but I gotta tell you this is the kind of loose string that resulted in Richard Nixon's resignation, even if the organization is valuing the excess benefit at only about $20,000, and the 4958 excise tax at $5,000.  It looks innocuous enough (why would Veritas even bother to report this, I wonder) and the explanation is ho hum.  But why was the CEO moonlighting as a Broadway wannabe anyway?  I'm thinking, maybe we ought to follow the money!  Now I'm not one to spread rumors, but one needs to ask what other expenses were paid by Veritas whilst its CEO was off chasing the bright lights, an extra salary, and using Veritas to film and prepare advertisements for the play. Were his expenses paid by Veritas, and did he take some Veritas staff with him as though he was working towards Veritas' charitable mission?  Veritas' website has a link to this headline: James O'Keefe Lands Lead Role in Off-Broadway Outdoor Production of "Oklahoma!"  Performing in Solidarity with Artists Who've Been Cancelled.  And the web has it all over that O'Keefe is actually a frustrated would-be Broadway actor, disguised as a right wing charitable "educational" organization CEO.  Seems to me that Veritas is not hurting that cause, I'm just saying!  The Veritas website looks like the play (Oklahoma) is actually sponsored by Veritas and the link takes readers to a page from which they may order tickets.  Another loose string that ought to generate curiosity at National Tax is the sharing of expenses and personnel (with its 501(c)(4) action organization through which much of its actionable or illegal "sting" operations are conducted) hinted at on Schedule R. I am just asking questions here is all.  

 

dkj 

VIP Treatment at NYU Hospital

Nonprofit and for-profit hospital differ in very few ways--both generally provide the same services and both can be extremely profitable. One dividing line? Charity care. For a federal tax exemption, a nonprofit hospital is supposed to demonstrate that it provides an emergency room open to all, irrespective of ability to pay, and hospital care for all capable of paying, whether they're paying in cash or with Medicaid. (Some states have additional requirements; in Illinois, for example, to qualify for a property tax exemption, a hospital must provide more free and discounted services to certain communities than they would have paid in property taxes during the year.)

As part of its extensive investigation on nonprofit and tax-exempt hospitals, the New York Times reported last week that NYU's emergency room prioritizes VIPs, especially relatives of trustees, donors, and their families. (Unsurprisingly, NYU denies having a VIP program.)

Continue reading

Hospitals and Politics

As the distance between nonprofit and for-profit hospitals narrows, peoplee hve begun asking whether hospitals should qualify as tax-exempt, a question I'm going to look at over the next couple days. Before we get there, though: almost 60% of hospitals are nonprofit. I assume that a large portion of those nonprofit hospitals are also tax-exempt and, as such, subject to the rules for tax-exempt organizations. Including the campaigning prohibition.

As a general rule, when I think of tax-exempt organizations violating the campaigning prohibition, I think of churches. In fact, I'd probably generally put hospitals at the bottom of my list of violators.

I'd be wrong, though. WTTW and ProPublica have recently looked at Roseland Community Hospital, a nonprofit hospital on the South Side of Chicago. Their investigations focused primarily on patient care and funding issues, but in the course of their investigations, the reporters came across an unexpected issue: Tim Egan, the CEO, has endorsed at least one candidate in his capacity as hospital CEO.

As we spend much of the rest of the week looking at whether hospitals should qualify for tax exemption, it's worth starting out asking whether those that are exempt follow the rules that govern tax-exempt organizations. At least one, it appears, does not.

Samuel D. Brunson 

Photo by Robert L. on Unsplash

New NY Pennies for Charities Report; CVS Accused of Deceptive Fundraising

There are two recent developments relating to charitable solicitations. 

First, the New York Attorney General released the latest iteration of its annual Pennies for Charity Report.  Highlights from the press release announcing the report include:

Despite the pandemic’s continuing economic impact and limitations on in-person events, donations rose to over $1.7 billion in 2021 — an increase of almost $250 million from 2020 and over $400 million from 2019 pre-pandemic contributions. Other report findings include:  

• In 276 campaigns — 42 percent — charities received less than 50 percent of funds raised, with professional fundraisers retaining the rest. 
• In 96 campaigns — 15 percent — expenses exceeded revenue and cost charities over $10 million. This is fewer cases than last year for both findings. 

Second, the Boston Globe reports that a lawsuit has been filed against CVS alleging that checkout donations to the American Diabetes Association are actually being used by CVS to reimburse the company for $10 million it already owes to the charity. Here is the complaint, courtesy of the FastCompany website that also covered this story. The plaintiffs filed the lawsuit last May, but it apparently flew below the media radar screen until a recent Tweet highlighted it in the wake of CVS filing a motion to dismiss. CVS strongly rejects the accusation, saying it only agreed to top off the donations if customer donations over a three-year period (2021 to 2023) did not reach $10 milliion. If instead customer donations exceed $10 million, any excess would go the charity.

Lloyd Mayer

Churches & Tax Exemption: Growing Less Settled?

Since I occasionally write about tax law and religious organizations, I am sometimes asked if there is a realistic possibility that churches might lose their tax exempt status given scandals ranging from televangelist salaries to sexual abuse. My go-to response is that there are hundreds of congregations in every congressional district, and if there is one thing that would unite them it would be protecting that status. So no.

Making me wonder if my response has been too glib are the following recent pieces on this topic that the authors thought worth the effort to write. The first relates to certain specific churches, but the other two are more broad based defenses of the exemption, responding to recent criticisms: 

• Taylor Holley, Note, Auditing Scientology: Reexamining the Church's 501(c)(3) Tax Exemption Eligibility, 54 Tex. Tech. L. Rev. 345 (2022). The author raises commerciality, private inurement, and fundamental public policy concerns with Scientology organizations.

• Reece Barker, Note, A Memorial and Remonstrance Against Taxation of Churches, 47 BYU L. Rev. 1001 (2022). The author argues "[a]though religious organizations are currently exempted from taxation, this issue is important because there is a growing appetite to remove the exemptions. For example, many view religion as an untapped source of revenue for cash-strapped governments. Others think they can coerce religious organizations to bend to the will of popular opinion through revocation of tax exemption. But whether the tax is designed to increase revenue or to align doctrine with popular opinion, religious taxation is off the table. It is off the table because tax exemption for religious organizations is not a reward, benefit, tax break, or legislative prerogative; it is a right rooted in the First Amendment. A right that acts as a crucial bulwark of society because it enables state and church autonomy that protects each from exercising undue influence over the other." (footnotes omitted)

• Howard Husock, Removing the Tax Exemption for Religious Congregations Is the Wrong Move for Our Polarized Nation (Opinion, Chronicle of Philanthropy, Nov. 17, 2022). He concludes "[t]he value of religion in providing links among neighbors, promoting friendship, and building a foundation for good works in an increasingly fragmented society transcends any tax accounting. During this time of extreme polarization, limiting the tax deduction for America’s most popular form of charitable giving would be exactly the wrong move."

And as an added bonus, another recent article addresses the perennial topic of churches and politics:

• Julia Camp, John Masselli, and Amy J.N. Yurko, Religion versus Politics: An age-old question with continued importance to the U.S. nonprofit classification system, The ATA Journal of Legal Tax Research (2022) (subscription required). From the abstract: "Following the awarding of church status to some seemingly politically charged organizations, we investigate this issue and propose that it is time for the U.S. Congress and the IRS to revisit, evaluate, and revamp the existing system to prevent political organizations from abusing the tax provisions intended to benefit churches."

Lloyd Mayer

Eds Update: Rep. Pascrell on College Coaching Salaries; Grand Canyon University Not a Nonprofit (for DOE purposes)

I previously noted the interest of Representative Bill Pascrell (D-NJ) in salaries paid by colleges to sports coaches, as demonstrated by the letters he sent to several of them. He has now released an official House Ways and Means Committee Subcommittee on Oversight report on this topic, including both the text of his letter and the responses of the nine addressees. In releasing the report, he stated:

Universities’ tax-exempt status is an important pillar of our higher education system, but it is not a blank check from taxpayers to dole out gargantuan coaching contracts with lavish benefits. The committee should consider reforming the excise tax on salaries over one million to apply to all colleges and universities. This would close a loophole that may enable some state universities to avoid the tax. It is also worth exploring whether profitable, multimillion dollar college athletics programs should be subject to the Unrelated Business Income Tax. We must consider whether tax-exempt educational activities and lucrative athletics programs should be treated differently. Certainly we can see that American students and American taxpayers deserve better

The report also includes as an Appendix a four and a-half page memo from the Congressional Research Service providing "Information on the Tax-Exempt Status of Colleges and Universities and Sections 4960 and 4958 of the Internal Revenue Code." It is uncertain whether his yet-to-be-determined Republican successor as Oversight Subcommittee Chair will have any interest in this topic or the proposed reforms.

In other news, the U.S. District Court for the District of Arizona upheld the decision by the U.S. Department of Education refusing to recognize Grand Canyon University as a nonprofit. As posted previously, the Department decided the University, which had legally converted from for-profit to nonprofit status under state law and obtained tax exemption under section 501(c)(3), did not qualify as a nonprofit for purposes of Title IV funding. The basis for the decision is reported to be that the University has an agreement that continues to generate revenue for its former owner. (I have not been able to find a publicly available copy of the court's decision; if any reader identifies one, please let me know and I will add a link to it.)

Lloyd Mayer

Meds Update: Mayo Clinic is an "Educational Organization"; More Charity Care Complaints (including for Mayo)

On remand from the Eighth Circuit, the U.S. District Court for the District of Minnesota in Mayo Clinic v. United States, No. 16-cv-03113 has concluded that the Mayo Clinic's primary purpose is educational and therefore it qualifies as an "educational organization" exempt from unrelated business income tax on its debt-financed income. As a result, the Mayo Clinic is eligible for an $11.5 million refund (plus interest). Especially given this was a factual conclusion, it is uncertain whether the government will appeal the result since it would presumably be subject to clearly erroneous review. Nevertheless, the decision could have major implications not only for nonprofit hospitals and other tax-exempt organizations that have unrelated debt-financed income, but also for tax-exempt organizations that could plausibly seek educational organization status so as to escape private foundation classification. It is likely in part for this reason that the IRS issued an Action on Decision refusing to accept the Eighth Circuit's decision that lowered the bar for qualifying as an educational organization, which bar the District Court applied. Coverage: Law360, Tax Notes.

Ironically, on the same day the court issued this decision the Post Bulletin published a story headlined They could have qualified for charity care. But Mayo Clinic sued them, that included this damning information:

The Post Bulletin interviewed 20 patients sued by Mayo Clinic for unpaid bills and determined that 14 could have qualified for charity care based on the household income information provided during the interview. Yet all but one were forced to pay their bills in full after they were sued, often through wage garnishment. Most had no idea charity care was an option .

Of course the Mayo Clinic is far from alone among nonprofit hospitals in facing complaints relating to charity care. The L.A. Times also recently reported that Hospitals had to put charity care rules on their websites months ago. Some didn’t do it. A new California law requires hospitals to "prominently post their financial assistance policies on their websites," but "more than nine months after the California law went into effect, some hospitals still had not put up their charity care policies in readily apparent spots on their websites, The Times found after reviewing websites for hospitals around the state."

Lloyd Mayer

 

Donor-Advised Funds Update: New Articles by Colinvaux and Heist et al.; NY AG Action; Fidelity Charitable Just Keeps Growing

Roger Colinvaux (Catholic University) has published Speeding Up Benefits to Charity by Reforming Gifts to Intermediaries, 63 Boston College Law Review 2621 (2022). Here is the abstract:

Charitable giving tax incentives are intended to encourage giving for public benefit. Gifts to intermediaries frustrate this goal. Presently, $1.26 trillion has accumulated in donor advised funds (DAFs) and private foundations. These are charitable intermediaries that do not benefit the public until they release their funds for public use. Congress has long recognized that intermediaries cause a "delay in benefit" problem because the tax incentive is awarded before the public benefits from the gift. Congress addressed this problem for foundations in 1969 by requiring them to pay out a minimum amount annually. Congress, however, has not addressed the problem for DAFs, and the foundation payout now has too many loopholes. The Article explains that reform of charitable intermediaries is essential to the continued viability of the charitable giving incentives. The status quo allows donors to a take a tax deduction, retain effective control over their donations indefinitely, and provides no guarantees that the public will ever benefit from tax subsidized charitable gifts. This Article responds to arguments against charitable intermediary reform and analyzes bipartisan legislation, the ACE Act, introduced to accelerate charitable giving from DAFs and foundations. The Article also considers whether community foundations and other mission-driven DAF sponsors warrant distinct legal treatment. The Article concludes that the status quo undermines generosity and perpetuates wealth, and that reform is required. This Article further concludes that, though the ACE Act is sound legislation, it should apply to existing DAF accounts and require further study of its incentives for private foundations and whether DAFs at mission-driven sponsors further their mission.

H. Daniel Heist (BYU), Benjamin F. Cummings (Utah Valley University), Megan M. Farwell, Ram Cnaan (University of Pennsylvania), and Erinn Andrews (GiveTeam) have published Tubs, tanks, and towers: Donor strategies for donor-advised funds giving, Nonprofit & Management Leadership (2022), which provides interesting information about the various ways donors use DAFs. Here is the abstract:

The increasing use of donor-advised funds (DAFs) creates challenges for nonprofit managers and fundamentally changes the way that many donors give to charity. We conducted 48 in-depth interviews with DAF donors to understand their strategies of how they give through a DAF. From the interviews, we found three distinct models of DAF giving strategies: tubs, tanks, and towers. Tub donors give quickly through a DAF, moving money in and out annually. Tank donors contribute large lump sums and grant the money away in the relatively near future. Tower donors take a calculated approach with the DAF to sustain their philanthropic activity over time. Several factors relate to these strategies, including the sources and timing of contributions, different purposes of grantmaking, tax implications, investment strategies, and family involvement. Our findings may help nonprofit managers, fundraisers, and other stakeholders to better understand the various ways donors give through DAFs.

In other news, last month the New York Attorney General filed an Assurance of Discontinuance relating to Peter Fleischmann, former chief executive office of the Foundation for Jewish Philanthropies (FJP), a donor-advised fund (DAF) sponsoring organization. According to news reports, four years ago Fleischmann resigned from his role with the charity that then managed nearly $200 million in assets. I could not find a ready link to the document - I received it from the New York AG's office - but it contains findings and relief agreed to by the AG and Fleischmann, including:

• A disclosure by FJP of an internal investigation to the AG's office triggered the AG's inquiry.

• Fleischmann breached his fiduciary duties in various ways, specifically facilitating a donor's award of scholarships from a fund held by FPJ to relatives of the donor (which FJP reported to the IRS as violations of section 4966 relating to DAFs and obtained repayment from the donor for) and making charitable donations in violation of the terms of other funds and claiming those donations as his personal ones for charitable contribution deduction purposes (which he has since repaid in significant part to FJP).

• Fleischmann agreed to be permanently barred from serving in a position with fiduciary responsibilities for any New York nonprofit and has corrected the tax returns on which he claimed the improper charitable contribution deductions.

Finally, Fidelity Charitable announced that new grants are expected to surpass deposits in 2022, according to AP News, with grants expected to exceed the $10.3 billion donated in 2021. And Bloomberg Law (subscription required) reports on the details of Fidelity Charitable's latest IRS Form 990, including that of those 2021 donations hundreds of millions of dollars flowed to other DAF sponsoring organizations.

Lloyd Mayer

Politics Update: More Coverage of Mega-501(c)(4)s; Senator Whitehouse Criticizes 501(c)(3) CPI

I previously reported on commentary stimulated by recent reports of multi-billion dollar donations to 501(c)(4)s. Bloomberg Law (subscription required) has now published Ray Dalio, Koch Family Wield Powerful Tool to Give Fortunes Away highlighting additional instances of mega-501(c)(4)s controlling billions of dollars.  Here are the opening paragraphs for the story:

Ray Dalio , founder of the world’s largest hedge fund, has one. The Koch family, sitting atop a $137 billion fortune, has at least two. Still another entity, with unknown backers, owns a big stake in one of Wall Street’s fastest-growing financial technology startups.

The vehicle, long deemed a dumping ground for nonprofits like low-income housing developers, Rotary International and even the AARP, drew controversy in the past decade as a “dark money” political giving tool. Now it’s attracting billionaires who realize it offers far more.

The most important quality of the so-called 501(c)(4) organization boils down to one word: control.

Control over their business. Control over political influence. Control over disclosure. Control over taxes. And, of course, control over the crucial soft power of charitable giving.

All in one place.

In other politics and nonprofits news, U.S. Senator Sheldon Whitehouse, Chairman of the Senate Finance Taxation and IRS Oversight Subcommittee, publicly criticized the section 501(c)(3) Conservative Partnership Institute for possible political campaign intervention and private benefit. This follows an NPR report on CPI's activities (full disclosure: I am quoted in this report as saying CPI's reported activities raise yellow flags). It also comes at the same time as a Daily Signal report that Senator Whitehouse pressured the IRS and DOJ to investigate conservative groups.

Lloyd Mayer

Rev. Jim Wallis: How Congress Can Bring Good News to the Poor This Advent

In an opinion piece in today's Religion News Service, the Rev. Jim Wallis, Director of Georgetown University’s Center on Faith and Justice and the Chair in Faith and Justice at the McCourt School of Public Policy, calls on Congress to bring good news to America's children this Advent by expanding the child tax credit.

Rev. Wallis begins his article by noting that as the season of Advent begins, millions of Christians around the world prepare to mark the birth of a child born on the margins of a great empire. He continues:

As it happens, Advent runs alongside another season of sorts in the nation’s capital: a lame-duck congressional session. Lawmakers aren’t expected to pass much legislation during this time — hence the fowl nickname — but they will likely consider extending Trump-era tax cuts for corporations.

This provides an opportunity — even a moral obligation — to bring good news to American children as well. Congress should not approve any year-end corporate tax breaks without expanding the child tax credit.

In the throes of the pandemic, in 2021, Congress expanded the child tax credit, raising the amount available to the poorest American families up to $3,600 a year per child and allowing the credit to be distributed across the tax year in monthly installments. The measure produced historic results. Even during a global pandemic and economic recession, the expanded credit helped drive the child poverty rate to a record low of 5.2%, according to the Center on Budget and Policy Priorities.

The current Congress allowed the expanded credit to expire at the end of 2021, leading to dire consequences: 3.7 million children, including 2.5 million Black and Latino kids, fell back into poverty. Some believe that number will rise to 4.1 million because of the still-rising costs of food, gas and housing.

According to Rev. Wallis, these numbers represent a deep — and totally unnecessary — moral failure. He laments the fact that

In a nation where millions claim to follow the teachings of Christ, this is strangely un-Christian behavior. In the Gospels, Jesus makes his concern for children crystal clear. In the Gospel of Matthew, he explicitly says that caring about God entails caring for children. “Whoever welcomes a child in my name welcomes me,” he says. 

Yet, says the Rev. Wallis,

In this country, we have constructed safety nets for corporations (in the form of financial bailouts), for farms (federal subsidies) and for retirees (Social Security.) Why haven’t we produced a social safety net for children, our most vulnerable members?

He recounts stories of how the poor have benefited from the expanded child tax credit:

I’ve heard stories about parents who used the tax credit to pay overdue doctor bills, buy new school clothes, fix the family car and pay for internet connections so their children don’t fall behind in school.

One study found that more than half of families that received the child tax credit used the money to put food on the table. Think about that: The politicians who ended this program literally took food from the mouths of children. We know that taking this money away will hurt children, who did nothing to deserve such harm. Research shows that children who live in a family with income below the poverty line display lower levels of educational attainment, poorer health and lower earnings.

Moreover, says the Rev. Wallis, expanding the child tax credit is more than moral; it is also economically sound:

A report from the Joint Economic Committee found that every dollar of CTC payments generates $8 in social and economic benefits, as families spend this money back into the local community. Despite fears that the credit would deter employment, research proved otherwise, with nearly 94% of parents saying they plan to continue working at the same rate or even more.

Reviving the expanded child tax credit isn’t political — it’s about staying true to our moral obligations by giving families the means to survive and thrive.

The line between faith and politics is not always direct, but caring for children should not be a political matter. We have a generational opportunity to alleviate the scourge of child poverty in this country. According to researchers, the child tax credit lifted millions of families above the poverty line, decreased food insecurity by nearly a third and cut child poverty by 40%.

We do not all have to agree on how to fight poverty in this country, but when we see something that works, such as the child tax credit, it makes little sense to stop merely because Congress can’t summon the political will. We have a moral obligation to ensure that every child — each made in the image of God — has the chance to grow and thrive. That is what it means to be “pro-family.”

As he concludes his opinion piece, Rev. Wallis reiterates his theme -- that it would be excellent policy implementation this Advent Season for Congress to expand the child tax credit:

When Jesus began his public ministry, he did so with a simple but profound message. He came, as the prophet said, to “bring good news to the poor.” This Advent, the expansion of the child tax credit would be welcome news for millions of American families.

I agree wholeheartedly with the Rev. Jim Wallis.

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

 

 

 

   

Something to Think About on Giving Tuesday...

"Giving Tuesday" is drawing to a close. My iPhone has been sounding off frequently all day as several non-profits have sent me word to "remember them" on this special day. Now that this day is drawing to a close, this report caught my ears (I am visually impaired; nothing catches my eyes anymore).

Monday's NonProfit Times reported that according to a new report from the New York state Attorney General’s office, commercial fundraising firms turn over an average of 73% of funds raised to the nonprofits that retain them. However, the report states, “there is a minority of [fundraising firms that] collect fees so large that charities receive only a small fraction of the total amount donated through a campaign.”    

According to the Times,

The authors analyzed data from 658 fundraising campaigns conducted either entirely or partially during 2021 by for-profit fundraisers in New York. That’s a dip from the 718 campaigns conducted the previous year, a drop attributed to COVID-19-related restrictions. “With vaccine eligibility limited until the second quarter of the year, live fundraising events remained difficult,” report authors wrote. “Charities and fundraisers had to pivot as the pandemic ebbed and flowed.”

The Times goes on to state that the report does not break out whether potential funders were from prospect databases or lists provided by the individual nonprofit. The two types of lists often have different remittance rates. Representatives for the New York state Attorney General’s office did not return messages at deadline seeking clarification regarding whether remittance rates on these types of lists differed.

Here is some more of what the Times had to say:

On the whole, the campaigns analyzed raised more than $1.71 billion, around $248 million more than was generated in 2020, despite the drop in the number of campaigns, according to Pennies for Charity: Funding by Professional Fundraisers, the new report from New York state Attorney General Letitia James’s office. Of that, the nonprofits received just less than $1.25 billion. More than half (60%) of the money raised was generated by two donor-advised funds – Network for Good, which coordinates Facebook-based campaigns, and Eaton Vance Distributors.

The $464 million retained by fundraisers made up 27% of all gross receipts, a percentage that has held more or less steady since 2018. But remittance rates to individual nonprofits varied widely: In 42% of the campaigns analyzed, charities received less than 50% of the funds raised. And in 15%, the expenses generated by the fundraisers exceeded the revenue generated, costing these charities an aggregated $10 million.

The report included at least three other interesting findings:

• Online funding, which had jumped 21% during 2020, continued its rise, growing an additional 9% during 2021.
• Millennials, the generation coming into its own as funders, are responsive to peer-to-peer fundraising efforts. Nearly four in 10 (39%) have made donations via social media in support of someone they know.
• Telemarketing use as a fundraising channel has been dropping. During 2020, 410 campaigns employed telemarketing, a figure that slipped to 401 in 2021. Part of the reason for telemarketing fundraising’s decline might be rooted in its efficacy – for the fundraisers. In 2019, 195 fundraisers retained more than 50% of the dollars collected via these campaigns. By 2021, that number had dropped to 158 fundraisers.

The report is based on the New York state database of charities and fundraising activity records. Individual campaign records include the name of the charity, name of the professional fundraiser, filing year, gross receipts, net remitted to charity, percentage remitted to charity and the amounts of uncollected pledges reported.

This might be something you want to look through as you reflect on all the money you gave away on Giving Tuesday.

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

 

 

Donor Advised Funds Update: Continued Growth, Continued Scrutiny

Donor advised funds are both continuing to grow and continuing to be subject to government and academic scrutiny, as illustrated by a new report, an Attorney General review, and a new academic article. 

First, the National Philanthropic trust issued its 2022 DAF Report. Highlights include:

• DAF donors granted at historic levels. Grants from DAFs to qualified charities totaled an estimated $45.74 billion, representing a 28.2 percent increase compared to 2020, which itself was 28.3 percent higher than in 2019. The ten-year average rate of change for DAF grantmaking is 17.5 percent from 2011 to 2020.

• The DAF grant payout rate was 27.3 percent, the highest grant payout rate on record. Payout has remained above 20 percent for every year on record, reflecting the consistent charitable support that DAF donors provide. The ten-year average payout rate from DAFs is 22.2 percent.

• Other key metrics, like contributions and charitable assets, also increased at rates much higher than the ten-year average. For example, charitable assets in DAFs increased significantly as the stock market surged and donors made more contributions than ever before. Historically, periods with very strong growth in charitable assets (20 percent increases or more) are immediately followed by large increases in grantmaking.

Second, the California Attorney General issued a report on its audit of donor advised fund sponsors registered in California. (Hat tip: Bloomberg (subscription required).) Here are the "notable takeaways" from the Executive Summary:

• The results show a growth in DAFs, with average annual growth in assets above 20 percent (Tables 3 and 4).

• Commercial DAFs saw the most growth in dollar terms, topping $20 billion in contributions and $75 billion in year-end assets (Figures 2 and 7). The growth in commercial DAF sponsors was fueled by donations of equity securities, with equities representing between 50 to 65 percent of donations received each year, compared with the rate of equity security donations among all sponsors ranging between 34 to 38 percent (Tables 7 and 11).

• Grant payouts by DAFs increased across sponsor types and sponsor locations, with the exception of community foundations where the payouts remained somewhat flat (Figures 13 and 14).

• The data suggests that 20 percent of DAFs pay out less than 5 percent in a given year (Figure 30).

• On average, 32 percent of DAFs in commercial sponsors and 42 percent of DAFs in community foundations paid out less than 5 percent (Figures 37-38).

• DAF-to-DAF transfers accounted for 10.8 percent of all grants (Figure 23).

• The boost in payout and fund flow rates due to DAF-to-DAF transfers was most pronounced in community foundations, with DAF-to-DAF transfers representing 17.8 percent of all grants made by community foundation DAFs (Figure 26).

• Private foundation distributions account for 5.3 percent of all contributions received by DAFs (Figure 10). For commercial sponsors, private foundation contributions represented 3.1 percent of all contributions; for mission-based sponsors and community foundations it was higher, making up 9.8 and 12.2 percent of all contributions received, respectively (Figure 12).

Third, David I. Walker (Boston University) has posted "Donor-Advised Funds in the Wake of the Tax Cuts and Jobs Act." Here is the abstract:

Donor-advised funds (DAFs) are conduits for charitable giving that support immediate tax deductions while creating a reservoir of assets for subsequent disposition to end-use charities. The number of new DAF accounts has skyrocketed in the wake of the 2017 Tax Cuts and Jobs Act (TCJA). This Article presents evidence suggesting that bunching charitable contributions to game the TCJA-enhanced standard deduction likely motivates much of the onslaught of new DAF accounts established since 2016 and argues that the typical buncher is likely to differ from other DAF account holders in ways that matter from a policy perspective. Thus, while DAF critics have generally focused on the unproductive accumulation of assets in DAF accounts and have advanced reforms aimed at speeding up DAF payouts, this Article argues that in the context of bunchers, unproductive accumulation of assets in DAF accounts is unlikely to be a major problem. The more significant problem with DAF-facilitated bunching is that the cost to the public fisc is unlikely to be justified by incremental charitable giving. Thus, while this Article concludes that regulation targeting DAF payouts is unobjectionable, it argues that a wholly different set of reforms targeting the deductibility of charitable giving generally would be needed to address the cost of DAF-facilitated bunching under current law and under thoughtfully reformed laws involving universal charitable deductions above a floor.

Lloyd Mayer

 

More Charity Care and Commerciality Criticisms of Tax-Exempt, Nonprofit Hospitals

Another month, another set of criticisms of tax-exempt, nonprofit hospitals. The latest group includes a report on low levels of charity care at many hospitals, an analysis revealing that some hospitals make it difficult for financially needy patients to access charity care, and a call for removing tax exemption entirely on commerciality grounds.

First, the Kaiser Family Foundation issued a report finding that "[h]alf of hospitals reported that the cost of providing charity care to patients represented 1.4% or less of their operating expenses in 2020, though the rates vary widely from hospital to hospital." While its analysis was not limited to tax-exempt, nonprofit hospitals, it noted that almost 60 percent of community hospitals are nonprofits. Here is an excerpt from the description of the analysis:

This issue brief addresses key questions about hospital charity care programs. According to our analysis of hospital cost reports, charity care costs represented 1.4 percent or less of operating expenses at half of all hospitals in 2020, though the level of charity care varied substantially across facilities (Figure 1) (see Methods for details about our calculations). For example, while charity care costs represented 0.1 percent of operating expenses or less on the lower end of the spectrum (for 8% of hospitals), they represented 7.0 percent of operating expenses or more among a similar share of hospitals (9%). The variation in charity care costs as a percent of operating expenses likely reflects differences in hospitals’ missions and business practices; the need for charity care among patients; and federal, state, and local policy and regulation.

Second, the Wall Street Journal reports in "Hospitals Often Don’t Help Needy Patients, Even Those Who Qualify" (subscription required) that some nonprofit hospitals make it difficult for needy patients to receive financial assistance as they "put up obstacles, delay checking eligibility and sometimes press for payments that aren’t refunded even if a patient eventually gets qualified for assistance." Its findings included:

•Though hospitals have the power to prequalify low-income patients for charity care and never send a bill, about 450 nonprofit facilities—roughly 15% of the 3,100 nonprofit facilities in the Journal’s analysis of tax documents—didn’t report using the option.

•Even among the hospitals that told the IRS they do prequalify people, many spent months chasing patients for payment before checking eligibility. The parent organizations for roughly 1,000 of those facilities reported pursuing at least $2 billion in billings to patients who likely qualified for aid.

•In scripts and other training material for staff who talk to patients about bills, obtained through public-record requests to more than 100 government hospitals, the possibility of financial assistance is sometimes raised only as a last resort, or not at all.

Third and finally, Edward A. Zelinsky (Cardoza) has posted "The Commerciality of Non-Profit Hospitals Requires Them to Be Taxed: Bringing the Debate to a Conclusion," 42 Virginia Tax Review (forthcoming 2022). Here is the abstract:

It is now time to conclude our prolonged debate about the tax-exempt status of nonprofit hospitals. The contemporary nonprofit hospital is a commercial enterprise, materially indistinguishable for tax purposes from its profit-making, taxed competitor. The federal income tax and the states’ income, sales and property taxes should treat all hospitals alike, regardless of whether such hospitals are nonprofit or for-profit enterprises. In the interests of equity and efficiency, these similar institutions should be taxed similarly.

As a political matter, nonprofit hospitals will continue to defend their tax-exempt status. Like any other lucrative, vested interest, nonprofit hospitals will continue to fight hard to protect their valuable tax benefits. But, on the substantive merits, the case for taxing the contemporary nonprofit hospital is compelling, given the commerciality of today’s nonprofit hospitals. Such nonprofit hospitals are not materially distinguishable for tax purposes from their profit-making, taxed competitors.

Lloyd Mayer

Politics & Money: Hundreds of Millions from Philanthropists or to DAF Sponsor; Donor Lawsuit (Mostly) Fails

A previous post reported on billions of dollars flowing to section 501(c)(4) organizations with at least partially political agendas, and related critical commentary. The recent midterm elections have now sparked two stories about philanthropists, nonprofits, hundreds of millions of dollars, and politics. We also have the latest court decision in a frustrated donor lawsuit arising out of the 2020 election.

First, the Chronicle of Philanthropy reported in "A Half-Billion Dollars of Influence: Big Philanthropists and the MidtermElections" that 32 of the 100 biggest political donors are also major philanthropists by one measure or another, and that collectively these philanthropists made political contributions in the 2021-22 election cycle of at least half a billion dollars based on federal campaign finance reports. As the article notes, this almost certainly understates their political spending since it does not capture contributions to organizations not subject to public disclosure of donors or spending that is reported under state campaign finance laws. George Soros leads the pack with at least $125 million contributed to a super PAC, but 14 others have given at least $10 million.

Second,  Politico reported in "Two anonymous $425 million donations give dark money conservative group a massive haul" that the section 501(c)(3) DonorsTrust received two enormous gifts, sources unknown. Since DonorsTrust is a sponsoring organization for donor-advised funds, presumably the donors can advise as to the ultimate recipients of their largesse even though ultimate control rests with the 501(c)(3). One of the 2021 donations (for $427 million) was apparently in cash, while the other (for $426 million) was in the form of "closely held common stock in a C-corporation."

Third and finally, the fate of a donor's lawsuit shows the risks of large donations since they do not always obtain the desired results and the donor may not have legal recourse. In Eshelman v. True the Vote, a Texas appellate court affirmed the dismissal of a multi-million dollar donor's lawsuit agains the named nonprofit and its leaders on standing grounds. It did so based on the failure of the plaintiff to provide evidence that the gift was conditional on certain uses of the gifted funds (to challenge alleged voter fraud in the 2020 elections), which failure meant that the plaintiff lacked an injury sufficient to grant him standing. (The court reversed the dismissal of the lawsuit as against the nonprofit's law firm and lawyer because it found they had not raised the evidentiary issue but relied solely on alleged deficiencies in the plaintiff's complaint, which the court found did not exist; presumably those defendants will raise the evidentiary issue on remand.) The lower court's dismissal was without prejudice, however, so the donor may still attempt to correct the standing issue so as to pursue his lawsuit against the nonprofit and its leaders.

Lloyd Mayer

Steve Bannon Associate Convicted For We Build The Wall Fraud

The N.Y. Times reports that a federal jury has convicted Timothy Shea, who was charged along with former advisor to President Trump Stephen K. Bannon (since pardoned) and two others for federal crimes relating to raising funds for the section 501(c)(4) We Build the Wall, Inc. Mr. Bannon currently faces state charges, not forestalled by the pardon, relating to the same facts. The other two defendants pled guilty to federal crimes.

According to the original federal indictment, the crimes stemmed from the defendants' promises to donors not to use any funds raised for salary or compensation. Instead, they promised that all of the millions of dollars raised would be used for private efforts to build a border wall. These promises were made as part of an effort to convince donors to an initial crowdfunding effort to permit their donations to be redirected to the new nonprofit, once it became clear the crowdfunding campaign was not legally allowed to donate the funds raised to the U.S. government for construction of a border wall. But the defendants allegedly instead directed hundreds of thousands of dollars in donor funds toward compensation of themselves and personal expenses. 

Lloyd Mayer

Tax Court Conservation Easement Setbacks for IRS

The IRS suffered two significant partial defeats this month in the U.S. Tax Court relating to conservation easements.

First, the court in Green Valley Investors, LLC v. Commissioner held that the listing notice (Notice 2017-10) for syndicated conservation easements was invalid because of the failure of the IRS to comply with procedures required by the Administrative Procedure Act (APA). Coverage: Bloomberg (subscription required); Forbes; JDSupra; National Law Review.

Second, the court in four cases denied government motions for partial summary judgment on the grounds that the regulation relied upon by the IRS had been found invalid (you guessed it - on APA grounds) by the relevant circuit court and because "partial summary judgment would neither expedite resolution of this case nor make trial unnecessary" with respect to a Form 8283 issue raised by the government. The relevant, essentially identical orders are in Baker's Farm Nature Reserve LLC v. Commissioner, East Village Reserve LLC v. Commissioner, Jack's Creek Reserve LLC v. Commisioner, and Rock Cliff Reserve LLC v. Commissioner. 

Lloyd Mayer

IRS Commissioner Nominee Evokes Memories of Alleged IRS Bias Against Conservative Nonprofits

The Washington Post reports that the White House announced on Thursday that President Biden will nominate Daniel Werfel to lead the Internal Revenue Service, tapping a former budget official to spearhead implementation of key parts of the administration’s economic agenda. 

Mr. Werfel served in the George W. Bush and Obama administrations, working at senior levels of the White House Office of Management and Budget and at the IRS. He was acting IRS commissioner in 2013, taking over after top officials resigned over a controversy involving the agency’s scrutiny of nonprofit groups.

What was the controversy about? 

NPR provides the answer. In an October 5, 2017, report, NPR revealed that in 2013, IRS official Lois Lerner revealed that conservative groups seeking tax-exempt status had been getting extra scrutiny, based on words such as "tea party" or "patriots" in their names. For conservatives, Ms. Lerner's statement confirmed their darkest suspicions: in the Tea Party heyday years of 2009 and 2010, hundreds of groups affiliated with the party had sought tax-exempt status as 501(c)(4) "social welfare" organizations. IRS demands for documents left many of them in bureaucratic limbo for a year or more.

The NPR report revealed that an audit by the Treasury Inspector General overseeing the IRS had found that the agency had targeted not just conservatives but also scores of groups with words like "progressive" in their names. The Treasury Inspector General for Tax Administration, or TIGTA, did the report at the request of a bipartisan group of senators.

The report did not satisfy everyone, particularly supporters of the conservative groups who had sought tax-exempt status during that period. Conservative lawyer Cleta Mitchell, who represented eight groups that were given the extra scrutiny, said at the time that the approval process took far too long. In one case, she said, "the IRS wanted every communication that this organization had made about Obamacare," as the Affordable Care Act is commonly called. 

Mitchell opined that even if progressive groups were targeted, "they didn't get subjected to the kinds of follow-up the Tea Party groups did." Meanwhile, in June 2013, Rep. Hal Rogers, R-Ky., told Fox News the IRS had an "enemies list out of the White House." Also, at a Tea Party rally on Capitol Hill, Sen. Rand Paul said an out-of-control government was "persecuting people for their religious and their political beliefs."

According to the NPR report, 

Then-President Obama quickly cleaned house in the upper echelons of the IRS, but congressional hearings ran more than three years before they spun off into secondary issues, which inevitably included missing emails. Lerner became a target for conservative attacks when she took the Fifth Amendment at a House investigative hearing.

In cleaning house, President Obama appointed Mr. Werfel acting IRS Commissioner. According to the Washington Post, current Treasury Secretary Janet Yellen reacted positively to Mr. Werfel's pending nomination:

Danny’s prior service under both Democratic and Republican administrations, his deep management experience, and his work directing significant transformation efforts, make him uniquely qualified to lead the agency at this critical juncture. Danny’s deep commitment to fairness and making sure government works for all will also be invaluable as we improve the taxpayer experience and eliminate a two-tiered tax system.

John Koskinen, who served as IRS commissioner after being nominated by President Obama, also had words of praise for Mr. Werfel. According to Mr. Koskinen, Mr. Werfel worked effectively with the GOP at the height of the anger over accusations that the tax agency had targeted tea party groups for additional scrutiny. He continued: "Werfel was dropped into the middle of a maelstrom [yet] did a good job of responding positively to congressional inquiries.”

But not everyone is sold on the idea that Mr. Werfel is the best person for the job. The Post reports that at least one leading House Republican on Thursday criticized Mr. Werfel’s performance during that period. According to Rep. Kevin Brady (R-Tex.), the top Republican on the House Ways and Means Committee, "Daniel Werfel was named acting IRS commissioner in 2013 with the goal of restoring credibility and confidence in the IRS after the agency’s shameful targeting of conservative groups. He didn’t succeed in 2013 and I’m concerned about whether he can succeed in 2023 and beyond."

We shall have to wait to find out. If the Senate confirms Mr. Werfel's appointment as IRS Commissioner, he will face many challenges, including the challenge of improving IRS customer service, which struggled amid the pandemic after years of budget cuts. The IRS taxpayer watchdog reported over this summer that the agency had a backlog of 21.3 million returns, and call response rates have plummeted. Only 1 in 10 of the 73 million taxpayer calls for help reached an employee in the last filing season. 

Whatever he does, though, it would be wise for Mr. Werfel to ensure that the IRS does not unnecessarily target nonprofit organizations for extra scrutiny. 

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

 

    

IRS to Hire Over 700 Employees to Help Taxpayers in Person

In an statement issued on its website yesterday, the IRS announced that it is now seeking over 700 new employees to help taxpayers at Taxpayer Assistance Centers across the country. In making the announcement,  Ken Corbin, the Service's Taxpayer Experience Officer and Wage and Investment Commissioner, stated: "This is an important priority to provide more service at the IRS for the upcoming filing season." According to Mr. Corbin, the IRS is "working to have more than 270 walk-in sites properly staffed to provide the help taxpayers need and deserve. This will be the first time in a decade our walk-in sites will be fully staffed." 

The Service's announcement goes on to state that the "increase in staffing is part of much wider IRS improvements enabled by the Inflation Reduction Act funding approved in August 2022, and additional updates on the implementation of the landmark 10-year legislation will be provided soon."

According to the IRS, these 700 new positions will include technical positions such as Individual Taxpayer Advisory Specialists who provide face-to-face assistance in IRS TAC offices and Initial Assistance Representatives, responsible for greeting and determining the needs of taxpayers visiting TAC offices. In addition to the face-to-face representatives and phone assistors, the IRS is also working to hire additional people throughout the agency, not just in taxpayer service areas but in Information Technology and compliance positions – all with a goal of improving the work the IRS does.

The announcement concludes by stating that

All employees must be U.S. citizens and pass an FBI fingerprint check and tax compliance verification. Federal experience is not required. The applicant may have gained experience in the public sector, private sector or volunteer service.

Prospective employees are encouraged to attend an upcoming IRS Careers information session to learn more about the position and requirements, how to apply, and all the benefits of federal service.

The public will undoubtedly welcome the upcoming assistance from the IRS.

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

S Corporations and Charitable Contributions

In light of the recent changes to the AGI limitations for charitable contributions, it is interesting to explore charitable giving in the S Corporation context.  In 2019, a CPA Journal article noted that unique planning opportunities exist for charitably minded S corporation shareholders.  For example, the rule that limits the pass-through deduction to the shareholder’s basis in S corporation stock and debt is not applicable when the S corporation donates appreciated property to a charity.  Thus, even if a shareholder has a zero basis in his/her S corporation stock, appreciated property donated to a charity would pass through as a charitable contribution.  In effect, the deduction becomes the portion limited by (and reducing) basis, plus the appreciation in the donated property. This interesting article addresses the incentives Congress has provided since 2006, which are still applicable under the TCJA.

 

Khrista McCarden

Hoffman Fuller Associate Professor of Tax Law

Tulane Law School