Nonprofit Law Prof Blog

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

The Other Side of Hospital Financials: Fees, Debt and Charity Care

I just want to piggy-back quickly on the great blogging done by Darryll Jones on the hospital financials and pay issue - clearly, there is a lot of attention currently being paid to hospital expenses.   The hospital income part of the balance sheet has also been getting a great deal media attention as of late, as noted in Darryll's post on the ProPublica article below.  On June 26, the Wall Street Journal piled on with, "When Patients Can't Pay, Many Hospitals Sue," discussing the aggressive collection tactics of  nonprofit hospitals.   The article does mention that the Affordable Care Act included limitations regarding debt collections, but that lawmakers may be currently looking into additional debt collection or charity care limits, noting that

...Congressional and state lawmakers from both political parties say nonprofits hound low-income patients with aggressive collection efforts, even as they enjoy tax-exempt status and their senior executives bring in salaries that rival for-profit organizations....

While I am dubious that nonprofits should pay less in compensation because they are nonprofits (and I am absolutely not biased on this as a employee of a nonprofit LOL), the link between aggressive collection efforts and executive salaries is clear in the minds of the public and lawmakers.    For an interesting follow up on the article, the opinion page as of July 7 has the insights of a number of doctors as well.

EWW

 

 

Ways and Means Channels Its Inner Emily Litella on Parking: Never Mind.

Emily Litella (played by Gilda Ratner) was cranky old woman who always showed up to complain about something on the Weekend Update in the early years of Saturday Night Live. In every case, she was complaining about something she failed to hear correctly – she couldn’t understand, for example, why everyone was so upset about violins on television.  When informed that people were, in fact, upset about violence on television, she would pause and then just say, “Oh, Never Mind.”

Congress clearly didn’t hear all the complaints about the parking tax way back when (or about any other part of the TCJA for that matter: “The Games They Will Play,” anyone?)  Now in the face of complaints from the nonprofit sector, the House Ways and Means Committee had a “Never Mind” moment with the parking tax in the extenders package that passed out of committee at the end of June.  According to The Hill, the bill retroactively repeals the parking tax and extends some other tax provisions, notably the EITC, the child tax credit. and the dependent care credit.

For those of you not following the parking tax in excruciating detail, Section 132(f) excludes qualified transportation fringes (QTFs) from income for an employee BUT new Section 274(a)(4) prohibits a Section 162 deduction for “the expense of providing” a QTF, regardless of the fair market value of the fringe.   Because nonprofits don’t care about deductions, new Section 512(a)(7) imposes the UBIT on non-deductible expenses under Section 274.  (Which totally puts nonprofits and for-profits on the same footing, right?  Right?)

Probably the most common QTF is the qualified parking fringe under Section 132(f)(1)(C). The cost of providing a parking QTF is relatively simple if you are paying a third-party vendor for a parking space for an employee. But for a hospital that runs a parking garage, it isn’t so easy. For a university that has many different parking facilities, some of which are open to the public, it’s even more difficult. A quick perusal of Notice 2018-99 demonstrates just how much of an administrative nightmare it can be; my sister, who is a tax accountant for a state university, backs that up anecdotally. And that’s the tale for large organizations that have the accounting resources to deal with such things – consider the burden for a small organization with a part-time bookkeeper and a pro bono accountant.

Although The Hill reports that Republicans support the parking tax repeal, they opposed the other tax provisions, citing the uncertainty to taxpayers.  In addition, the bill seems to be short on revenue offsets, which may cause political issues with a variety of legislator, so the future of this bill may be uncertain. 

EWW

 

Tennessee Nonprofit Hospital in Propublica Expose

Propublica has been doing great investigative work where they team up with local reporters to do some in depth reporting. They provide a nice recent look at Methodist Le Bonheur Healthcare, a nonprofit tax-exempt hospital, in Memphis Tennessee. 

The story documents the collection practices that Senator Grassley might be interested in as he starts up an investigation into nonprofit hospitals again.

The story states: "From 2014 through 2018, the hospital system affiliated with the United Methodist Church has filed more than 8,300 lawsuits against patients, including its own workers. After winning judgments, it has sought to garnish the wages of more than 160 Methodist workers and has actually done so in more than 70 instances over that time, according to an MLK50-ProPublica analysis of Shelby County General Sessions Court records, online docket reports and case files."

The primary focus of the story seems to be on the hospital's efforts to collect from its own employees: "It’s not uncommon for hospitals to sue patients over unpaid debts, but what is striking at Methodist, the largest hospital system in the Memphis region, is how many of those patients end up being its own employees. Hardly a week goes by in which Methodist workers aren’t on the court docket fighting debt lawsuits filed by their employer."

Furthermore, they look at the hospital's financial assistance policies. It's not clear whether they meet the Internal Revenue Code CHNA rules in section 501(r) applicable to nonprofit hospitals after the Affordable Care Act: "Methodist’s financial assistance policy stands out from peers in Memphis and across the country, MLK50 and ProPublica found. The policy offers no assistance for patients with any form of health insurance, no matter their out-of-pocket costs. Under Methodist’s insurance plan, employees are responsible for a $750 individual deductible and then 20% of inpatient and outpatient costs, up to a maximum out-of-pocket cost of $4,100 per year."

Philip Hackney

 

President Trump "jokes" about enforcing "Johnson Amendment" against his opponents

President Trump talked about the so called "Johnson Amendment" again the other day. The Johnson Amendment, as probably most of the readers of this blog know, is the language contained in section 501(c)(3) of the Internal Revenue Code that prohibits a charity hoping to maintain its status as exempt from federal income tax from intervening in any political campaign. I say so called as it was not called that on its entry to the Code, though this article does suggest it was LBJ who was the author of the language added to the Code in 1954.

The President, speaking before the Faith and Freedom Coalition conference in Washington stated: “Our pastors, our ministers, our priests, our rabbis . . . [are] allowed to speak again . . . allowed to talk without having to lose your tax exemption, your tax status, and being punished for speaking."  He then apparently jokingly cautioned that if a pastor spoke against him “we’ll bring back that Johnson Amendment so fast,” the president said to laughter, adding, “I’m only kidding.”

President Trump signed an executive order back in May. The law of course is still found within section 501(c)(3) and thus is a duly enforceable law. In my opinion, the executive order did not do anything to change the actual state of affairs of the meaning of the law or its interaction with other laws, such as the Religious Freedom Restoration Act, or constitutional rights. If anything, the current state of the law should work to protect those he jokingly threatened to use the state of the law against. 

The news article I cite to above unfortunately wrongly states the following: "The president has not undone the law, like he sometimes claims he has, but rather told the Treasury Department it can enforce at its own discretion — leaving the possibility that the Trump administration could only penalize churches that oppose the president."

Although the President has not undone the law, as the article correctly states, I say wrongly in two senses: (1) he has not told the Treasury Department that it can enforce at its own discretion - he only directs Treasury to apply the law with due regard to allowing individuals and organizations to speak when speaking from a religious perspective "where speech of similar character has, consistent with law, not ordinarily been treated as participation or intervention in a political campaign", and (2) it would be unlawful for the administration to penalize churches that oppose the president, and his executive order did not create that possibility of such unlawful action. If you have interest in more detail on the (obvious) legal problems associated with (2), I wrote about the legal reasons why it would be unlawful for the IRS to unequally enforce the law in such a way in a longer scholarly article here considering the claims that the IRS violated conservative organizations rights when it specifically used names of groups like the Tea Party in managing its application system.

Philip Hackney

From Bad to Worse?: The NRA and University of Maryland Medical System Scandals

The drip-drip of bad news about the National Rifle Association and the University of Maryland Medical System continues. For the NRA, the newest revelation was that 18 members of the NRA's 76-member board had direct or indirect financial transactions with the organization at some point during the past three years even though board members are not compensated for their service. Transactions with board members of tax-exempt nonprofit organizations are generally allowed if the terms, including the amounts paid, are reasonable in light of what the organization receives in return, and particularly if they are vetted through a conflict of interest policy (which policy the NRA has). Nevertheless, the number of board members involved and the amounts - ranging from tens thousands of dollars to in one case over $3 million in purchases - raises the question of whether the judgment of those board members might be affected by the transactions, particularly when it comes to evaluating the performance of the executives who control such transactions. As Mother Jones reports, however, the IRS is unlikely to try to revoke the tax-exempt status of the NRA even given these recent revelations. The more potent threat to the organization is instead the ongoing New York Attorney General investigation, as the NRA is incorporated in New York.

Meanwhile, similar governance issues continue to come to come to light at the University of Maryland Medical System, but with somewhat different results. These issues include longstanding financial relationships with a number of board members, including a former state Senator, and disregard for the two consecutive five-year terms limit on board service. Unlike the situation with the NRA, these revelations have also claimed a number of leadership casualties, most recently four top executives (including the system's primary lawyer) who resigned earlier this month. Given the ongoing federal and state investigations and legislative calls to force all current board members to step down, more leadership changes are probably likely.

Lloyd Mayer

 

Churches & Disclosure: Time for a 990-CH?

This month brought us the spectacle of a televangelist awkwardly trying to explain why he has to fly in a private jet and a report that a Catholic bishop gave hundreds of thousands of dollars in gifts to fellow clergymen, with his diocese increasing his compensation to cover the value of the gifts. The latter story came from a leaked draft confidential report to the Vatican that led to the Bishop's resignation last fall. And the latter story also led to a call in the Washington Examiner from the head of the Center for a Free Economy for an IRS audit of the Catholic Church and in the Washington Post for churches to have to file Form 990, the IRS annual information return that almost all other tax-exempt organizations are required to file (although for financially smaller organizations shorter versions of the form are usually sufficient).

This raises a perennial issue that understandably never gains any political traction - should churches have to file some version of the Form 990, say a Form 990-CH, to allow the IRS and the public to see whether they continue to qualify for the tax benefits they enjoy? It seems unlikely that the occasional financial scandal or lavish spending by a church leader will be enough to change the political calculation that pursuing this idea legislatively is a fast way for a member of Congress to alienate many of their constituents. Nor is it obvious that the arguably rare incidents along these lines should be the basis for this change and the encroachment on church internal affairs that it would represent. However, as the proportion of Americans who associate with a formal religious organization continues to decline - including not just the "nones" but also people who consider themselves religious but do not engage with the institutional church - it should not be taken for granted that this exemption from the annual return requirement will always be invulnerable to attack. And of course there is the little matter of the Freedom from Religion Foundation's lawsuit challenging the exemption, although I would not give the lawsuit much chance of success, in part for the reasons provided by fellow blogger Sam Brunson.

Lloyd Mayer

Giving USA 2019 Reports Decline in Giving by Individuals and (When Inflation-Adjusted) Overall

The annual Giving USA report provides what is generally recognized as the most comprehensive report on charitable giving in the United States. It is therefore not surprising that this year's edition is garnering headlines for its report that total giving in 2018 only increased by 0.7% over 2017, and declined by 1.7% when adjusted for inflation, despite the continuing strong economy. Giving by individuals also declined, both in current dollar (-1.1%) and inflation-adjusted (-3.4%) terms, but was partially offset by increased foundation and corporation giving. A variety of reasons may have caused the declines, including the recent tax law changes, as noted in the press release that accompanied the report:

A number of competing factors in the economic and public policy environments may have affected donors’ decisions in 2018, shifting some previous giving patterns. Many economic variables that shape giving, such as personal income, had relatively strong growth, while the stock market decline in late 2018 may have had a dampening effect. The policy environment also likely influenced some donors’ behavior. One important shift in the 2018 giving landscape is the drop in the number of individuals and households who itemize various types of deductions on their tax returns. This shift came in response to the federal tax policy change that doubled the standard deduction. More than 45 million households itemized deductions in 2016. Numerous studies suggest that number may have dropped to approximately 16 to 20 million households in 2018, reducing an incentive for charitable giving.

“The complexity of the charitable giving climate in 2018 contributed to uneven growth among different segments of the philanthropic sector. Growth in total giving was virtually flat. Contributions from individuals and their bequests were not as strong as in 2017, while giving by foundations and corporations experienced healthy growth,” said Amir Pasic, Ph.D., the Eugene Tempel Dean of the Lilly Family School of Philanthropy. “Charitable giving is multi- dimensional, however, and it is challenging to disentangle the degree to which each factor may have had an impact. With many donors experiencing new circumstances for their giving, it may be some time before the philanthropic sector can more fully understand how donor behavior changed in response to these forces and timing.”

It remains to be seen if these trends continue in future years, particularly as individuals and households continue to adjust to the 2017 federal tax law changes.

Media Coverage: Chronicle of Philanthropy; Wall Street Journal; Washington Post.

Lloyd Mayer

Form 990 Electronic Filing About to Become Mandatory, Along with Release in Machine Readable Form

Congress has passed the Taxpayer First Act (H.R. 3151), and President Trump is expected to sign the bill. Almost at the very end of the bill, after numerous other improvements to tax procedures, is a section that will require tax-exempt organizations to electronically file their Form 990 series returns and the IRS to publicly release the data from these returns in machine readable format "as soon as practicable." The Secretary of the Treasury, or his delegate, may delay the mandatory electronic filing for up to two years for financially smaller organizations if not doing so would cause an undue burden. The bill also requires the government to notify organizations that fail to file a required annual return for two years in a row, if a third consecutive missed filing will lead to automatic revocation of the group's tax-exempt status.

As detailed in (shameless plug) my article on Big Data and nonprofits, these changes will provide researchers, journalists, and other members of the public with an enormous amount of information about tax-exempt organizations. While these data will require a significant amount of work to be usable, there is already a Nonprofit Open Data Collective in place to do this work. The much easier access to this information that this legislation will provide holds the promise of greatly expanding the ability to research most organizations in the nonprofit sector.

Lloyd Mayer

New Jersey "Dark Money" Disclosure Bill Poised to Become Law

New Jersey Governor Phil Murphy has reversed course, announcing last week that he will sign bill S1500 after initially vetoing it conditionally because of constitutional and policy concerns. Assuming he follows through on his commitment, any group that is tax-exempt under either section 501(c)(4) (social welfare organizations) or section 527 (political organizations) of the Internal Revenue Code that engages in certain activities will have to publicly disclose donors who contribute $10,000 or more. The triggering activities are raising or spending $3,000 or more for the purpose of "influencing or attempting to influence the outcome of any election or the nomination, election, or defeat of any person to any State or local elective public office, or the passage or defeat of any public question, legislation, or regulation, or in providing political information on any candidate or public question, legislation, or regulation." Groups that engage in these activities will also have to report details of their relevant expenditures. The bill will become law despite opposition from the New Jersey chapters of both the ACLU and American for Prosperity.

So far it appears that state-level expansions of required public disclosures by politically active nonprofits have been limited to a handful of Democratic-controlled states, although significant ones in terms of their size (California, New Jersey, and New York). It remains to be seen whether disclosure legislation introduced in many other states becomes law (see the end of this Ballotpedia News story for a nationwide update on such legislation).

Lloyd Mayer

Searchable 990s!

I had a substantive post I was going to write today about a recent PLR. It was going to be fascinating, and I was going to raise a question about why the IRS drafted the PLR the way it did.

And then I opened Twitter. And saw this:

New: Search the full text of nearly 3 million nonprofit IRS filings, including investments and grants given to other nonprofits.https://t.co/LyCBYe6evq

— ProPublica (@propublica) June 6, 2019

And there went my productivity for the day.

I love GuideStar. I love the access it gives to tax-exempt organizations' 990s, and all the information I can get from that. The one thing that has always kind of annoyed me, though, was that the 990s weren't searchable. And that wasn't Guidestar's fault--it merely posted the 990s it received, which, I assume, the organizations didn't provide in an OCR manner.

But now, ProPublica has provided a searchable database of 990s, going back as far as 2011. (Full-text search is here; advanced search is here.) I don't know the best way to use the database, but I did do a search for "Loyola University Chicago" to see whose 990s we show up in. Turns out about 304 990s mention us. (I say about because the search isn't perfect: I couldn't find Loyola mentioned in the DePaul Schedule I that came up in the search.) A lot of the mentions are from private foundations, or from matching grants. There's even a mention in the 2010 Form 990 for the Charles Koch Foundation, though there the university is giving back about $1,200 in unused funds from a 2009 grant.

Samuel D. Brunson

 

MacKenzie Bezos and the Giving Pledge

About a week and a half ago, MacKenzie Bezos signed the Giving Pledge, promising to give away at least half of her almost $37 billion wealth either over the course of her life or in her will. With her signature, she's joined more than 200 other people, from around the world, in making this promise.

In the first instance, I think this commitment to philanthropy is tremendously laudable. She recognizes that she has a disproportionate share of assets, and that she has a moral obligation to share those assets with those who don't have her fortune:

We each come by the gifts we have to offer by an infinite series of influences and lucky breaks we can never fully understand. In addition to whatever assets life has nurtured in me, I have a disproportionate amount of money to share. My approach to philanthropy will continue to be thoughtful. It will take time and effort and care. But I won’t wait. And I will keep at it until the safe is empty.

Still, I have a couple questions. The first is, as a practical matter, how she'll give. After all, the bulk of her wealth is in Amazon stock. And she gave her ex-husband voting control over her Amazon stock. I don't know exactly what that looks like, but I imagine there are some limitations on her ability to liquidate (or donate) that stock.

The second is, how quickly will she give? Half of $37 billion is $18.5 billion. If she donates to a private foundation, she can only deduct up to 30% of her contribution base (which is, roughly, her adjusted gross income). If she gives directly to a public charity, she can still only deduct up to 50% of her contribution base (or 60% if she gives cash before 2026). In other words, to fully deduct her charitable contributions, she would have to earn at least roughly roughly $37 billion.

Now, it absolutely may be that she's not worried about fully deducting her contributions. (Facebook founder Zuckerberg and Priscilla Chan certainly don't seem to be.) Or maybe she'll wait until her death, when charitable donations are excluded from her estate, to fully make her contributions. (Of course, actuarial tables put her expected death about 34 years in the future, so that would be charity delayed.)

Which brings us, briefly, to yesterday's Chronicle of Philanthropy, which reports that the Giving Pledge has not, contrary to its original expectations, turbocharged charitable giving. While more than 200 people have signed, the vast majority of the wealthy have not. Nor has it inspired increased generosity by non-wealthy Americans. Charitable giving stood at about 2% of GDP before the introduction of the Giving Pledge, and it has continued there since.

That's not to say, of course, that Bezos's pledge is insincere, that she's not actually planning on giving away more than half her money, or that she won't do it during her lifetime. It is to say that, while the Giving Pledge is theoretically nice, though, if we want to increase charitable giving, or if we want to reduce income inequality, the Giving Pledge isn't the solution.

Samuel D. Brunson

Controlling a Donor-Advised Fund

A couple months ago, I presented a work-in-progress on donor-advised funds to my colleagues at Loyola (a work-in-progress I hope to finish and post on SSRN soon). That evening, I got an email from one of those colleagues. It turned out that that same night, some donor-advised fund sponsored a bunch of the programming on WBEZ, our local NPR station, and the words donor-advised fund now meant something to my colleague.

Fast-forward to last Friday. A New York Times story popped up on my phone which, serendipitously, was about donor-advised funds. More specifically, it was about a lawsuit that, according to the Times, may cool donor enthusiasm for DAFs.

As a quick summary: commercial DAFs are essentially low-cost replacements for private foundations. They're often run by big mutual fund companies, which established a public charity. Donors donate to the charity, and the charity keeps their donations in separate accounts. The donor has given up ownership and control over the donation (and thus gets a deduction), but can advise the sponsoring organization about how to invest and distribute her donation.

And, as a legal matter, it's clear that the donor has given up the ownership and control. As a practical matter, though, I assume that donors have a lot of influence over their donations. If the sponsoring organization were to start going rogue, it's probably fair to assume that donors would be less excited to give their money to that particular sponsoring organization.

But, again, as a legal matter, the sponsoring organization, not the donor, has control. And that's where the lawsuit the Times mentions comes in. According to the Fairbairns' complaint, in 2017, they donated 1.93 million shares of Energous stock--which is publicly traded on the NASDAQ--to Fidelity Charitable. They wanted Fidelity to eventually distribute their donation to charities that combat Lyme disease.

The Fairbairns allege that Fidelity promised them four things to induce the donation:

1. Fidelity would use state-of-the-art methods for liquidating large blocks of the stock;
2. It wouldn't trade more than 10% of the daily trading volume of Energous shares;
3. It would allow the Fairbairns to set a floor on the price it would accept; and
4. It wouldn't start selling Energous shares until 2018.

Fidelity didn't do, well, any of those things. According to the complaint (which Fidelity admits is true), it sold all of the shares on December 29, 2017. The Fairbairns claim that the sale drove the value of the stock down by 30%. And why do they care?

The complaint gives two reasons:

It turns out, according to the complaint, that the 2017 changes to the tax law meant that the Fairbairns couldn't defer a sizeable tax hit any longer. Moreover, a couple days before the donation, the value of Energous stock jumped 39%. By making this donation, they managed to avoid paying taxes on the appreciation, and could, at the same time, offset their deferred income.

Now here's the thing about the lawsuit: by donating to Fidelity (rather than donating directly to their Lyme disease charity or donating to a private foundation), the Fairbairns had given up their legal right to control both the investment decisions and the distribution decisions. So instead, the complaint alleges that Fidelity misrepresented what they would do to induce the Fairnairns' investment, that it breached an enforceable agreement about how it would deal with their donation, that it was estopped from doing what it did, and that it was negligent in the manner it liquidated the stock.

Will this affect donors' willingness to provide charity through donor-advised funds? I honestly don't know. Frankly, investors should be aware that their right to advise is limited. On the other hand, large donors prefer to have control and, while a private foundation is more costly and provides a lower ceiling on deductibility, if they really want the control, perhaps they should give through foundations (or, heaven forbid, directly to active charities).

Samuel D. Brunson