Nonprofit Law Prof Blog

March Madness: Tax Edition

The Center for Public Integrity recently posted, "The Trump Tax Law Has Its Own March Madness" on its website.   The article highlights many of the issues with the TCJA that we have previously discussed on this blog, but specifically puts the new excessive compensation excise tax square in the context of the NCAA Men's Basketball Tournament:

The coaches who made the final four are being paid the following this year by their universities:  Tom Izzo, Michigan State University, $3.7 million; Tony Bennett, the University of Virginia, nearly $3.2 million; Chris Beard, Texas Tech University, $2.8 million; Bruce Pearl, Auburn University, $2.6 million. John Calipari, whose Kentucky team also made the Elite Eight, earned compensation of nearly $8 million in 2018-2019.

The Article goes on to highlight the fact that these coaches may all be treated differently despite having similar salaries.   Because some of the coaches work at public universities, they may escape the excise tax due to the drafting issue identified by Ellen Aprill previously (and discussed on this blog here), who is quoted in the article.   In addition, John Calipari particularly receives significant third party revenue that may or may not be captured by the controlled organization rules.   

EWW

 

Baltimore Mayor, University of Maryland Medical System, and Form 990

Proving that issues with politicians and nonprofits are truly bipartisan (and not limited to President Trump), the dust continues to fly over various financial transactions involving Baltimore Mayor Catherine Pugh (a Democrat), her inaugural committee, and the University of Maryland Medical System. According to media reports, the Mayor, who was then a UMMS board member, had a $500,000 deal with UMMS to purchase her self-published children's books, a deal that she now says was a "regrettable mistake" and for which she has apologized. (Washington Post; WBAL-TV) She also resigned from the UMMS Board of Directors after the deal came to light.

The possible legal troubles do not stop there, however. According to reports last week, the Mayor's inaugural committee failed to file its required IRS annual information returns (Form 990). In addition, UMMS failed to report on its returns that it gave $20,000 to that committee. UMMS is taking the position that the payment was not a grant, which it would have had to report, because it received in return 28 tickets to inaugural events. It made this argument even though in an earlier filing it had reported a contribution to support the inauguration of another public official.

Lloyd Mayer

Now With the Mueller Report Done, We Can Get to the Important Trump-Related Investigations

As the Washington Post details, the end of the Mueller investigation is far from the end of law enforcement actions relating to President Trump. Among those investigations are several tied to nonprofit organizations, specifically the continuing litigation in New York relating to the Trump Foundation and investigations into the President's inaugural committee.

Turning first to the inaugural committee, in late February the District of Columbia Attorney General's office subpoenaed the committee for documents relating to its finances according to several media reports (CNN; NY Times; Politico; Wall Street Journal; Washington Post). This followed subpoenas on the same topic from the New Jersey Attorney General's Office and from the U.S. Attorney's Office for the South District of New York, both earlier that month. The latter subpoena identified a number of possible federal crimes under investigation, including conspiracy against the United States, mail and wire fraud, money laundering, and accepting contributions from foreign nations and straw donors. The DC and NJ subpoenas are more focused on nonprofit-related matters, such as possible private benefit and whether the committee complied with laws relating to soliciting contributions.

As for the Trump Foundation litigation in New York, Courthouse News Service reports that New York Attorney General Letitia James requested judgment against the Foundation, Donald J. Trump, Donald J. Trump Jr., Ivanka Trump, and Eric F. Trump for $2.8 million in restitution and $5.6 million in penalties, as well as injunctive relief. The filing, technically a Reply Memorandum of Law in Further Support of the Verified Petition, argues that the evidence provided by the Attorney General has not been challenged by the respondents or countered by any admissible evidence provided by them, and that it demonstrates breach of fiduciary duties, wasting of charitable assets, and improper use of the foundation for political purposes.  Hat tip: Nonprofit Quarterly.

Lloyd Mayer

Grassley, Wyden, and DOJ Scrutinize Syndicated Conservation Easement Transactions

UPDATE: Rep. Mike Thompson, Chair of the House Ways and Means Subcommittee on Select Revenue Measures and Rep. Mike Kelly have introduced the Charitable Conservation Easement Program Integrity Act of 2019 in the House. Senator Steve Daines previously introduced a bill with the same name in the Senate.

Senators Chuck Grassley and Ron Wyden, Chairman and Ranking Member of the Senate Finance Committee, respectively, have announced an investigation into the potential abuse of syndicated conservation easement transactions. While stating general support for the availability of charitable contribution deductions for conservation easements, they cited a need to preserve the integrity of the conservation easement program by preventing "a few bad actors" from wrongly gaming the tax laws relating to conservation easements. They have requested information from fourteen named individuals relating to such transactions, drawing on a 2017 Brookings report on conservation easements.

This announcement follows a Department of Justice complaint filed in December 2018 against certain promoters of "an allegedly abusive conservation easement conservation easement syndication tax scheme" and a 2017 IRS Notice targeting such schemes by declaring them "listed transactions." 

At the heart of all these actions are allegedly false valuations based on inflated appraisals that sharply increase the tax benefits from the conservation easements. 

Media coverage: Accounting Today; Law360; Wall Street Journal.

Lloyd Mayer

Church Tax Benefits: Does 7th Circuit Ruling on Cash Parsonage Allowance Exclusion Protect Other Church-Specific Benefits?

In a much anticipated decision, the U.S. Court of Appeals for the Seventh Circuit concluded that the exclusion from gross income of cash parsonage allowances under Internal Revenue Code section 107(2) is constitutional, reversing a federal district court decision to the contrary. (Full disclosure: I signed an amicus brief arguing that the provision is constitutional.)  Since the decision leaves the exclusion in place and there are no contrary federal appellate court decisions, it is highly unlikely that the Supreme Court will take up the case even if the plaintiffs file a cert petition. The Freedom from Religion Foundation, which instigated the challenge, or others could of course try to raise this issue in a different circuit in order to try to create a circuit split, especially since the plaintiffs here managed to overcome the standing issue that had frustrated an earlier challenge. At least one panel of the U.S. Court of Appeals for the Ninth Circuit indicated in an earlier case an interest in reaching the constitutional issue by appointing an amicus law professor who was skeptical of the provision's constitutionality (an issue that had not been raised by any party in that case). But such a split is likely years down the road, if it ever materializes.

A larger question is whether the decision provides broader protection for other tax benefits provided to churches, other religious groups, and ministers. Perhaps the most important holdings of the court in this respect are its conclusion that Congress had the secular purpose of avoiding excessive entanglement with religion when it enacted the provision (citing Taxing the Church, authored by Edward Zelinsky (Cardozo), on this point), its narrow reading of the Supreme Court's Texas Monthly decision as part of its reasoning for why the primary effect of section 107(2) is not to advance religion, and its stated deference to Congress in determining whether the provision causes excessive government entanglement with religion. (These conclusions reflect the much criticized by still applicable Lemon test.) These conclusions are not accepted by all; for a thoughtful critique of them, see this TaxProf Blog op-ed by Adam Chodorow (Arizona State), who argued against the constitutionality of section 107(2). And of course the decision only directly applies to that provision and is only precedential in the Seventh Circuit. But they likely foreshadow a difficult path for any other challenges to tax benefits enjoyed by religious groups or ministers, including the exemption from the annual information return filing requirement for churches currently being challenged by the Freedom from Religion Foundation (in the District of Columbia, not the Seventh Circuit).

Lloyd Mayer

Mayer: Could a More Robust IRS Have Nipped the Varsity Blues Scandal in the Bud?

In today's Chronicle of Philanthropy, Lloyd Hitoshi Mayer (Notre Dame) authored an opinion piece questioning whether a better funded IRS could have discovered and ended sooner the college admissions scandal discussed in several prior blog entries this week (here, here and here).  Here are some highlights of the opinion:

• There were certainly enough yellow flags in IRS filings of the nonprofit at the center of the scam to signal something was wrong.  The Internal Revenue Service would have needed the capacity to review those filings carefully and to pursue those flags.
• In addition to more funding for the IRS oversight of nonprofits, Congress could consider possibly moving that oversight out of the IRS.
• One significant red flag:  In its tax-exempt application, the Key Worldwide Foundation articulated that it would be using materials developed by a for-profit company owned by one of the organization’s directors, which also employed the foundation’s chief financial officer and treasurer.
• In its annual Form 990 returns, the Foundation reported it had three directors and none of them met the IRS’s definition of “independence,” indicating they all had financial ties to the foundation or related entities.
• The Foundation also stated in its annual returns that none of the grant recipients were tax-exempt charities. While charities can make grants to businesses and governments in limited cases, the complete lack of charity recipients raises the issue of how KWF ensured that its grants would be used only for charitable purposes.
• The Foundation's organizers and maybe some of the parents participating in the admissions scam knew that the IRS is mostly asleep at the switch with respect to audits.  
• There is only so much that technology and public disclosure of information can do to uncover such misdeeds without more funding of IRS oversight.
• It is, therefore, not surprising that an apparently unrelated FBI investigation led to the discovery of this scheme instead of an IRS investigation, given this lack of resources and resulting low audit coverage.

 

Nicholas Mirkay

Nonprofits Are Front & Center in College Admissions Scandal

One would be hard pressed to find a news source that is not covering the recently unearthed college admissions scandal.  The focus of particular articles vary, but the central theme is consistent--a tax-exempt, nonprofit organization was used to perpetrate the fraud. The Key Worldwide Foundation was founded by Rick Springer, with a mission "to provide guidance, encouragement, and opportunity to disadvantaged students around the world."  In reality, KWF was used primarily as a conduit to solicit funds from parents eager to get their children into elite universities and then use those funds to bribe both test administrators and university administrators and coaches to effect those admissions.  As Sam Brunson discusses in his entry on The Surly Subgroup blog, not only were parents' contributions laundered through KWF, but added insult to injury, they also were entitled to deduct those payments as charitable contributions. 

As discussed in one of many articles by the Los Angeles Times, KWF boasts on its website and tax filings that it provides grants to assist needy Cambodians and after-school programs for children across the country.  According to another news source, one purported grant recipient, Friends of Cambodia, never received any of the money reported by KWF.  Rather, as reported by the Times' pursuant to its review of KWF's "federal tax records" (presumably their Forms 990), a vast majority of the Foundation's grants went directly to elite, private and public universities and their athletic programs (USC, Yale, University of Texas).  

Notwithstanding the gross misuse of the tax-exempt, nonprofit sector and tax incentives for contributions to charities, this scandal sheds even more light on a persistent issue making a lot of headlines lately--unprecedented wealth inequality in America.  Even with tax proposals being floated to effectively tax wealth accumulation, this scandal proves that the privilege conferred by wealth can be boundless.

 

(Hat tip:  The Surly Subroup, TaxProf Blog)

Nicholas Mirkay

Effect of TCJA on Charitable Giving: "Sluggish" Growth in 2018

As reported by The Washington Post and other news outlets, the Fundraising Effectiveness Project's most recent report announced an unimpressive 1.6 percent increase in charitable giving for calendar year 2018.  Donations from general donors (gifts under $250) and mid-level donors (gifts between $250 and $999) each dropped by 4 percent from the prior year.  On the other hand, donations from major donors (gifts of $1,000 and more) rose by 2.6 percent.  The report also revealed that the number of donors decreased by 4.5 percent from the prior year.  Although not conclusive evidence, the report does lend some credence to the conclusion that the TCJA and the resulting decrease in taxpayers itemizing their deductions (which includes the charitable contributions deduction) has negatively affected charitable giving. 

 

Nicholas Mirkay

Trump Foundation Redux: Cohen Testimony Raises Self-Dealing and Assignment of Income Issues

While the media and public understandably focused mostly on other aspects of Michael Cohen's testimony before Congress yesterday, the information he provided raised two significant issues relating to the soon-to-be-dissolved Donald J. Trump Foundation. 

First, in his opening statement Cohen mentioned (on pages 3 and 12) that the Foundation had been involved in the purchase of a third portrait of Mr. Trump from a charity auction, this time through reimbursing the winning bidder the $60,000 purchase price, which portrait was then hung in one of Mr. Trump's country clubs. If these statements are true, this is a clear case of self-dealing in violation of Internal Revenue Code section 4941 (and comparable state law requirements as well), as was the case with the previously reported charity auction purchases of two other portraits that also ended up hanging in Trump business properties. It should be noted that the Foundation's annual IRS return for 2013 (available from GuideStar) does not show such a reimbursement and the only $60,000 payment it includes is to the American Cancer Society, although the Foundation has inaccurately reported distributions before. For coverage of this aspect of Cohen's testimony, see CNN, The Guardian, and this Surly Subgroup post by Ellen Aprill.

Second, he confirmed previous reports that Mr. Trump had steered a $150,000 payment from a Ukrainian billionaire, Victor Pinchuk to the Foundation in lieu of it being paid to Mr. Trump as a speaking fee. As Ellen Aprill and I discussed back in 2016, such arrangements raise a possible assignment of income issue in that depending on the exact circumstances Mr. Trump may have been required to include that fee in his gross income for both federal and state income tax purposes (although there may have been a full or partial offsetting charitable contribution deduction to reflect the transfer of those funds to the Foundation). Of course without seeing Mr. Trump's personal federal and state income tax returns, we can't be sure whether he included this amount in his income or not. For coverage of this aspect of Cohen's testimony, see Time.

Lloyd Mayer

 

What's Wrong with "Behested" Payments to Charity? (Part I)

There was an interesting article in yesterday's L.A. Times regarding something the left coasters call "behested payments."  On the right coast, the practice is probably more often referred to as "pay to play."  Anyway, yesterday's L.A. Times article described left coast politicians' habit and history of soliciting charitable donations to their favored causes.  Sounds ok so far.  "These payments are not considered campaign contributions or gifts," the state's political watchdog explains, "but are payments made at the 'behest' of elected officials to be used for legislative, governmental or charitable purposes."  The more sinister implication is that the donors are doing two bad things.  First, they are avoiding campaign donation limitations by steering campaign contributions to a candidate's favorite charity, through which the candidate receives some sort of implicit benefit associated with the donation.  Secondly, the donor is buying access to city hall.  Los Angeles Councilman Mitchell Englander has caused many a donor to contribute, at Councilman Englander's "behest," to a charity at whose well attended events Councilman Englander is a frequent and featured guest speaker.  For federal tax purposes the implication is that in exchange for benefitting from a politician's fundraising prowess, charities are providing focused and featured face-time and feel good associations for the candidate.  In other words, the candidate who can steer donations to a charity by sending out personal "behests' [sic], is treated as the charity's favorite son or daughter, though the charity never implicitly tells its stakeholders to "vote for so and so because he supports us."  A 2017 article graphically illustrated the potential in this graphic regarding behested payments solicited by Mayor Eric Garcetti:

 

 

Mayor Garcetti has raised a boat load of money mostly for the Mayor's Fund of Los Angeles, a 501(c)(3) he set up himself and which generally does its good works in partnership with L.A. city government, especially the incumbent Mayor.  One commentator describes Garcetti's success with behested payments thusly:

Garcetti has raised more than twice as much in behested payments as California Gov. Jerry Brown and more than 40 times the amount of Lt. Gov. Gavin Newsom over the same time period, according to a KPCC analysis of reports filed by the politicians.  Most of the donations Garcetti raised went to a charity he helped create after his election, the Mayor's Fund for Los Angeles, according to reports he filed with the Los Angeles City Ethics Commission.  Other contributions given at his request benefited other efforts, including two that are dear to his heart: L.A.'s Olympic bid and The GRYD Foundation, which runs a summertime park program Garcetti has supported for years.  “It strikes me that he’s taking advantage of the law more than anybody else has ever done,” said Bob Stern, a former California Fair Political Practices Commission general counsel who helped write the state's 1974 Political Reform Act.

 

 

 

California has disclosure rules that require politicians to disclose "behested payments."  I suppose transparency in politics is a good thing so I don't have a philosophical bent against campaign disclosure laws.  But what exactly is the public to conclude from, for example, the disclosure that a political incumbent has generated -- "behested" -- millions of dollars for a charity whose glow benefits everybody with whom the charity associates, including its political incumbent rainmaker?  The answer to that question begs the question what exactly is the politician purchasing from the charity who benefits from behested payments and what implication does that expectation have for charitable organizations prohibited from campaign intervention.  I will talk about that in my next post.

 

Darryll K. Jones

 

 

 

 

 

Pennsylvania AG Challenges the University of Pittsburgh Medical Center's Public Charity Status

Pennsylvania Attorney General Josh Shapiro announced yesterday that he is seeking to modify consent decrees governing the relationship between the University of Pittsburgh Medical Center (UPMC) and Highmark (a health insurer and health care provider), with the support of Highmark's leadership. According to the AG "UPMC is not fulfilling its obligation as a public charity." More specifically, in the petition his office filed he is asking the Commonwealth Court to:

• Enable open and affordable access to UPMC’s health care services and products through negotiated contracts with any health plan;
• Require last, best-offer arbitration – commonly known as “baseball arbitration” – when contract negotiations between insurers and providers fail; and
• Protect against UPMC’s unjust enrichment by prohibiting excessive and unreasonable billing practices inconsistent with its status as a non-profit charity providing healthcare to the public.

Alleged violations of UPMC's charitable obligations include "[w]ithholding access to doctors for patients in Williamsport, Pennsylvania whose employers have contracts with a competing health plan" and "[r]efusing to negotiate reasonable payment terms with self-insured employers, resulting in UPMC's unjust enrichment through excess reimbursements for the value of its services."

Press coverage: Pittsburgh Business Times; Pittsburgh Post-Gazette.

Lloyd Mayer

California AG Announces $410,000 Settlement of Overvaluing In-Kind Donations Case

California Attorney General Xavier Becerra recently announced that his office had settled a case it had brought against charity Giving Children Hope alleging that the charity had overvalued in-kind donations it had received in order to inflate the value of the contributions it received and therefore its claimed direct aid. Here is the AG's description of what the charity did:

Giving Children Hope provides international assistance in the form of food, clothing, and medical supplies. The Attorney General’s investigation revealed that between July 1, 2012 and June 30, 2016, GCH inaccurately claimed, in its public financial reporting and on its website, that 99 percent of all contributions provided direct aid. This was misleading and the result of deceptive reporting of Gift-in-Kind donations. GCH created two subsidiaries, Giving Hope International and International Clinic Aid, which purchased pharmaceuticals from a wholesaler in the Netherlands for less than $225,000. The two subsidiaries then donated the same pharmaceuticals to GCH. GCH reported the total value for these pharmaceuticals as being over $34.9 million using U.S. prices of drugs rather than the actual purchase price paid by its affiliated charity. GCH should not have reported $34.9 million in revenue and donations when the pharmaceuticals cost less than $225,000. Also since GCH failed to submit any documentation showing that the pharmaceuticals were, in fact, distributed in furtherance of Giving Children Hope’s charitable purpose, the actual value for those pharmaceuticals should have been zero.

For previous coverage of the California AG's other enforcement actions in this area, see this earlier blog post.

Lloyd Mayer

U.S. Olympic Committee Responds to Senator Grassley's Challenge to Its Tax-Exempt Status

In the wake of the recent sexual assault scandal involving Olympic athletes, Senate Finance Committee Chairman Senator Chuck Grassley sent a letter to the United States Olympic Committee asking for details regarding how the organization would comply with its congressional expanded purpose that now includes providing a safe environment in sports. He based his inquiry on the need for the organization to comply with its purpose in order to maintain its tax exempt status under Internal Revenue Code section 501(c)(3).

The USOC has now responded through the Covington & Burling law firm, detailing its planned activities, which include:

• Providing $6.2 million to fund the Center for SafeSport in 2019, double the amount of its 2018 support for the Center, and continuing to work with the Center on various initiatives.
• Surveying athletes regarding USOC's policies, programs, services, and priorities and considering other ways to increase the influence of athletes within the organization.
• Conducting a governance review focusing on USOC's relationship with the fifty national governing bodies and athletes more generally.
• Continuing with proceedings to revoke the status of USA Gymnastics as the national governing body for gymnastics, although that process is currently stayed because of the pending bankruptcy of that organization.

Lloyd Mayer

Private Benefit at Memorial Sloan Kettering Cancer Center: The Exempt Purpose, Sponsored Research and Tech Transfer

The private benefit doctrine has always been about "when is one person or entity getting too rich from a tax exempt organization?"  It is axiomatic that for everyone to benefit generally, somebody must benefit particularly.  So, for example, a University has to provide a private benefit to a student if the public is to benefit.  Likewise, a hospital has to provide benefits to a patient to achieve public benefit.  Technology transfer is perhaps the hardest arena in which to apply the private benefit doctrine.  Some research is so expensive that even government funding is insufficient.  Yet it is so potentially lucrative that private investment is inevitable even if engaged in by a relatively few very wealthy investors (usually venture capital firms or big pharmacy).  Somehow, we are bothered by a few people getting very very rich from an exempt organization's research work product.  Without tax exemption, a lot of research would go undone.  On the other hand, without the profit potential, "donors" ["philanthropic investors" is probably a better label] might not donate/invest in the otherwise nonprofit research vital to public benefit.  Applying private benefit analysis to nonprofit research and technology transfer is so difficult, in fact, that perhaps the only specific direct regulatory application of the private benefit doctrine pertains to sponsored research and technology transfer.  Treasury Regulation 1.501(c)(3)-1(d)(5), at least in my judgment, wholly exempts sponsored research and technology transfer from the concerns that somebody is getting way too rich from tax subsidized nonprofit research and technology.  1.501(c)(3)-1(d)(5)(iv)(b) allows a tax exempt research organization to grant a monopoly in its research product "if granting of such exclusive right is the only practicable maner in which the patent, copyright, process, or formula can be utilized to benefit the public . . .  Scientific research described in this subdivision will be regarded as carried on in the public interest even though such research is performed pursuant to a contract or agreement under which the sponsor or sponsors of the research have the right to obtain ownership or control of any patents, copyrights, processes, or formulae resulting from such research."  Like I said, sometimes somebody's gotta get paid if we want everybody to benefit.  

A recent case in point:  An identity crisis is brewing at Memorial Sloan Kettering Cancer Center, one of the nation's top nonprofit cancer research centers, according to a series of articles published by ProPublica and the New York Times.  The latest article, published December 31, 2018, discusses rank and file stakeholders' increasing anguish regarding the nonprofit's increasing coziness with profit makers seeking to exploit the Center's research and discovered technology:  

Hundreds of doctors packed an auditorium at Memorial Sloan Kettering Cancer Center on Oct. 1, deeply angered by revelations that the hospital’s top medical officer and other leaders had cultivated lucrative relationships with for-profit companies.  One by one, they stood up to challenge the stewardship of their beloved institution, often to emotional applause. Some speakers accused their leaders of letting the quest to make more money undermine the hospital’s mission. Others bemoaned a rigid, hierarchical management that had left them feeling they had no real voice in the hospital’s direction.  “Slowly, I’ve seen more and more of the higher-up meetings happening with people who are dressed up in suits as opposed to white coats,” said Dr. Viviane Tabar, chairwoman of the neurosurgery department.  "The corporatization of this institution is clear to many of us who have been here a long time,” said Dr. Carol L. Brown, a gynecologic cancer surgeon, according to an audio recording of the meeting.

. . . 

Closer ties between nonprofit research centers like Memorial Sloan Kettering and corporations are being fueled by a rush of potentially breakthrough cancer treatments. Venture capital firms and drug companies have looked to cash in on the scientific discoveries, said Brad Loncar, the founder of an investment fund that focuses on cancer. “Money follows success,” he said, and Memorial Sloan Kettering has been a focus “because they conduct terrific science there.”  In recent years, the hospital, like its competitors, has struck increasingly sophisticated deals to commercialize its discoveries, in some cases receiving equity stakes in startups rather than simply collecting royalties.

The "crisis" actually began when ProPublica and the NY Times published an expose, of sorts, that resulted in the Chief Medical Officer's forced resignation due to his failure to disclose millions of dollars in payments from for-profit health care and pharmaceutical companies.  Apparently, the CMO wrote almost 200 articles in medical journals touting new drugs and technologies in which for profit drug-makers and biotech start-ups had financial interests.  Eighty seven percent of the articles involved topics of interest to profit makers with whom the CMO had financial connections or from whom he had received compensation. 

The private benefit concerns cut both ways, incidentally.  A private for-profit entity's exclusive rights to commercialize an exempt research organization's work product makes it relevant to ask whether the exempt organization is operating for private benefit.   But the more nuanced analysis recognizes that even great wealth generating private benefit is sometimes required to generate the sometimes monumental public benefit from medical and pharmaceutical research:

Even as Memorial Sloan Kettering leaders have promised greater transparency, they have engaged a public affairs firm, SKDKnickerbocker, to manage their message and have aggressively pushed back against the idea that the hospital’s leaders are too close to industry.  “I can see how someone might think that business relationships are problematic,” said Dr. Lisa DeAngelis, who has stepped into [the former CMO’s] former position at Memorial Sloan Kettering on an acting basis. “But I’m telling you, as someone who works with patients, and I’ve worked with patients throughout my entire career here, that working with industry has helped me save lives.”

The regulations linked above support this contention.  On the other hand, an insider's exploitation of his control over that entity's operations, or his or her implicit or explicit,  compensated endorsement, especially when undisclosed, of research favoring the compensating entity's financial interests raises the question whether the insider is operating the entity for his or her own private benefit.  The regulation linked above does not condone this occurrence.  The latter occurrence ought to be strictly prohibited and that is what seems the problem described by ProPublica and the NY Times.  

Darryll K. Jones

The News Keeps Getting Worse for Southwest Key, a Charity That Houses Detained Immigrant Children

The N.Y. Times has done a series of stories about Southwest Key, a leading migrant shelter provider. It led off with a lengthy article about the charity and a number of questionable financial arrangements, followed up with an article about the charity's promise to conduct an internal inquiry, and just yesterday reported that the Department of Justice is now investigating. Given the attention that the federal government's immigration policies, particularly with respect to children, is attracting, it will be interesting to see how this story develops.

Lloyd Mayer

NPQ: Wreaths Across America: Is a Nonprofit Built on Conflict of Interest Still A Nonprofit?

The Nonprofit Quarterly recently had an interesting story - based on reporting by the Times Record of Maine - about the charity Wreaths Across America. On its face, it is a worthy endeavor, laying wreaths at the graves of veterans. The issue is that the family controlling the nonprofit also owns a for-profit company that, you guessed it, supplies wreaths. Indeed, 75 to 80 percent of the for-profit company's business is with the nonprofit. Take a look at the story for more details, including the charity's defense of this arrangement.

Lloyd Mayer

Congress Lives Up to "Lame Duck" Label: Failed Attempt to Reverse Schedule B Change & Clinton/Trump Foundation Hearing

While Congress may actually keep the government funded during the current lame duck session, its efforts relating to nonprofits appear doomed to amount to nothing. First, with much fanfare the Senate narrowly passed legislation to reverse the IRS decision to no longer require reporting of contributor information for tax-exempt organizations other than 501(c)(3)s and 527s, but that legislation is almost certain not to advance in the House (or survive a trip to the White House, if it came to that). Second, the House Subcommittee on Government Oversight held a hearing on the Clinton Foundation (and, at the insistence of Democratic members, the Trump Foundation). I have not watched the C-SPAN recording, but by all accounts it was a last gasp attack on Hillary Clinton, with even the Washington Examiner calling it "a fiasco" as Republicans clashed with their own witnesses. The only relative bright spot was the testimony of Professor Philip Hackney (Pittsburgh), who used the platform to highlight the congressionally created resource constraints hindering the ability of the IRS to effectively oversee tax-exempt organizations.

There is also the lame duck tax bill (H.R. 88, the Retirement, Savings, and Other Tax Relief Act of 2018), which in its latest iteration would repeal new section 512(a)(7) (includes the costs of certain fringe benefits, most notably parking provided to employees, in unrelated business taxable income), modify the section 4943 rules for excess business holdings with respect to certain purchases of employee-owned stock, relax the Johnson Amendment by not applying it to statements "made in the ordinary course of the [501(c)(3)] organization's regular and customary activities in carrying out its exempt purpose" that do not result in more than de minimis incremental expenses, permit section 501(3) organizations to make collegiate housing and infrastructure grants, and relax some of the section 170 limitations with respect to disaster relief. But it seems that passage of that bill is unlikely.

Lloyd Mayer

Johnson & Johnson Subsidiary Pays $360 Million Fine for Misuse of 501(c)(3) (third such settlement)

Earlier this month the U.S. Department of Justice announced that Actelion Pharmaceuticals US, Inc., a subsidiary of Johnson & Johnson, had "agreed to pay $360 million to resolve claims that it illegally used a [section 501(c)(3) charitable] foundation as a conduit to pay the copays of thousands of Medicare patients taking Actelion's pulmonary arterial hypertension drugs, in violation of the False Claims Act." More specifically, the DOJ alleged that Actelion only donated enough to the foundation to cover the copays of patients prescribed its drugs in an effort to generate revenue from Medicare and induce purchases of its drugs. The announcement also noted that Johnson & Johnson acquired Actelion after the alleged misconduct occurred.

An analysis by HealthLeaders states that this is the third time in the past year that a drugmaker has settled a similar claim, joining a $24 million settlement by Pfizer last April and a $210 million settlement by United Therapeutics Corp. a year ago. The same analysis identified the foundation in the Actelion case as Caring Voice Coalition, Inc. (CVC), and noted that CVC both objected to providing information requested by Actelion and ultimately withdrew from providing financial assistance for drug copays (in part because of the withdrawal of an Advisory Letter from the U.S. Department of Health and Human Services Office of Inspector General that presumably related to providing such assistance). The DOJ settlement agreement in the United Therapeutics case states that CVC was also the charity involved in that case, while the DOJ settlement agreement in the Pfizer case states it was the Patient Access Network Foundation (PANF) in that case. There is no public indication that IRS has raised any issues regarding the tax-exempt status of either CVC or PANF in the wake of these developments.

Lloyd Mayer

Trump (Nonprofit) Trouble: Foundation to Dissolve and More

While paling in comparison to other recent developments related to President Trump, the drumbeat of negative news relating to nonprofits associated with him has also continued. The three most recent developments involve a federal investigation into the President's inaugural committee, the revelation that in "an abundance of caution" the President's foundation was reimbursed for six questionable transactions (presumably either by Mr. Trump personally or his companies), and today's announcement that President Trump has agreed with the NY Attorney General to shut down his foundation and give away its remaining money.

The Wall Street Journal broke the story that federal prosecutors are conducting a criminal investigation of the President's inaugural committee, a section 501(c)(4) nonprofit organization formally named the 58th Presidential Inaugural Committee. The investigation is out of the U.S. Attorney's office for the Southern District of New York, which not coincidentally also handled the investigation of Donald Trump's former attorney Michael Cohen; it was a recording seized as part of the Cohen investigation that triggered the investigation of the committee. The latter investigation focuses both on whether the committee misspent any of the $107 million in funds it raised and on whether any donors received improper access or policy concessions in return for their donations. While not formally part of the Mueller investigation, it may be relevant to that investigation if any foreign money flowed to the committee, which would have been illegal. The investigation of the committee is reportedly still at a relatively early stage. Additional coverage: CNN, NPR, N.Y. Times, The Hill.

As for the Donald J. Trump Foundation, its latest IRS annual return showed $271,356 in "REIMBURSEMENTS" (Part I, Line 11 and Statement 2), but the only explanation provided in the return (Statement 5) tied the reimbursement to the auction of a membership to the Trump National Golf Club in 2012. What is odd about this explanation is that the amount relating to this auction was only $158,000 (as first reported by David Fahrenthold at the Washington Post), so even with interest it should have totalled significantly less than the amount reported. The more complete explanation may instead be that there was more than just this one reimbursement: in the November 23, 2018 decision in the state case involving the Trump Foundation, the court noted that the Foundation and the other respondents "point out that the Foundation has already been reimbursed for six individual donations" and in a footnote further noted that "Respondents aver that 'in an abundance of caution,' the Foundation was reimbursed with interest for the following donations: (1) the [$100,000] Fisher House Transaction; (2) the [$158,000] Greenberg Transaction [relating to the auction]; (3) a [$5.000] 2013 DC Preservation League donation; (4) a [$25,000] 2013 "And Justice for All" payment; (5) a [$10,000] 2014 Unicorn Children's Foundation donation; and (6) a [$32,000] 2015 North American Land Trust donation." The links are to the news stories that report more details about these transactions. These amounts total more than what was reported on the 2017 IRS return, which may be because some of them were repaid either before or after 2017. Regardless, they reflect quite a trail of questionable expenditures by the Foundation.

That undoubtedly is part of what led to today's announcement by the New York Attorney General that the Trump Foundation has agreed to resolve under judicial supervision. Coverage: CNN; Washington Post.

Lloyd Mayer

UK's Cabinet Office Urges Charities to Speak Out about Public Grants

Apparently in response to increasing use of "gagging clauses" in grants that forbid public commentary on public grants, the United Kingdom's Cabinet Office recently urged charities to report improper behavior and wasteful government grants "without fear of consequences." From the full story at Third Sector, "The new rules have been prompted by concerns in the media that charities working on the Department for Work and Pensions’ universal credit programme were unable to speak about their concerns with how the programme was being delivered because of clauses in government contracts."

It will be interesting to see if this move actually emboldens charity whistleblowing, or if more concrete protections are needed.

-JWM