Thursday, November 9, 2023

A New Way for Nonprofits to Fix Broken Markets?: Civica Rx

Download (21)KSL TV recently reported "Utah nonprofit pharmaceutical company is fixing the market, producing 80 drugs." The company is Civica Rx. Launched five years ago, its stated purpose is "to reduce and prevent drug shortages and the price spikes that can accompany them" by "mak[ing] quality generic medicines accessible and affordable to everyone." As detailed in its Form 990 filings, it is tax-exempt under section 501(c)(4) and was approaching $100 million in gross revenue in 2021. Does its emergence help confirm law and economics theories about the role of nonprofits when there are apparent market failures? It would certainly be an interesting case study to explore. 

Lloyd Mayer

November 9, 2023 in In the News | Permalink | Comments (0)

Wednesday, November 8, 2023

States & Hospitals: Minnesota Law Enhances Charity Care Requirements

Download (13)Several media outlets reported last week that a new Minnesota law designed to increase public access to existing hospital charity care programs has just taken effect.  The provision was part of a lengthy health care bill enacted by the state legislature (picture: Minnesota State Capital) earlier this year.  Article 4, Section 40 of the bill contains the relevant provision, including this subdivision:

Subd. 4. Prohibited actions. A hospital must not initiate one or more of the following actions until the hospital determines that the patient is ineligible for charity care or denies an application for charity care:

(1) offering to enroll or enrolling the patient in a payment plan;

(2) changing the terms of a patient's payment plan;

(3) offering the patient a loan or line of credit, application materials for a loan or line of credit, or assistance with applying for a loan or line of credit, for the payment of medical debt;

(4) referring a patient's debt for collections, including in-house collections, third-party collections, revenue recapture, or any other process for the collection of debt;

(5) denying health care services to the patient or any member of the patient's household because of outstanding medical debt, regardless of whether the services are deemed necessary or may be available from another provider; or

(6) accepting a credit card payment of over $500 for the medical debt owed to the hospital.

Coverage: CBS News Minnesota; Health Care Dive; Star Tribune.

Lloyd Mayer

November 8, 2023 in In the News, State – Legislative | Permalink | Comments (0)

Monday, November 6, 2023

Proposed Class Action for Solicitation Fraud Filed Against LDS Church

Download (12)We previously reported about the August 2023 Ninth Circuit decision reinstating John Huntsman's claim against the Church of Jesus Christ of Latter Day Saints (more on that decision here) and the March 2023 survival in the face of a motion to to dismiss of a civil RICO claim against the LDS Church by another disgruntled donor. Now a different set of unhappy donors have filed a proposed class action against the LDS Church.

The thrust of their complaint is that the Church told them that their donations would be used immediately for charitable purposes, including "humanitarian relief," but instead some or all of their donations became part of a now multi-billion dollar endowment. The specific claims filed in the U.S. District Court in Salt Lake City include breach of fiduciary duty, fraud, and unjust enrichment. The docket is available on Pacer, but I have not been able to find a copy of the actual complaint that is not behind a paywall. 

Coverage: AP; Law360 (subscription required); NY Post.

November 6, 2023 in Federal – Judicial, In the News, Religion | Permalink | Comments (0)

Friday, October 20, 2023

Major DAFs Support Anti-Vax Organizations

Yesterday, Rolling Stone reported that Fidelity Charitable and the Vanguard Charitable Endowment Program had given millions of dollars to organizations that push vaccine misinformation, including RFK Jr.'s Children's Health Defense

And how did two of the largest public charities in the U.S. give money to anti-vaccination groups? As DAF sponsors.

But wait, you might say. DAFs? DAFs are controlled by individual donors who decide where the money goes. The sponsor is basically only the holder of the dollars.

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October 20, 2023 in Current Affairs, In the News | Permalink | Comments (0)

Friday, October 13, 2023

Building an Open Form 990 Data Clearinghouse

Download (9)Last last summer, several organizations announced the formation of a collaboration to build a clearinghouse for IRS Form 990 data. Here is the start of the announcement:

Today, a partnership that includes GivingTuesday, the Aspen Institute’s Program on Philanthropy and Social Innovation (PSI), Charity Navigator, CitizenAudit, and the Urban Institute announced that they have kicked off the building of a clearinghouse for raw, clean, and standardized US nonprofit tax data. This collaboration combines the efforts of nonprofits, scholars, charitable giving data platforms, and many others to more widely share essential information captured on the IRS Form 990.

Lloyd Mayer

October 13, 2023 in In the News | Permalink | Comments (0)

Mother Jones: "Chuck Feeney’s Legacy Is a Lesson for America’s Billionaires"

Download (5)Mother Jones reported on the philanthropy of Charles "Chuck" Feeney, who died last week. From that story:

In 2016, Feeney’s charitable foun­dation pledged the last remaining sliver of his staggering wealth to Cornell, cap­ping an epic three-decade giving streak. All told, starting in the early 1980s, Feeney had doled out $8.6 billion, setting aside a scant $2 million for himself and his second wife, Helga, to live on in their old age. For every $100,000 Feeney gave away, he kept about $25.

Other Coverage: Forbes.

Lloyd Mayer

October 13, 2023 in In the News | Permalink | Comments (0)

Forbes: "Charles Koch Has Given More Than $5 Billion Of His Stock To Two Nonprofits"

Download (3)Forbes reported this week that Charles Koch gave $4.3 billion to 501(c)(4) Believe in People last year and another almost $1 billion to 501(c)(4) CCKc4 in 2020. As noted in the story:

Unlike a traditional 501(c)3 nonprofit–which includes the private charitable foundations commonly used by wealthy individuals–a C4 can own an entire for-profit company indefinitely and (so long as these activities support its principal purpose) benefit private individuals; engage in an unlimited amount of issue lobbying; and get directly involved in politics.

Since 2015, when Congress exempted donations to C4s from the 40% federal gift tax, in a move a Koch lobbyist promoted, a number of other billionaires have donated their entire companies to C4s. The most high profile of them: Patagonia founder Yvon Chouinard, who transferred all of his outdoor clothing and gear retailer’s nonvoting stock to the environmentally-focused Holdfast Collective in September 2022; at the time of the gift, Patagonia was reportedly valued around $3 billion. Koch’s $4.3 billion gift to Believe in People is now the largest publicly disclosed donation to a C4.

Lloyd Mayer

October 13, 2023 in In the News | Permalink | Comments (0)

New Senate Finance Committee Majority Staff Report Critical of Nonprofit Hospitals

Download (2)This week the majority staff of the Senate Finance Committee issued a report titled Executive Charity: Major Non-Profit Hospitals Take Advantage of Tax Breaks and Prioritize CEO Pay Over Helping Patients Afford Medical Care. From the introduction to the report (citations omitted):

[H]ospitals have gladly accepted the tax benefits that come with nonprofit status but have failed to provide the required community benefits. Non-profit hospitals spent only an estimated $16 billion on charity care in 2020, or about 57 percent of the value of their tax breaks in the same year. Those hospitals have made information about their charity care programs difficult to access, leaving many patients unaware that they may qualify for free or discounted care. Some hospitals also aggressively try to collect from patients through practices that verge on extraordinary collection practices. One recent study found that in 2017, non-profit 2 hospitals billed $2.7 billion to patients who were likely eligible for charity care. At a time when a record number of Americans report delaying medical care due to high costs, those choices from well-resourced hospitals ensure that future patients, including those who qualify for charity care, will hesitate before they seek necessary care out of a fear of accruing medical debt. That is unacceptable.

Not surprisingly, the American Hospital Association quickly responded with its own study, announced in a press release titled Tax-Exempt Hospitals Provided Nearly $130 Billion in Total Benefits to Their Communities. The press release begins:

Even in the face of a once-in-a-century pandemic, all hospitals, regardless of ownership type, continued to provide a comprehensive range of benefits, programs and essential services to their communities. New analysis released today by the American Hospital Association (AHA) shows that tax-exempt hospitals provided more than $129 billion in total benefits to their communities in 2020 alone; the most recent year for which comprehensive data is available. The analysis calculates that tax-exempt hospitals’ and health systems’ total community benefits were 15.5% of their total expenses in 2020, based on data from the Internal Revenue Service.

Coverage: Axios; The Hill; Law360 (subscription required).

Photo credit: Mary Free Bed. (Memorial Hospital in South Bend, Indiana)

Lloyd Mayer

October 13, 2023 in Federal – Legislative, In the News | Permalink | Comments (0)

IRS Issues Final Supporting Organization Regulations

DownloadThe IRS has issued final regulations (T.D. 9981) relating to supporting organizations and amendments by the Pension Protection Act of 2006 (yes, 2006) to Internal Revenue Code section 509(a). As compared to the proposed regulations, the final regulations clarify the definition of "control" for persons who are restricted with respect to donating to the supporting organization because they control the governing body of the supported organization. The final regulations also modify certain requirements for Type III supporting organizations and make some non-substantive, technical corrections.

Coverage: Bloomberg Law (subscription may be required).

Lloyd Mayer

October 13, 2023 in Federal – Executive, In the News | Permalink | Comments (0)

Wednesday, October 11, 2023

AGs in Action: Recent Cases Involving Involving Allegations of Millions Stolen

6a00d8341bfae553ef02788045cfd8200d-320wi Download (10)There is unfortunately but not surprisingly a steady litany of stories involving charity insiders allegedly stealing significant funds from the charities they operate. Of course some malfeasance among the approximately one and a-half million charities (based on IRS data and so not counting all charities and particularly all churches) is unavoidable. And often the amounts are small, reflecting both the small financial size of many charities and likely their related lack of strong internal controls to prevent such theft. That said, it is worth noting when the amounts at issue cross into seven-figure territory. There are at least two such stories last month, one from Florida and the other from Ohio.

The Florida case involves the former CEO of the Florida Coalition Against Domestic Violence (FCADV) being "charged with one count each of organized scheme to defraud, grand theft and official misconduct, all felonies." Readers of this blog may remember that this has been a long-simmering situation, which began with a state audit triggered by public reports that the CEO had been paid $761,000 in the fiscal year that ended on June 30, 2017. That audit led in 2021 to the former CEO repaying to FCADV $2.1 million in alleged excess compensation, as well as payments from FCADV's insurer and other former officials, and FCADV's dissolution. But those payments were apparently not enough to protect the former CEO from criminal charges. Coverage: Florida Politics; Miami Herald.

The Ohio case involves former executives of the Columbus Zoo and Aquarium being charged with alleging diverting over $2 million for their own benefit. The Attorney General's press release alleges that "the former executives manipulated credit-card and check authorization forms for more than a decade" and that the "stolen money was spent on lavish non-zoo related items, including suites and tickets to concerts and sporting events; golf memberships; trips to multiple states and foreign countries; meals, beverages and alcohol; and motor vehicles." Coverage: Columbus DispatchN.Y. Times.

Lloyd Mayer

October 11, 2023 in In the News, State – Executive | Permalink | Comments (0)

Tuesday, October 3, 2023

DC AG’s Investigation of Nonprofits Incorporated in “Foreign” Jurisdictions: Is it a Violation of the “Internal Affairs Doctrine”?

Last week, the Wall Street Journal published an opinion piece about a letter that 12 Republican state AGs sent to DC AG Brian Schwalb. In it, they complained about the DC AG’s investigation into several nonprofits associated with conservative activist (and Federalist Society founder) Leonard Leo. (There is no link to the letter because none is published online and I have been unable to get a copy, perhaps because of my truly pathetic journalistic skills). According to the WSJ,

“Mr. Schwalb [issued] subpoenas. This is remarkable because the D.C. AG lacks jurisdiction. All of Mr. Leo’s affiliated businesses and nonprofits mentioned in the complaint are based outside of D.C., including in Virginia or Texas. Under a longstanding legal principle known as the internal affairs doctrine, matters relating to an entity’s internal workings are governed by the laws of the state of its incorporation and enforced solely by that state’s officials.”

(Politico also has an article about the DC AG’s investigation, which, unsurprisingly has a different take on it).  (UPDATE: Politico posted another article today that reports that the Leo-affiliated entities are not cooperating with the DC AG and that the DC AG is also investigating Arabella Advisors, a "liberal 'dark money' group" that was the subject of a complaint from a conservative watchdog group.)

But, of course, the internal affairs doctrine applies to – you guessed it – internal affairs, and so the claim that DC does not have jurisdiction over the Leo-affiliated entities raises the question of the claim at the heart of DC’s investigation. Is it an investigation into the internal affairs of the Leo-affiliated entities, or something else? Unfortunately, I don’t have access to the DC AG’s subpoenas or any other source for its legal reasoning establishing jurisdiction. The WSJ piece claims that the investigation was initiated because of a letter sent by the Campaign for Accountability to the DC AG in April, but unfortunately CfA only posted its companion letter to the IRS (which obviously has jurisdiction).  That letter identifies the alleged misconduct, saying,

“There are questions as to whether the Leo-Affiliated Nonprofits have diverted substantial portions of their income and assets, directly or indirectly, to the personal benefit of Leonard Leo. Most of these entities have either made substantial independent contractor payments one or more of his for-profit business entities or made major contributions to other Leo-Affiliated Nonprofits that made such payments. Such payments were generally listed as made in exchange alleged consulting, research, public relations, or similar services, however, CfA has reasonable questions about whether those alleged services were actually rendered at all or, if services were rendered, whether the payments made were substantially in excess of the fair market value of those services.”

So, the question is, under DC state law are diversions of nonprofit assets to the personal benefit of someone who directly or indirectly controls that nonprofit an “internal affair” or not? Not to get too confusing on matters of jurisdiction, but it seems clear that DC has personal jurisdiction over at least some of the entities (all of the ones I checked) because they maintained their principal office in DC and they may well have conducted fundraising operations in the District. So, the question is just about the scope of the internal affairs doctrine, not about the “reach” of state authorities over foreign entities.

Anyway, if anyone from the DC AG’s office, or the Republican AGs who wrote the letter, would like to provide their analysis of the question, I and my students would love to see it!

Benjamin Leff

October 3, 2023 in In the News, State – Executive | Permalink | Comments (0)

Tuesday, September 26, 2023

Can You Smell What The Rock is Getting in Bad Tax Advice?

In my recent post, "Can You Smell What the Rock is Donating?", I talked a little bit about a number of different nonprofits that were accepting donations from some high profile folks, such as The Rock, in order to provide charitable support for those involved in the SAG-AFTRA and the (hopefully now ended) Writers' Guild strike.  Well, The Rock and his charitable donations are back, at least indirectly.  With a h/t to this thread started by Andrea Carr CPA (@andreacpa0 on X formerly known as Twitter) - she found the following on the website of the Entertainment Industry Foundation.  The EI Foundation is sponsoring a "People's Fund of Maui," which is giving "direct financial assistance to Maui community members experiencing devestating losses form the fires in Lahaina and Kula."  Apparently the People's Fund will make monthly payments to impacted residents of Maui for as long as it has funds, which include some hefty initial gifts from Oprah and, you guessed it, The Rock.  Which is amazing all around.

In the not-so-amazing category ... in the FAQs for applicants, the website states:

Are there any restrictions on how funds are used?

Financial disbursements provided by the People's Fund of Maui are considered Qualified Disaster Relief Payments and are intended for the following expenses... (edited)

Will I need to report the monthly payments on my taxes?

No, you will not need to report the monthly income payments on your taxes.   Payments will be characterized under the IRS's "charitable gift status" which is non-taxable and only needs to be reported to the IRS if individuals receive $17,500 or more in one year.  Individuals will only need to report this income payment if they received additional cash/asset gifts that bring the total to more than $17,500 a year.

Um... no.  I mean, they aren't taxable, so that part is right but otherwise... no.

Whenever I talk about gifts under Section 102 (and our old friend, Commissioner v. Duberstein) to students in Tax I class, I always mention that the INCOME tax treatment of gifts is different from the ESTATE & GIFT tax treatment of these items.  It is a Federal income tax class so I always debate whether it is worth precious class time to go through the difference, but in my experience there is so much confusion on this point that it comes up year after year.  So thanks, EI Foundation, for validating my teaching.

Revenue Ruling 2003-12 posits the following hypo in Situation 2:

Situation 2. O, a charitable organization described in § 501(c)(3) that is exempt from tax under § 501(a), whose purpose is to provide assistance to individuals who are affected by disasters, also makes grants to distressed individuals affected by the flood described in Situation 1. The grants will pay or reimburse individuals for medical, temporary housing, and transportation expenses they incur as a result of the flood that are not compensated for by insurance or otherwise.

Substitute "flood" with "wildfire" and well, you have Situation 2 in Maui - I do note that Situation 1 in the Revenue Ruling involves a Presidentially declared disaster as defined in Code Section 1033(h)(3), which appears to include the Hawaii Wildfires. 

In any event, I'm not sure it really matters. Rev. Ruling 2003-12 concludes with regard to Situation 2 (emphasis added):

In Situation 2, the grants made by O are designed to help distressed individuals with unreimbursed medical, temporary housing, or transportation expenses they incur as a result of the flood. Under these facts, O’s grants are made out of detached and disinterested generosity rather than to fulfill any moral or legal duty. Thus, the grants are excluded from the gross income of the recipients as gifts under § 102. Because payments by non-governmental entities are not considered payments for the general welfare, the grants made by O are not excluded from the recipients’ gross income under the general welfare exclusion. Rev. Rul. 82-106, 1982-1 C.B. 16. It is not necessary to reach the question of whether § 139 applies to the grants.

Accordingly, assistance from a charity to a disaster recipient are straight up gifts under Section 102 and Duberstein.  Revenue Ruling 2003-12 is really clear that you don't need to get to the issue of whether the funds are "Qualified Distaster Relief Payments" under Code Section 139. Code Section 139 is important for GOVERNMENT payments for disaster relief and potentially for disaster relief payments from an EMPLOYER - but not grants from a private charity.

And finally, as Andrea Carr CPA put it on X/Twitter:

i'm tired and exhausted, what is "charitable gift status"?  Does someone know the IRC that covers this?  Where is $17,500 coming from?

I'm guessing here because it is a common mistake, but maybe they are referencing the gift tax annual exclusion under Code Section 2503(b), which is $17,000 for 2023 after inflation adjustment - as one X/Twitter person indicated, $17,500 could be a typo?  Of course, the gift tax doesn't apply to transfers to charity under Code Section 2522 (assuming we don't have DAF or supporting organization issues), so The Rock and Oprah are safe on that.  However, even if that's the case, the gift tax falls on the DONOR of the gift - not the recipient (assuming we don't have a net gift situation), so at no point would the gift tax exclusion impact recipient of the funds - and even then, it would never impact the income tax treatment of the funds.  Because this is a gift tax exclusion.  Different tax.  And the gift tax doesn't even apply here.  So... 

I got nothing on "charitable gift status."

So, EI Foundation, I know I'm coming down pretty hard on you here and I'm sorry for that.  Some on X/Twitter blame AI (see ... all my posts align in the universe).  Maybe there's something we can't tell from the information you've put up on your website that would change this anaylsis.  But let me repeat that the things you are doing, not only for Maui but for all of the other charitable purposes and recipients you fund, are really really awesome and thank you for all you do in that regard.   

Educationally, eww

September 26, 2023 in Current Affairs, Federal – Executive, In the News | Permalink | Comments (0)

Monday, August 21, 2023

Vermont Law & Graduate School and Artists' Moral Rights

Vermont_Law_School_03I confess that, when I blog here, I tend to focus on tax issues related to nonprofit and tax-exempt organizations; after all, my primary area of expertise is the tax law. And tax law issues that affect nonprofits are both fascinating and nearly endless.

But the tax law (and, for that matter, state nonprofit laws) are not the only laws that touch nonprofits and tax-exempts. So today, with the beginning of a new semester at Loyola (and, I assume, many other law schools), let's look at nonprofits and the Visual Artists Rights Act of 1990 ("VARA").

In 1993, the Vermont Law School, a tax-exempt educational institution, commissioned artist Sam Kerson to paint two murals that depicted Vermont's role in the Underground Railroad. Kerson painted his murals (each measuring 8 feet by 24 feet) directly on the drywall of the school's Jonathan B. Chase Community Center.

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August 21, 2023 in Current Affairs, In the News | Permalink | Comments (0)

Thursday, August 17, 2023

Charity Fraud in the News - Michael Meyer and the Family Office Foundation

Last Saturday, Forbes reported on the indictment of Michael Meyer for the promotion of his allegedly fraudulent charitable-donation tax shelter, the Ultimate Tax Plan. Meyer and his associates and the charities he created have been the subject of federal law enforcement interest for more than a decade, and the indictment recounts numerous acts of fraud and deception. Additional information can be found in the Tax Court petition filed in July by the Family Office Foundation, a charitable entity created by Meyer, to contest its denial of tax-exempt status. The appendix includes the adverse determination letter from the IRS, which provides a detailed description of the Ultimate Tax Plan and how it was supposed to work.

The acts described in the indictment are clearly fraudulent. As the Forbes article points out, many of the transactions involved backdating transaction documents to a previous year, and “[a]nything that involves backdating is bad.” Backdated transactions reflect clear deception, and “[j]uries can … easily understand that one cannot take a deduction for 2016 for something that didn’t happen until 2017.” Furthermore, “if a tax strategy has a name, then it probably doesn’t work.”

However, the strategy includes at least one component that the IRS appears to view as impermissible that I would love to learn more about, partially because it is facilitated by donor-advised funds. The Ultimate Tax Plan involves the following structure. First, a donor-advised fund sponsoring organization (let’s call it “Charity”) is created. Second, each client creates an LLC with controlling interests and noncontrolling interests. The client retains the controlling interest and donates the noncontrolling interest to the Charity. The client then takes a charitable tax deduction for fair market value of the noncontrolling LLC interest. In the actual Ultimate Tax Plan, this transaction (allegedly) includes all sorts of shenanigans like the aforementioned backdating, transactions that appear on paper but were never executed, dramatic mis-valuations of the donated noncontrolling LLC interest, an explicit promise that the Charity would sell back the LLC interest to the “donor” at a fraction of the value taken as a tax deduction, and many others. But more interesting to me than all the shenanigans is the fact that the IRS appears to take the position in the adverse determination letter that the donation of noncontrolling LLC interests to the Charity inherently fails to qualify as a charitable contribution because “the Bogus Charities never had dominion or control over any of the purported contributions.” By permitting the donor to transfer a noncontrolling interest in the LLC that the donor continues to control, “the donor can take a tax deduction for a ‘charitable contribution’ while maintaining the economic benefit and control of the donated asset.”

Again, the (alleged) shenanigans clearly make Meyer’s scheme fraudulent and cause the Family Office Foundation to fail to qualify as a tax-exempt organization. But I’m not sure the IRS is on such firm legal grounds if it wants to argue that a donation of a noncontrolling interest in an LLC that continues to be controlled by the donor automatically fails as a charitable contribution because the charity never obtains dominion and control. (I’m sure some readers know this law better than me, and would love help if I’m just wrong about this). Obviously, any time a charity receives a donation of corporate stock, it does not thereby receive the right to obtain any distribution from the stock or demand that the company repurchase it. Generally, at least for publicly-traded stock, that’s not a problem for the charity because it can sell the stock and use the proceeds to pursue its charitable activities (or not, at its discretion). My understanding is that the general principle is true for donations of illiquid property as well: the fact that there is not a ready market for a donated asset may affect the valuation of that asset (a so-called liquidity or marketability discount), but it does not render the donation void. A charity that receives a donation of an illiquid asset, like a noncontrolling interest in a closely held firm, is considered to have sufficient dominion and control over the asset to treat the transaction as a completed donation. The fact that the charity doesn’t have the power to compel the firm to make distributions or convert the ownership interest into cash does not negate the fact of the donation. The fact that the charity has expressly agreed to sell the property back to the donor at a fraction of its reported value of course would negate the substance of the transaction, but not the mere fact that it is a noncontrolling interest in a firm that the donor continues to control.

It is true that there is a poorly defined body of law that holds that a charity has to undertake at least some actual charitable activities in order to qualify for exemption, and so the charity has to actually receive some cash from somewhere that it can spend on pursuing its charitable activities. The IRS determination letter calls this the “substantial present economic benefit test.” But for the purposes of our hypothetical, let’s assume that the Charity manages to get its hands on enough cash to satisfy the substantial present economic benefits test.

The reason I’m interested in this structure, if it could be pursued without all the shenanigans that make it obviously illegal, is because it appears to be substantially facilitated by the current legal treatment of Donor Advised Funds. If the Charity had to be a Private Foundation because it was receiving donations from a single person or family, current law would prevent it from continuing to own a substantial interest in the donated LLC, taking a deduction for the fair-market value (rather than basis) of the donated LLC interest, and from spending less than 5% of its assets every year, etc. In other words, the Family Office Foundation case might be an example of a structure that (if dramatically cleaned up) still illustrates an abusive but currently legal use of Donor Advised Funds.  The big commercial DAF sponsoring organizations, like those created by Fidelity and Vanguard, would never permit such an abusive use even if legal. I think the IRS and Congress should focus on relatively low-hanging fruit of closing these DAF loopholes rather than getting tied up deciding whether to make dramatic changes to the DAF laws.

-Benjamin M. Leff

August 17, 2023 in Current Affairs, Federal – Executive, Federal – Legislative, In the News | Permalink | Comments (0)

Tuesday, August 15, 2023

Barnes Foundation Back in Court

Last week, the Philadelphia Inquirer and New York Times (and then the Philadelphia Inquirer again) reported on the decision by a Pennsylvania court to permit the Barnes Foundation to make some modest changes in how they display their art: specifically permitting temporary loans of art to other institutions or temporary displays of art in other locations in the museum.

Anyone who has followed the Barnes Foundation case(s) over the years knows that Albert Barnes amassed a truly incredible collection of art during his lifetime, and left it to the Barnes Foundation with unusually precise instructions on how it should be displayed. Over the years the trustees of the Barnes Foundation have returned to court over and over to try to alter those precise instructions, successfully winning the right to move the paintings from their original location in Merion, Pennsylvania, into Philadelphia, among other limited changes. The museum in Philadelphia is truly one of my favorite art museums in the world, and (despite really liking art museums) I was always too lazy to visit the museum in Merion before the courts permitted the Foundation to move the collection. So, I’m a direct beneficiary of the court’s permissiveness. On the other hand, this case is often used in Nonprofit Law classes (including mine) to illustrate the potential for conflict between philanthropists and the charitable institutions they create or fund, especially after their deaths. Barnes illustrates this conflict so well because he was so clearly mistrustful of the art establishment in Philadelphia, and worked so hard to direct his philanthropic vision after his death. So, even the most modest and reasonable alterations to the rules that bind the Foundation are viewed by some as a betrayal of Barnes and his legacy. I’m sympathetic to that instinct. If you want to get yourself worked up on Barnes’s behalf, I recommend the movie Art of the Steal (2009), which can be streamed from Amazon for a fee.

I’m also sympathetic to how difficult it is for a court to balance the competing interests in cases like these. Yesterday, I wrote about director standing, and my co-blogger Darryll Jones pointed out in a comment how annoying (and expensive!) it can be for a charity when a single person brings vexatious litigation. In the Barnes case, the Foundation brought an action to deviate from the terms of the trust indenture and the Pennsylvania Attorney General filed a “no objection letter,” leaving the judge with no party genuinely taking a position adverse to the Foundation. The judge did conduct a “site visit,” and probably did not really need an adverse party to make the case against deviation, but the fact that nonprofit standing is generally so limited does reduce the likelihood that the interests of a deceased donor will be fully represented. Again, I think that’s probably on balance a good thing, but it’s a hard balance to get perfect.

Benjamin M. Leff

August 15, 2023 in Film, In the News, State – Judicial | Permalink | Comments (1)

Monday, August 14, 2023

More Thoughts About Director Standing in Turner v. Victoria

A couple of Fridays ago, fellow Nonprofit Law blogger Darryll Jones wrote about the California Supreme Court’s recent decision in Turner v. Victoria. The holding is clear, and for anyone who has thought about these matters, it shouldn’t have been controversial. California state law gives directors of a nonprofit corporation standing to sue the other directors to enforce their fiduciary duties. As Professor Jones noted, Director Debra Turner sued the other directors, arguing that they breached various duties when they agreed to pay $15 million of assets destined to the Foundation to settle a dispute with a spurned heir. All the directors of the Foundation re-elected themselves to the board in the meeting following the lawsuit, but did not elect Turner, thereby removing her from the board. They then moved to dismiss the lawsuit on the grounds that Turner, who was no longer a director, ceased to have standing to pursue the lawsuit. Turner lost at the trial court and appellate court level. The California Supreme Court reversed, holding that the language of the nonprofit standing statute does not seem to require a “continuous directorship requirement.” More importantly, it held that denying standing to a removed director would defeat the purpose of the standing statute, since it would “permit gamesmanship by directors accused of wrongdoing [since] [d]irectors who are sued would be able to terminate the litigation by removing the plaintiffs from office[.]” 

My initial response to the holding was “duh.” Of course it doesn’t make sense to permit the kind of gamesmanship described so well by the court. So, why did the litigation get all the way to the California Supreme Court before this reading of the statute prevailed?  One possibility is that the Supreme Court’s understanding of the law benefited from an exceptionally clear and persuasive amicus filed by Nonprofit Law Professors Jill Horwitz (who is also the Reporter on the recent ALI Restatement on Charitable Nonprofit Organizations) and Nancy McLaughlin (who is an Associate Reporter). Their brief points out that there was significant discussion at the ALI advisers’ meeting about the issue of director standing. Because of the concern that whistle-blowing directors would likely lose their position on the board, the Restatement permits standing by former directors, if they lost their position because of their attempt to address the alleged harm. California law does not go that far, according to Turner v. Victoria. It just holds that once a director brings a lawsuit against the organization, the director may continue to pursue the lawsuit even if they are removed from the board. Therefore, California law creates a sort of race to courthouse, since directors have standing while they are still directors, but lose it as soon as they are removed from office.  If they can file their lawsuit before the board removes them, the lawsuit can proceed.

Of course, if an organization wants to prevent its directors from having standing to bring a derivative action on behalf of the organization, it can always incorporate in a state with less permissive standing rules. Apparently, there aren’t many states that don’t permit director standing, but (according to a recent symposium piece by our own Lloyd Mayer) Indiana is one of them. Honestly, if you’re interested in nonprofit standing, I highly recommend this recent piece by Professor Mayer.

Benjamin M. Leff

August 14, 2023 in Current Affairs, In the News, State – Judicial | Permalink | Comments (3)

Thursday, August 10, 2023

An Update on the Streamlining Federal Grants Act - Streamlining? Sure...

In a post I made earlier this week on the Streamlining Federal Grants Act of 2023, I discussed the Act's peculiar definition of "nonprofit."   As a reminder, the Act's definition of nonprofit is as follows:

any corporation, trust, association, cooperative, or other organization that—

(A) is operated primarily for scientific, educational, service, charitable, or similar purposes in the public interest;

(B) is not organized primarily for profit;

(C) uses net proceeds to maintain, improve, or expand the operations of the organization; and

(D) is not an institution of higher education.

While the definition reverberates with the echoes of Section 501(c)(3), it is clearly not the same.  So in my original post, I posed a question to the universe about the origins of this language.

And the universe answered!

David Thompson, the Vice President of Public Policy at the National Council of Nonprofits (the source of the article I linked in the original post) wrote me with the following information:

The definition of nonprofit organization in the legislation actually tracks ... the definition in the OMB Uniform Guidance, 2 CFR Sec. 200.1 Nonprofit Organization. Since the bill deals with the grantmaking process, it makes sense to use the definition upon which the federal grantmaking agencies rely. This also explains why Institution of Higher Education is defined separately too – the Uniform Guidance has distinct rules for Eds that are different from the ones governing grants to nonprofits.

So many thanks to David for that assist!

It does leave me to wonder, however, if this isn't a place where we could have some streamlining, which is ostensibly the purpose of the Act (I mean, just look at the title, friends!). The committee hearing testimony of all of the participants highlighted the capacity issues facing organizations applying for grants - cost, expertise, training, just having enough warm bodies, etc. For nonprofits, having to deal with two definitions certainly makes life more (and IMHO, unnecessarily) complicated. I'd certainly advocate for using the 501(c)(3) definition, something that nonprofit grantees are already going to be pretty used to dealing with on a regular basis.

I can see, however, two issues: (1) this definition may already be so embedded in Federal contracting lingo that changing it could have collateral impacts, and (2) the definition  seems broader than just Section 501(c)(3). So here's my compromise, Senate Homeland Security Committee: what about a safe harbor? Can we just say, explicitly, that any organization holding a current 501(c)(3) determination letter automatically meets the contracting definition - assuming that doesn't exists already somewhere in the Federal contracting guidelines. That keeps your original contracting definition in play, makes life easier for your 501(c)(3) grantees, and preserves the ability of non-501(c)(3)s to qualify under the Federal contracting definition, if it is in fact broader? You might have to deal with churches separately, as some have their determination letter but others do not... but we deal with churches separate all the time for this reason.

Anyway, thanks again to David for his good work and the work of the Council, and thanks for participating in this conversation.

Clarified, eww





August 10, 2023 in Current Affairs, Federal – Legislative, In the News | Permalink | Comments (0)

Tuesday, August 8, 2023

Defining "Nonprofit" and the Streamlining Federal Grants Act of 2023

The National Council of Nonprofits reports that the Senate Homeland Security and Governmental Affairs Committee approved Senate Bill 2286, the Streamlining Federal Grants Act of 2023.  According to the Council,

the legislation seeks to improve the effectiveness and performance of federal grants and cooperative agreements, simplify the application and reporting requirements, and facilitate greater coordination among federal agencies responsible for delivering services to the public. Notably, the bill mandates consultation with charitable nonprofits and governments and calls for improving services delivered to communities and organizations that historically have not received federal grants or cooperative agreements.

In summary, the Act requires each federal agency to appoint a senior official to oversee federal grant administration for that agency.  In addition, the Office of Management and Budget (OMB) must establish a Grants Council, made up of the Controller of OMB as the chair, the senior grants officials from the various agencies, and others as determined by the chair.  The Grants Council is charged to “consistently and regularly solicit input and collect feedback and user experience information with respect to the application, administration, and reporting of grants and cooperative agreements, including from non-Federal entities” (emphasis added). The Director of OMB, in consultation with Grants Council, must develop plans for improving grants administration, including streamlining application and reporting processes, simplifying grant opportunity notices, and increasing opportunities for training and education in federal grants administration.

As indicated, the Grants Council is supposed to work with “non-Federal entities” in developing these grant procedure improvement plans.  A “non-Federal entity” is defined as  a “State, local government, Indian Tribe, institution of higher education, or nonprofit organization.” In turn, the term “nonprofit organization” is defined as follows:

any corporation, trust, association, cooperative, or other organization that—

(A) is operated primarily for scientific, educational, service, charitable, or similar purposes in the public interest;

(B) is not organized primarily for profit;

(C) uses net proceeds to maintain, improve, or expand the operations of the organization; and

(D) is not an institution of higher education.

I’m struck by the definition of a nonprofit organization for these purposes. It clearly is not co-terminus with the requirements of Code Section 501(c)(3).  For example, it includes “service” purposes…” and contains an odd variation on the nonprofit distribution constraint.  Confusingly, it uses terms that do not seem to exclude for-profit entities, as the organization only need be “not organized primarily for profit” – would this include, for example, an L3C?   A for-profit traditional (not next gen) cooperative?

In a concededly brief effort to find more information on the definition of “nonprofit” in the bill, I took a very quick look at some of the hearing testimony.  The Senate Committee held a hearing on May 2, information about which can be found here. I didn’t find a great deal of information on that specific issue – in fact, most of the testimony revolves around state and local government capacity challenges and it barely mentions private entities.  I’d be curious if anyone out in Nonprofit Land recognizes this definition from another Federal grant statute or otherwise has any background on from whence it came.  

Perplexedly, eww

August 8, 2023 in Current Affairs, Federal – Legislative, In the News | Permalink | Comments (0)

Monday, August 7, 2023

Teaching Nonprofits in the Era of ChatGPT

First of all - let me say how excited I am to be back blogging.  As some of you may know, I have been the Associate Dean for Academic Affairs for the last five years, and as a result, I had to step back from blogging as well as many other things.  Sadly, efforts to clone myself failed miserably.  Now that my time in academic purgatory administration has come to a merciful end, I'm glad that Lloyd Mayer and all the the folks at Nonprofit Law Prof Blog were willing to have me back as a regular poster.  

For those readers who are academics, you know that it is that time of the summer to turn to those Fall syllabi, if you haven't done so yet. As I prepare to teach Nonprofits for the first time in a bit, I'm thinking a great deal about how to teach it and other drafting-heavy classes in a world with ChatGPT and other generative AI. I regularly use Nonprofits and my Estate Planning class (likely coming this spring) as a platform to teach the appropriate use of forms and samples.  I think that we can and should teach ChatGPT as just another type of form or sample - a starting point and not an ending point.   To know how to evaluate a form or sample, including text created by generative AI, one must know what good drafting looks like.  As a result, I'm thinking about how to mix original drafting with purposefully generated AI language.  It feels like things like bylaws and compensation policies are great places to do this kind of work.

  • If you are an academic, are you thinking of doing this?  Do you have thoughts on exercises or assignments?  Thoughts on academic integrity issues?
  • If you are a nonprofit professional, how are you using generative AI in your practice?  What skill sets do you want to see from graduates coming out of law school?

There were some great discussions at SEALS this year (a law prof conference for those of you who aren't academics)  on this topic, so I'd love to see some continuing work in this area.  I do think it is really important for practitioners to weigh in on this, however - when it comes to AI, I think that many law profs immediately start with either "It's cheating" or "How will they learn to write?"  Those are concerns that we need to address but we can't use those concerns simply to avoid AI -  I think we put our head in the sand if we don't acknowledge generative AI ... not as the future, but as the present.

What say you all!???

Originally, Elaine Waterhouse Wilson (aka eww)

(no part of this post was created using generative AI!)






August 7, 2023 in Current Affairs, In the News, Other, Web/Tech | Permalink | Comments (0)

Friday, August 4, 2023

NYT: "Donors Are War-Weary, So Ukrainian Soldiers Get Creative for Funds"

Download (3)As the war over Russia's invasion of Ukraine drags on (seventeen months and counting), the N.Y. Times reports (subscription required) that Internet donations to support Ukraine's efforts are understandably started to lag. Yet the needs are as greater or greater than ever, so Ukrainians are getting creative in their fundraising. This includes a Kyiv art museum auctioning off war memorabilia as well as continuing fundraising efforts by charities created to support the Ukrainian military, such as the Come Back Alive foundation.

Lloyd Mayer

August 4, 2023 in In the News, International | Permalink | Comments (0)