Nonprofit Law Prof Blog

The Nonprofit Person of the Week

I got a note yesterday about my post on Streckfus.  Not from Streckfus, himself, but a respected source nevertheless.  Concerned that I might have insulted my subject and other folks I have sometimes profiled.  I kinda doubt that anything insults Streckfus because he has been through things that pretty much make our magnified daily worries look silly.  And that is one reason why I admire him even though I don't know him.  He might have edited some things I wrote for EO Tax Review when it was part of Tax Notes, I don't remember.  He is smart enough, you know, that he could have developed bone spurs or something.  Instead, chances are high that I have seen Streckfus in one or two Vietnam war documentaries without recognizing him. I used to watch a lot of war documentaries and war movies.  And I can  only  imagine  how  some  drill  sergeant  pronounced his  name  during  basic  training.  Probably  "Streck-wuss"  or  some some  such  worse aberration. 

 If I mention a name on this blog, trust me, it is purely for praise and admiration, not for ridicule and insult.  So long as the name is neither Trump nor DeSantis, but at least I am honest about my prejudices.  The people I profile have done something very good for nonprofit/tax exemption jurisprudence in my view.  If I say something stupid or inappropriate, by all means send me a nasti-gram. If its up to me any hate mail will be posted with much fanfare.  Tucker Carlson's hate mail is dwarfed perhaps only be the boatloads of money he's paid for being way more stupid and insulting than I could ever be.  Hate mail is better than no mail in the "look at me" business.  But seriously, I am not trying to be provocative and I don't even get lunch money for this blog.  

Lately I am trying to make this blog more predictable and a more desirable read -- not by shock and insult, though my mother has no filter  and I am my mother's middle child.  Nor by unserious assertions about the law of nonprofits and tax exemption.  Churches really can do whatever they want with their tax exempt status.  So on Fridays, if I am posting, I have introduced a new column called "Opinion Page" where I try to gather editorials and post them mostly without comment.  There are editorials in the queue right now waiting on Friday.  I am also endeavoring to profile one person a week.  A cheap way to scare up clicks, I know, but the profiled persons are far from empty suits, and doing so tends to generate a sense of community.  Readers of this blog are the "cool kids." I haven't called it "the Nonprofit Person of the Week," but that is  what seems to be evolving.  So far, its been Henzke -- somebody wrote me that he goes by "Len," not "Lenny" -- and Streckfus, but those aren't the only people I have watched over the years and whose work has influenced us all in positive ways about nonprofit jurisprudence.  The profiles are all intended to be positive, even if tongue in cheek, and I am open to nominations.  The caveat is that I am not going to email or call the subject for some sort of contrived interview.  I am not a journalist I just play one on the internet.  Besides I want to capture my subjects in the wild and interviews would just muck up things.  I don't personally know the people I have profiled thus far and I only want to get to know them through normal interactions, not a fawning interview.   

Most blogs are boring, even this one I imagine, and even when they try not to be.  I am even thinking about introducing an original new graphic design layout to accompany regular installments of Nonprofit Person of the Week.  I'm still considering possibilities.

darryll jones

Stanford's Statement Regarding Charitable Property Tax Exemption Fight

We talked about Stanford University's suit against Santa Clara County a few weeks ago.  The suit asserts that homes owned by Stanford faculty on grounds owned by Stanford University are entitled to partial charitable tax exemption.  Here is the first page of Stanford's press release explaining Stanford's position:

Elon Musk Still Doesn't Understand How OpenAI Can Get Away with Tax Exemption

I’m still confused as to how a non-profit to which I donated ~$100M somehow became a $30B market cap for-profit. If this is legal, why doesn’t everyone do it?

— Elon Musk (@elonmusk) March 15, 2023

The exempt developer of ChatGPT, Open AI is "stacking paper," and Elon wants to know what happened to his $100,000,000 charitable contribution.

 See here, here, and here.  If OpenAI gets away with paying private investors "capped profits," we really have no rule against private inurement or excess benefit and yes, Elon, everybody should do it.      

 

darryll jones

World NGO Day

What the rest of the world calls football ain't football.  

We Americans are just different.  Obstinately.  And we pretty much insist that we are right even in the face of objective reality.  While the rest of the world has named the most popular sport ever after its primary activity -- foot to ball, "football!"  -- we insist on calling it "soccer" and a smash-mouth game hardly involving feet to balls we correctly call "football."  

Same thing with organizations comprising the "Third Sector," "Independent" Sector, or "Civil Society" -- organizations we Americans call "nonprofits" even though they can make profit.  "Nonprofit" to NGO is about as accurate as football to soccer. Or something like that, you understand what I'm trying to say.  Just to prove that we insist on confusing ourselves with our own names, do a Google search of "nonprofit."  What you will get are links to websites in America as if the rest of the world hardly exists. But search "NGO" and the mind is transported all over the world.  The State Department, probably because it is more often focused on worlds different from our own, has a primer entitled "Non-Governmental Organizations" including a short section on the Foreign Agents Registration Act, which can be applied to foreign NGOs operating in the U.S.  I should remember that the next time I get indignant about lesser governments suspiciously monitoring foreign NGOs in obvious effort to prop up a DeSantian dictatorship.  

If I had learned to speak English instead of American, I would not have missed World NGO Day this year.  World NGO day was first proposed by Resolution of the IX Baltic Sea NGO Forum in 2010 

To support the official setting of the World NGO Day. Following the discussions among non-governmental organizations and members of the Baltic Sea NGO network from Belarus Denmark, Estonia, Finland, Germany, Iceland, Latvia, Lithuania, Norway, Poland, Russia and Sweden, the Coordinating Committee on behalf of the Baltic Sea NGO Forum 2010 (16 to 17 April 2010, Vilnius, Lithuania) has approved the necessity to promote the official setting of the “Worldwide NGO Day”, proposed by the Civic Alliance-Latvia. The World NGO Day is to be announced as an official UN observance day according to the UN resolution.

After the Resolution, World NGO day was first observed in 2014, and every February 27th thereafter in 89 countries across six continents; the EU and other governmental organizations issue proclamations while NGOs around the world host all sorts of events.  

Its too late for us, though.  Our ethnocentrism makes us hardly recognize NGOs, nevermind World NGO Day.  And I, for one, am not about to call a buncha guys and gals running around in clean white shorts kicking a ball "football," "fussball," futbol, or anything like it.  

darryll jones

 

Nonprofit NIMBYs

Growing up, I could count on a field trip to Balboa Park almost every school year. At least by the time I was in high school, we'd split into groups and walk around the grounds, probably slipping into an art museum or maybe the Museum of Us (which I'm pretty sure was called the Museum of Man when I was a kid), or the surprisingly engaging Railroad Museum. The high point (at least to a kid--it's been a long time since I've been there) was almost inevitably the Air and Space Museum.

It turns out that the various institutions at Balboa Park have come together with the Balboa Park Cultural Partnership, a 501(c)(3) organization that, according to its 990, exists to "advancing Balboa Park cultural organizations through collaboration and advocacy."

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Streckfus

If Streckfus was a cartoon, he would be Eeyore according to those who know him.

Streckfus is of German derivation.  It sounds like the German, "Fuss Strecken," which translates to the English, "stretch feet."  There is a guy named Peter Streckfus who writes and teaches poetry:

 

My grandfather went on his moped to the factory, two hours travel each way.
The rest of the days he fished in the woods.
The fishing rods and the nets he tied to the moped.

When I was old enough, he took me.
We rode with our legs out in the air on the bags.
We fished for eel.

Boiled water out of the creek for coffee, tea, and soup.
If we didn’t catch anything, we had nothing.
At night, when we lay to sleep, the world changed.

. . . 

Peter Streckfus seems introspective and contemplative, as all poets must be I suppose.  He doesn't seem as grouchy as his cousin/uncle/father/unrelated (I don't know which), Paul Streckfus.  Except for Peter's poem Purgatorio, by which I think he refers to life in front of a computer screen. I thought computers would make writing a breeze and me a Pulitzer prize winner.  Now I know computers are just the gates to hell.  Peter might be trying to warn us all.  But poetry is not my day job so what do I know?  I went to jump school, though, and served in the 101st Airborne (during a war but not during the Vietnam war!) just like Paul.  And I read Neil Sheehan just like him.  I hope he is not my ghost of Christmas future; I'm just trying to be happy is all.  

Streckfus has been on a kinda rant lately, I thought to myself.  But then I realized that he might always have been on some sort of rant, though certainly not without justification given the places he's been and the people he's met.  Late last year he said we should scrap the whole damn charitable contribution deduction.  Years ago, and more recently, he told us that what the Mormon church does with its tithes and offerings was of no concern to the Service.  "This matter does not merit IRS sacrificing even a coffee break's worth of time, idiots!"  he sneered in Forbes interview.  I guess I agree, especially on Ensign Peak.  I keep saying it but nobody is listening:  Churches can do whatever the Hades they want with their tax exemption.  Forbes calls Streckfus an unusually gloomy gadfly who rails against government and alleged NYU annual philanthropy conference secrecy. After reporting about the time Harvey Dale said he acted with a "lack of integrity," Forbes notes that Dale is still an EO Journal subscriber.  That is sort of high backhanded praise.  EO Journal doesn't have enough pictures for my taste so I don't subscribe.   He should have courtesy subscriptions for tax professors who served with the Screaming Eagles anyway.  

Paul is still pretty gloomy as far as I can tell.  Here is what he had to say about the TE/GE Division:

I’m sorry to say that things have gotten worse in the division. When I was there, it was kind of “the Golden Age.” The Tax Reform Act of 1969 brought in the Chapter 42 foundation provisions and it also brought in more funding for the EO Division. Not long after, we had the Pension Protection Act of 1974 and that also brought more attention to the EO area. But unfortunately, that was the high-water mark. By 1980, things were going downhill, let’s say slowly for the next 20 years, but since 2000, it’s been a really rapid descent, unfortunately, in terms of resources, etc.

 He has lots of fans, though.  And he seems to have convinced them all that its all just a big con game, why even bother?  Exempt Organization supervision and regulation I mean.  And then he said professors like me are basically irrelevant:

A number of professors have addressed some of the EO issues. Of course, even professors admit no one in power pays much attention to their articles. At least they help them get tenure. If you’re interested, there are a number of articles that are on various EO problem areas, but nothing ever gets done. Some, of course, say that’s good.

He and my mother really have no filters.  My articles and this blog, Stretchfeet, are read by Congress and the Service as often as any other law professor's work.  I admit no such contrary thing!  I am not so sure about his observation that only charities that get most of their revenues from donations -- rather than from the sale of goods or services -- and who give away most of what is entrusted to them on an annual basis -- rather than sitting on wealth for decades -- deserve tax exemption.  He might be right though.  

And here is what he said to Philanthropy Daily about social welfare organizations:

With the (c)(4)s, it . . . it’s completely out of control, but both political parties and their supporters are now guilty of playing loose with the rules. We mentioned the FEC. They’re not playing any role. Since the IRS got its head cut off with the so-called tea party scandal, Commissioner [Charles] Rettig is not going to tell his people, let’s audit (c)(3)s and (c)(4)s and have Congress chop us into pieces, so the IRS has retreated from the field of battle.

"The horror . . . the horror."  Must be pretty interesting at Thanksgiving with a poet and a nonprofit curmudgeon sitting around watching football.  Peter praising the wonderful tradition of Detroit playing every thanksgiving and Paul condemning the NFL for whatever it does to keep Detroit losing games every damn year.  

darryll jones

A Proposal to Dismantle College "Revenue Sports" to Save the Charitable/Educational Purpose

           

An abstract from a paper posted by William Devine.

Many observers, including at least one associate justice of the United States Supreme Court, seem to believe there’s just one big question about the legality of higher education’s multi-billion dollar revenue sport business model. That’s the business model that lets schools take eight-figure annual slices from a multi-billion dollar TV deal pie, lets bureaucrats and men who teach football and men’s basketball earn multi-million dollar salaries, yet forbids players from earning wages from schools. Their question is, does the agreement among schools to prohibit each other from paying a player to play a sport violate antitrust law?

Yet the case that revenue sport critics would most welcome, and that revenue sport proponents would most fear, might instead be one that asks, does the revenue sport business university trustees oversee cause them to breach fiduciary duties imposed by laws governing charitable corporations?

This article maintains it does. Trustees direct university affairs. Universities are tax exempt corporations with a charitable purpose: education. An 11-state survey shows law requires trustees to operate institutions according to institutional purpose. The law imposes liability when trustees breach duties. It authorizes attorneys general to bring enforcement actions.

Trustees are relentless in their workforce exploitation, educational compromise, PR dissembling and legal delusions. They have no apparent plan for handling the fiscal calamity that could strike if, as is increasingly likely, three forces collide: a revenue sport player work stoppage, Title IX requirements, and the default/penalty clauses written into billions of dollars of contracts universities have signed with television networks and with each other.

Because the revenue sport business undermines institutional purpose, laws governing charitable corporations could be used to force trustees to dismantle revenue sport teams, especially at private universities. Disregard for institutional purpose, along with the recklessness of ignoring the possible fiscal calamity, could be grounds for holding trustees personally liable for damages. The defense that revenue sports’ educational value brings them within the bounds of university purpose is arguably not sufficiently rooted in reality to survive scrutiny. The slender legal precedent for the position that revenue sports have educational value comes from such a distant economic era that it is arguably obsolete. The defense that other sports, especially women’s sports, will lose funding if revenue sport revenues disappear is a cry for continued discrimination.

Basketball and football are gateways to experiences that can border on sublime. But operating billion-dollar leagues for these sports is not the job of higher education trustees. Educating students all the way to graduation is. The article concludes by sketching a path trustees could take to dismantle the revenue sport business on a deliberate basis, rather than waiting for a player work stoppage or court order that forces them to dismantle it under duress.

 darryll jones

Our Fraying (Private) Social Safety Net

Yesterday the Washington Post reported that Bread for the City, a D.C. nonprofit that provides, among other thing, food, clothing, health care, and even legal services to struggling residents of D.C., is going to shut down for the next month or so.

The shutdown is not because it lacks funding, or because of problems with its physical infrastructure, or because it has achieved its goals. It's closing to give its workers a break, time to breathe and recover after three years of nonstop work helping people get through a pandemic and all that came with it.

The Post points out that, for front-line workers at social safety net nonprofits, burnout is very real and very present. They have more people to help with fewer resources that, thanks to inflation, won't buy as much.

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Is Profit Maximization Hopelessly Inconsistent with Efficient, Community Needs -- Based Health Care?

A really interesting quick read in the Harvard Business Review implicitly asks whether profit maximization correlates to less efficient health care for the least able and sickest patients.  Along the way, the report questions whether a market-based approach to health care delivery is even appropriate.  The authors don't answer the question but indicate that if market based health care is to be the norm, safeguards should be strengthened to ensure against inefficiency and decreased community benefit.  I think the discussion has relevance to nonprofit hospitals which are, in any event, discussed in the report.  Here are a few snippets from "What Happens When Private Equity Firms Buy Hospitals?"

In the decades leading up to the Covid-19 pandemic, acquisitions of hospitals and health systems by private equity firms soared, sparking debate about how the growing influence of PE in U.S. health care would affect costs, quality, and access. Supporters of PE cite its established track record of creating value for companies and investors across a variety of industries by improving operations, promoting an innovative culture, providing access to capital to support infrastructure improvements like IT systems and new facilities, leveraging economies of scale, and adopting managerial best practices. Critics point out the downsides of PE’s focus on maximizing returns such as surprising patients with costly bills, scaling back nursing staff, and avoiding low-margin service lines primarily used by vulnerable populations. Critics also question whether PE funds’ relatively short life cycle of seven to 10 years might have negative implications for the entities they acquire and, as a result, for the communities and patients those entities serve.

Our study of 42 leveraged buyouts of hospitals by PE firms from 2003 to 2017 suggests that these competing views do not fully characterize the reality of these acquisitions. Instead of framing PE’s influence in health care as simply “good” or “bad,” we believe that future policy discussions around PE should do the following:

• • Make recommendations specific to each provider community (e.g., nursing homes, physician practices, hospitals) because the issues — potential benefits, risks, and what’s inciting investments — raised by PE acquisitions may vary considerably across them.
  • Focus on strategies aimed at aligning economic incentives, penalties, and oversight (e.g., antitrust regulation, public disclosure requirements, and monitoring of fraud and abuse in claims coding practices) so that PE’s capital resources and management expertise can be redirected to maximizing benefits for patients (e.g., expanding access to care, increasing care quality, and improving the patient experience).

In this article, we provide an overview of the existing research on the effects of PE ownership of U.S. hospitals and health systems. Specifically, we highlight the key changes in health systems after they’ve been acquired by PE firms with respect to their financial health, staffing levels, care quality, and availability of service lines. We conclude by calling attention to the key issues that should shape future policy deliberations on PE in health care.  

. . . 

After their literature review generally showing that profit maximization does not seem to decrease quality or availability, the researchers set out a few recommendations, two of which are included here.  Overall, the researchers assert, implicitly if not explicitly, that even profit maximizers have nonprofit like obligations to eliminate inefficiency and pursue community benefit.  

Loopholes should be examined.

Loopholes in payment policies that create opportunities for profit maximization, at the expense of patient welfare, should be the primary focus of regulatory scrutiny. The United States has a market-based approach to paying for care and uses a blend of private and government-financed health coverage that reimburses at different rates rather than the type of universal coverage adopted by many other wealthy nations. The current approach in the United States causes high levels of administrative waste, limited information on price and quality, workforce shortages, and growing consolidation among insurers and hospitals.

Such inefficiencies create opportunities for PE investors, but these incentives are not unique to PE, as many of the business strategies they use to profit from health care’s bloat and waste are indistinguishable from those of major non-profit health systems seeking to maximize their own margins. In recent months, we have witnessed alarming reports of a large, non-profit hospital manipulating and pressuring poor patients for financial gain even when they were eligible for free care and another that exploited a loophole in the 340b drug-pricing program in which the government reimburses hospitals that serve poor communities by allowing them to mark up certain pharmaceuticals.

As some have suggested, PE strategies in the hospital sector could be used to identify payment loopholes like surprise billing or perverse incentives that may adversely impact the affordability and quality of care. For instance, Medicare’s reimbursements for drugs is currently higher for those administered by physicians in their offices, which are covered by Part B, than for the same drugs prescribed under Part D. Regulators and policymakers should address such underlying issues and not target any one entity or class of investors given that other firms not owned by PE could behave the same way.

Community needs should be prioritized.

All hospitals have a “social contract” with their communities (i.e., to deliver high-quality, equitable, and timely care), a relationship that should take precedence over a PE fund’s goal of maximizing stakeholder returns. To that end, PE-acquired hospitals should be required to have manageable debt obligations to ensure that they can provide adequate care to the communities they serve. Other examples of needed policies include increasing the transparency and public reporting of deal terms when a PE fund is in the process of acquiring a hospital and disposing of it. State and federal requirements that PE firms provide advance disclosure of hospital acquisitions would also allow stakeholders to adequately evaluate and provide feedback on such proposed deals. All of these changes would significantly improve the ability of researchers and policymakers to monitor the impact of PE on hospital-based care.

 

darryll jones

 

Tiger King, Private Inurement, and Piercing the Nonprofit Corporate Veil

 

 

I wonder what historians will say about our time.  Historians from another planet.  "There's a wacky bunch, those humans," they'll say.  Reality TV, Trump and DeSantis, QAnon Shamans storming the capital, COVID and COVID deniers, cancel culture, anti-woke politicians, and let's not forget the golden age of quality TV.  The Bachelor and the Bachelorette, and even Tiger King.  One of the main characters in Tiger King's Season 2 is getting his comeuppance, thanks to PETA and the Indiana Attorney General.  Heck, even President Biden got into the act, signing into law the Big Cat Public Safety Act late last year in part because of the cruelty, neglect, and exploitation of animals that goes on in these usually tax exempt "sanctuaries." 

And then there are wars still, like 1941 all over again in Ukraine, mass shootings at elementary schools, police killings right in front of our eyes, right there on camera, and a prominent South Carolina attorney whose brain was so fried on opioids that he stole millions from his clients and partners, then murdered his wife and son, all after murdering his housekeeper probably because he needed money to buy his opioids.  Opioids legally manufactured and then sold from Pez candy dispensers.  Yep.  We are a wacky bunch, we are.  At least the historians will know that our tax exemption jurisprudence held the hope that human intellect is capable of higher levels of reasoning and behavior, right? Keep hope alive.

So recent litigation against Tim Stark, one of the main characters on Tiger King, is exposing some teachable moments.  Here is something you  don't see everyday.  The Indiana Court of Appeals pierced the corporate veil between Starks and Wildlife in Need (WIN), a 501(c)(3) that, at its peak was pulling in over a million bucks a year operating a wildlife sanctuary and being featured on the Tiger King Netflix show that ran for three seasons.   I am not sure why, because there was no antecedent liability against WIN, itself, for which a shareholder might rightly be held liable based on the equities of it all.  It was Tim Starks using the organization for private inurement and excess benefit, along with various violations of the nonprofit business judgment rule codified in Indiana law.  Tim's liability was direct, no veil piercing was necessary. Curious. 

Tim Stark is now bankrupt and banned by the USDA from ever owning big game animals again.  Plus, he should expect an excess benefit tax bill if he hasn't already received it.  He also owes PETA nearly a million bucks just in legal fees.  

Nevertheless, the Court pierced the corporate veil for all the reasons that prove Tim engaged in private inurement, excess benefit and violations of his state law nonprofit fiduciary duties:

WIN was a nonprofit corporation located in Charlestown, Indiana, which was incorporated in 1999, with the purpose of rescuing and rehabilitating wildlife. Stark was the president, and Lane, Stark’s then-wife, was the secretary and treasurer of WIN.1Stark had an animal exhibitor license through the United States Department of Agriculture (“USDA”), but WIN did not have a license. The WIN Board of Directors rarely held formal meetings, did not take minutes of meetings, and did not prepare or review budgets or financial statements.

Stark and Lane owned the property where WIN was located, and their personal residence was also located on the property. WIN did not have an agreement to  lease the property from Stark and Lane, and WIN paid for improvements to Stark and Lane’s property to house the animals. Stark had a line of credit that was secured by improvements to the property, including the improvements constructed by WIN. WIN also paid for property taxes and utility bills for the entire property, including the property taxes and utility bills for Stark’s personal residence. WIN also routinely paid Stark’s personal credit card bills.

Until 2014, WIN had annual revenue of less than $50,000. In late 2013, however, WIN started advertising a “Tiger Baby Playtime” program, which allowed paying participants to interact with tiger cubs. The events were advertised as fundraising for WIN, and WIN’s annual revenue increased substantially. In 2016 and 2017, WIN reported more than $1,000,000 in annual revenue. WIN used a portion of the funds to purchase additional animals. In 2014, WIN had forty-three animals, but after Tiger Baby Playtime events began, WIN eventually acquired 293 animals. Although Stark claims that he owns all of the animals at WIN, almost all of the animals were purchased with WIN funds.

Here are the trial court's findings, all of which were upheld on appeal:

97. Stark breached his fiduciary duties as a member of WIN’s Board of Directors and as WIN’s President. Stark routinely failed to act in WIN’s best interest, including but not limited to taking assets belonging to WIN to be used in a private venture in Oklahoma, causing the death of numerous WIN animals in transport to Oklahoma, conduct resulting in the finding of multiple violations of the Animal Welfare Act by the USDA, leaving at least one piece of heavy equipment in Oklahoma, routinely using WIN’s funds for his personal sustenance without any corporate oversight or record keeping of the activity, using WIN funds to make improvements to real property not owned by WIN and using that property to secure a line of personal credit, using WIN funds to pay for utilities utilized solely for his benefit, and using WIN funds to pay thousands of dollars of personal credit card debt. Stark diverted WIN assets to be used for personal gain to an outrageous extent. The Court finds that Stark’s misconduct involving WIN assets breached fiduciary duties owed to WIN and was not only reckless but rises to the level of willful behavior as he intended to act solely in his own interests and not those of WIN.

97. Stark breached his fiduciary duties by allowing WIN to make distributions of WIN assets to himself. INCA provides that a nonprofit “corporation may not make distributions,” Ind. Code § 23-17-21-1, where a “distribution” is “a direct or an indirect transfer of money or other property or incurrence or transfer of indebtedness by a corporation to or for the benefit of a person.” Ind. Code § 23-17-2-10(a). A director who assents to a distribution is personally liable to the corporation for the amount of the distribution that is illegal. Code § 23-17-13-4(a).

98. Stark further breached his fiduciary duties by failing to inform the Board of Directors of his intent to transfer all of WIN’s assets to a new business in Oklahoma. . . .

99. The Court concludes that Stark’s plans to transfer all or substantially all of WIN’s assets to a new business in Oklahoma triggered the requirement that a meeting be held at which the Board of Directors vote to approve the transfer and triggered the requirement that the Board of Directors be given notice prior to the meeting that a vote is to be held. The Court concludes that Stark’s planning and, in fact, undertaking to transfer WIN’s assets without first notifying the Board of those plans and obtaining approval through a vote of the Board constitutes a breach of Stark’s fiduciary duty to act in the best interest of WIN. Further, this breach was willful as Stark intended to keep the Board uninformed about his planned transfer of all of WIN’s assets to another business he planned to organize.
100.  . . .  .
101. Piercing the corporate veil and holding Stark personally liable is appropriate. WIN, through Stark, solicited donations purportedly for its stated corporate purpose, but Stark ultimately had no intention of reasonably, adequately fulfilling that purpose and fraudulently used the donations for personal gain. WIN paid Stark’s personal obligations. WIN’s Board of Directors failed meaningfully to engage in any corporate formalities. Finally, Stark commingled WIN and his assets and affairs, for example by Stark’s utilizing WIN equipment and animals in attempting to start a private zoo in Oklahoma.

Stark, appearing pro se, even used the tried and true argument so many times rejected:  "I didn't take anything more from the exempt organization than what I would have been paid anyway."  Nope.  This is classic "incorporated pocketbook" private inurement, clear as day.

  

darryll jones

The American Hospital Association's Non-Denial Denial

A non-denial denial is a statement that, at first hearing, seems to be a direct, clear cut and unambiguous denial of some allegation or accusation, but after being parsed carefully turns out to not be a denial at all, and is thus not explicitly untruthful if the allegation is in fact correct. 

The American Hospital Association is out with its typical sort of non-denial denial to any suggestion that Nonprofit Hospitals might not  really deserve tax exemption.  Here is a snippet:  

The highly respected international firm EY has looked at how the benefits tax-exempt hospitals provide stack up against their federal tax exemption. And every time EY confirms what an amazing return it is for taxpayers. Last year’s report showed the spread was 9 to 1 – for every $1 of exemption, reporting hospitals provided $9 of benefit to the community. Unlike a recent Kaiser Family Foundation (KFF) analysis that took a much narrower view, EY looked at the entire range of community benefits, not just financial assistance — a much fairer and more comprehensive way to measure how much hospitals give back. In addition, EY did not employ fuzzy math by lumping in charitable contributions to its calculations. These same funds would likely have been donated to perhaps less worthy purposes than hospitals so should not count as a loss to the U.S. treasury.

Another notable lapse was KFF’s analysis of state tax exemptions — always difficult to quantify given the differences in every state’s tax policy — because it fails to note the growing trend for hospitals and health systems to be asked to pay Payments in Lieu of Taxes (PILTs) to their local governments, some of which are very substantial. For example, hospitals in Boston paid over $20 million in PILTs in 2022 alone.

It’s a mystery why any analysis would focus on just the benefit of financial assistance and seemingly ignore everything else hospitals do for their communities. Didn’t we learn once again during the pandemic that hospitals are the first ones to step up to serve their patients and communities? Whether it was funding the development of COVID-19 tests after setbacks from public health agencies, expanding treatment capacity as COVID-19 cases surged, establishing vaccine clinics, or launching outreach campaigns to provide community-wide access to vaccines, hospitals are always there, ready to care. To downplay all the work they do to treat, heal, improve, and comfort their communities is a huge disservice to all who rely on our nation’s hospitals and health systems for care.

Oh, the disingenuity sir!  The Kaiser Family Foundation report states quite clearly that it is comparing tax benefit to charity care.  The AHA response perhaps proves the implicit point.  That we have expanded the concept of community benefit so wide -- from actual charity care to even just putting up a "Smoking will kill you" billboard -- as to render community benefit an abstraction.  And in our abstraction, we can assign whatever value we want to things other than the charity care's concrete dollar value, and thereby justify our existence by any possible measure other than charity care.  I'm just saying.

By the way, if you want to sit in on a free webinar regarding whether nonprofit hospitals earn their exemptions, check out the Lown Institute Webinar happening next month.  Click on the picture below for registration.

darryll jones

Silicon Valley Bank and Nonprofits

Professor Darryl Jones does an incredible job covering the waterfront of nonprofit and tax-exempt issues on this blog. So much so that I had to go back to make sure he hadn't covered this particular issue.

See, the effect of Silicon Valley Bank's implosion and collapse on the tech industry has been well-documented. But I was curious if it would have any effect on tax-exempt and nonprofit organizations. And it turns out the answer is yes. In fact, there were potentially two consequences, one of which has been resolved, but the other which has not.

One issue for nonprofits is similar to a major issue for for-profits: nonprofits deposited money in Silicon Valley Bank, sometimes in excess of the $250,000 insured by the FDIC. That meant that any delay in accessing their accounts risked impacting nonprofits' ability to pay their employees. But a couple days after California regulators closed Silicon Valley Bank, the FDIC announced that it would pay an advanced dividend to uninsured depositors and eventually allow them to get at their full deposit. Like their for-profit counterparts, then, nonprofits that had deposit accounts with SVB would be made whole.

But nonprofits faced an additional issue, one that has not yet been resolved. Because Silicon Valley Bank not only made loans to startups, it made loans and donations to nonprofits. These loans weren't a huge part of its portfolio--as of last year it had loaned about $1 billion (or less than 2% of its outstanding loans) to nonprofits--but nonprofits were counting on money it had pledged to contribute going forward. SVB had been especially important in funding the construction of affordable housing.

At this point, SVB isn't going to be providing those loans or making those donations, and nonprofits are left to scramble to find funding to finish their projects.

Samuel D. Brunson

UPenn and Biden Center Draw Ways & Means Scrutiny

Here is the first page of a four page letter House Ways and Means Committee Chair Jason Smith sent to Penn:

 

darryll jones
 

 

We Need A Restatement of the Law of Charitable Tax Exemption

 

The Service issued a private letter ruling last week denying tax exempt status to a commercial credit counseling wolf running around in educational sheep's clothing.   PLR 202311006 is 17 pages of IRAC-ness, wholly lacking in any sort of literary appeal or policy reasoning.  Just square peg in square hole.  An educational organization transferred credit "educational packages" to clients, and clients simultaneously made "donations" contingent on the size of the educational package.  Even with dry generic terms -- transfer, simultaneous, and donation -- you get the picture.  Substance, not form.  There, problem solved in three words!  Its a PLR, so I understand why it has to dot every I and cross every T.  All it needed to say though was "you are selling, you are pursuing a private benefit, and you look just like a regular store to us. Now get the hell outta here!"  It needed all 17 pages to go through 501(q).  Proof that no statute should extend beyond the letter "d" in subsections anyway.  

Section 501 is quickly becoming as unhelpfully detailed as the partnership tax regulations.  That's because its a mish mash of standards and rules on so many different subjects.  A single statute is almost a whole subchapter all by itself.  Its an old debate, I know, whether tax jurisprudence would be better served by standards rather than rules.  But Section 501 has regurgitations on disparate, unrelated,  unassociated, variant, different, and not-same topics:  insurance in 501(m), credit counseling in 501(q), terrorism in 501(r), child care in 501(k), community benefit in 501(r), and anti-discrimination in 501(i).  IRC 501(q)'s purpose could have been accomplished with a few regulatory examples, cross-referencing the few regs on commerciality and private benefit.  And those examples would have edified us all on the general topics of private inurement, private benefit, commerciality, and unrelated activities.  Every IRAC regarding 501(c)(3) revolves around those four topics.  Plus politics I guess, but I am not convinced politics ought to be a substantive concern of tax exemption.  

I just think laws develop better when Congress enacts standards, Treasury adopts rules, and courts analyze those rules to ensure they are applied consistently with the standards.  Wash, rinse, repeat.  That way, all three branches talk to each other often, in reasoned conversation and the law is better for it.  That is how it works at American Law Institute -- representatives from all three branches -- judges, legislators, and folks in or who interact with executive branch folks (including professors) --  reason and talk and then publish restatements and model codes comprising standards more than rules.  Its obvious Congress and Treasury talk a lot, because 501(q) basically adopts Treasury's credit counseling audit manual in statutory form.  Which really proves the point, if we understand that statutes are intended to apply broadly, not to just one problem.  The most obvious affect of all that detail is that courts rarely accept tax cases they can avoid, and when they do, they just follow the lines.  The outcome for a "code" is perpetual, motivating and resulting in increasing amounts of tall weeds in the statutes and even the regulations because verbiage is used to discourage judicial reasoning.  Wash, rinse, repeat.  

We need a whole new Restatement of the Law of Charitable Tax Exemption.

 

darryll jones

NTA's 53rd Annual Spring Symposium Program In Association with the American Tax Policy Institute

NTA has released the Program for its Annual Spring Symposium.  All the sessions look interesting but here are two that seem especially relevant to nonprofit organizations:

            8:15 - 9:45, May 11, 2023 (relating to poverty relief)

SOCIAL POLICY FOR VERY LOW-INCOME PEOPLE: COVID-19 AND BEYOND 

Moderator: Elaine Maag, Urban-Brookings Tax Policy Center
Discussants: Dayanand S. Manoli, Georgetown University

New Child Tax Credit that will Reduce Poverty and have Bipartisan Appeal
Jacob Bastian, Rutgers University

The Child Tax Credit and Income Inequality
Bradley Hardy, Georgetown University

Earnings Business Cycles: The COVID Recession, Recovery, and Policy Response
David Splinter, Joint Committee on Taxation

 

1:20 - 2:35, May 11, 2023 (as it may relate to challenges to IRS administrative efforts to curb syndicated conservation easement deductions)

SEPARATION OF POWERS: WHAT DO RECENT COURT CASES MEAN FOR THE IRS’ EXERCISE OF REGULATORY AUTHORITY? (Panel Discussion) Co-Sponsored by the American Tax Policy Institute

Moderator: Eric Solomon, Steptoe & Johnson LLP
Panelists:
Julie A. Divola, Pillsbury Winthrop Shaw Pittman LLP
Gil Rothenburg, American University
Eric Solomon, Steptoe & Johnson LLP

Panel Description
Many federal judges believe that federal agencies are making law that should be made by Congress.  Taxpayers have been winning court cases asserting that tax regulations are invalid because they exceed the rulemaking authority granted to the Treasury Department.  This panel will explore this emerging area of controversy and its effect on the rulemaking process.

8:05 - 9:20, May 12, 2023 (as it relates to efforts to alleviate poverty)

LESSONS FROM THE PANDEMIC: ADMINISTRATIVE ISSUES IN DELIVERING ASSISTANCE THROUGH THE TAX SYSTEM (Panel Discussion) Co-sponsored by the American Tax Policy Institute

Moderator: Gabriel Zucker, Code for America
Panelists:
Ariel Jurow Kleiman, Loyola Law School
Katherine Lim, U.S. Department of Agriculture

Panel Description
The tax system is being used with increased frequency to deliver assistance to low-income individuals and families.  This panel will explore the challenges and potential solutions related to such efforts, including a discussion of lessons learned from the pandemic and the potential role for an IRS-developed e-filing tool.

2:00 - 3:20, May 12, 2023 (as it may relate to property tax exemption)

SOCIAL ISSUES IN STATE AND LOCAL PUBLIC FINANCE

Moderator: Gary Cornia, Brigham Young University
Discussants: Laura Dague, Texas A&M University, Daniel Garrett, University of Pennsylvania, Joshua Miller, U.S. Department of Housing and Urban Development

Can State Oversight Improve Local Property Assessments?  Evidence from Education Reform in Kentucky
Alex Combs, University of Georgia
John Foster, Southern Illinois University
Erin Troland, Federal Reserve Board of Governors

How Do Local Government Finances Respond to Opioid Epidemics?  Evidence from Hydrocodone Rescheduling
Mikhail Ivonchyk, University of Albany
Felipe Lozano, University of Georgia

State Low Income Housing Credits: Impacts on Housing Affordability
Robert Buschman, Georgia State University
Kshitiz Shrestha, Georgia Sate University
Nicholas Warner, Georgia State University

Does Revenue-Motivated Policies Alter Who Receives Traffic Citations?  Evidence from Driver Race and Income in Indiana
Sian Mughan, Arizona State University
Akheil Singla, Arizona State University

 

darryll jones

Opinion Page: Without federal audits, tax scammers and nonprofit cheats would go undetected

From the St. Louis Dispatch, January 14, 2023:

"Examples of abuses by just a few St. Louis-area federally registered nonprofits underscore why the Internal Revenue Service and other federal agencies deserve to be fortified with funding and staffing rather than weakened, as Republicans in Congress would like to see. Nonprofit status allows people to avoid paying taxes, ostensibly because they are performing a function serving the public interest. But all too often, nonprofit status serves more to line directors’ own pockets at public expense.

As the Post-Dispatch’s Jacob Barker reports, one St. Louis-area nonprofit, Sister of Lavender Rose, launched a food-preparation company called Food For All to take advantage of federal funding to feed school kids. When Missouri inspectors arrived at the company’s University City registered address, what they found was Elmo’s Love Lounge. That was only one of multiple warning signs that something was seriously amiss. State officials directly say the nonprofit, founded in 2017 by Cymone McClellan, submitted false or fraudulent documents and claimed thousands of dollars for meals it never provided.

Nonprofits must submit an IRS Form 990 annually, outlining revenues and expenditures. McClellan’s last publicly available filing was in 2018, when she listed a $30,651 salary and $191,122 in revenues. But deep down in the filing is a notation for $120,045 for unspecified and unexplained “contract workers” — a red flag for potential donors trying to verify that money is going to good causes instead of wasteful overhead.  The USDA child-feeding program paid out $20.6 million to New Heights Community Resource Center in St. Charles. The founder, Connie Bobo, used some of the nonprofit’s money to purchase a $975,000 house in St. Charles.

That’s just two cases in the microcosm of the St. Louis area. Thousands more exist across the country, and that’s the gargantuan task facing IRS auditors as they ferret out nonprofit cheaters along with hundreds of other important functions the agency performs. It takes lots of human and computing power, which requires funding to expose waste and abuse. 

Republicans say they want to reverse provisions of the Inflation Reduction Act that will boost the IRS budget by $80 billion so it can hire thousands more agents in hopes of clawing back $180 billion from scofflaws and tax cheats over the next decade. It’s people like McClellan, Bobo and West who could benefit if the GOP succeeds, allowing them to rest easy in the assurance that no one will catch up to any new legally dubious programs they might be hatching."

 

darryll jones

Opinion Page: Harvard, Boston, and Taxes

My oldest, aka "Dad's walking retirement plan," is almost done with her MBA.

From the Harvard Crimson, October 2022:

Many Harvard students may have heard, or even said, this infamous line before: “I go to a school just outside of Boston.” But being “just outside of Boston” doesn’t mean that Harvard has nothing to do with Boston. In fact, Harvard is one of the largest property owners in the city — without paying any property taxes.  Since 2011, however, under the Payment in Lieu of Taxes program, Boston has instead requested that nonprofit organizations with property holdings valued at upwards of $15 million — a designation which includes Harvard — voluntarily contribute 25 percent of the property taxes they are exempt from paying.

This year, like every year since PILOT’s inception, Harvard has failed to fully comply with Boston's PILOT request, contributing $10.8 million, which amounts to just 79 percent of the city’s recommended amount of $13.7 million. Additionally, less than half of Harvard’s contributions this year were actual financial disbursements: A total of $6.8 million was paid in “community benefits credits” — the estimated financial value of Harvard initiatives that are considered of benefit to Boston residents. Initiatives such as the Harvard Law School Pro Bono Program, summer academies for high schoolers, and the Arnold Arboretum fall under this category.

For an institution that prides itself on nurturing the next citizens and citizen-leaders, Harvard’s own ability to fulfill its civic duties is questionable. How can Harvard teach responsible leadership when it refuses to lead responsibly in the very communities it resides in? Unfortunately, our university is not alone in dropping the baton: Other nearby universities such as Tufts University, Boston University, and Boston College have also failed to satisfy their PILOT requests. Harvard, along with these peer institutions, should move to pay these dues in full in order to enrich the surrounding community.

Above all, we believe that the real scandal is that institutions as wealthy as Harvard can be tax-exempt for property ownership in the first place. The state of Massachusetts should take legislative action to ensure that Harvard pays a fair, standard property tax at the state level. The specific clauses of such legislation and the extent to which it should be extended to other institutions, of course, are up to actual legislators.

darryll jones

Opinion Page: Should UPMC and other nonprofits worry about Tower Health ruling?

From the Pittsburgh Tribune, March 16, 2023: (For background see our post here.)

Tower Health might be the canary in the nonprofit coal mine.

The Reading-area health system has four hospitals. It has joint ventures with Drexel University. It has about 11,500 employees and was ranked No. 8 in Pennsylvania by U.S. News & World Report in 2022. In 2020, it had total revenues of $534 million. It spent $4.7 million on executive compensation.

That’s a pretty solid resume for a Pennsylvania health system. It checks many of the same boxes as others across the state.

And that is why the others should be paying attention — because Commonwealth Court Judge Christine Fizzano Cannon said in a recent ruling that the nonprofit failed to meet the most critical aspect of being a “purely public charity” in Pennsylvania. Namely, she said, it was not free of profit motive.

Why? In part because of the executives’ paychecks.

Cannon took issue with a lower court’s finding because a hefty portion of that $4.7 million was due to incentive bonuses to the CEO at 24% of salary and the CFO at 18-19% of salary based on how Tower Health performed financially. She agreed with a description of the paychecks as “eye-popping” and revoked property tax exemptions for Tower’s three hospitals in Chester County.

Now consider UPMC. It dwarfs Tower on multiple levels, with more hospitals in Pittsburgh alone than Tower spreads across four communities. UPMC’s revenue is measured in billions, not millions. And former CEO Jeffrey Romoff made more than double that “eye-popping” Tower executive figure. His compensation was $10.38 million in the 2020-21 fiscal year; $7.54 million was from bonuses and incentives.

. . . 

darryll jones

Opinion Page: Homeless Services corruption is just a taste of NYC’s nonprofit scams

 

From the NY Post: (Westhab is a Westchester County 501(c)(3))

In yet another sign of the potential for corruption in the $2.4 billion New York City spends each year on housing the homeless, meet Jocelyn Carter.  Placed in a top Homeless Services job in the de Blasio years, Carter seems in violation of the city’s conflicts of interest law. Her sister’s firm has landed 17 contracts with the agency valued at $1.7 billion, per the City Comptroller’s Office.

The sister, Valerie Smith, is vice president of New York City housing programs for Yonkers-based Westhab Inc., which runs homeless shelters in the city. Even if she got the job after Carter’s promotion, alarms should’ve gone off.  But lots of dubiousness ensued as city homeless spending ballooned in the de Blasio years under Commissioner Steven Banks, opening the door to crooked social service and shelter operators.

The bribery arrest of the CEO of the city’s largest shelter provider was one clue; the pals-on-the-payroll scandal at another “nonprofit,” another. The Post identified dozens of suspect arrangements.

, , , , 

 

darryll jones

Mayer: Is Tax Law Different? Unconstitutional Conditions, Religious Organizations, and Taxation

I have hated Notre Dame ever since Jerome Bettis came in during the 2nd Half of the 1992 Sugar Bowl and ran the ball right down the Gators' throats.

Lloyd still has a bone in his throat about religious nonprofits.  Him, Sam and Phil too. I think its still safe to stand next to Sam and Phil without getting struck by God's lightening for their insolence.  But you would think a guy working under the outstretched arms of Touchdown Jesus would tread lightly.  It's simple really.  Churches can do whatever they want with their tax exemption.  Plain old "religious organizations," are subject to regulation of some such I imagine, but not churches.  We just pretend they are.  I mean that as a practical matter.  We have generally applicable tax exemption rules but to the extent the Constitution, the Supremes, and the Tea Party have put the . . . yep you guessed it, the fear of God in the IRS, we know that whatever stated restrictions exist on Church tax exemption will never be enforced.  I know I am in the distinct minority here, a minority of 1 outside the far right I expect.  And those guys don't know the difference between "Second" and "Two" Corinthians so I could be wrong. But even broken coo-coo clocks are right twice a day.  Meanwhile the money-changes, Lloyd, Sam, and Phil, set forth formidable arguments.  Here is Lloyd's abstract to the article whose title is in the headline:

Abstract

In common with other charities, religious organizations enjoy significant benefits under federal tax law, including exemption from income tax and the ability of donors to deduct their contributions for income, gift, and estate tax purposes. But these benefits are not costless. Also in common with other charities, religious organizations are prohibited from providing private inurement and private benefit, engaging in a significant amount of lobbying, intervening in political campaigns, promoting illegality, or acting contrary to fundamental public policy.

The IRS takes the position that these limitations apply with equal force to all tax-exempt charities, including religious organizations. Some religious organizations have challenged the application of the lobbying, political campaign intervention, illegality, and fundamental public policy limitations on religious liberty grounds, invoking the Free Exercise of Religion Clause of the First Amendment and, more recently, the federal Religious Freedom Restoration Act (RFRA). To date, however, federal courts have rejected these challenges, concluding that they are permissible conditions on the tax benefits enjoyed by religious organizations.

This essay reconsiders this conclusion and the arguments in support of it. One such argument is that tax law is somehow different from other legal contexts for purposes of applying the unconstitutional conditions doctrine to religious organization. The consistent refusal of the courts to allow free-exercise-of-religion-based exemptions from generally applicable federal tax laws suggests this may be the case. This difference could be viewed as a strand of the increasingly disfavored view sometimes referred to as “tax exceptionalism.” But I argue that this difference instead fits within the more traditional compelling governmental interest and least restrictive means analysis codified in RFRA and that arguably applied in the Free Exercise of Religion Clause context before the Supreme Court’s decision in Employment Division v. Smith.

More specifically, tax law is different because of its complex rules applicable to all individuals and entities relating to expenditures for lobbying, political campaign intervention, and illegal activity. The complexity of these rules, and the risk that granting exemptions from them for any reason would undermine their uniform and consistent application, support the conclusion that the government has a compelling interest in not allowing exemptions, and that the existing limitations imposed on tax-exempt charities, including religious organizations, are the least restrictive means to do so. As a result, constitutional and RFRA free exercise of religion rights do not require exemptions for religious organizations from these existing limitations even when such organizations are motivated by their religious beliefs to engage in the limited activities. Furthermore, while this argument does not apply to the contrary to fundamental public policy limitation, the Supreme Court has correctly concluded that in the instances where there is a fundamental public policy, ensuring that tax-supported charities do not undermine that policy is also a compelling governmental interest and prohibiting them from doing so is the least restrictive means of furthering that interest.

darryll jones