Nonprofit Law Prof Blog

Federal Tax Policy and Individual Charitable Giving

The Independent Sector recently released research on the relationship between federal tax policy and individual charitable giving. The study attempts to quantify the lost individual charitable revenue from the 2017 tax changes, and the effect that these five new policies would have on charitable giving:

1. Deduction identical to itemizers’ tax incentive;
2. Deduction with a cap in which gifts over $4,000 or $8,000 do not receive an incentive;
3. Deduction with a modified 1% floor, in which donors can deduct half the value of their gift if it is below 1% of their income and the full amount of the donation above 1%;
4. Non-refundable 25% tax credit; and
5. Enhanced deduction that provides additional incentives for low- and middle-income taxpayers

The study concludes that "all five policies could bring in more donor households and four of the five policies could bring in more charitable dollars than could be lost due to recent tax changes[, and f]our of the five tax policies could generate more giving than cost to the government."

-Joseph Mead

Eldar: Designing Business Forms to Pursue Social Goals

Ofer Eldar (Duke University) has posted Designing Business Forms to Pursue Social Goals, Virginia Law Review (forthcoming). Here is the abstract:

The long-standing debate about the purpose and role of business firms has recently regained momentum. Business firms face growing pressure to pursue social goals and benefit corporation statutes proliferate across many U.S. states. This trend is largely based on the idea that firms increase long-term shareholder value when they contribute (or appear to contribute) to society. Contrary to this trend, this essay argues that the pressing issue is whether policies to create social impact actually generate value for third-party beneficiaries — rather than for shareholders. Because it is impossible to measure social impact with precision, the design of legal forms for firms that pursue social missions should incorporate organizational structures that generate both the incentives and competence to pursue such missions effectively. Specifically, firms that have a commitment to transacting with different types of disadvantaged groups demonstrate these attributes and should thus serve as the basis for designing legal forms.

While firms with such a commitment may be created using a variety of control and contractual mechanisms, the related transaction costs tend to be very high. This essay develops a social enterprise legal form that draws on the legal regime for Community Development Financial Institutions (“CDFIs”) and European legal forms for work-integration social enterprises (“WISEs”). This form would certify to investors, consumers and governments that designated firms have a commitment as social enterprises. By obviating the need for costly social impact measurement, this form would facilitate the provision of subsidy-donations to social enterprises from multiple groups, particularly investors (through below-market investment) and consumers (via premiums over market-prices). Thus, this social enterprise form would be to altruistic investors and consumers what the nonprofit form is to donors.

Moreover, the proposal could facilitate the flow of investments by foundations in social enterprises (known as program-related investments, “PRIs”) because it would help foundations verify the social impact of their investees, which could help them avoid potential tax penalties. In addition, by giving subsidy-providers greater assurance that social enterprises pursue social missions effectively, the proposed legal form could facilitate public markets for social enterprises.

Lloyd Mayer

Chen & Liu: Regulating Provisions of Charitable Activities by Religious Organizations

Jianlin Chen (University of Melbourne) and Junyu Loveday Liu (London School of Economics & Political Science; K&L Gates) have published Managing Religious Competition in China: Regulating Provisions of Charitable Activities by Religious Organizations, in Regulating Religion in Asia: Norms, Modes and Challenges (Cambridge University Press 2019). Here is the abstract:

Drawing on the Law & Religious Market theory, this Chapter utilizes the case study ofChina to explain 1) how regulation of ostensibly non-economically motivated activities(i.e., religion and charity) can be properly conceived as a form of market regulation; and, 2) how such a conception can add a valuable dimension to the discourse. In particular, this Chapter situates China’s regulation of charitable activities by religious organizationsin the context of recent major legal reform on charity law and highlights the contradictory treatment where, on one hand, the law recognizes the self-interested motivation of participants and donors of charitable activities and accommodates their co-opting of charitable activities to promote or advance commercial interests but, on the other hand, specifically prohibits religious organizations from any religiouspropagation during provisions of charitable services. This Chapter argues that from the perspective of market regulation, such denial of religious “self-interest” hampers the purported policy objectives of promoting greater religious participation in charitableactivities but may be justified on the grounds that it promotes religious competition that is normatively desirable.

Lloyd Mayer

Everything You Wanted to Know About 501(c)(4)s But Were Afraid to Ask

The N.Y.U. Journal of Legislation & Public Policy has published an issue that comprehensively addresses legal issues relating to Internal Revenue Code section 501(c)(4) social welfare organizations. Here is the table of contents:

Introduction

Social Welfare Organizations: Better Alternatives to Charities?
Harvey P. Dale & Jill S. Manny

Articles

Examining the Landscape of § 501(c)(4) Social Welfare Organizations
Ellen P. Aprill

Social Welfare Organizations as Grantmakers
David S. Miller

A (Partial) Defense of § 501(c)(4)’s “Catchall” Nature
Lloyd Hitoshi Mayer

Social Welfare and Political Organizations: Ending the Plague of Inconsistency
Roger Colinvaux

The Tax Exemption Under I.R.C. § 501(c)(4)
Daniel Halperin

Practitioner Comment

Practitioner Perspectives on Using § 501(c)(4) Organizations for Charitable Lobbying: Realities and an Alternative
Rosemary E. Fei & Eric K. Gorovitz

Responses

Grantmaking Advice for Mega-Donors: A Second Opinion
Stephen Schwarz

Social Welfare Organizations as Grantmakers: Further Thoughts
Robert A. Wexler

An Exempt Status Sorting Hat
Richard Schmalbeck

Disclosing Donors to Social Welfare Political Activity
Kenneth A. Gross

The Importance of Using Affiliated § 501(c)(4) and § 501(c)(3) Organizations for Advocacy
Terence Dougherty

Realities and an Alternative
Jill S. Manny

Lloyd Mayer

Breen, Dunn & Sidel: Riding the Regulatory Wave

Oonagh B. Breen (University College Dublin), Alison Dunn, and Mark Sidel (Wisconsin) have published Riding the Regulatory Wave: Reflections on Recent Explorations of the Nonstatutory Nonprofit Regulatory Cycles in 16 Jurisdictions in the Nonprofit and Voluntary Sector Quarterly. Here is the abstract:

This article explores both state-based regulation and self-regulation, shared narratives, and lessons to better understand the interaction of these two forms of regulation in the nonprofit space. “The Context” section outlines six preliminary research questions that inform the work. “The Framework” section then outlines the regulatory framework, focusing on various regulatory motivations, before “The Findings” section turns to country findings. In unpacking some of the major findings, we look first at state perspectives on the role of regulation before considering the sector’s perspective. Taking both on board enables us to configure the relationship spectrum between state and sector when it comes to regulation and to begin to identify, based on the 16 case studies undertaken, the most common triggers for regulatory change identified therein and to reframe them through the development of a series of five regulatory propositions and seven environmental variables to help understand how different forms of regulation are triggered and interact.

Lloyd Mayer

Mayer: The Promises And Perils Of Using Big Data To Regulate Nonprofits

Lloyd Hitoshi Mayer (Notre Dame) has posted his article, The Promises and Perils of Using Big Data to Regulate Nonprofits, to SSRN (forthcoming in the Washington Law Review).  Here is a brief abstract:

For the optimist, government use of “Big Data” involves the careful collection of information from numerous sources and expert analysis of those data to reveal previously undiscovered patterns and so revolutionize the regulation of criminal behavior, education, health care, and many other areas. For the pessimist, such use involves the haphazard seizure of information to generate massive databases that render privacy an illusion and result in arbitrary and discriminatory computer-generated decisions. The reality is of course more complicated, with government use of Big Data presenting on one hand the promises of greater efficiency, effectiveness, and transparency, and on the other hand the perils of inaccurate conclusions, invasion of privacy, unintended discrimination, increased government power, and violations of other legal limits on government action.

Until recently, these issues were theoretical for nonprofits in the United States given that the federal and state regulators overseeing them did not use a Big Data approach. But nonprofits can no longer ignore these issues, as the primary federal regulator is now emphasizing “data-driven” methods to guide its audit selection process, and state regulators are moving forward with plans to create a single, online portal to collect required filings. And both federal and state regulators are making or plan to make much of the data they collect available in machine-readable form to researchers, journalists, and other members of the public. The question now is therefore whether regulators, researchers, and nonprofits can learn from the Big Data experiences of other agencies and private actors so as to fully realize Big Data’s promises while avoiding the numerous perils it presents.

This Article explores the steps that nonprofit regulators have taken toward using Big Data techniques to enhance their ability to oversee the nonprofit sector. It then draws on the Big Data experiences of government regulators and private actors in other areas to identify the potential promises and perils of this approach to regulatory oversight of nonprofits. Finally, it recommends specific steps those regulators and others can take to ensure that the promises are achieved and the perils avoided.

 

Nicholas Mirkay

Galle: Empirical Assessment of the Tax Exemption for Charitable Property

Brian Galle (Georgetown) has authorized a research paper entitled, "The Tax Exemption for Charitable Property: An Empirical Assessment," which he recently presented at Duke's Tax Policy Workshop Series.  Here is his brief abstract:

I offer the first multi-jurisdictional assessment of the balance-sheet effects of the property-tax exemption for charitable property. I combine a manually-assembled dataset of property tax rates in over 4,000 municipalities with three large samples of firm-level administrative data, as well as hand-coded variations in the legal details of different states’ exemption regimes, to assemble a panel of more than 1 million firm-years.

As expected, exemption causes charities to utilize more real property as tax rates rise. I offer new theoretical contributions showing that this effect, previously described as an unwanted distortion, may be second-best efficient in the presence of an income tax with accelerated depreciation, and confirm empirically the predictions of this new theory.

Exemption also increases managerial compensation while crowding out efforts to raise revenue through donations and commercial activity. Lastly, exemption eases liquidity constraints on colleges and universities, allowing them to expand enrollment while holding per-student costs level.

[Hat tip:  TaxProf Blog]

Nicholas Mirkay

Understanding Donor-Advised Funds: How Grants Flow During Recessions

H. Daniel Heist (University of Pennsylvania, School of Social Policy and Practice) and Danielle Vance-McMullen (University of Memphis, Public and Nonprofit Administration) have authored a research paper entitled "Understanding Donor-Advised Funds:  How Grants Flow During Recession."  Here is a short abstract:

Donor-advised funds (DAFs) are becoming increasingly popular. DAFs receive a growing share of all charitable donations and control a sizable proportion of grants made to other
nonprofits. The growth of DAFs has generated controversy over their function as intermediary philanthropic vehicles. Using a panel data set of 996 DAF organizations from 2007 to 2016, this article provides an empirical analysis of DAF activity. We conduct longitudinal analyses of key DAF metrics, such as grants and payout rates. We find that a few large organizations heavily skew the aggregated data for a rather heterogeneous group of nonprofits. These panel data are then analyzed with macroeconomic indicators to analyze changes in DAF metrics during economic recessions. We find that, in general, DAF grantmaking is relatively resilient to recessions. We also find payout rates increased during times of recession, as did a new variable we call the flow rate.

 

Nicholas Mirkay

 

Hemel on The State-Charity Disparity Under the 2017 Tax Law

David Hemel (Chicago) has posted The State-Charity Disparity Under the 2017 Tax Law, Washington University Journal of Law and Policy (forthcoming). Here is the abstract:

Since December 2017, several states have enacted laws granting state tax credits for charitable contributions that go toward public education or public health. One purpose of these laws is to allow individuals to claim federal charitable contribution deductions for payments that simultaneously serve to reduce those individuals’ state tax liabilities and to support programs that state governments would otherwise fund. The strategy adopted by these states — if effective — would mitigate the impact of the $10,000 cap on individual state and local tax deductions imposed by the December 2017 tax law. The U.S. Treasury Department and the Internal Revenue Service (“IRS”) have proposed, but not yet finalized, regulations aimed at shutting down that strategy.

The ongoing debate regarding state charitable credit programs and the proposed Treasury regulations raise a number of interesting legal questions — some of which may be addressed at subsequent stages of the rulemaking process, others of which will likely be resolved by litigation. Rather than trying to answer any of those questions, this Essay — an edited transcript of remarks at the Washington University Journal of Law & Policy-Missouri Department of Revenue 2018 Symposium on State & Local Taxation — focuses instead on a separate, though related, question, a question that is implicated by the charitable credit debate but that will linger long after any litigation is resolved. That is: Why should federal tax law allow more favorable treatment to charitable contributions than to state and local tax payments? What are the essential differences between non-governmental charities and sub-national governments, or between contributions and tax payments, that justify this lack of parity?

Ultimately, this Essay concludes that there is little justification for allowing a virtually unlimited charitable contribution deduction while capping the deduction for SALT. That conclusion gives rise to a critique of the December 2017 tax law, but also to a critique of presidential candidate Hillary Clinton’s tax plan, which would have capped the rate at which state and local tax payments could be deducted without applying the same cap to charitable contributions. The Essay ends with reflections on the long-term implications of the state charitable credit programs for tax policy and politics.

Hat tip: TaxProf Blog

Lloyd Mayer

NBER Working Paper on Corporate Philanthropy and Strategic Advocacy

Marianne Bertrand (Booth School of Business, University of Chicago), Matilde Bombardini (Vancouver School of Economics, University of British Columbia), Raymond Fisman (Economics, Boston University), Bradley Hackinen (University of British Columbia), and Francesco Trebbi (University of British Columbia) have posted a National Bureau of Economic Research working paper titled Hall of Mirrors: Corporate Philanthropy and Strategic Advocacy. Here is the abstract:

Politicians and regulators rely on feedback from the public when setting policies. For-profit corporations and non-pro t entities are active in this process and are arguably expected to provide independent viewpoints. Policymakers (and the public at large), however, may be unaware of the financial ties between some firms and non-profits - ties that are legal and tax-exempt, but difficult to trace. We identify these ties using IRS forms submitted by the charitable arms of large U.S. corporations, which list all grants awarded to non-profits. We document three patterns in a comprehensive sample of public commentary made by firms and non-profits within U.S. federal rulemaking between 2003 and 2015. First, we show that, shortly after a firm donates to a non-profit, the grantee is more likely to comment on rules for which the firm has also provided a comment. Second, when a firm comments on a rule, the comments by non-profits that recently received grants from the firm's foundation are systematically closer in content similarity to the firm's own comments than to those submitted by other non-profits commenting on that rule. This content similarity does not result from similarly-worded comments that express divergent sentiment. Third, when a firm comments on a new rule, the discussion of the final rule is more similar to the firm's comments when the firm's recent grantees also comment on that rule. These patterns, taken together, suggest that corporations strategically deploy charitable grants to induce non-pro fit grantees to make comments that favor their benefactors, and that this translates into regulatory discussion that is closer to the firm's own comments.

Lloyd Mayer

Boris & Cordes on How the TCJA's New UBIT Provisions Will Affect Nonprofits

Elizabeth Boris and Joseph J. Cordes at the Urban Institute's Center on Nonprofits and Philanthropy have published How the TCJA's New UBIT Provisions Will Affect Nonprofits. Here is the abstract:

Changes in Unrelated Business Income Taxes (UBIT) mandated by the Tax Cuts and Jobs Act (TCJA) of 2017 will have significant costs for some nonprofit organizations. A survey of Independent Sector members and partner organizations in November 2018 reveals the costs and other implications of those changes.

Costs of New Transportation Benefits UBIT Taxes: Over 200 nonprofit organizations estimate it will cost them more than $2.1 million dollars in unrelated business income taxes (UBIT) on transportation fringe benefits they provide to employees, and for organizations that will report UBIT for the first time under that requirement, there will be estimated associated administrative expenses for filing IRS tax forms (Form 990T) of more than $200,000.

Costs of New Reporting Rules for UBIT: Required separate reporting of multiple revenue streams for purposes of UBIT is estimated to cost an additional $376,150 for affected organizations.

Lloyd Mayer

Identifying and Navigating Impermissible Private Benefit in Practice

John Tyler (Ewing Marion Kauffman Foundation), Hillary Bounds, and Edward Diener posted to SSRN an article published in the September/October 2018 edition of Taxation of Exempts entitled Identifying and Navigating Impermissible Private Benefit in Practice.  Here is the abstract:

Organizations and people from within the charitable sector are increasingly engaging in historically non-traditional activities and with other than 501(c)(3) organizations in their efforts to generate revenue and investment/donations and to more aggressively pursue their charitable mission objectives. Examples include ventures with or from other than charitable-oriented businesses and investors, combined public-private fund arrangements, pay-for-success, impact investing, opportunity zones, micro-lending for business, and other finance-oriented relationships. These efforts are changing the ways in which 501(c)(3) organizations must identify and manage against impermissible private benefit.

One aspect of many of these activities is intentional awareness that the brand and reputation of many 501(c)(3) organizations can have independent value on which others might want to trade, with or without providing commensurate value. Another area in which private benefit problems arise is within more garden-variety, day-to-day operations. Consider operation-oriented pursuits such as contracting for delivery of goods and services, which might require increased attention to the financial and non-monetary values of data collected and the tools used to collect, store, secure, and analyze that data. Finally, “new” philanthropists and social change actors are engaging in historically non-traditional activities by structuring these activities without regard to (or at least with much less regard for) the incentives of tax deductions and exemptions. 

All of these implicate and require thoughtful consideration of and management to protect against impermissible private benefit while still allowing for enthusiastic pursuit of mission objectives.

Nicholas Mirkay

 

Denying Tax-Exempt Status to Discriminatory Private Adoption Agencies

Allison M. Whelan (Covington & Burling, Washington D.C), Denying Tax-Exempt Status to Discriminatory Private Adoption Agencies, 8 UC Irvine L. Rev. 711 (2018):

This Article ... argues that the established public policy at issue here is the best interests of the child, which includes the importance of ensuring that children have safe, permanent homes. In light of this established public policy, which all three branches of the federal government have recognized and support, this Article ultimately argues that, consistent with the holding in Bob Jones, private adoption agencies that refuse to facilitate adoptions by same-sex parents, thereby narrowing the pool of qualified prospective parents and reducing the number of children who are adopted, act contrary to the established public policy of acting in the best interests of the child.

This Article proceeds in five Parts. Part I first provides general information about the child welfare system, adoption, private adoption agencies, and the “best interests of the child” standard. Part II describes the emergence of state laws that allow private agencies to refuse to facilitate adoption by same-sex couples. Part III provides an overview of federal income tax exemptions and then summarizes the Supreme Court’s decision in Bob Jones University v. United States. Part IV applies the analysis and holdings of Bob Jones to private adoption agencies that discriminate against same-sex couples, and ultimately argues that such policies are contrary to the established public policy of the best interests of the child. As a result, this Article argues that the IRS should conclude that these agencies do not qualify for exemption from federal income tax. Part V concludes by offering a potential compromise and additional policies the government should consider.

(Hat tip:  TaxProfBlog )

Nicholas Mirkay

Hemel posts "Tangled Up in Tax: The Nonprofit Sector and the Federal Tax System"

Daniel Hemel has posted "Tangled Up in Tax: The Nonprofit Sector and the Federal Tax System," to SSRN. From the abstract:

If the relationship between the federal tax system and the nonprofit sector is to be summed up in a single word, “entanglement” rather than “exemption” would be the appropriate term. Nonprofit organizations in the United States are caught in a complex web of nonprofit-specific tax provisions, and even seemingly unrelated tax statutes often tie back to the nonprofit sector in winding ways. This chapter seeks to understand how the federal tax laws lead to and limit the nonprofit sector’s entanglement with the public and for-profit sectors. It distinguishes among three types of entanglement—administrative entanglement, political entanglement, and market entanglement—and goes on to explain how society’s decisions to support the nonprofit sector through tax exemptions and tax deductions both respond to and result in entanglement of all three types. It then evaluates the specific strategies of entanglement management that the federal tax system employs. The chapter concludes with thoughts on the future of entanglement in light of the December 2017 tax law, which creates new sources of friction between the federal tax system and nonprofit organizations while at the same time withdrawing some of the tax system’s support for the nonprofit sector. 

 

Aprill Adds More Light to IRC 4960

Following up on my post regarding [Questionable] Strategies to Avoid IRC 4960.  Professor Ellen Aprill's excellent article earlier this year provides needed clarity:

New section 4960 imposes a 21% excise tax on certain organizations not subject to income tax, including organizations exempt under section 501(c)(3) and those for which income is excluded from taxation under section 115(1), if any of their five highest paid employees have annual compensation above $1 million. (It also imposes the tax on “excess parachute payments,” as defined in the statute.) In December, 2017, I wrote a blog post on “Medium: Whatever Source Derived,” arguing that, whatever the Congressional intent, the language of the statute did not reach states, their political subdivisions or integral parts of either.

In particular, the post contrasted the basis of income tax exemption for states and their political subdivision to entities that fall under section 115(1). Section 115(1) excludes from gross income “income derived from...the exercise of essential governmental function and accruing to a state or any political subdivision thereof.” This provision, however, is not the basis for exempting from income tax the income of states and their political subdivisions. The IRS has long exempted states and their political subdivisions from income tax under a doctrine of implied statutory immunity, not under section 115(1). For many decades, the IRS has interpreted section 115(1) not refer to states and their political subdivisions, but only to organizations that are organized separately from a state or political subdivision and meet certain other requirements. The blog post is reprinted here as Part I of this piece.

Professor Douglas Kahn of University of Michigan took issue with my position on the basis that the new section does apply to section 501(c)(3) organizations and that state universities are educational institutions. I responded to him in an article originally published in Tax Notes that constitutes Part II of this piece. It corrects an error in my earlier piece by acknowledging that some state universities have indeed received recognition under section 501(c)(3) from the IRS. Not all, however, have done so. Thus, I assert again my position that new section 4960 does not by its terms apply to entities free of income tax by virtue of their status as a state, political subdivision, or an integral part of either. Moreover, as the piece explains, those state universities that have received a section 501(c)(3) determination can, if they choose, relinquish their section 501(c)(3) status. The piece discusses the various options available to tax authorities and public universities confronting this new excise tax.

Since publication of these pieces, Treasury and the Joint Committee of Taxation have acknowledged that a technical correction is need in order for section 4960 to apply to all governmental entities, as Congress intended. Technical corrections, however, are not anticipated any time soon. Even though not all public universities and other governmental entities are subject to the strictures of section 4960, guidance could specify that its excise tax applies to those that have sought section 501(c)(3) status. On the other hand, until there is a technical correction, out of considerations of federal-state comity and to avoid differential treatment of various state universities and other governmental entities, Treasury and the IRS could decide that such governmental entities with 501(c)(3) status are to be treated as exempt from this excise tax, on the model of the special treatment they currently receive in being exempt from the Form 990 filing requirement and from the intermediate sanctions excise tax regime. I do not envy Treasury and the IRS in having to make this difficult choice.

I think state universities still have a problem because most of their football coaches' compensation is typically paid not by the University itself, but through related foundations that are exempt under 501(c)(3).   See  https://www.wsj.com/articles/SB122853304793584959.  

dkj

Pomeroy, On Job's Defense (and the Duty of Charity, not Business, by Houses of Worship)

Chad J. Pomeroy has just published "Let My Arm Be Broken Off at the Elbow" (Job 31:22) in the Oklahoma Law Review.  Here is the introduction (sans footnotes):

 

The largest producer of nuts in the United States. A multi-billion dollar insurance and financial services company. The fourteenth largest radio chain in the country. “A catering company, a major television channel, an internet marketing company.” And real estate! Enormous real estate holdings in Hawaii, Montana, Nebraska, Oklahoma, Texas, Washington, and Wyoming. Probably more land in both Utah and Florida than any other private actor. Internationally, there are major investments in Argentina, Australia, Brazil, Canada, and Mexico, and about as much land in Britain as the Crown Estate.  Take these assets, add billions in stocks and bonds and other securities, and include another $6-$8 billion per year of donated funds. To most of us, such a collection of assets and income probably seems appropriate for a large, public corporation.

However, as the preceding footnotes make clear, the entity described is not a titan of industry but is instead a church. And that is the starting point for this Article: though the American legal system is deferential toward religion and churches, it is undeniable that the Church of Latter-day Saints--and other like organizations--are not just churches. They are, instead, important participants in the market economy, some of them global business enterprises of major proportions. This twinning of profit and spirit is seamless for many religions, with numerous modern churches preaching a “prosperity gospel” that promises spiritual and temporal blessings in return for donations. Still other churches--such as the Church of Scientology--directly charge for religious services that are “necessary” for spiritual improvement and advancement in the church hierarchy. And still others accumulate their own reserves of property and wealth. This asset assemblage leads, ineluctably, to enormous income and wealth concentrated in the hands of religious organizations across America.

While there is nothing inherently wrong with religious organizations amassing wealth, it is troubling that they do so while enjoying informational and tax advantages not afforded to other entities. However, these benefits are not “tax advantages”; these are “tax advantages that are expressly made unavailable to other, competing, profit-seeking entities that suffer greatly due to their comparative disadvantage.” Indeed, this Article’s foundational claim is these advantages are so significant that they have come to shape the aims and actions of many religions, effectively bending the nature of many organizations away from traditionally religious and charitable work and toward profit-seeking. This state is both unintended and inequitable. As such, these advantages should be eliminated.

Before describing any recommended changes to these tax benefits, it is critical to first understand how the American tax system treats churches. As explained in Part I, our legal and tax system is laced with a series of benefits and exemptions that favor churches over virtually every other kind of entity. These benefits permit churches to bring in funds under the auspices of a non-profit entity and then direct those funds to for-profit endeavors. Indeed, not only are churches permitted to do this, they are incentivized to do so. Because these organizations are uniquely permitted to build up networks of interlocking entities of non-profit and for-profit subsidiaries and freely funnel funds from one to the other, churches are effectively permitted to own profit-seeking entities that have an intrinsically lower cost of capital than their competitors. This system ensures that church-affiliated companies will always enjoy a superior market position. In the face of such economic opportunity, how could any entity not do what these churches have done? It is difficult to blame churches for taking advantage of a U.S. system of religious tax exemption that effectively guarantees them preferential returns on church-sourced funds when those funds are directed to profit-seeking instead of charity.

Blameworthy or not, this tax structure is problematic. Such a market-oriented incentive discourages churches from expending funds in pursuit of charitable goals. The American economy is a capitalistic one, rewarding capital, among other things. Permitting churches, with their lower cost of capital, to access markets that reward capital means that every dollar devoted to the needy is not being devoted to its highest and best use--from an internal rate-of-return perspective. That, of course, will lead to “under-spending” on charity, which is deleterious to the public policy underlying the relevant sections of the Internal Revenue Code.

The United States was clear in its reasoning when it made the decision that churches should enjoy special tax status: the government explicitly decided to forego the substantial tax revenues associated with funds raised and expended by churches because it believed that these entities--of all entities--would use those funds to do the “good works” that would otherwise be the responsibility of government. Taxing a church on funds that it could use to set up an orphanage makes no sense, for example, if such taxation would force the church to abandon its plans for the orphanage and leave the government to ultimately clean up the remains itself. Indeed, the U.S. government--through Congress, the judiciary, and the IRS--has been extraordinarily generous in its treatment of churches in connection with tax law, both in terms of how it has interpreted and applied tax laws and rules to churches and in terms of how much tax money the government has foregone. But that attempt to generate private party charity is defeated, at great expense to the American taxpayer, when churches invest instead of help.

Even more troubling than the undercutting of U.S. tax policy is when churches use their tax exempt funds to engage in massive business operations instead of directing funds toward charity. This does actual damage to the broader market economy. As discussed in Part II below, when non-taxed organizations compete against ordinary business entities in the market, they operate under different economic constraints and disrupt the normal functioning of capital supply and demand, fundamentally distorting the market place. By tapping into untaxed capital, these non-taxed businesses put downward pressure on the rates of return that would otherwise be available in an equally constructed market place, which burdens other economic actors. Accordingly, it is not simply that charitable entities undermine the intent of the IRC when they engage in profit-seeking activities--it is that by doing so, they distort the economy and introduce inherent market inefficiencies.

Part III makes recommendations intended to resolve this problem as it manifests itself in the context of churches. These suggestions largely revolve around increased transparency and the potential imposition of a tax on funds that are not spent on charitable endeavors. Laying bare the finances of these organizations will enable all stakeholders in charitable giving-- including, importantly, U.S. taxpayers--to see how their investments are being spent. Furthermore, taxing non-charitable funds would ensure that our tax system functions the way it is intended--without favor or distortion.

dkj

Delany and Steckel on the Private Benefit Doctrine and Pay for Success Programs

Sean Delany and Jeremy Steckel have published "Balancing Public and Private Interests In Pay for Success Programs:  Should we Care About the Private Benefit Doctrine?" in the New York University Journal of Law & Business.  Here is the abstract:

In the rapidly expanding world of social impact finance, “pay for success” or “PFS” programs are increasingly popular vehicles for attracting private resources to address historically intractable social problems. Also known as “social impact bonds,” these programs are designed to encourage private investors to advance capital to fund social services and receive a return from the government only if predetermined “success metrics” for the target populations are met. As well as private investors and government agencies, participants include social service providers, technical advisors, and other entities that have been recognized as tax-exempt under section 501(c)(3) of the Internal Revenue Code.  This Article is an effort to understand how the private benefit doctrine might affect the structures of PFS programs in the United States, and might limit or encourage their expansion in the future. The doctrine prohibits charitable entities from being operated more than incidentally for the benefit of private interests. The boundaries that tax-exempt organizations must observe when engaging with profit-making entities—whether through transactional relationships or joint ventures—to achieve their charitable missions are far from clear, because the private benefit doctrine has evolved in piecemeal fashion without a coherent conceptual framework. As PFS programs evolve and relationships between participating exempt organizations and profit-making investors are designed, how will the exempt organizations ensure they are not violating the private benefit doctrine? Despite the inconsistent jurisprudence surrounding the private benefit doctrine, applying it to PFS programs demonstrates that it protects against valid concerns not addressed elsewhere in the Code, and offers a cost-benefit framework which we use to draw conclusions about the desirability of funding social services through PFS programs.

dkj

 

Prentice, "Misreporting Nonprofit Lobbying Engagement and Expenses: Charitable Regulation and Managerial Discretion"

 

ARNOVA's (Association for Research on Nonprofits and Voluntary Action) Nonprofit Policy Forum (Volume 9 (2018) (I think your law library has to have an electronic subscription) has an interesting article by Christopher Prentice on how nonprofits [mis]report lobbying activities and expenses.  Here is the abstract:

Abstract:

On the one hand, nonprofits are expected to protect values, promote ideals, and effect change, and on the other hand, they are normatively and legally discouraged from engaging in advocacy and lobbying. These countervailing forces produce a tension that nonprofit managers must navigate. Although previous research suggests that normative boundaries and legal implications constrain lobbying efforts, it is possible that these factors merely influence how some charities report their lobbying activities to authorities. Indeed, incentives to misreport lobbying engagement exist at the federal level where regulatory oversight is lax. This article compares state data obtained for a sample of charities to contemporaneous federal data regarding the lobbying engagement, payments, and expenses of these organizations and their registered lobbyists. Findings demonstrate that roughly half of the charities sampled engage in more lobbying than they report to federal authorities, lending support to the premise that managerial discretion influences nonprofit reporting. 

Other articles in Volume 9 include:

• Barbetta, Canino, Cima and Verracchia, Entry and Exit of Nonprofit Organizations  [in Italy]
• Andersson, Necessity Nonprofit Entrepreneurship:  A Study of Extrinsically Motivated Nascent Nonprofit Entrepreneurs
• Bryan and Isett, Philanthropic Foundation Strategies to Advance Systems Reform:  Perceptions from Frontline Change Implementers

ARNOVA also has a page containing forthcoming articles.  The most recent forthcoming issue contains several articles regarding nonprofit health care.  I recommend the website for anyone writing or thinking about how tax policy impacts nonprofits. 

dkj 

Tax Policy Center Brief on Reforming Charitable Tax Incentives: Assessing Evidence and Policy Options

Joseph Rosenberg and  C. Eugene Steuerle of the Tax Policy Center published Reforming Charitable Tax Incentives: Assessing Evidence and Policy Options.  Below is the brief's abstract:

The federal tax treatment of charitable giving and the nonprofit sector is at an inflection point. Following enactment of the Tax Cuts and Jobs Act in 2017, the number of taxpayers who will claim a charitable deduction will decline substantially. What does that mean for charitable giving and the nonprofit sector? What principles should guide tax policies affecting the nonprofit sector, and what are the policy options going forward? This brief summarizes these and other questions discussed at a recent roundtable—comprised of national experts on the issues of tax policy and charitable giving, including researchers, academics, government administrators, and charitable organizations—cohosted by the Tax Policy Center and Independent Sector.

-- TLH

 

Toussaint Publishes The New Gospel of Wealth: On Social Impact Bonds and the Privatization of Public Good

Professor Etienne C. Toussaint (UDC David A. Clarke School of Law) published The New Gospel of Wealth: On Social Impact Bonds and the Privatization of Public Good, 56 Hous. L. Rev. 153 (2018).  Below is the article's abstract:

Since Andrew Carnegie penned his famous Gospel of Wealth in 1889, corporate philanthropists have championed considerable public good around the world, investing in a wide range of social programs addressing a diversity of public issues, from poverty to healthcare to criminal justice. Nevertheless, the problem of “the Rich and the Poor,” as termed by Andrew Carnegie in his famous essay, remains unsolved. Socially conscious investors have recently called for America to reimagine a new “gospel of wealth”, one that not only grapples with the what of social injustice, but also explores the how and the why of systemic social and economic inequality. An emerging social finance tool, the social impact bond (“SIB”), has been praised as a promising platform that can help solve many of our social challenges by targeting impact investments toward traditionally underfunded social welfare programs.

This Article sets forth a critical examination of the new SIB model, highlighting some of the opportunities for the social finance tool to promote social impact, while also revealing several of its challenges that may hinder its broader adoption in communities across America. In the process, this Article exposes key flaws inherent in the design of the SIB model, including its neoliberal emphasis on market-based economic development strategies and its disregard for the primary role of government in the protection and advancement of the public good. It concludes by calling for a more progressive economic development framework to guide the implementation of the SIB model, one that can help development practitioners, philanthropists, and impact investors wrestle with the deficiencies of our global capitalist economic system and overcome the entrenched systemic barriers to economic justice in America.

-- TLH