Nonprofit Law Prof Blog

Broad Overviews of Civil Society Research, Form 990 Data, Nonprofit Studies, Political Activities, and Scandals

There have been a series of recent publications either pulling together past nonprofit research, looking forward to future nonprofit research, or both, including articles in the special issue of the Nonprofit & Voluntary Sector Quarterly marking that publication's 50th anniversary. These include:

• A Research Agenda for Civil Society (Kees Biekart & Alan Fowler, editors; Edward Elgar Publishing): "Mapping a wide range of civil society research perspectives, this pioneering Research Agenda offers a rich and clear insight for academics and practitioners hoping to embark on future civil society research. Kees Biekart and Alan Fowler bring together over 20 expert contributions from researchers across the globe who are actively engaged in testing the old and generating new knowledge about civil society."

• Unlocking the Potential of Open 990 Data (Cinthia Schuman Ottinger & Jeff Williams; Stanford Social Innovation Review): "As the movement to expand public use of nonprofit data collected by the Internal Revenue Service advances, it’s a good time to review how far the social sector has come and how much work remains to reach the full potential of this treasure trove."

• Disciplinary Contributions to Nonprofit Studies: A 20-Year Empirical Mapping of Journals Publishing Nonprofit Research and Journal Citations by Nonprofit Scholars (Megan LePere-Schloop & Rebecca Nesbit; Nonprofit & Voluntary Sector Quarterly)): "In celebration of Nonprofit and Voluntary Sector Quarterly’s 50th anniversary, we present a bibliometric analysis of nonprofit research published between 1999 and 2019, within and outside of three core nonprofit journals—NVSQ, NML, and Voluntas. We seek to understand which journals, across scientific domains and social science disciplines, inform nonprofit research in one of three ways, by (a) publishing articles, (b) citing the three core journals, or being cited in these core journals. We found that nonprofit research published in economics and social sciences journals has kept pace with a large increase in indexed research. Meanwhile, though the core nonprofit journals robustly cite and are increasingly cited by business and management and public administration journals, they are less engaged with other social science disciplines. We discuss ways that the core journals could increase their visibility and penetration into these other disciplines and highlight perspectives potentially missing from the core journals."

• Government Regulation and the Political Activities of Nonprofits (Deborah A. Carroll, Suzette Myser & Seongho An; Nonprofit & Voluntary Sector Quarterly): "We propose a conceptual model of the political activities of nonprofits that qualify for exemption under subsections of the Internal Revenue Code other than 501(c)(3), including social welfare organizations, civic leagues, social clubs, and so on, which considers three categories of explanatory factors: organizational capacity, financial strategy, and operating environment. Using a Heckman selection model with longitudinal IRS 990 data, we find government regulation to be an obstacle for nonprofits to engage in the policy process. Political activities of non-501(c)(3) organizations are also negatively associated with government support, suggesting these organizations perceive government intervention differently from 501(c)(3) organizations when engaging in political activities."

• Nonprofit Scandals: A Systematic Review and Conceptual Framework (Cassandra M. Chapman, Matthew J. Hornsey, Nicole Gillespie & Steve Lockey; Nonprofit and Voluntary Sector Quarterly): "High-profile charity scandals have always represented a threat to the nonprofit sector, which relies on public trust and funding to operate. We systematically review 30 years of empirical research on scandals involving nonprofits and present both quantitative and qualitative syntheses of the 71 articles identified. Informed by this review, we generate a conceptual model theorizing the causes and consequences of scandals, as well as how nonprofits can best prevent and respond to organizational transgressions. We then put forward a research agenda that elaborates five key factors that are especially important for understanding nonprofit scandals but remain understudied: (a) integrity versus competence violations, (b) moral licensing, (c) the multilevel nature of organizational transgressions, (d) sectoral causes of scandal, and (e) effective responses. We close the article with recommendations for nonprofit managers about how to conceptualize, prevent, plan for, and respond to transgressions occurring within their organizations, and any resulting scandals."

Lloyd Mayer

Grossman & Reid: The Liberation of Civil Society

Andrew Grossman and Alexander Lyman Reid (both at BokerHostetler) have posted "And the Walls Came Tumbling Down: TheLiberation of Civil Society." Here is the opening paragraph:

As anyone who has seen a building collapse or a bridge buckle can attest, it can be harrowing to witness the failure of a major structure, particularly one that is historic and relied upon heavily. Sometimes, however, falling walls can be a welcome change. The Berlin Wall, for example, unfairly separated the people of Berlin, and its demise was celebrated worldwide by lovers of freedom. Perhaps one day we too will celebrate the liberation of nonprofit organizations from the walls erected by the regulatory state to protect the powerful from the people. That day may come sooner than expected, as the Supreme Court recently recognized the freedom of association as a constitutionally protected right (Americans for Prosperity Foundation v. Bonta) and rejected the deference historically granted to the executive branch to write regulations without adequate legislative authority (West Virginia v. Environmental Protection Agency).

Lloyd Mayer

Donor Advised Funds Update: Continued Growth, Continued Scrutiny

Donor advised funds are both continuing to grow and continuing to be subject to government and academic scrutiny, as illustrated by a new report, an Attorney General review, and a new academic article. 

First, the National Philanthropic trust issued its 2022 DAF Report. Highlights include:

• DAF donors granted at historic levels. Grants from DAFs to qualified charities totaled an estimated $45.74 billion, representing a 28.2 percent increase compared to 2020, which itself was 28.3 percent higher than in 2019. The ten-year average rate of change for DAF grantmaking is 17.5 percent from 2011 to 2020.

• The DAF grant payout rate was 27.3 percent, the highest grant payout rate on record. Payout has remained above 20 percent for every year on record, reflecting the consistent charitable support that DAF donors provide. The ten-year average payout rate from DAFs is 22.2 percent.

• Other key metrics, like contributions and charitable assets, also increased at rates much higher than the ten-year average. For example, charitable assets in DAFs increased significantly as the stock market surged and donors made more contributions than ever before. Historically, periods with very strong growth in charitable assets (20 percent increases or more) are immediately followed by large increases in grantmaking.

Second, the California Attorney General issued a report on its audit of donor advised fund sponsors registered in California. (Hat tip: Bloomberg (subscription required).) Here are the "notable takeaways" from the Executive Summary:

• The results show a growth in DAFs, with average annual growth in assets above 20 percent (Tables 3 and 4).

• Commercial DAFs saw the most growth in dollar terms, topping $20 billion in contributions and $75 billion in year-end assets (Figures 2 and 7). The growth in commercial DAF sponsors was fueled by donations of equity securities, with equities representing between 50 to 65 percent of donations received each year, compared with the rate of equity security donations among all sponsors ranging between 34 to 38 percent (Tables 7 and 11).

• Grant payouts by DAFs increased across sponsor types and sponsor locations, with the exception of community foundations where the payouts remained somewhat flat (Figures 13 and 14).

• The data suggests that 20 percent of DAFs pay out less than 5 percent in a given year (Figure 30).

• On average, 32 percent of DAFs in commercial sponsors and 42 percent of DAFs in community foundations paid out less than 5 percent (Figures 37-38).

• DAF-to-DAF transfers accounted for 10.8 percent of all grants (Figure 23).

• The boost in payout and fund flow rates due to DAF-to-DAF transfers was most pronounced in community foundations, with DAF-to-DAF transfers representing 17.8 percent of all grants made by community foundation DAFs (Figure 26).

• Private foundation distributions account for 5.3 percent of all contributions received by DAFs (Figure 10). For commercial sponsors, private foundation contributions represented 3.1 percent of all contributions; for mission-based sponsors and community foundations it was higher, making up 9.8 and 12.2 percent of all contributions received, respectively (Figure 12).

Third, David I. Walker (Boston University) has posted "Donor-Advised Funds in the Wake of the Tax Cuts and Jobs Act." Here is the abstract:

Donor-advised funds (DAFs) are conduits for charitable giving that support immediate tax deductions while creating a reservoir of assets for subsequent disposition to end-use charities. The number of new DAF accounts has skyrocketed in the wake of the 2017 Tax Cuts and Jobs Act (TCJA). This Article presents evidence suggesting that bunching charitable contributions to game the TCJA-enhanced standard deduction likely motivates much of the onslaught of new DAF accounts established since 2016 and argues that the typical buncher is likely to differ from other DAF account holders in ways that matter from a policy perspective. Thus, while DAF critics have generally focused on the unproductive accumulation of assets in DAF accounts and have advanced reforms aimed at speeding up DAF payouts, this Article argues that in the context of bunchers, unproductive accumulation of assets in DAF accounts is unlikely to be a major problem. The more significant problem with DAF-facilitated bunching is that the cost to the public fisc is unlikely to be justified by incremental charitable giving. Thus, while this Article concludes that regulation targeting DAF payouts is unobjectionable, it argues that a wholly different set of reforms targeting the deductibility of charitable giving generally would be needed to address the cost of DAF-facilitated bunching under current law and under thoughtfully reformed laws involving universal charitable deductions above a floor.

Lloyd Mayer

 

More Charity Care and Commerciality Criticisms of Tax-Exempt, Nonprofit Hospitals

Another month, another set of criticisms of tax-exempt, nonprofit hospitals. The latest group includes a report on low levels of charity care at many hospitals, an analysis revealing that some hospitals make it difficult for financially needy patients to access charity care, and a call for removing tax exemption entirely on commerciality grounds.

First, the Kaiser Family Foundation issued a report finding that "[h]alf of hospitals reported that the cost of providing charity care to patients represented 1.4% or less of their operating expenses in 2020, though the rates vary widely from hospital to hospital." While its analysis was not limited to tax-exempt, nonprofit hospitals, it noted that almost 60 percent of community hospitals are nonprofits. Here is an excerpt from the description of the analysis:

This issue brief addresses key questions about hospital charity care programs. According to our analysis of hospital cost reports, charity care costs represented 1.4 percent or less of operating expenses at half of all hospitals in 2020, though the level of charity care varied substantially across facilities (Figure 1) (see Methods for details about our calculations). For example, while charity care costs represented 0.1 percent of operating expenses or less on the lower end of the spectrum (for 8% of hospitals), they represented 7.0 percent of operating expenses or more among a similar share of hospitals (9%). The variation in charity care costs as a percent of operating expenses likely reflects differences in hospitals’ missions and business practices; the need for charity care among patients; and federal, state, and local policy and regulation.

Second, the Wall Street Journal reports in "Hospitals Often Don’t Help Needy Patients, Even Those Who Qualify" (subscription required) that some nonprofit hospitals make it difficult for needy patients to receive financial assistance as they "put up obstacles, delay checking eligibility and sometimes press for payments that aren’t refunded even if a patient eventually gets qualified for assistance." Its findings included:

•Though hospitals have the power to prequalify low-income patients for charity care and never send a bill, about 450 nonprofit facilities—roughly 15% of the 3,100 nonprofit facilities in the Journal’s analysis of tax documents—didn’t report using the option.

•Even among the hospitals that told the IRS they do prequalify people, many spent months chasing patients for payment before checking eligibility. The parent organizations for roughly 1,000 of those facilities reported pursuing at least $2 billion in billings to patients who likely qualified for aid.

•In scripts and other training material for staff who talk to patients about bills, obtained through public-record requests to more than 100 government hospitals, the possibility of financial assistance is sometimes raised only as a last resort, or not at all.

Third and finally, Edward A. Zelinsky (Cardoza) has posted "The Commerciality of Non-Profit Hospitals Requires Them to Be Taxed: Bringing the Debate to a Conclusion," 42 Virginia Tax Review (forthcoming 2022). Here is the abstract:

It is now time to conclude our prolonged debate about the tax-exempt status of nonprofit hospitals. The contemporary nonprofit hospital is a commercial enterprise, materially indistinguishable for tax purposes from its profit-making, taxed competitor. The federal income tax and the states’ income, sales and property taxes should treat all hospitals alike, regardless of whether such hospitals are nonprofit or for-profit enterprises. In the interests of equity and efficiency, these similar institutions should be taxed similarly.

As a political matter, nonprofit hospitals will continue to defend their tax-exempt status. Like any other lucrative, vested interest, nonprofit hospitals will continue to fight hard to protect their valuable tax benefits. But, on the substantive merits, the case for taxing the contemporary nonprofit hospital is compelling, given the commerciality of today’s nonprofit hospitals. Such nonprofit hospitals are not materially distinguishable for tax purposes from their profit-making, taxed competitors.

Lloyd Mayer

Lott, Shelly, Dietz, and Mitchell, The Regulatory Breadth Index: A New Tool for the Measurement and Comparison of State-Level Charity Regulation in the United States

Cindy M. Lott (Indiana), Mary L. Shelly (Penn), Nathan Dietz (Independent), and George E. Mitchell (Baruch) have published The Regulatory Breadth Index: A New Tool for the Measurement and Comparison of State-Level Charity Regulation in the United States in Nonprofit Management & Leadership. Here is their abstract:

The bulk of charity regulation in the United States occurs at the state level, yet state-level charity regulation remains relatively under-researched within nonprofit scholarship, particularly from a comparative perspective. The complexity and variation in statutory regulation, coupled with the large volume of legal research required to study state-level charity regulation systematically, has impeded scholarly progress toward a better understanding of the US charitable sector. We address this problem by deriving a state-level charity regulatory breadth index (RBI) that will enable nonprofit researchers to contextualize state-level charity research within a broader framework and to incorporate state-level regulation into analyses across states. Policymakers can also benefit from the ability to benchmark their regulatory regimes against their peers.

Samuel D. Brunson

Hackney, Public Good Through Charter Schools?

Professor Philip Hackney (University of Pittsburgh School of Law) has posted Public Good Through Charter Schools? 39 Ga. State. L. Rev. (forthcoming 2023). Here is the abstract:

Should nonprofit charter schools be considered "charitable" under section 501(c)(3) of the Internal Revenue Code and be entitled to the benefits that go with that designation (income tax exemption, charitable contribution deduction, etc.)? Current tax law treats them as such; the question is whether there is a good rationale for this treatment. In addition to efficiency and equity, I consider political justice as a value in evaluating tax policy. By political justice I mean a democratic system that prioritizes the opportunity for more people to have a voice in collective decisions (political voice equality or PVE). Thus, a tax policy that decreases PVE violates the value of political justice. Efficiency theory and equity provide modest help in evaluating the charter question, but the tool of political justice provides important value. When viewed in its entirety the granting of tax exemption to charter organizations violates the norm of political justice. The charter movement takes decision-making regarding community education away from a community and gives it to private parties. Instead of the community controlling major educational decisions, charter management organizations control those decisions. Still, allowing parents to seek the form of education they deem right for their children may increase voice in part. Additionally, valid democratic authorities across the country have chosen to provide some education through charter vehicles. Given the strong interest in keeping tax policy in harmony with democratically chosen policies, most ideal in this conflict would be to maintain tax-exemption. However, to be charitable, a charter school and its management organization ought to be democratically operated in some broad sense. The Article thus suggests some ways to increase the democratic accountability of charters.

Samuel D. Brunson

Ryan: An Historical and Empirical Analysis of the Cy-Près Doctrine

Professor CJ Ryan (University of Louisville - Louis D. Brandeis School of Law) has posted An Historical and Empirical Analysis of the Cy-Près Doctrine, 48 ACTEC Law Journal (Forthcoming 2023). Here is the abstract: 

Cy près is a pivotal doctrine in estate law and indeed American jurisprudence. It places courts in the shoes of settlors of charitable trusts to discern not only their original intent but also affords the possibility of continuing the material purpose for which settlors created enduring legacies of philanthropy benefitting society. For this reason, it may well be that no other legal doctrine is as closely tied to the interests of the individual and the collective as cy près. And my first-of-its kind study puts the cy-près doctrine front and center, while providing three major contributions to the field.

First, through deliberative historical analysis, I offer an in-depth look at the types of cases American courts have heard involving the use of cy près. This historical categorization and explication is itself unique and provides significant insight into the controversies that allowed the doctrine to evolve. Second, the application of empirical methods to examine the doctrine is groundbreaking. By holistically examining the data I collected, I have been able to discern three major themes. The passage of time yields a gradual but greater adoption of the use of the cy-près doctrine. The presence of reversionary, gift-over, or private interests renders the use of the cy-près doctrine less practicable. And finally, courts are overwhelmingly more likely to apply cy près in cases involving public charitable trusts, educational purpose trusts, and medical purpose trusts, even when controlling for other independent variables and typologies of charitable trusts. Last, fifty-state surveys are commonplace; yet, none exists for the doctrine of cy près. I was able to assemble such a survey that not only assisted me in conducting this research but will undoubtedly aid other researchers for years to come, which I have addended to this Article in the Appendix.

TLH

Douglas: Banding Together: Law Versus People Power in the United States

Benjamin Douglas (Ashcraft & Gerel) has posted Banding Together: Law Versus People Power in the United States, 53 New Mexico Law review (forthcoming 2023). Here is the abstract:

This paper interrogates legal obstacles to forming member-directed, value-supporting associations in the U.S. I examine laws governing political parties, labor unions, nonprofit organizations, and other economic associations, and how law inhibits the scope for internal democracy, the expression of values, or the capacity to build power. This is one key ingredient preserving our system of spectator democracy, where citizens cheer for their designated faction and oppose the rival faction, but seldom actively participate.

Lloyd Mayer

Eric Amarante publishes States as Laboratories for Charitable Compliance: An Empirical Study

George Washington Law Review just published Eric Amarante's article States as Laboratories for Charitable Compliance. The
abstract reads as follows:

Each year, the Internal Revenue Service (“IRS”) awards 501(c)(3), taxexempt status to thousands of organizations that do not meet the statutory requirements for charities. This is because the IRS, facing increasingly severe budget cuts, adopted a woefully inadequate application process that fails to identify even the most obvious of unworthy applicants. To illustrate this problem, this Article reviews the formation documents of 500 charities that received 501(c)(3) status in 2018 using this new application process. The results of this study are dramatic as they are upsetting: In Florida, only 41.11% of the charities in the study met the statutory requirements necessary for 501(c)(3) status. In Ohio, that number is 33.33%, meaning that two-thirds of the organizations using the new application process were incorrectly awarded 501(c)(3) status.

The worst performing state in the study, Idaho, boasted only 22.08% of organizations meeting the statutory test. As unworthy charities proliferate, the public may lose faith in the entire charitable regime. As trust dissipates, donations are likely to follow, and the charitable sector may lose a vital revenue stream. It is not an exaggeration to say that this potential loss of donations represents an existential threat to the entire charitable sector. With a change in budgetary priorities unlikely in the foreseeable future, it is unwise to wait for the IRS to curb this threat. Rather, it is prudent to identify another way to increase regulatory compliance in the charitable sector. This Article proposes a cost-efficient mechanism for states to fill the regulatory void
left by the IRS. To identify this mechanism, this study identified two states with procedures that resulted in high levels of regulatory compliance: Maryland and North Carolina. Approximately 94% of the organizations formed in Maryland met statutory requirements, while that number was 80.68% in North Carolina. By replicating the procedures in Maryland and North Carolina, other states will not only ensure higher levels of regulatory compliance, but also may help restore the public’s trust in the charitable sector. 

Adediran: Nonprofit Board Composition

Atinuke O. Adediran (Fordham) has published Nonprofit Board Composition. 83 Ohio St. L.J. 357 (2022). Here is the abstract:

This Article addresses a critical gap in the literature and current debates about the composition of nonprofit boards. The law of fiduciary duties and nonprofit governance best practices do not provide sufficient guidance on how to compose boards to empower the communities they serve. And even as the corporate sector is seizing on current important moments to debate the inclusion of employees and racial and ethnic minorities on corporate boards, nonprofit boards are largely left out of these debates.

The Article introduces the concept of board capital, which originated from the for-profit management literature, but has gained a stronghold in the nonprofit boards’ literature, to provide guidance on how to compose boards of nonprofit organizations that serve vulnerable, often minority communities. Board capital comprises financial, social, and human capital and highlights the importance of having board directors who as a group, possess the skills, knowledge, and professional and personal experiences to not only provide legal and finance expertise, and funding, but also provide strategic advice informed by knowledge of the client population.

The Article supports its normative assertions with the empirical example of the 9000+ boards of directors of public interest legal organizations (PILOs). Empirical findings show that boards in these legal nonprofit organizations are largely assembled to focus on legal expertise and fundraising at the expense of social capital affinity with communities served, and human capital skills and characteristics to understand the needs of the client population and be racially and ethnically diverse. A majority of the boards comprise law firm and corporate lawyers who can be far removed from the legal and social issues the organizations represent. For other nonprofit organizations, many board members come from the business sector. This misplaced emphasis may be undercutting nonprofits’ abilities to serve their stated mission effectively. Board members are more likely to hew to their own expertise and abilities to raise financial capital. Boards of directors also tend to replicate themselves, which undermines human capital knowledge of the client population and racial and ethnic diversity. The Article makes suggestions for increasing human capital, particularly expertise on the client population and racial diversity on nonprofit boards. It also addresses board capital implications for for-profit boards.

Samuel D. Brunson

Heminway: The Fiscal Sponsor Alternative to Nonprofit Incorporation

Joan MacLeod Heminway (University of Tennessee) has published Choice of Entity: The Fiscal Sponsorship Alternative to Nonprofit Incorporation, 23 Transactions: The Tennessee Journal of Business Law 526 (2022). Here is an excerpt from the conclusion:

    This short article explores the potential use of fiscal sponsorships as a means of incentivizing and systematizing the activities of nonprofit projects without the need to form a separate legal entity. The appeal of attracting funders who desire a federal income tax deduction for their contributions and the desire to conduct operations that are tax-exempt under U.S federal law may be core reasons for conducting a nonprofit project through a nonprofit corporation. Yet, nonprofit corporations may be a less than appealing choice of entity for certain nonprofit projects after considering other factors.

     Specifically, the time and expense involved in both entity formation and maintenance and federal income tax compliance activities may make nonprofit incorporation under state law a suboptimal choice for certain nonprofit projects. Moreover, many nonprofit project founders and promoters do not need the structural and governance attributes that nonprofit corporate law provides. This may be especially true for discrete or one-off nonprofit projects that involve a single founder or promoter (or a small number of founders and promoters)—which often is the case for creative enterprises (like the Vita Brevis project in Boston). If

● the founders or promoters of this kind of nonprofit project can identify a §501(c)(3) organization with a corporate purpose that incorporates the substance of the nonprofit project and

● that §501(c)(3) organization is willing to serve as a fiscal sponsor for the nonprofit project under terms satisfactory to the founders and promoters of the nonprofit project,

then incorporation as a nonprofit corporation may not be necessary for the nonprofit project to secure federal income tax deductibility for funders and a federal income tax exemption for its income.

Lloyd Mayer

Schwartzel: Was It Wise to Try to Implement Trust Law Reforms Through UPMIFA?

C. Boone Schwartzel has posted Was It Wise to Try to Implement Trust Law Reforms Through the Uniform Prudent Management of Institutional Funds Act?, 14 Estate Planning & Community Property Law Journal 179 (2021). Here is the abstract:

This article explores two main topics. First, it generally discusses the Uniform Prudent Management of Institutional Funds Act’s new definitions and expanded scope, and then examines whether under the Act, as a matter of law, restrictions imposed in a gift instrument between a “donor” institution and a second, affiliated institution it controls must be respected and enforced (and the fund assets treated as “donor restricted”) even though generally accepted accounting principles may take a different view.

Second, the article examines UPMIFA’s new statutory remedies that empower courts and charitable institutions to modify much more easily a donor’s outdated or “wasteful” restrictions. UPMIFA’s remedies are loosely patterned after controversial reforms of trust law’s equitable deviation and cy pres doctrines, as promulgated in the Uniform Trust Code and the Restatement (Third) of Trusts, that loosen their historical ties to the donor’s original charitable intent and virtually eliminate cy pres’ “general charitable intent” requirement. There are important public policy issues and constitutional law questions concerning the wisdom and validity of these reformed trust law remedies, and especially as implemented in UPMIFA.

Lloyd Mayer

Conservation Easements Update: ProPublica Story, Articles on Valuation and Enforcement

ProPublica published a story on the government battle against syndicated conservation easements titled The Tax Scam That Won't Die. The discouraging sub-title is "The IRS, the Justice Department and Congressional Republicans and Democrats are all trying to put an end to syndicated conservation easements. But with lobbyists like Henry Waxman helping lead the resistance, the efforts have had little effect." It concludes: "The use of the scheme continues unabated. Along the way it has cost the U.S. Treasury billions in lost taxes, according to the IRS."

Conservation easements also continue to attract academic interest, with two recent articles of note. Alan Feld, Theodore S. Sims (both Boston University), and Jacob Nielsen (now at Ropes & Gray) have posted Green, or Greed? A Fresh Perspective on the Valuation of Conservation Easements, Tax Law Review (forthcoming). Here is the abstract:

Charitable contributions of "conservation easements" have since 1980 allowed high-income taxpayers to shelter income from taxation through overvalued deductions. Overvaluation has increased dramatically in the past 20 years: a 2016 study of all easement decisions since 1980 reported that while overvaluation had averaged by a factor of two before 1994, it averaged by a factor of ten for decisions between 1994 and 2016. SOI data disclose that aggregate easement contributions deducted on Schedule A grew from $2.26 billion in 2015 to $6.5 billion in 2018 (the most recent year available). A recent report by supporters of conservation easements acknowledges that "neither the [IRS] nor the courts have sufficient resources to effectively police valuation abuse."

Most of the concern has been with "syndicated conservation easements" ("SCEs"), and most proposed remedies to easement overvaluation focus on SCEs. We show, however, that exactly the same traits that produce overvalued SCEs -- allowing charitable deductions based on "fair market" value, which sanctions deducting unrealized appreciation without taxing the corresponding gain, combined with the unavoidable need to value contributed easements through as manipulable a process as appraisal -- have facilitated abusive overvaluation of non-syndicated easements too. That combination can leave an easement contributor better off than if she had done anything else with the land, including selling it for its (true) fair market value. The only effective solution to easement overvaluation is to restrict the deductibility of easement contributions attributable to unrealized gain. To that end we propose limiting charitable contributions of easements granted with respect to recently acquired property initially to cost, much as Congress has previously done with other contributions of appreciated property that are vulnerable to abuse, while allowing that limitation to evolve with real estate values over time. We also propose an upfront excise on unrealized appreciation in contributed easements, to increase the salience to prospective contributors of the risks of overvaluation.

In addition, Jimmy Godin has published A Sand County Tax Shelter: Syndicated Conservation Easements and Their Toll on the American Taxpayer, 2022 Utah Law Review 213 (2022). Here is the abstract:

The conservation easement is a powerful tool for conserving private land in the United States and beyond. Among the many incentives for encouraging conservation easement donations are tax deductions, which largely depend on the conservation value of the donated land. But groups of wealthy taxpayers, accountants, attorneys, and appraisers are manipulating the conservation easement tax framework and receiving large tax deductions for conservation easements that are practically worthless in a conservation sense—transactions known as 'syndicated conservation easements.' Syndicated conservation easements have generated substantial controversy, in part because they cost American taxpayers billions of tax dollars annually. While the Internal Revenue Service, the United States Department of Justice, members of Congress, and conservation groups are attempting to crack down on syndicated conservation easements, their efforts to curb the practice remain ineffective. This Note first examines the conservation easement tax framework and considers the ways in which it enables syndicated conservation easements. Next, this Note describes the measures taken against syndicated conservation easements and analyzes how such measures have fallen short. Finally, this Note contemplates more effective ways to uncover syndicated conservation easements and curb such transactions entirely. Specifically, the Internal Revenue Service must streamline its auditing efforts to focus on appraisals, while the United States Department of Justice must impose harsher penalties on those involved in syndicated conservation easements. Similarly, Congress must create a more effective system for appraisal oversight and should enact legislation that alters the existing tax framework in a way that disincentivizes wealthy taxpayers from engaging in syndicated conservation easements altogether. Lastly, individual conservation groups must work together to create a more uniform set of standards and practices for conservation easement donation, while state legislators should strive to create uniformity in state conservation easement tax law.

Lloyd Mayer

Abely, The Uncertain Role of Reliance in the Enforcement of Charitable Subscriptions

Christine Abely (New England Law) has posted The Uncertain Role of Reliance in the Enforcement of Charitable Subscriptions, 26 Lewis & Clark L. Rev. (2022) to SSRN. Its abstract reads:

In cases where charitable promises are made and later retracted, the Restatement (Second) of Contracts provides conflicting guidance as to how a court should factor in reliance by the charity when considering whether to enforce the promised donation by way of promissory estoppel. Specifically, the text of § 90(2) within the Second Restatement provides that a charitable subscription is binding “without proof that the promise induced action or forbearance.” The adoption of this provision represented a departure from the requirement of reliance historically necessary for the enforcement of most types of promises by promissory estoppel. According to the Second Restatement, however, reliance remains relevant to the determination of whether enforcement of a promise is necessary to avoid injustice, which is a required element to enforce a charitable subscription pursuant to § 90(2). Namely, Comment b to § 90, discussing the character of reliance protected, notes that enforcement of the promise must be necessary to prevent injustice, one factor of which is the nature and extent of reliance; such reliance “need not be of substantial character in charitable subscription cases.” Comment f states that for charitable subscriptions where recovery is rested on reliance, “a probability of reliance is enough,” although American courts “have found consideration in many cases where the element of the exchange was doubtful or nonexistent.” Moreover, Illustration 17 to Comment f describes a situation where reliance does in fact support enforcement of a charitable subscription.

Continue reading

Lu, "Fundamental National Public Policy" and Critical Race Theory in a Delicate Democracy

Lynn D. Lu (CUNY) has published Who’s Afraid of Bob Jones? “Fundamental National Public Policy” and Critical Race Theory in a Delicate Democracy in the CUNY Law Review. Here is the abstract:

Calls to defund critical race theory aim to freeze civil rights progress where it stood decades ago with the formal prohibition of intentional race discrimination in federally funded programs. In the notorious case of Bob Jones University v. United States, 461 U.S. 574 (1983), the U.S. Supreme Court confronted the federal tax exemption for public charities and ruled that the Internal Revenue Service (IRS) properly withheld tax-exempt status from otherwise qualifying private religious schools that denied admission to students based on race. In particular, the Bob Jones Court recognized the “fundamental national public policy” against racial segregation as a compelling government interest outweighing any burden on private schools’ religious exercise. However, the Court left unresolved vital questions of how (or indeed, whether) to allocate public resources affirmatively to foster diversity, equity, inclusion, or accessibility in democratic society.

This Article examines the lessons of Bob Jones for civil rights advocates as informed by critical race theories that have developed amid a federal-court retreat from enforcement of antidiscrimination norms. It also explores the case’s symbolic value for conservatives motivated to prevent its expansion, even as the Bob Jones Court narrowly constrained its own decision’s impact by refusing to engage a number of crucial substantive questions: namely, the role of pluralism in enforcing civil rights against First Amendment claims, the viability of race-conscious remedies for racial discrimination, and the visibility of economic justice in civil rights claims. This Article ultimately concludes that the legal reorientation critical race theorists have helmed in the wake of Bob Jones remains crucial for identifying and challenging ongoing power disparities in and through every level of democratic government and society.

Lloyd Mayer

Bernardo: The interconnection between welfare services and the market in the United States with a focus on the elderly: the application of antitrust law to nonprofits

Julia Ortego Bernardo (Universidad Autónoma de Madrid) has posted The interconnection between welfare services and the market in the United States with a focus on the elderly: the application of antitrust law to nonprofits. Here is the Background and Introduction section (footnotes omitted):

It is widely acknowledged that the US welfare system evolved differently from other industrialized countries’ welfare regimes. From a neutral standpoint, scholarly works evidence that the US social service framework cannot be compared to the welfare states implemented in Western Europe over the 20th century−which remain in place. This is due to the different approaches to welfare objectives. The prominent role of private organizations and nonprofits is one of the US system’s defining features, although public authorities’ action (or, better said, government intervention) has not been set aside completely.

The underlying rationale of the US welfare system largely relies on two premises: first, welfare benefits qualify as commodities that can be delivered by private entities (i) operating in the market; and thus (ii) able to meet the existing demand. Second, social service recipients or, where appropriate, welfare officials, have somewhat free choice to a certain extent regarding the services, which, also, would be available to anyone.

However, note that these ideas regarding the efficient operation of social service markets might not be true in practice. In fact, often there are market failures, i.e., the price, quantity or quality of the delivered social services may be unsuitable or simply not enough to meet society’s needs. The most common market failures in the field of social services, although not the only ones, are the so-called “informational market failures” or information asymmetries. If they lack information, welfare recipients can hardly assess the quality and value for money of welfare services. Ultimately, users are unable to choose correctly between services. These and other market failures trigger government intervention, which relies on two instruments: (i) regulation; and (ii) antitrust law. As for (ii), it is worth noting that it qualifies as a paramount example of indirect economic regulation. In the United States, the scope of antitrust law covers a wide range of social services, insofar as their provision is totally or partially subject to market conditions. By fining anticompetitive practices and behaviors, public authorities indirectly enhance the system, since the fines have a positive impact on the price and quality of services.

Within the field of US welfare, public action has been somewhat superseded by private entities’ initiatives (including both companies and nonprofits) and market-based management. This poses several challenges and concerns. Does the protection provided by antitrust law cover the activity of non-profit organizations? We will answer this question below. This paper examines (i) the development of strictly assistance-based services or benefits in the US (section 2.1); (ii) their current legal framework (section 2.2) with regards to other social services, particularly those catering to older adults (section 2.3); and (iv) the positive and negative outcomes (section 3.1) and oversight (section 3.2) of private initiatives, including not-for-profit action (section 3.3).

Lloyd Mayer

Binfarè & Zimmerschied: Doing Good and Doing it with (Investment) Style [private foundation investing]

Matteo Binfarè and Kyle Zimmerschied (both University of Missouri at Columbia) have posted Doing Good and Doing it with (Investment) Style. Here is the abstract:

We study the asset allocation, spending behavior, fees, and investment performance of U.S. private foundations, which have different economic objectives than other institutional investors. We find that large foundations generate positive risk-adjusted returns of about one percent per year and document considerable variation in alphas over time. Larger and more sophisticated foundations perform better and invest more aggressively. Foundations with concentrated stock holdings have higher returns, but also take on more risk. Because of the constraints imposed by the five percent minimum spending rule and accommodating monetary policy, private foundations also increase their risk-taking and reach for yield. Due to these constraints, a conservative asset allocation will decrease real wealth over time resulting in less charitable giving.

Lloyd Mayer

Goldeberg & LeClair: A proposal for a new type of charitable-business structure

Robert S. Goldberg (Adelphi University) and Mark S. LeClair (Fairfield University) have published A proposal for a new type of charitable-business structure: the donor-investor organization in the Journal of Sustainable Finance & Investment. Here is the abstract:

Non-profits redistribute assets in pursuit of a social goal, and for-profits organize assets to generate income and growth. While both organizations face a principal-agent problem, non-profits face unique challenges ensuring that managers adhere to the goals of endowers or donors. Regulations have failed to successfully address the principal-agent problem, and hybrid structures such as Benefit Corporations have profit as one of the objectives. We propose a new type of entity with both a business arm and a charitable arm, with a social purpose as the only objective, committing all profits to the entity’s charitable mission. Investors, both small and large, receive a stream of future tax deductions based on outlays for the organization’s mission, while retaining legal control of the entity’s operations. While not meant to replace all charities, the proposed structure provides a new way for investors, business people and non-profit professionals to work towards a social good.

Lloyd Mayer

Molk: Where Nonprofits Incorporate and Why It Matters

Peter Molk (Florida) has posted Where Nonprofits Incorporate and Why It Matters, forthcoming in the Iowa Law Review. Here is the abstract:

Nonprofit corporations account for over a trillion dollars of American annual GDP, employ twelve million people, and include some of the most well-known organizations in the world. Yet despite their significance, many core corporate governance issues about nonprofits remain a black box. This Article, using newly available data, begins to remedy this gap in the literature.

Using filing data from 300,000 charitable nonprofits, I examine the foundational issue of where nonprofits incorporate, a decision that determines both the law of nonprofit corporate governance affairs and public oversight apparatus for governance and compliance. Unlike publicly traded corporations, I find nonprofit incorporation choice is not a vigorously competitive race to the top or bottom, but instead is better characterized as a stroll. A nonprofit’s headquarters jurisdiction is the most popular incorporation destination - far more common than for publicly traded corporations. However, among those nonprofits that incorporate out-of-jurisdiction, Delaware is the most popular destination, with the District of Columbia a surprising second. The findings are consistent with nonprofits’ selecting weaker governance and oversight rules, suggesting a potential “stroll to the bottom” among nonprofits. Using these results, I offer evidence-based policy implications to improve governance of nonprofits, to reverse the potential stroll to the bottom, and to invigorate beneficial state competition for nonprofit incorporations.

Lloyd Mayer

Murray: Charities & Discrimination

Ian Murray (University of Western Australia) has published Charities & Discrimination: Is Charity Law Always a Better Solution than Public Policy? in the Nonprofit Policy Forum. Here is the abstract:

Discrimination by charities raises questions about the appropriate extent of equality regulation and has implications for government outsourcing through charities and for the provision of tax concessions. Professor Parachin has recently provided a justification for denying the application of public equality norms to charities through the public policy test of charity law. This paper builds on that work by considering whether liberal societies might, however, have good grounds to apply public equality norms to charities in circumstances such as the provision of outsourced government services, state enforcement of egoistic giving, or where doing so is a proportionate means to prevent harm.

Lloyd Mayer