Nonprofit Law Prof Blog

The changing face of policing nonprofits

An article written by Joshua Rosenberg of Law360 last month provides interesting insight for persons not intimately familiar with the oftentimes intricate subject area of tax-exempt organization regulation. Where once the IRS led the way in prosecuting potential tax infractions by nonprofit organizations, it now seems that state governments have stepped to the fore in that arena. As illustration, Rosenberg points to events such as the recent victory by New York’s attorney general in bringing a case against the National Rifle Association which made headlines nationwide last year. Developments such as this, says the article author, “have set the tone at the state level for policing charities, even though they’re unable to directly adjudicate the tax-exempt status of those organizations.”

Balanced against this upswing in the vigilance of state governments is a certain amount of apathy by the Internal Revenue Service in policing nonprofit organizations. This is likely due in no small part to dramatic funding cuts in 2013 when the Agency faced criticism (and indeed was ultimately found liable in the matter) for subjecting to strict scrutiny a number of conservative groups applying for charitable organization status 

For Rosenberg’s succinct and informative discussion of the topic including what this means for nonprofit tax infraction enforcement moving forward, see: https://www-law360-com.ezproxy.law.uky.edu/articles/1336984/states-not-irs-lead-in-policing-tax-exempt-organizations

David Brennen, University of Kentucky College of Law

M. Kopel & M. Marini: Mandatory Disclosure of Managerial Contracts in Nonprofit Organizations

Michael Kopel (University of Graz) and Marco A. Marini (Ph.D. student, University of Rome La Sapienza) have posted Mandatory Disclosure of Managerial Contracts in Nonprofit Organizations on SSRN. Here is the abstract:

Nonprofit organizations have been recently mandated to disclose the details of their executives’ compensation packages. Contract information is now accessible not only to current and prospective donors, but also to rival nonprofit organizations competing for donations in the fundraising market. Our aim is to investigate the impact of publicly available contract information on fundraising competition of nonprofit organizations. We argue that, although such provision makes contract information available to multiple stakeholders and increases the transparency of the nonprofit sector, it also induces nonprofits to use managerial incentive contracts strategically. In particular, we find that the observability of incentive contracts relaxes existing fun draising competition. This is beneficial in terms of nonprofits’ outputs, in particular when these organizations are trapped in a situation of excessive fundraising activities. However, we show that publicly available contract information distorts nonprofits’ choice of projects, thus potentially inducing socially inefficient project clustering.

Lloyd Mayer

I. Murray: Donor Advised Funds: What Can North America Learn From the Australian Approach?

Ian Murray (University of Western Australia) has published Donor Advised Funds: What Can North America Learn From the Australian Approach? in the Canadian Journal of Comparative and Contemporary Law. Here is the abstract:

Charity law is a public and private hybrid that seeks to balance donor intent with the achievement of public benefit. In supporting that balance, regulatory frameworks typically intrude less on donor intent when the recipient charity is a publicly controlled charity, rather than a private foundation. This approach is challenged by the rise of donor advised funds — public charity intermediaries that behave in many ways like privately controlled foundations. The rise has been particularly marked in the United States, but is also apparent in Canada and Australia. Pertinently, while Australia took many years to regulate private foundations, it shortly afterwards also introduced specific rules for public charitable foundations. This article therefore examines whether the United States and Canada can draw guidance from Australia’s experience in dealing with donor advised funds, especially in relation to delay in distributions and conflicts of interest.

Lloyd Mayer

N. Yoon: Understanding theoretical orientation and consequences of board interlock

Nara Yoon (Ph.D. student, Syracuse University) has published Understanding theoretical orientation and consequences of board interlock: Integration and future directions in Nonprofit Management & Leadership. Here is the abstract:

Board interlock represents a phenomenon where organizations are connected via overlapping board members and executives. Board interlock is an important area of research in governance study because of its potential to impact governance outcomes through the flow of information, resources, and status. Despite its potential significance, the role of board interlock in governance has not been explicitly discussed in the nonprofit board governance literature. I review and synthesize corporate and nonprofit board governance literature and link this literature to the study of board interlock. Then, I review the extant literature on the antecedents and consequences of board interlock. I conclude by identifying gaps in the literature and proposing directions for future research.

Lloyd Mayer

Sidel & Moore: The Law Affecting Civil Society in Asia

Mark Sidel (Wisconsin) and David Moore (International Center for Not-for-Profit Law) have posted The Law Affecting Civil Society in Asia:  Developments and Challenges for Nonprofit and Civil Society Organizations.  Here is the abstract:

Asia presents a paradox. Many of the more than forty countries in this vast region are home to
vibrant civil society sectors, engaged in everything from social services to advocacy to mutual
benefit activities and other pursuits that fall within the definitions of non-profit or charitable
activity. Yet in many countries of Asia, government regulatory controls on civil society are
restrictive or highly restrictive. Indeed, based on reports from countries as diverse as India,
China, Malaysia, Thailand and Vietnam, among many others, the legal operating environment is
becoming more restrictive, particularly for advocacy and other groups engaged in independent
civil society activity.

Nicholas Mirkay

 

E. Jensen: College Athletics and UBIT

Erik Jensen (Case Western Reserve) has published College Athletics and the Tax on Unrelated Business Income: Will 'Student Athletes' Still Be Students After the NCAA Changes Its Rules? in the Journal of Taxation of Investments.  Here is the abstract:

This article considers the effects of the California Fair Pay to Play Act—permitting a student athlete at any California college, beginning in 2023, to profit from income generated by the athlete’s “name, image, or likeness”—and the NCAA’s apparent acceptance of that principle on the liability of big-time athletic colleges for the unrelated business income tax (UBIT). College athletic teams historically have not been subject to UBIT because of the pretense that the participants are student athletes. Although the Fair Pay to Play Act and the NCAA’s response might not yet require discarding that pretense, the probable next step—direct compensation by the colleges, beyond scholarships, for participation in athletics—will make characterization of many athletes as “student athletes” untenable.

Nicholas Mirkay

C. Ahn, J. Houston & S. Kim: The Role of Corporate Board of Directors in Public Charity Lobbying

Changhyun Ahn, Joel F. Houston, and Sehoon Kim (all of the University of Florida) have posted Hidden in Plain Sight: The Role of Corporate Board of Directors in Public Charity Lobbying. Here is the abstract:

Using IRS tax filings by public charities linked to lobbying disclosure and corporate board data, we show that charities with corporate directors on their boards spend more money on lobbying for the connected firms' industry interests. Firms with greater exposure to political risk and lobbying activities more often seek board connections with charities, and the effects of connections are stronger when charities are connected to such firms or when charities are constrained on funding. We rule out assortative matching between directors and charities by controlling for firm-charity pair fixed effects, and address concerns of reverse causality using director turnovers as shocks to firm-charity connections. Consistent with quid-pro-quo relationships between firms and charities, we find that connected firms benefit from increased procurement contracts, and that connected charities receive more grants and donations. Our results highlight executive charitable engagement as a hidden avenue for corporate political activities.

Lloyd Mayer

J. Andreoni & R. Madoff: Calculating DAF Payout

James Andreoni (San Diego) and Ray Madoff (Boston College) have posted Calculating DAF Payout and What We Learn When We Do It Correctly. Here is the abstract:

The tremendous increase in the use of donor-advised funds for charitable donations has led policy-makers to ask if there is sufficient regulation and oversight of DAFs. In the absence of account level reporting, the debate has focused on the average payout rates of DAF sponsoring organizations, which have been reported by the DAF industry to exceed 20%. We show that the industry-preferred method for calculating payout rate overstates the correct payout by more than 50%. We then argue that the flow rate is uninformative unless grounded in the stock of assets held by the DAF sponsor. We suggest a different measure of flow we call the stockpiling rate. Finally, we show that transfers between DAFSs cause DAF grants to be overstated. Reporting transfers separately would allow a more precise estimate of flow.

Lloyd Mayer

A. Ball: Social Enterprise Lawyering

Alina Ball (Hastings) has published Social Enterprise Lawyering in the UMKC Law Review. Here is the abstract:

Social enterprises — businesses that achieve an articulated social mission using market-based strategies — have commanded rare attention in the last decade of corporate law scholarship. The recent enactment of for-profit, mission-driven entity legislation across the country has inspired a significant production of legal scholarship on corporate law innovations and governance considerations within the social enterprise sector. However, this influx of social enterprise legal scholarship has not, surprisingly, translated into a scholarly examination of the methods and strategies that corporate lawyers use when representing social enterprise clients. The proliferation and sustainability of social entrepreneurship will undoubtedly require the assistance of corporate and transactional lawyers who are equipped to address the nuances that social entrepreneurship presents. This Essay uniquely addresses this gap in social enterprise legal scholarship by advocating for “social enterprise lawyers” — corporate lawyers who also intuit how the social justice objectives of their social enterprise clients impact each legal matter. Moreover, social enterprise lawyers, as defined herein, are those corporate lawyers who conduct their lawyering in a manner that is consistent with the social change ethos of social entrepreneurship. As social entrepreneurship challenges fundamental assumptions of standard business practices and theories, social enterprise lawyering invites a re-imagining of conventional corporate lawyering. This Essay hypothesizes that for the nascent social enterprise sector to reach its full potential, there must also be a rise of social enterprise lawyers.

Lloyd Mayer

C. Chapman, M. Homsey, N. Gillespie: A Longitudinal & Multinational Examination of Public Trust in Nonprofits

Cassandra M. Chapman, Matthew J. Homsey, and Nicole Gillespie (all from the University of Queensland) have published No Global Crisis in Trust: A Longitudinal and Multinational Examination of Public Trust in Nonprofits in the Nonprofit and Voluntary Sector Quarterly. Here is the abstract:

Recent high-profile scandals suggest the potential for a crisis of trust in charities, which could have negative consequences for the nonprofit sector as a whole. Although widespread, this crisis narrative has not yet been subjected to empirical examination. To assess the extent to which public trust has changed over time, we examined trust in nongovernmental organizations within 31 countries over nine consecutive years using data from the Edelman Trust Barometer (N = 294,176). Multilevel analysis revealed that, after allowing for differences in absolute levels of trust and trends across countries, there was actually a small increase in global trust in the nonprofit sector. This increase was sharper among men, people aged below 40 years, and people with higher education, income, and media consumption. Overall, we find no evidence of a crisis of trust in nonprofits; scandals within individual organizations have not affected sectoral trust.

Lloyd Mayer

B. Leff: Fixing the Johnson Amendment Without Totally Destroying It

Benjamin M. Leff (American) has posted Fixing the Johnson Amendment Without Totally Destroying It. Here is the abstract:

The so-called Johnson Amendment is that portion of Section 501(c)(3) of the Internal Revenue Code that prohibits charities from "intervening" in electoral campaigns. Intervention has long been understood to include both contributing charitable funds to campaign coffers and communicating the charity's views about candidates' qualifications for office. The breadth of the Johnson Amendment potentially brings two important values into conflict: the government's interest in preventing tax-deductible contributions to be used for electoral purposes (called "non-subvention") and the speech rights or interests of charities.

For many years, the IRS has taken the position that the Johnson Amendment's prohibition on electoral communications includes the content of a religious leader's speech in an official religious service — a minister may not express support or opposition to a candidate from the pulpit. For at least as many years, some commentators and legislators have found this application of the Johnson Amendment especially problematic, since it implicates directly the freedom of houses of worship speech and religious exercise. These Johnson Amendment critics sought to provide some carve-out from the Johnson Amendment's general application to permit speech that includes ministers' pulpit speech without creating a massive loophole for the Johnson Amendment's general prohibition on campaign intervention. Other commentators have long argued that a limited carve-out for certain types of speech is not possible — that permitting any communication of the organization's views, even in pulpit speech, would provide a massive loophole in the overall treatment of campaign contributions and expenditures.

This Article reviews the leading proposals to fix the Johnson Amendment, and finds them all lacking. It then proposes four types of modifications that could be used to properly balance the speech interests of charities (especially churches) with the government's interest in a level playing field for campaign expenditures (non-subvention). These proposed modifications include:

(i) a non-incremental expenditure tax,

(ii) a reporting regime,

(iii) a disclosure regime, and

(iv) a governance regime.

The Article concludes that in order to properly balance non-subvention with speech interests of charities, a modification of the Johnson Amendment should include some version of all four types of interventions.

Lloyd Mayer

Election 2020: Pre-Election Walking Up To (and Over?) the 501(c)(3) Political Campaign Intervention Line

As happens every election season, in the run-up to the 2020 election there were a flurry of news stories about Internal Revenue Code section 501(c)(3) charities pushing up against, and maybe pushing through, the political campaign intervention prohibition. With over 65 years of guidance from the IRS, as meticulously compiled by  Steven H. Sholk of Gibbons P.C., you would think just about every possible situation has been addressed, yet charities and candidates continue to come up with new ways of walking right up to, and maybe crossing, that line.

For example, in mid-October the Washington Post reported on a closed-door session of conservative activists, including leaders of a number of 501(c)(3)s, discussing electoral tactics from challenging mail-in ballots to ballot harvesting. The story quoted nonprofit experts  Roger Colinvaux and Marcus Owens as being concerned that the involvement of 501(c)(3) leaders raised questions about their organizations' compliance with the political campaign intervention prohibition. In response, some of those leaders stated they were not there on behalf of the groups they lead.

At the more local level, in Kansas a state senate candidate included on his campaign signs not only that he had founded a church and thrift store, but also included the organization's logo. The candidate insisted that the sign was purely informational. But as I noted to the reporter who wrote the story, the problem is the inclusion of the group's logo, which constitutes the use of the charity's property for the candidate's benefit. And the story also reported appearances by the candidate at two churches, which did not provide his opponent with a similar opportunity to appear.

And of course there were other reports of more common but still problematic support of candidates. These included a Kansas state house candidate using mailing equipment owned by a church; his campaign reimbursed the church for the cost of that use, but it does not appear that the church made the equipment generally available for use by the public or other candidates on similar terms as required by IRS guidance. And a Catholic priest in Mississippi called then candidate Joe BIden "an embarrassment to Catholicism" from the pulpit in late October.

There is no indication that any of these events have led to adverse IRS attention, although of course the IRS has a number of years to pursue an audit or, in the case of the churches, a church tax inquiry.

Lloyd Mayer

Brescia, Ansari & Hage, The Legal Needs of Nonprofits: An Empirical Study of Tax-Exempt Organizations and Their Access to Legal Services

Raymond H. Brescia (Albany Law School), Bahareh Ansari (Ph.D. candidate, University at Albany), & Hannah Hage (JD, Albany Law School) have posted The Legal Needs of Nonprofits: An Empirical Study of Tax-Exempt Organizations and Their Access to Legal Services to SSRN. Here is the abstract:

This empirical study, using quantitative and qualitative techniques, attempts to assess the state of the legal needs of non-profit organizations, with an emphasis on the ways in which non-profit organizations are or are not accessing assistance addressing their legal services needs. While most research into the extent to which Americans may or may not be accessing legal services focuses on the legal needs of individuals and families, this study focuses on the legal needs of non-profit groups. Our goal with this research project is to contribute to the growing literature on the scope of unmet legal needs in the United States. The findings from this study suggest that many of the groups we surveyed and with which we communicated do have access to legal representation, particularly as groups grow in terms of their financial wherewithal (that is, the size of their budgets). Smaller groups appear to face greater barriers to obtaining legal services, and we attempt to probe some of the reasons that is the case. At the same time, many groups, large and small, are meeting their legal needs through a range of legal services providers: whether they use legal services providers that are themselves non-profit entities that offer them assistance; they obtain the volunteer services of private lawyers who provide representation; or they are simply paying for legal services themselves. Often, as our findings indicate, they are using a mix of these different resources: they are paying for services, obtaining non-profit legal services free-of-charge, and/or utilizing the services of pro bono counsel. This study attempts to begin to fill the gap in the research by exploring not just the unmet legal needs of non-profit groups, but also probing the ways in which non-profit entities that are accessing legal services are able to obtain those services, and from whom. It also attempts to create a taxonomy of needs: an assessment of the types of legal needs the organizations we surveyed face.

Samuel D. Brunson

Pittsburgh Tax Review: Special Issue on the Tax Reform Act of 1969

The Pittsburgh Tax Review has published a special issue marking the 50th anniversary of the Tax Reform Act of 1969. Here is the articles:

The 1969 Tax Reform Act and Charities: Fifty Years Later by Philip Hackney

The Private Foundation Rules at Fifty: How Did We Get Them and Do They Meet Current Needs? by James J. Fishman

The Private Foundation Excise Tax on Self-Dealing: Contours, Comparisons, and Character by Ellen P. Aprill

The Five Percent Fig Leaf by Ray D. Madoff

Foundation Regulation in Our Age of Impact by Dana Brakman Reiser

Private Operating Foundation Reform and J. Paul Getty by Khrista McCarden

Lloyd Mayer

 

Breen: Regulatory European Philanthropy: Lessons from the Scholarly Legacy of Evelyn Brody

Oonagh B. Breen (University College Dublin) has published Regulating European Philanthropy: Lessons from the Scholarly Legacy of Evelyn Brody in the Nopnrofit Policy Forum. Here is the abstract:

Throughout her long and distinguished academic career, spanning more than three decades, as a Professor of Law at Chicago-Kent University, Evelyn Brody’s work has interrogated three broad themes that underpin and drive charity law – the tax treatment of charities; the governance framework applicable to charities, its application, monitoring and enforcement; and the evolution of charitable structures over time, whether from an economic convergence perspective, a constitutional right of association perspective or from a public/private benefit perspective. This article reviews Brody’s contribution in these key areas. It explores the resonance of her work outside of the United States and its relevance for EU non-profit scholars before looking to Brody’s research legacy for future nonprofit scholars on both sides of the Atlantic.

Lloyd Mayer

Galle: The Quick (Spending) and the Dead: The Agency Costs of Forever Philanthropy

Brian D. Galle (Georgetown) has posted The Quick (Spending) and the Dead: The Agency Costs of Forever Philanthropy, which will be published in the Vanderbilt Law Review. Here is the abstract:

American philanthropic institutions control upwards of a trillion dollars of wealth. Because contributions to these entities are deductible from both income and estate taxes, and the entities’ earnings are tax-free, that trillion dollars is heavily underwritten by contemporary taxpayers. Law offers little assurance that those who pay will be those who benefit, however. To the contrary, since these subsidies become more valuable the longer charitable assets are left unspent, law strongly encourages philanthropies to save rather than spend, even in situations of great current need. Other legal rules further encourage grant-making institutions to strive to exist “in perpetuity.”

This Essay offers new empirical evidence of the social cost of forever philanthropy, that is, of institutions that long outlive their founders. Drawing on a relatively unique dataset of foundation donors, and combining it with a large archive of tax returns filed by private foundations, I search for evidence that managers of long-lasting organizations depart significantly from the preferences of the organization’s supporters. I find that a firm’s overhead, or the ratio of administrative expenses to grants made, jumps by about 12% as soon as the organization’s last living donor dies. Payout rates, or the share of assets spent each year, move sharply in the opposite direction, falling about 7% at that time.

I interpret these findings as evidence of substantial agency costs. Since the timing of the donor’s death is relatively random, these outcomes offer convincing causal evidence that the ability of a donor to monitor her foundation’s managers importantly affects whether those managers follow her wishes. I argue that overhead and payout changes in the direction I observe strongly suggest that managers, once free from direct oversight, are operating the firm for their own comfort and security. Thus, by unnaturally extending the lifespan of foundations, law is encouraging wasteful allocation of taxpayer-supported charitable resources.

Therefore, I suggest several policy options that would reduce the agency-cost problem. Among others, I support maintaining or increasing legal requirements for mandatory distributions by private foundations, and closing legal loopholes offered by a relatively new charitable phenomenon, the donor advised fund.

Michelle Layser (Illinois) has posted a review of the article on TaxProf Blog.

Lloyd Mayer

Haber: Legal Issues in Mutual Aid Operations

Michael Haber (Hofstra) has posted Legal Issues in Mutual Aid Operations: A Preliminary Guide. Here is the abstract:

This is a preliminary guide to legal issues that impact groups engaged in mutual aid. It is targeted to groups that have been responding to the COVID-19 crisis in New York, but has information that may be relevant for groups engaged in mutual aid in other contexts and other places. It gives legal information on topics including: risk of liability; questions around governance and incorporation; safety policies, liability waivers, and insurance; banking and mutual aid; funding mutual aid and taxation of mutual aid; crowdfunding regulations; and food storage and safety rules.

Lloyd Mayer

Langford (two papers): Conflicts and Coherence in the Charities Sphere; Using the Corporate Form for Public Benefit

Rosemary Teele Langford (Melbourne) has posted two articles.  The first is Conflicts and Coherence in the Charities Sphere: Would a Conflict By Any Other Name Proscribe the Same?, 14 Journal of Equity 1 (2020). Here is the abstract:

Proscriptions on conflicts of interest have long been a core component of governance regimes. In the charities sphere such proscriptions arise from a number of sources, including general law, statute and governance standards articulated by the regulator. Unfortunately the wording of relevant conflicts duties varies extensively, giving rise to acute incoherence and uncertainty. This article undertakes detailed critical analysis of the myriad of conflicts duties in order to provide certainty and comprehensive guidance. This resolution is relevant beyond the charitable sphere given the multitude of ways in which conflicts proscriptions are expressed in other governance contexts.

The second is Use of the Corporate Form for Public Benefit - Revitalisation of Australian Corporations Law, which will be published in 43 University of New South Wales Law Journal No. 3 (2020). Here is the abstract:

This article specifically addresses the theme of revitalisation of Australian law in the facilitation of purpose-based companies. It is the second of two articles on purpose-based governance in the charitable and for-profit spheres. Building on the first article, this article critically analyses relevant features of the Australian corporations law regime. It pays close attention to challenges relating to the application of directors’ duties where companies have multiple purposes and to the drafting of appropriate constitutional provisions. In so doing it draws on insights from overseas jurisdictions that have enacted legislation to enable purpose-based companies.

Lloyd Mayer

Li: Global Civil Society Under the New INGO Regulatory Law (China)

Shuoyan Li (Shanghai University) has published Global Civil Society Under the New INGO Regulatory Law: A Comparative Case Study of Two INGOs in China, in VOLUNTAS. Here is the abstract:

This paper tries to explain why similar International Nongovernmental Organizations (INGOs) have different scopes under the new regulatory law in China. While previous studies have often associated fragmented authoritarianism with more room for civil sectors, the unintended consequence has been largely ignored. The paper argues that while civil sectors benefit from decentralized bureaucratic politics, the conflict between bureaucracies may also become an obstacle. This argument is based on a comparative case study of two similar INGOs whose missions are to solve poverty issues. While World Vision International had difficulties becoming a national organization after establishing several provincial offices with the help of local authorities, Oxfam succeeded and received permission from CPAFFC because it terminated collaboration with other local authorities, which put CPAFFC at ease. The interviews illustrate that competition among different departments and concerns about political risk lead to different outcomes for civil society. Government agencies will doubt an INGO’s willingness to commit to a new relationship if it has too many partners. This implication reveals the complex effects of fragmented bureaucracy on INGOs. The decentralized political structure may lead to different outcomes for INGOs. It is necessary for INGOs to understand the political logic of the new INGO law so that they can choose the proper strategy to maximize their benefits.

Lloyd Mayer

López-Arceiz & Bellostas: Nonprofit governance and outside corruption

Francisco-José López-Arceiz (Universidad Pública de Navarra) and Ana J. Bellostas (University of Zaragoza) have published Nonprofit governance and outside corruption: The role of accountability, stakeholder participation, and management systems in Nonprofit Management & Leadership. Here is the abstract:

Outside corruption implies that a nonprofit organizatio

n is used to commit an infraction or crime. In Spain, this type of corruption has been detected in the context of public nonprofits as a result of the legal reform that enabled the judgment of the criminal responsibility of legal entities. A large percentage of these entities were affected by the reform, but little is known about the possible practices that can altogether prevent this behavior. In particular, there are few studies that consider nonprofit governance as a possible measure to avoid corruption in this context. For this reason, our aim is to analyze the role of certain nonprofit governance practices in fighting corruption. Using structural equation modeling, our results reveal that nonprofit governance is a key tool for mitigating corruption, although the weights of the different practices are not the same.

Lloyd Mayer