Nonprofit Law Prof Blog

Festschrift for Professor Ellen Aprill at Loyola Law School LA

Loyola Law School Los Angeles hosted a Festschrift on Friday March 24, celebrating the scholarly career of Ellen Aprill who has
contributed so much to the nonprofit/tax-exempt organization legal sphere over her impressive career. I participated in the event. It was a wonderful opportunity for the Loyola Law School Community to share a collective recognition of Prof. Aprill with law professors from around the country, as well as practitioners. So many described the significant ways in which Prof. Aprill impacted their scholarly and personal lives. It was a touching tribute with her family sharing fabulous reflections as well. 

9:30 am – 3:00 pm  
FESTSCHRIFT & LIVE SYMPOSIUM featuring works-in-progress, to be published in a symposium issue of the Loyola of Los Angeles Law Review, by  

•  Lloyd Hitoshi Mayer, University of Notre Dame, Nonprofits, Taxes, and Speech 
• Samuel D. Brunson, Loyola University Chicago School of Law, & Philip Hackney, University of Pittsburgh School of Law: A More Capacious Conception of Church
• Roger Paul Colinvaux, Catholic University of America: Strings Are Attached: Placing a Spotlight on the Hidden Subsidy for Perpetual Donor Limits on Gifts
• Richard L. Hasen, UCLA School of Law: Nonprofit Law as the Tool to Kill What Remains of Campaign Finance Law: Reluctant Lessons from Ellen Aprill
• Michelle D. Layser, University of San Diego School of Law: The Unknown Consequences of Place-Based Tax Incentives

The presentation of papers was followed by a celebration and tribute from around thirty different people from students to colleagues, from practitioners to family from 3:30 – 5:00 pm. It was a true joy.

Philip Hackney

Brunson & Hackney: A More Capacious Concept of Church

Samuel D. Brunson (Loyola Chicago) and Philip Hackney (Pittsburgh) have posted A More Capacious Concept of Church, which will be published in the Loyola of Los Angeles Law Review as part of a symposium issue honoring Ellen Aprill (Loyola L.A.). Here is the abstract:

United States tax law provides churches with extra benefits and robust protection from IRS enforcement actions. Churches and religious organizations are automatically exempt from the income tax without needing to apply to be so recognized and without needing to file a tax return. Beyond that, churches are protected from audit by stringent procedures. There are good reasons to consider providing a distance between church and state, including the state tax authority. In many instances, Congress granted churches preferential tax treatment to try to avoid excess entanglement between church and state, though that preferential treatment often just shifts the locus of entanglement. But those benefits and protections come with cost both to individual churches (by making these organizations susceptible to tax shelters and political activity shelters) and to our democratic order (by granting churches to a higher status than other organizations). Does Congress get the balance right? We think the balance struck is problematic but justifiable. In this Essay we only note the problems and suggest some actions churches and religious organizations might take to protect against some of the dangers.

Lloyd Mayer

Galle, Gamage & Shanske: Solving the Valuation Challenge

Brian D. Galle (Georgetown), David Gamage (Indiana), and Darien Shanske (U.C. Davis) have posted Solving the Valuation Challenge: The ULTRA Method for Taxing Extreme Wealth, 72 Duke Law Journal 1257 (2023). Here is the abstract:

Recent reporting based on leaked tax returns of the ultra-rich confirms what experts have long suspected: for the wealthiest Americans, paying taxes is mostly optional. Some of the country's richest have reported annual incomes that would be modest for a school teacher, even as the share of wealth held by the top .1% is at its highest in nearly a century.

Experts have long understood that one problem sits at the root cause of many of the tax system's failures to reach the very rich: valuation. Because it is difficult to appraise complex or unique assets, modern tax systems instead wait until an asset is sold to impose tax. In combination with an American rule that wipes away income tax on inherited profits, and a highly porous estate tax system, this "realization" approach has deeply undermined U.S. efforts to tax extreme wealth.

This Article proposes a new approach: governments should take payments from the wealthy in the form of notional equity interests, which we call "ULTRAs," for unliquidated tax reserve accounts. Simply put, the ULTRA is economically equivalent to a government claim on a portion of the stock of a business, but because it is "notional" it does not provide the tax authority with any governance rights or minority shareholders protections. Because the ULTRA represents a set share of an asset, whatever that asset's worth, it does not require valuation.

We explain how the ULTRA proposal builds on existing components already in use by wealth taxes around the globe, as well as prior academic proposals. By combining select features from predecessors, the ULTRA addresses many of the shortcomings those tools face individually. For example, unlike the "retrospective" system proposed by the economists Alan Auerbach and David Bradford, the ULTRA solution ensures that taxpayers who expect to outperform the market with their investments will still have no incentive to delay paying tax.

We then set out a variety of ways in which ULTRAs can be used to close the loopholes that wealthy taxpayers use to minimize their tax burdens. Most obviously, our proposal helps to make an annual tax on extreme wealth viable, and we detail how the ULTRA features in our proposal, developed more comprehensively elsewhere, for a state-level wealth tax. ULTRAs can also be used to reform the income tax system, most ambitiously as in the recent Billionaires Income Tax proposal to eliminate the "realization" approach for the very rich. We also show that valuation is at the core of many other common income-tax dodges, and detail ways that ULTRAs can be used to curtail them.

Lloyd Mayer

Hasen: Nonprofit Law as the Tool to Kill What Remains of Campaign Finance Law

Richard L. Hasen (UCLA) has posted Nonprofit Law as the Tool to Kill What Remains of Campaign Finance Law: Reluctant Lessons from Ellen Aprill, which will be published in the Loyola of Los Angeles Law Review as part of a symposium issue honoring Ellen Aprill (Loyola L.A.). Here is the abstract:

This brief Essay was prepared for a festschrift honoring the work of Professor Ellen Aprill. I explain in the Essay how Professor Aprill’s deep knowledge of nonprofit and tax law and her relentless intellectual honesty leads her (and us) to an unhappy place: a world in which many of the remaining regulations of money in politics could well be struck down as unconstitutional or rendered wholly ineffective by a Supreme Court increasingly hostile to the goals of campaign finance law and extremely solicitous of religious freedom. Just as the Supreme Court’s 2010 decision in Citizens United v. Federal Election Commission used the First Amendment rights of nonprofit corporations to open up direct political spending by large, for-profit corporations, additional arguments about the rights of charitable institutions and other nonprofits will be used to push further judicial deregulation of the political process for all.

Professor Aprill in her most recent writings at the intersection of nonprofit law and election law reluctantly shows the way: a path toward getting churches, synagogues and other charitable institutions directly in the business of politics; a means of striking down or rendering ineffective what remains of our campaign disclosure laws; and a self-reinforcing bootstrapping that relies upon legislative and agency inertia coupled with judicially-created loopholes to argue for the ineffectiveness of the system as a whole, triggering its demise through constitutional litigation. It is a sad but expertly told story of regulatory collapse.

Lloyd Mayer

Legislators Continue Scrutiny of Tax-Exempt Hospitals; Article Examines Their Finances

Last month three U.S. Senators focused their attention on tax-exempt hospitals. Two of them, Senator Elizabeth Warren (D-Mass.) and Senator Ron Wyden (D-Ore.) directed their ire toward McKinsey & Company, asking it to explain its role in helping nonprofit hospitals "take financial advantage of low-income patients." The other, Senator Tammy Baldwin (D-Wisc.) focused on the Ascension Health system, asking its CEO to explain activities at some of its hospitals that recent press reports highlighted , including patient safety concerns, the closure of a labor and delivery unit, and sizeable for-profit investment activities.

And a recent article by Brian D. Cadman and Elena Patel (both at the University of Utah, the former in the School of Business and the latter in the Department of Finance) focuses on nonprofit hospital finances. It is titled Nonprofit Regulation and Earnings Distribution: Nonprofit Hospital. Here is the abstract:

Organizing as a nonprofit amplifies agency problems through limited ownership and restricted earnings distribution. We examine how these agency problems influence the distribution of economic profits by nonprofit hospitals, which dominate the population of tax-exempt organizations and account for a large fraction of the US economy. Using detailed hospital-level financial data, we find that nonprofit hospitals earn large economic profit. We also show that these hospitals hold five times more cash and 85% more retained earnings than for-profit hospitals. In addition, we document that general and administrative labor expenses are 60% larger, physician labor expenses are 32% larger, and expenses for drugs provided to patients are 31% larger for nonprofit hospitals. Finally, we find that nonprofit hospitals invest more in land improvements and buildings. The evidence suggests that nonprofit hospitals distribute economic profits through wages and capital expenditures.

Lloyd Mayer

Conservation Easements Update: Cert. Denial; Hearing on Proposed Regs; New Articles

The long legal grind relating to conservation easements continues, with no end in sight. Setting aside the periodic issuance of dispositive and procedural decisions in the many pending cases - about half-a-dozen such decisions over the past three or so months by my count - there have been two significant developments and two new articles of interest.

First, the Supreme Court of the United States denied certiorari in Oakbrook Land Holdings, LLC v. Commissioner, one of two federal appellate court decisions that had created a circuit split over the validity of a conservation easement regulation. The Court apparently took to heart Professor Michael Kane's recommendation that it not take up this issue.

Second, the Treasury Department held its public hearing earlier this month on proposed regulations designed to address court decisions holding syndicated conservation easement listing Notice 2017-10 to be invalid under the Administrative Procedure Act. According to a Thompson Reuters article, many commentators urged Treasury to retain a carveout for donee organizations. According to a Law360 article, some of the commentators also questioned whether the proposed regulations are needed now that Congress has enacted a new charitable deduction disallowance rule for certain conservation easement contributions. 

As for the articles, Vanderbilt Law Review has published a note authored by Molly Teague and titled Conservation Options: Conservation Easements, Flexibility, and the “In Perpetuity” Requirement of IRC § 170(h). And the Wildlife Society Bulletin published a short article by several scholars titled Conservation Easements: A Tool for Preserving Wildlife Habitat on Private Lands and proposing "a shift from primarily negative clauses and restrictive language to a more affirmative approach, developing language to proactively improve management of properties under conservation easement in order to maximize benefits to wildlife and ecosystems."

Lloyd Mayer 

 

Murray: Donor Advised Funds & Delay: An Intergenerational Justice Solution?

Ian Murray (University of Western Australia) has published Donor Advised Funds & Delay: An Intergenerational Justice Solution in the Nonprofit Policy Forum. Here is the abstract:

Much writing on Donor Advised Funds (DAFs) relates to whether they ‘unduly’ delay the direct application of donated funds to achieve public benefit. However, the discussion rarely touches on a normative basis for determining what is ‘undue’ or that can be used to shape potential reforms, which are typically framed with reference to a private foundation payout rate or time limit for expending contributions. Research on charity accumulation conducted across the United States, United Kingdom, Canada, Australia and New Zealand, suggests that the normative principle of intergenerational justice is helpful for grounding such discussions (Murray, I. 2021. Charity Law and Accumulation: Maintaining an Intergenerational Balance. Cambridge: Cambridge University Press). This article considers intergenerational justice in the context of DAFs and considers whether the principle can be implemented in ways that support DAF sponsor independence and flexibility. One way that this could be achieved is by imposing (or enforcing existing) procedural obligations on decision-makers to give genuine consideration to intergenerational justice when making decisions about how much to spend and retain.

Lloyd Mayer

Nonprofit Finance Fund Survey

WARNING 

This post is about a survey conducted by The Nonprofit Finance Fund, which advocates from a racial justice perspective.  The group's beliefs that racism is systemic might make this post a violation of Florida Law, to wit:  The Stop Woke Act.  A federal judge enjoined enforcement of the act late last year in a "blistering opinion" comparing Florida to the Netflix Series, Stranger Things.  But if the injunction is lifted and Stop Woke yet prevails, your reading of this post shall be at your own risk of legal liability.

I'm just saying . . . 

 

The Nonprofit Finance Fund is out with some informative empirical data regarding the impact of the last two years on the nonprofit sector.   You might want to bookmark the report for later reference or cite.  The report focuses on that impact as it relates to communities of color:  Here are some snippets from The 2022 State of the Nonprofit Sector Survey:  

Events of the last two years also accelerated a racial reckoning in this country. The murders of innocent Black Americans like George Floyd and Breonna Taylor sparked widespread calls for racial justice. The anti-Asian attacks in places like Atlanta and San Francisco ignited the Stop Asian Hate movement. As with the COVID-19 response, nonprofits were on the frontlines of these movements for racial justice and equity. We asked survey respondents: Is your organization working toward advancing racial equity? We also asked questions to understand: Is the sector more broadly moving forward on racial equity? Did these racial reckonings translate to more equitable funding for BIPOC-led organizations?

In a sector with such a large power imbalance between who controls the money and who uses it, there are always financial challenges and inequities. We gathered data to compare the experiences of BIPOC-led (Black, Indigenous, and person of color) organizations with those of white-led organizations. Despite the many commitments to racial equity and to diversity, equity and inclusion, long-standing inequities persist in the nonprofit funding system that favor white-led organizations. For example, BIPOC-led organizations had less access to unrestricted funding and corporate donations than their white-led counterparts.

The NFF's web page has a series of YouTube videos summarizing its findings, one of which is embedded here:

Here are a few samples from a Stanford Social Innovation Review article summarizing the report:

A significantly higher percentage of nonprofits reported receiving funding from foundations in 2021 (51 percent) than in 2017 (38 percent). And, importantly, foundation funding became more flexible during a critical time of need. Flexible funding allowed nonprofits to adapt to the challenges of the COVID-19 pandemic, whether by modifying or starting programs, upgrading Internet speed and buying laptops for staff and clients as they adopted a remote working environment, or providing personal protective equipment to staff. In fact, 56 percent of nonprofits agreed that foundation funding was more flexible after March 2020, with only 12 percent disagreeing.

One survey respondent (who did not take the survey in 2018 but did in 2022) shared that their organization was able to redirect funds originally slated for in-home visits with new mothers to purchase good, quality strollers for families that didn’t have them. Staff and participants were able to meet outside while walking, getting fresh air and exercise along the way. We heard repeatedly how important flexibility was to supporting community needs.

Two-thirds of organizations ended 2021 with a surplus—an uptick from 2017—and fewer had a deficit or break-even financials. By and large, this is good news for nonprofits, although there was also a small jump in organizations with very high deficits, which we defined as 25 percent or more of their operating expenses.

Nonprofit is a tax status, not a directive to break even financially. In the social sector, nonprofits reinvest surpluses to grow, change, and prepare for the future, making surpluses a strong driver of nonprofit resilience. When nonprofits operate from a stronger financial position, funders can help them maintain strong levels of reserves and cash on hand by funding general operating support and not penalizing those that operate with surpluses by withholding or clawing-back grants. Encouraging surpluses allows nonprofits to adapt and grow to meet changing community needs.

darryll jones

 

 

Nonprofit Governance

Recently posted on SSRN:

Governance of Nonprofit Organizations

Nonprofit governance systems are designed to monitor, motivate, and guide managers to ensure they are working to achieve their organization’s mission and fulfill their fiduciary responsibilities. Considerable heterogeneity exists in governance practices across the nonprofit sector. We first describe the multidimensional set of governance mechanisms that can be implemented by boards, in conjunction with regulators, donors, creditors, and other stakeholders. We then discuss prior accounting research on the consequences and determinants of governance. Studies generally document positive outcomes from adopting effective governance, including enhanced stewardship, improved procurement of resources, and more useful disclosure. Research also suggests that organizational characteristics, board characteristics, and funding sources influence an organization’s governance structure. Finally, we note that there is still much to learn and encourage future research that addresses causality, identifies distinct contexts where specific governance mechanisms may be more or less beneficial, and investigates the role of governance in programmatic accomplishments.

dkj

Woke Philanthrophy

Yesterday's post was my clumsy attempt to steer the conversation (with both my readers) to a topic I am thinking about:  the role of nonprofits in the great social compact.  Nonprofits as an indispensable participant in both democracy and capitalism, without which democracy and capitalism would eventually crash, not of their immorality, but of their amorality.  I guess.  I ran across a Heritage Foundation report, of sorts, regarding the alleged danger to America, baseball, apple pie and hot dogs presented by "woke" philanthropists.  The title caused me to stop scrolling:  The Radicalization of Race:  Philanthropy and DEI.  I am not sure the publication is really a "report" as much as it is an advocacy piece decrying the progressivism that pretty much necessarily defines nonprofit anyway.  I think the reportage is plain old garbage (see what I did there?) and am tempted to dismiss the authors as "privileged" (the polite academic word for "racists").  I would be wrong.  We ought to give each other the benefit of our honest biases and engage the biases, not necessarily each other.  Plus, I want both my readers to know they can get both sides on this blog.  With that, here are some interesting excerpts:

 

Philanthropy and the Radicalization of Race

Despite the divisiveness, antagonism, and outright racism that CRT engenders, in the years after that fateful Wisconsin gathering in 1989 that launched CRT, major foundations began to increasingly adopt its premises. Similar to what was happening in the corporate world at the time, foundations and other actors in American society made an effort to increase “diversity,” where diversity was defined by race, sex, gender, sexuality, and disability. One such effort was the Increasing Diversity in Philanthropy Committee, which was formed in 1990 and lasted until 2015.

 It then continued as the Committee for Equitable and Inclusive Philanthropy. Another initiative was the Diversity in Philanthropy Project. Begun in 2007, 50 foundations and allied leaders came together for this time-limited campaign to expand diversity in the philanthropic field. In 2010, a number of nonprofits, companies, and high-status individuals came together to form the D5 Coalition, a five-year effort to advance philanthropy’s DEI mission. Partners included the Rockefellers, the Kellogg Foundation, and the William and Flora Hewlett Foundation.

Again, diversity was narrowly defined as “the demographic mix of a specific collection of people: racial and ethnic groups, LGBT populations, people with disabilities, and women.  In December 2019, the consulting firm Community Wealth Partners convened 21 foundations to form a new coalition—paid for by the Kresge Foundation, which has an endowment of $4.3 billion—including the Rockefeller, Gates, Bush, Hewlett, Kellogg, and Packard Foundations. A two-day summit was called to address how to “Support Nonprofit Leaders’ DEI Capacity.” A report detailing the coalition’s takeaways stated that “DEI work…requires dismantling practices and policies in order to create space for new ways of working.” The Ford Foundation later hopped on the wagon as well by releasing its “Guidance for Engaging Grantees on DEI.” As a result of this coordination, foundations began to ask for DEI statistics from their grantees. Following the death of George Floyd in May 2020, most large foundations significantly increased their funding to DEI causes.

Responding to DEI

DEI has become the guiding principle and dominant focus today of many private foundations, corporations, and the federal government. At the heart of these multi-billion-dollar efforts are certain key assumptions: that America is systemically racist; that all white Americans harbor unconscious racism; that equal rights, meritocracy, and the law itself all reinforce a regime of white supremacy; and that the free market is at least partly to blame. The end result of these assumptions, of this worldview, is that America itself is fundamentally flawed, hopelessly unfixable, and must be radically transformed, which has long been a Marxist goal.

Many of the practices and principles of DEI violate the Constitution and the Civil Rights Act. DEI suppresses rights of some while elevating the rights of others. Numerical quotas, government race-conscious policies, and speech codes do nothing to close the real disparities of achievement, because they do not address the root causes. Simon Fraser University professor Karen Ferguson had it right when she wrote that Bundy and his men dealt with the “psycho-cultural and therapeutic issue of black identity without having to deal with the structural and material issues that initially fostered the call for black self-determination.” That is still the lethal charge against DEI. It works to eradicate all the best aspects of the American experiment that have brought prosperity and possibility to so many: the rule of law, respect for individual rights, and equal treatment under the law. DEI is leading the country to the tyranny of collective rights, where people’s fates are in the hands of elites.

dkj

Nonprofit Hospital Community Benefit in Poor Areas and Nonprofit Hospital Profitability

Scholars, media, and policy makers continue to focus attention on nonprofit hospitals, as demonstrated by this WSJ article published Monday:

 

Many of the nation’s largest nonprofit hospital systems, which give aid to poorer communities to earn tax breaks, have been leaving those areas and moving into wealthier ones as they have added and shed hospitals in the last two decades. As nonprofits, these regional and national giants reap $8.8 billion from tax breaks annually, by one Johns Hopkins University researcher’s estimate. Among their obligations, they are expected to provide free medical care to those least able to afford it. Many top nonprofits, however, avoid communities where more people are likely to need that aid, according to a Wall Street Journal analysis of nearly 470 transactions. As these systems grew, many were more likely to divest or close hospitals in low-income communities than to add them. Since 2001, half the hospitals divested by CommonSpirit Health, a large Catholic system based in Chicago, were in communities where the poverty rate was above the medians for state hospital markets, compared with 30% of those it added. At Bon Secours Mercy Health, formed by the 2018 merger of two growing regional nonprofits, about 42% of hospitals it divested were in areas with higher poverty, compared with 27% of hospitals it added. Of hospitals divested or closed by St. Louis-based Ascension, about half were located in higher-poverty areas, compared with 40% of the Catholic system’s acquisitions.

Coincidentally, two scholars have posted "Nonprofit Regulation and Earnings Distribution:  Nonprofit Hospital."  Here is the abstract:

Organizing as a nonprofit amplifies agency problems through limited ownership and restricted earnings distribution. We examine how these agency problems influence the distribution of economic profits by nonprofit hospitals, which dominate the population of tax-exempt organizations and account for a large fraction of the US economy. Using detailed hospital-level financial data, we find that nonprofit hospitals earn large economic profit. We also show that these hospitals hold five times more cash and 85% more retained earnings than for-profit hospitals. In addition, we document that general and administrative labor expenses are 60% larger, physician labor expenses are 32% larger, and expenses for drugs provided to patients are 31% larger for nonprofit hospitals. Finally, we find that nonprofit hospitals invest more in land improvements and buildings. The evidence suggests that nonprofit hospitals distribute economic profits through wages and capital expenditures.

dkj

Brown & Fan: The Prospects for Mixed-Market Competition With Nonprofit and Hybrid Firms

Eleanor Brown (Pomona College) and Claire Qing Fan (PhD Student, University of Chicago) have published Lower Prices for Customers, and Less Charity Care? The Prospects for Mixed-Market Competition With Nonprofit and Hybrid Firms, Nonprofit and Voluntary Sector Quarterly (2022). Here is the abstract:

In recent years, the emergence of new legal forms allowing for-profit firms to incorporate with a formal commitment to both profit and social purpose has disrupted the traditional American business-charity dichotomy. The arrival of these hybrid firms can be expected to affect the functioning of markets and poses a potential challenge to the role played by large nonprofits that provide quasi-public services such as education and health care. We construct duopoly models of competition between a nonprofit firm and either a traditional for-profit firm or a hybrid firm, simultaneously choosing output levels of a homogeneous good. We show that when the nonprofit competes with a hybrid firm it becomes less competitive in the sense that its output level contracts, it raises less net revenue with which to fund charity care, and it is more easily driven out of the market.

Lloyd Mayer

Fisher: A Case for Nonprofit-Exempting Federal Action in Consumer Data Privacy Nonprofit-Exempting Federal Action in Consumer Data Privacy

Sarah Fisher (J.D. candidate, William & Mary Law School) has published Preempting the States and Protecting the Charities: A Case for Nonprofit-Exempting Federal Action in Consumer Data Privacy, 64 William & Mary Law Review 229 (2022). Here is the abstract:

This Note argues that Congress should use its Commerce Clause power to pass a consumer data privacy measure that (1) preempts state law and (2) explicitly exempts 501(c)(3) organizations from compliance. Such preemptive action with a narrow 501(c)(3) carve-out would avoid the potential harm of exempting too broad a group of nonprofit entities while ensuring charitable organizations’ continued existence, would be more protective of both the individual privacy right and 501(c)(3) existence than merely adjusting the revenue dollar threshold at which entities must comply, and would properly balance the individual right to control personal data with the societal good served by the existence of 501(c)(3) charitable organizations.

Part I of this Note elaborates on the relationship between 501(c)(3) organizations and personal data and expands on the compliance difficulties faced by (and the collective societal good of) (c)(3) groups. Part II reviews the four major existing privacy law measures—the GDPR, the CCPA, the CPA, and the VCDPA—and analyzes the scope of each measure’s reach as it pertains to 501(c)(3) charities. Part III of this Note makes the case for federal preemptory action in a sweeping consumer privacy rights measure that trumps the existing patchwork of state law and exempts 501(c)(3) organizations from compliance. Finally, Part IV of this Note considers and responds to potential Tenth Amendment and state expertise counterarguments that could be raised in opposition to federal preemptory action in this arena.

Lloyd Mayer

 

Two Articles By Sholk, On Election Activities and Substantiating Charitable Contributions

Steven H. Sholk (Gibbons Law) has posted two recent articles. The first is the annual update of A Guide to Election Year Activities of Section 501(c)(3) Organizations, a now 649-page comprehensive guide to this topic. The second is a A Guide to the Substantiation Rules for Deductible Charitable Contributions, to be published in the 137 Journal of Taxation (2022), which provides a detailed discussion of this topic that repeatedly creates problems for taxpayers.

Lloyd Mayer

Churches & Tax Exemption: Growing Less Settled?

Since I occasionally write about tax law and religious organizations, I am sometimes asked if there is a realistic possibility that churches might lose their tax exempt status given scandals ranging from televangelist salaries to sexual abuse. My go-to response is that there are hundreds of congregations in every congressional district, and if there is one thing that would unite them it would be protecting that status. So no.

Making me wonder if my response has been too glib are the following recent pieces on this topic that the authors thought worth the effort to write. The first relates to certain specific churches, but the other two are more broad based defenses of the exemption, responding to recent criticisms: 

• Taylor Holley, Note, Auditing Scientology: Reexamining the Church's 501(c)(3) Tax Exemption Eligibility, 54 Tex. Tech. L. Rev. 345 (2022). The author raises commerciality, private inurement, and fundamental public policy concerns with Scientology organizations.

• Reece Barker, Note, A Memorial and Remonstrance Against Taxation of Churches, 47 BYU L. Rev. 1001 (2022). The author argues "[a]though religious organizations are currently exempted from taxation, this issue is important because there is a growing appetite to remove the exemptions. For example, many view religion as an untapped source of revenue for cash-strapped governments. Others think they can coerce religious organizations to bend to the will of popular opinion through revocation of tax exemption. But whether the tax is designed to increase revenue or to align doctrine with popular opinion, religious taxation is off the table. It is off the table because tax exemption for religious organizations is not a reward, benefit, tax break, or legislative prerogative; it is a right rooted in the First Amendment. A right that acts as a crucial bulwark of society because it enables state and church autonomy that protects each from exercising undue influence over the other." (footnotes omitted)

• Howard Husock, Removing the Tax Exemption for Religious Congregations Is the Wrong Move for Our Polarized Nation (Opinion, Chronicle of Philanthropy, Nov. 17, 2022). He concludes "[t]he value of religion in providing links among neighbors, promoting friendship, and building a foundation for good works in an increasingly fragmented society transcends any tax accounting. During this time of extreme polarization, limiting the tax deduction for America’s most popular form of charitable giving would be exactly the wrong move."

And as an added bonus, another recent article addresses the perennial topic of churches and politics:

• Julia Camp, John Masselli, and Amy J.N. Yurko, Religion versus Politics: An age-old question with continued importance to the U.S. nonprofit classification system, The ATA Journal of Legal Tax Research (2022) (subscription required). From the abstract: "Following the awarding of church status to some seemingly politically charged organizations, we investigate this issue and propose that it is time for the U.S. Congress and the IRS to revisit, evaluate, and revamp the existing system to prevent political organizations from abusing the tax provisions intended to benefit churches."

Lloyd Mayer

Conservation Easements Update: Proposed Listed Transactions Regs; Kane on Circuit Split

Last month the U.S. Tax Court held that the syndicated conservation easement listing notice was invalid for failure to follow Administrative Procedure Act requirements. Without agreeing with the Tax Court's decision, the Treasury Department has now issued proposed regulations that would identify these transactions as listed transactions. Here is the Federal Register summary:

This document contains proposed regulations that identify certain syndicated conservation easement transactions and substantially similar transactions as listed transactions, a type of reportable transaction. Material advisors and certain participants in these listed transactions are required to file disclosures with the IRS and are subject to penalties for failure to disclose. The proposed regulations affect participants in these transactions as well as material advisors. In addition, while the proposed regulations exclude qualified organizations from being treated as participants or parties to a prohibited tax shelter transaction subject to excise tax, this notice of proposed rulemaking requests comments on whether the final regulations should remove the exclusion from the application of the excise tax for qualified organizations that facilitate syndicated conservation easement transactions. Finally, this document provides notice of a public hearing on the proposed regulations.

Comments are due by February 6, 2023. For additional coverage of the Tax Court's decision, see Peter J. Reilly's Forbes article.

I also previously noted the circuit split relating to a conservation easement regulation. Now Mitchell Kane (NYU) has published The Dispute Over Perpetual Conservation Easements Just Got Worse in Tax Notes, arguing that Supreme Court should not grant certiorari to resolve that split. Here is a paragraph from the introduction:

In Section I, I explain why certiorari is not warranted in Oakbrook. Further, the stakes transcend conservation easements and the proceeds regulation: A grant of certiorari in this case could lead down a path that would destabilize tax regulations generally and greatly hinder effective tax code enforcement. To argue against cert grant is not to say that the status quo is optimal. IRS challenges to easements under the proceeds regulation seem to have involved instances with suspiciously high valuations. There is nothing wrong with that strategy from a litigation standpoint; we should expect the IRS to focus its scarce resources on high-value cases, and the agency has won cases bringing challenges under the proceeds regulation. Even so, this litigation at least raises the prospect of casting a cloud over existing, or future, easement transactions that are not abusive and are within the set of transactions that Congress plausibly wanted to encourage. The status quo is thus not obviously the best outcome in terms of the law applicable to the tax treatment of conservation easements under section 170. For this reason, in Section II, I will consider alternatives to the status quo.

For previous coverage of the circuit split, see Kristin E. Hickman (Minnesota), The Federal Tax System's Administrative Law Woes Grow, ABA Tax Times, May 26, 2022.

Lloyd Mayer

Donor-Advised Funds Update: New Articles by Colinvaux and Heist et al.; NY AG Action; Fidelity Charitable Just Keeps Growing

Roger Colinvaux (Catholic University) has published Speeding Up Benefits to Charity by Reforming Gifts to Intermediaries, 63 Boston College Law Review 2621 (2022). Here is the abstract:

Charitable giving tax incentives are intended to encourage giving for public benefit. Gifts to intermediaries frustrate this goal. Presently, $1.26 trillion has accumulated in donor advised funds (DAFs) and private foundations. These are charitable intermediaries that do not benefit the public until they release their funds for public use. Congress has long recognized that intermediaries cause a "delay in benefit" problem because the tax incentive is awarded before the public benefits from the gift. Congress addressed this problem for foundations in 1969 by requiring them to pay out a minimum amount annually. Congress, however, has not addressed the problem for DAFs, and the foundation payout now has too many loopholes. The Article explains that reform of charitable intermediaries is essential to the continued viability of the charitable giving incentives. The status quo allows donors to a take a tax deduction, retain effective control over their donations indefinitely, and provides no guarantees that the public will ever benefit from tax subsidized charitable gifts. This Article responds to arguments against charitable intermediary reform and analyzes bipartisan legislation, the ACE Act, introduced to accelerate charitable giving from DAFs and foundations. The Article also considers whether community foundations and other mission-driven DAF sponsors warrant distinct legal treatment. The Article concludes that the status quo undermines generosity and perpetuates wealth, and that reform is required. This Article further concludes that, though the ACE Act is sound legislation, it should apply to existing DAF accounts and require further study of its incentives for private foundations and whether DAFs at mission-driven sponsors further their mission.

H. Daniel Heist (BYU), Benjamin F. Cummings (Utah Valley University), Megan M. Farwell, Ram Cnaan (University of Pennsylvania), and Erinn Andrews (GiveTeam) have published Tubs, tanks, and towers: Donor strategies for donor-advised funds giving, Nonprofit & Management Leadership (2022), which provides interesting information about the various ways donors use DAFs. Here is the abstract:

The increasing use of donor-advised funds (DAFs) creates challenges for nonprofit managers and fundamentally changes the way that many donors give to charity. We conducted 48 in-depth interviews with DAF donors to understand their strategies of how they give through a DAF. From the interviews, we found three distinct models of DAF giving strategies: tubs, tanks, and towers. Tub donors give quickly through a DAF, moving money in and out annually. Tank donors contribute large lump sums and grant the money away in the relatively near future. Tower donors take a calculated approach with the DAF to sustain their philanthropic activity over time. Several factors relate to these strategies, including the sources and timing of contributions, different purposes of grantmaking, tax implications, investment strategies, and family involvement. Our findings may help nonprofit managers, fundraisers, and other stakeholders to better understand the various ways donors give through DAFs.

In other news, last month the New York Attorney General filed an Assurance of Discontinuance relating to Peter Fleischmann, former chief executive office of the Foundation for Jewish Philanthropies (FJP), a donor-advised fund (DAF) sponsoring organization. According to news reports, four years ago Fleischmann resigned from his role with the charity that then managed nearly $200 million in assets. I could not find a ready link to the document - I received it from the New York AG's office - but it contains findings and relief agreed to by the AG and Fleischmann, including:

• A disclosure by FJP of an internal investigation to the AG's office triggered the AG's inquiry.

• Fleischmann breached his fiduciary duties in various ways, specifically facilitating a donor's award of scholarships from a fund held by FPJ to relatives of the donor (which FJP reported to the IRS as violations of section 4966 relating to DAFs and obtained repayment from the donor for) and making charitable donations in violation of the terms of other funds and claiming those donations as his personal ones for charitable contribution deduction purposes (which he has since repaid in significant part to FJP).

• Fleischmann agreed to be permanently barred from serving in a position with fiduciary responsibilities for any New York nonprofit and has corrected the tax returns on which he claimed the improper charitable contribution deductions.

Finally, Fidelity Charitable announced that new grants are expected to surpass deposits in 2022, according to AP News, with grants expected to exceed the $10.3 billion donated in 2021. And Bloomberg Law (subscription required) reports on the details of Fidelity Charitable's latest IRS Form 990, including that of those 2021 donations hundreds of millions of dollars flowed to other DAF sponsoring organizations.

Lloyd Mayer

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