Friday, September 3, 2021
Florida officials annnounced last week that the former chief executive officer of nonprofit Florida Coalition Against Domestic Violence has agreed to repay $2.1 million in alleged excess compensation paid to her, the Miami Herald reported. In addition, the nonprofit's insurer agreed to pay an additional $1.7 million to the Department of Children and Families and a court-appointed receiver, and two other former officers agreed to pay $60,000. The nonprofit will be dissolved.
As previously covered in this space, the settlement grew out of a state audit triggered by the reported $761,000 paid to the CEO for the fiscal year that ended on June 30, 2017. The nonprofit received almost of its funding from the state of Florida, which it would then distribute to domestic violence centers throughout the state. It eventually came out that the CEO had in fact been paid more than $7.5 million over three years. According to the most recent news report, the state alleges that the board compensation committee worked with the CEO to conceal the high level of compensation that she received. But the CEO's attorney pushed back on the assertion that the amount of compensation paid was improper or excessive.
Wednesday, September 1, 2021
UPDATE: A reader commented that 1st Circuit has cited but distinguished the AFPF decision in rejecting a constitutional challenge to certain Rhode Island disclosure and disclaimer laws applicable to election-related communications, possibly setting the stage for the Supreme Court to consider the AFPF decision's applicable to campaign finance disclosure laws. See Gaspee Project v. Mederos (1st Circ. Sept., 14, 2021). In contrast, a federal district court in Colorado has relied in part on the AFPF decision in enjoining a municipal independent expenditures disclosure law. See Lakewood Citizens Watchdog Group v. City of Lakewood (D. Colo. Sept. 7, 2021). And finally, the Hawaii Attorney General has posted the following notice on its Tax & Charities website: "Effective immediately, the State of Hawaii Department of the Attorney General’s Tax & Charities Division will no longer require the filing of Schedule B to the IRS Form 990 as part of the registration and annual reporting requirements."
The first effects of the Supreme Court's decision in Americans for Prosperity Foundation v. Bonta are now being felt, although it will take years for the full effects of this landmark donor disclosure case to be realized.
Not surprisingly, California quickly posted the following notice on its Charities webpage in recognition of its loss:
Effective July 1, 2021, the Registry of Charitable Trusts will no longer require the filing of Schedule B to the IRS Form 990 as part of the registration and annual reporting requirements.
New Jersey, which has a filing requirement similar to California's, announced it would not be enforcing its requirement on its Charities Registration Section webpage, saying:
In light of the United States Supreme Court’s recent decision in Americans for Prosperity v. Bonta, the Division's Charities Registration Section has determined that the requirement that charities submit the Internal Revenue Service (IRS) Form 990 Schedule B upfront as part of their initial and yearly registrations can no longer be enforced. The Division will therefore be revising its rules, and in the interim will not be taking enforcement action based on the failure to include Schedule B or an equivalent donor schedule in such registrations. The Division will deem any entities that were previously deemed non-compliant solely because they failed to submit Schedule B or an equivalent donor schedule to be in compliance with registration requirements. All other regulations at N.J.A.C. 13:48-1.1 et seq. remain in effect and the Division continues to require the submission of all other schedules and statements.
And as already noted in this space, New York has also suspended collection of that schedule pending review of the decision. Both New York and New Jersey faced legal challenges from the Liberty Justice Center to their collection of the schedule, which may have pushed them to get these notices out quickly. No word yet on whether Hawaii, which is the other state with a similar requirement, will follow their lead. (Ballotpedia also identifies Kentucky as having such a requirement, but filings in the AFPF litigation indicate this is not accurate.) Coverage: The NonProfit Times.
For recent, in-depth analysis of the possible further effects of the decision, see Americans for Prosperity Foundation v. Bonta: Questions and Answers, written by Professor Bradley A. Smith (Capital University) for the Institute for Free Speech. One interesting aspect of his analysis is his take on the possible effect on the federal tax law donor disclosure requirement (operationalized through Schedule B) (footnotes omitted):
Does This Mean Nonprofits No Longer Have to File Schedule B With the IRS?
No. In 2020, the IRS repealed the requirement that donor names and addresses be reported on Schedule B for most nonprofits, but not for those operating under Sections 501(c)(3) or 527 of the Internal Revenue Code. The AFPF majority specifically noted that, “revenue collection efforts and conferral of tax-exempt status may raise issues not presented by California’s disclosure requirement.”
It is hard to say how the courts would respond to a challenge to the IRS’s Schedule B filing requirement. Such a challenge would now be analyzed under the AFPF framework, meaning the IRS would have to show an important need for the information and that the demand was narrowly tailored. However, as 501(c)(3) donors claim a tax deduction, the IRS would likely argue that the information is needed to ensure tax compliance – i.e., that the donations claimed by individual filers are actually received by charities. Given the potential revenue consequences, and a more direct connection between the information sought and the potential fraud than existed under California’s policy, courts might still uphold the rule, as the majority appears to suggest.
As often happens with Supreme Court decisions announcing new or clarified standards of review, how lower courts interpret the case going forward will be almost as important as the case itself.
Tuesday, August 24, 2021
The New York Attorney General's Charities Bureau chose to suspend its collection of Schedule B with substantial donor information. It intends to study the question of whether it can constitutionally collect this information in light of the recent Supreme Court decision in Americans with Prosperity Foundation v. Bonta.
They state: "The New York Attorney General’s Charities Bureau has suspended its collection of IRS Form 990 Schedule B while we review any amendments that may be necessary to our policies, procedures and forms in order to comply with the U.S. Supreme Court’s decision in Americans for Prosperity Foundation v. Bonta (594 U.S. __, 2021). Effective immediately, charities’ annual filings will no longer require disclosure information that identifies donors. Any notices that charities have received regarding any deficiency due to missing or incomplete Schedule Bs are no longer operative as to such deficiency, and annual filings will no longer be considered deficient in such regard."
Saturday, May 15, 2021
Politicians have long taken advantage of close ties with nonprofits in a number of ways. For example, just in the past couple of weeks there have been news stories about a 501(c)(4) nonprofit chartering a flight on which the Michigan governor purchased a seat for a trip to see her father (see also this story), and "How a top New York mayoral candidate used a charity to boost his profile". But in a new twist, the L.A Times has now run two stories about how charities associated with California politicians have used donor advised funds to obscure the original sources of donations.
One story was titled "How a $1-million donation on behalf of Newsom was hidden in plain sight". As required by California law, California Governor Gavin Newson repotted the gift as given on his behalf. But he did not apparently have to report who arranged for the gift because it came from a donor advised fund at the Silicon Valley Community Foundation. This allowed the original source of the funds- and who advised that the gift be made - to be hidden even though according to the story "[u]nder California law, when an elected official or someone acting on their behalf asks that a donation of $5,000 or more in cash or services be directed to a nonprofit or government agency, that contribution is considered a behested payment and must be reported to the [California Fair Political Practices Commission]."
And the L.A. Times also reported this week that "Donors gave millions to Garcetti nonprofit but kept their identities secret, Times analysis finds". The story focuses on a charity founded by Los Angeles Mayor Eric Garcetti that has raised over $60 million, including at least $3.8 million from donor advised funds. The Mayor is subject to the same law mentioned above, but has refused to reveal the original source of the funds or who advised that the various donations be made.
Friday, May 14, 2021
Last week the Boston College Law School Forum on Philanthropy and the Public Good released a report by James Andreoni (U.C. San Diego) and Ray Madoff (Boston College ) titled Impact of the Rise of Commercial Donor-Advised Funds on the Charitable Landscape 1991-2019. Here is the conclusion:
This report has examined existing data about changes in the charitable landscape since the creation of the first commercial donor-advised fund. The following are the key findings of this analysis:
- There is no evidence that the proliferation of donor advised funds has resulted in an increase in individual charitable giving as individual giving has remained largely constant as a percentage of disposable income, and is currently at the low-end of the range.
- While individual giving has remained largely constant, there has been a substantial shift in this giving toward donations to private foundations and donor-advised funds and away from direct giving to charities. Combined giving to donor-advised funds and private foundations has increased from 5% in 1991 to 28% in 2019, an increase of 460%.
- The value of assets in donor advised funds and private foundations have increased
significantly over the past thirty years.
- Though more funds are flowing into, and growing in, private foundations and donor advised funds, there is no evidence that charities have benefitted from this trend.
- In the five-year period prior to 1991, charities received on average 94.1% of all
individual giving. By contrast in the years 2014-2018 (the most recent years for which data is available), total donations received by charities (including grants from private foundations and donor-advised funds as well as direct giving) equaled between 71-75% of total individual giving.
- If charities had received donations at the rate of 94.1% of individual giving (the average rate that they received in the 5-year period before commercial donor-advised funds), they would have received an additional $300 billion over those 5 years.
Coverage: Chronicle of Philanthropy.
The Minnesota Council of Nonprofits also recently posted a paper presented at a conference a year ago titled Private Foundation Grants to DAFs: Attorney General Charitable Trust Oversight Calls for Disclosure of Use of Funds. Here is the abstract:
$3 billion was transferred from over 2,200 U.S. private foundations to five donor advised fund (DAF) sponsors between 2010 and 2018. Within this universe, a growing number of private foundations have made a single grant during a reporting year to a commercial DAF. Looking just at transfers to the top five commercial DAF sponsors, 35 foundations transferred the entirety of their annual grantmaking to DAFs between 2010 and 2018.
These transactions offered no tax benefit, but in effect excused private foundations from two legal requirements for U.S.-based private foundations derived from the Tax Reform Act of 1969: reporting grant recipients1 and the 5 percent annual payout requirement.2 Such grantmaking, while facially charitable and in-line with the requirements put forth in the 1969 legislation, not only risks breaches of restrictions established by the foundations’ founding documents but also obscures all aspects of the recipients of private foundation funding by providing no context for when or where the charitable dollars will be used.
Private foundation-to-DAF transfers frustrate state attorneys general’s ability to fulfill their supervisory duties to monitor and ensure that charitable dollars held by charitable trusts are used for their intended purpose.
This paper examines the governing authority and practices of state attorneys general offices as relating to a special problem of charitable trust enforcement: private foundation grantmaking to commercial DAFs. The authors examine the regulatory challenges based on interviews with both current and former attorneys from nine attorney general offices, as well as interviews with commercial DAF sponsors. Charities regulators’ ability to fulfill their supervisory duties related to private foundation-to-DAF grantmaking is blocked by the lack of transparency on the use of funds transferred to DAFs. Thus, charities regulators cannot ensure that private foundations’ grantmaking fulfills restrictions on their charitable giving, and the public is unable to see charitable activity ordinarily subject to public inspection.
In order to equip charity regulators to effectively enforce state charitable trust requirements, the paper concludes with two recommendations:
1. Charitable trusts should be required to report to state attorneys general all grants made or approved for future payment from DAF accounts to which they have transferred funds, subject to public inspection, and
2. Attorney General’s offices should respond to the growth of charitable funds held in trust by devoting increased resources to monitoring charitable trusts and donor advised funds.
Friday, April 2, 2021
Solicitation Update: States & FTC Crack Down on Fraud; Crowdfunding Grows; Donors Test Their Influence
There has been a steady drumbeat of news stories reporting that state authorities and, on occasion, the FTC continue to scrutinize and prosecute individuals who allegedly engage in fraudulent charitable solicitation. Some of the cases involve tried-and-true techniques, such as purporting to raise funds to help veterans, while others reflect more recent events, such as attempting to capitalize on support for the Black Lives Matters movement. Here are recent examples from just last month:
- The FTC, 38 States, and the District of Columbia shut down a fraudulent charity telefunding operation that raised more than $110 million, almost all of which went to pay fundraising costs and very little of which went to actual charitable services.
- The Florida AG shut down a "sham" wounded veterans charity named Healing Heroes Network that used very little of the contributions it received to actually help veterans.
- The Minnesota AG is suing a company that allegedly posed as a charity for service members, using the name Contributing 2 Combatants and Coast 2 Coast Marketing, but instead allegedly used the donations to enrich the company's owner.
- In Ohio, the U.S. Attorney's Office reported an indictment against a man for allegedly using a fake nonprofit Facebook page with the Black Lives Matter name to rob donors of more than $450,000.
- In Oregon the Douglas County Sheriff's Office arrested a man accused of using fake nonprofits to obtain donations, including the Impossible Roads Foundation that purpotedly built tiny homes for disabled veterans.
- In Utah, the Davis County attorney general is investigating whether Operation Underground Railroad made misleading statements in its fundraising appeals, even as Vice reports broader concerns about the anti-child sex trafficking charity's operations.
It is not surprising that there is fraud in this area, as it has been increasingly easy to raise funds quickly for a variety of legitimate causes. Again just in the past month. Facebook and Instagram announced that users had donated more than $5 billion over five years to nonprofits through campaigns on those platform, and the AP reports that millions of dollars have poured in through crowdfunding campaigns to aid the families of the Atlanta shooting victims. Crowdfunding can also be used for more controversial causes, as illustrated by The Guardian's report that far-right extremists have raised millions of dollars via social media, among other channels.
Finally, some prominent donors are trying to use their influence to affect the charities they support. The Washington Post reports that James Huntsman has filed a federal lawsuit against the LDS Church, alleging it misused millions of dollars of his family's donations by using them for commercial purposes. And some wealthy supporters of the University of Texas have waded into the controversy over the school's fight song (Eyes of Texas), vowing to pull their donations unless the school retains it.
UPDATE: In another case of a disgruntled donor, a Sinclair anchor is demanding $20 million from the WE charity that has been at the center of a charity scandal in Canada. The amount is in addition to a demand for return of donations the anchor made, and is for "destruction of [the donor's] character and marketability as a journalist, public speaker, filmmaker, and author."
Friday, December 11, 2020
In Americans For Prosperity Foundation v. Becerra, California recently filed a Supplemental Brief countering the US brief in the case, which argued that while the US Schedule B requiring donor disclosure of charitable organizations was constitutional, the California version was unconstitutional:
"1. The United States principally contends that the court of appeals applied the wrong standard of scrutiny. U.S. Br. 8-19. But it is difficult to see any material difference between the standard embraced by the United States and the one applied below. According to the United States, “compelled disclosures that carry a reasonable probability of harassment, reprisals, and similar harms are subject to exacting scrutiny.” Id. at7. Exacting scrutiny, in turn, calls for “a form of narrow tailoring” (id.) that requires “‘the strength of the governmental interest [to] reflect the seriousness of the actual burden on First Amendment rights’” (id. at 9); that dem ands a means-ends fit that is “‘reasonable’” but not “‘perfect’” (id. at 16); and that ensures that the compelled disclosure does “not sweep significantly more broadly than necessary to achieve [a] substantial governmental interest” (id. at 12). See also id. at 9 (compelled disclosure requirements are valid where “the public interest in disclosure outweighs the harm”) (internal quotation marks and ellipses omitted). The United States also asserts that “narrow tailoring is to some degree implicit in the requirement that the governmental interest in the compelled disclosure be ‘legitimate and substantial’” because “it is difficult to demonstrate a ‘substantial’ interest in a broad disclosure scheme when narrower disclosures would be sufficient.” Id. at 10-11.
The court of appeals held that California’s Schedule B filing requirement is subject to “‘exacting scrutiny,’” and it understood exacting scrutiny in the same way as the United States. Pet. App. 15a.1 It recognized that the “strength of the governmental interest must reflect the seriousness of the actual burden on First Amendment rights.” Id. (internal quotation marks omitted). It examined whether the State’s chosen approach swept too broadly. See id. at 19a-23a, 29a. And it determined that concerns about overly broad regulation are part and parcel of the substantial-relationship test. See id. at 15a-16a (requirement “that the State employ means ‘narrowly drawn’ to avoid needlessly stifling expressive association” is not “distinguishable from the ordinary ‘substantial relation’ standard”).
The United States ignores the overlap between the court of appeals’ approach and its own and asserts that the lower court erred in declining to require an adequate means-ends fit. U.S. Br. 16. But what the court of appeals declined to adopt was “the kind of ‘narrow tailoring’ traditionally required in the context of strict scrutiny,” including the requirement that “the state . . . choose the least restrictive means of accomplishing its purposes.” Pet. App. 16a; see also Opp. 6, 14-15. And the United States itself agrees that strict scrutiny and its “particularly stringent form of narrow tailoring” do not apply to information-reporting requirements like the one at issue here. See U.S. Br. 16."
Friday, November 20, 2020
The Charities Bureau in the Office of the New York State Attorney General recently released Guidance on Appraisals of Property for Not-for-Profit and Religious Corporations Seeking Approval of Property Transactions by the Attorney General or the Court. This guidance is particularly timely given that many nonprofits, in New York and elsewhere, are likely having to consider selling property in order to shore up their finances because of the pandemic.
Friday, September 18, 2020
The Missing IRS: States (NRA, Bremer Trustees, Outreach Calling) and DOJ (We Build the Wall, Teva) Step Up
I do not have data to back this up, but my impression is that in the past it was common to see state authorities and, more rarely, U.S. Attorney offices working closely with the IRS when investigating the activities of a tax-exempt nonprofit organization. However, it appears that recently the IRS is almost always absent from such investigations.
State Investigations: The New York Attorney General's lawsuit against the National Rifle Association and the District of Columbia Attorney General's lawsuit against the NRA Foundation are prominent examples of this apparent trend. While the N.Y. AG cited among the NRA's alleged failures a lack of compliance with IRS requirements, there is no indication that she coordinated her investigation or the filing of the lawsuit with that agency. But these are not the only recent examples.
The Minnesota Attorney General has moved to replace the trustees of the Otto Bremer Trust, a charitable trust and private foundation that owns bank Bremer Financial Corp. The basis for this move is alleged violations of the duty of loyalty by the current trustees. Presumably such violations would also be of interest to the IRS, especially since at least some of them also allegedly constituted violations of the self-dealing prohibition, but there is no indication in the news reports of the AG's actions or the lengthy memorandum filed by the AG in court that the IRS is involved. (And if the IRS had been involved, you would hope they would have corrected the AG's repeated use of "IRS Code" in that memorandum.)
It is perhaps more typical to see the IRS absent when the actions of for-profit telemarketers are at issue, as the Federal Trade Commission tends to take the lead for the federal government in such matters. This is illustrated by the recent case brought by the FTC and several state attorneys general to shut down Outreach Calling, Inc. and several other companies for having "allegedly scammed consumers out of millions of dollars." It should be noted that the Center for Public Integrity highlighted the questionable activities of Outreach Calling and individuals associated with it more than two and a-half years ago. But the involvement of the FTC when matters within its jurisdiction arise only emphasizes the IRS absence in matters squarely implicating federal tax laws as well as state charity laws.
Department of Justice Investigations: The IRS also appears absent from two recent investigations by the Department of Justice. The most prominent one involves criminal charges against former senior advisor to President Trump Steve Bannon and others associated with an Internal Revenue Code section 501(c)(4) nonprofit We Build the Wall, Inc., formed to fund the building of a border wall between the United States and Mexico. The investigation was pursued by the U.S. Attorney's Office for for the Southern District of New York. While the allegations relate to alleged lies made to donors about the use of the funds raised, some of the actual uses of those funds - compensation and payment for personal expenses - may have tax ramifications for both the organization and the individuals involved. Yet there is no indication in the indictment or otherwise that the IRS is involved. This is despite the fact that the U.S. Postal Inspection Service was involved in the arrest of Bannon, presumably because one of the charges is mail fraud.
In a case a bit more removed from federal tax law, the Department of Justice's civil division has filed a False Claims Act complaint against two affiliated pharmaceutical companies, Teva Pharmaceutical USA Inc. and Teva Neuroscience Inc. relating to donations to charitable foundations. The allegations are that Teva used the foundations "as conduits to funnel kickbacks to Medicare patients." The announcement of the filing does not indicate any involvement by the IRS, including with respect to investigating the foundations involved. Coverage: Wall Street Journal. An earlier news story involving allegations of similar arrangements with other companies reported multi-million dollar payments to the federal government by the charities involved to resolve the claims against them, but again did not mention IRS involvement, nor did the DOJ announcement of that settlement.
Monday, August 17, 2020
On August 6, 2020, the New York Attorney General Letitia James filed a complaint against the NRA seeking restitution from officers and directors, removal of officers and directors, and the dissolution of the nonprofit organized in New York in 1871. While it looks like few think the suit for restitution and removal wrong, many are criticizing the AG for bringing the dissolution action.
I think she was right to bring the dissolution action, but I doubt a court will grant it, and I think that is all fine.
The AP provided a good rundown of the case and immediate reactions.
Last year when leadership in the NRA was in disarray and widely predicting that the misuse of the nonprofit by its officers and directors could lead to its dissolution, I wrote that this was highly unlikely:
"At the same time, I think it’s possible that the New York authorities investigating the group might remove officers and members of its 76-member board of directors. There is even a slight possibility, as NRA CEO Wayne LaPierre warned in a fundraising letter, that New York authorities could cause the NRA “to shut down forever.” But I doubt it."
Ruth Marcus has questioned the NY AG.
The NRA has filed a lawsuit challenging the AG action on many grounds including first amendment grounds, defamation, and procedural grounds trying to nullify the dissolution action. Asher Stoker has a nice tweet thread explaining why the procedural effort was unlikely to work. The NY AG amended its complaint to comply with the strict requirements of filing a dissolution.
The AG lays out the basis for dissolution on page 138-39 of the complaint:
- Under N-PCL § 112(a)(5), the Attorney General is authorized to maintain an action or special proceeding to dissolve a corporation under Article 11 (Judicial dissolution).
- Under N-PCL § 1101(a)(2), the Attorney General may bring an action seeking the dissolution of a charitable corporation when “the corporation has exceeded the authority conferred upon it by law, or … has carried on, conducted or transacted its business in a persistently fraudulent or illegal manner, or by the abuse of its powers contrary to public policy of the state has become liable to be dissolved.”
Here is the N-PCL.
Many question the AG's partiality because she is a Democrat and so vocally stated she would investigate the NRA during her campaign, and called it a terrorist organization.
I encourage everyone to read the complaint. When you read the allegations of a long running, substantial, and extensive fraud on the members of the NRA, I am left wondering when the AG may use the dissolution provision that is in New York nonprofit law, if she does not use it now.
Importantly, and I think interestingly for the process, the New York statute states that the AG “may” bring a dissolution action under these circumstances. But, the judge then still has to decide.
N-CPL 1109 tells the judge what to take into consideration. It says:
(a) In an action or special proceeding under this article if, in the court's discretion, it shall appear that the corporation should be dissolved, it shall make a judgment or final order dissolving the corporation.
(b) In making its decision, the court shall take into consideration the following criteria:
(1) In an action brought by the attorney-general, the interest of the public is of paramount importance.
(2) In a special proceeding brought by directors or members, the benefit to the members of a dissolution is of paramount importance.
(c) If the judgment or final order shall provide for a dissolution of the corporation, the court may, in its discretion, provide therein for the distribution of the property of the corporation to those entitled thereto according to their respective rights. Any property of the corporation described in subparagraph one of paragraph (c) of section 1002-a (Carrying out the plan of dissolution and distribution of assets) shall be distributed in accordance with that section.
It seems to me that the appropriate way for this process to play out is for the AG to bring the dissolution action. She should present the evidence for that claim. It may be that the power structure associated with what we consider the NRA today is so impossibly entangled with the wrongdoers that it would be impossible for the NRA to be reformed to actually further the mission of the NRA. If that is the case, dissolution is the answer. I am just skeptical that this is the answer.
Though I do not believe in the same ideological beliefs that the NRA seeks to further, I do believe a robust defense of the Second Amendment should be a part of American life. I think the large membership is entitled to an organization that honestly and fairly furthers that mission. I believe we are better off in a world where the folks that believe in that right have good representation. Because of that, I find it hard to believe it will be impossible to reform the entity with that substantial membership in mind. That said, I think it possible the AG could prove her case. I think she should be allowed the respect to bring that forward. I think we will be better for it, including especially those who are conservatives. AG James is insisting on a rule of law. We should all be grateful to her for that commitment.
I shared my general thoughts with BBC World Tonight on the day the complaint was filed. You can listen to those starting at about 27:45 in on this link.
Many have wondered whether the NRA can just move out of New York to avoid the problem. The NY AG has the direct answer by tweet. No.
It is also worth watching the DC AG complaint against the NRA Foundation.
If you want a deep and rich understanding of the matter of the NRA I highly recommend the Gangster Capitalism podcast on the NRA.
Friday, June 12, 2020
There have been new developments in two matters previously covered in this space, specifically the proposed sale of the .ORG domain - virtual home to most nonprofit organizations - to a private equity firm and the ongoing controversy regarding the compensation paid to the CEO of the Florida Coalition Against Domestic Violence.
With respect to the .ORG domain sale, the California Attorney General issued a lengthy letter urging the Internet Corporation for Assigned Names and Numbers (ICAAN) to reject the sale by the Internet Society of the .ORG domain (technically, a "registry") to Ethos Capital, a private equity firm. In the wake of that letter and appeals from a number of prominent nonprofit organizations, including the Electronic Freedom Foundation and the National Council of Nonprofits, ICANN vetoed the $1.1 billion deal. Coverage: N.Y. Times, Reuters.
With respect to the Florida Coalition Against Domestic Violence, the Miami Herald reports that a state court judge ordered the dissolution of the nonprofit at the request of the Florida Attorney General and placed the organization's assets under the supervision of a bankruptcy expert. The dissolution came in the wake of the discovery that the nonprofit had paid its chief executive officer more than $7.5 million over three years as compensation. It is not clear whether the nonprofit's board knew about and approved the compensation, or simply allowed itself to remain ignorant of the financial arrangements with the CEO. State and federal investigations are continuing. The Tampa Bay Times also reports that the same receiver now has been given control by the courts over the assets of the separate foundation that existed to support the Coalition.
One helpful service that government agencies can provide is issuing reports summarizing their activities, saving researchers and practitioners the work of gathering such information piecemeal based on reviewing every pronouncement and ruling that is issued. Two recently issued summaries relating to nonprofit law are particularly helpful in this regard, one relating to state enforcement efforts and the other to federal charitable contribution deduction disputes.
First, the National Association of State Charity Officials (NASCO) has issued a report detailing the activities of state officials with respect to charities from January 2019 to March 2020. From the introduction:
The contents of this report are a representative sample of cases and other initiatives from January 2019 to March 2020 in the areas of: I. Deceptive Solicitation; II. Governance and Breach of Fiduciary Duties; III. Trust & Estate Issues; IV. Health Care; and V. Other, including Registration, Legislation, and Guidance. Descriptions were provided by the relevant state, and questions regarding particular cases should be directed to that state. Contact information for state regulators can be found at www.nasconet.org.
Second, the Office of Chief Counsel, Internal Revenue Service has released an internal memorandum (CCA 202020002) that summarizes the issues and holdings in 121 federal court decisions from 2012 through mid-April 2020 relating to the charitable contribution deduction under Internal Revenue Code Section 170.
Wednesday, April 22, 2020
And the pandemic has been devastating to the arts world, a world that quite frequently relies on public performance both to raise revenue and to encourage donors. The novel coronavirus has devastated the jazz world (which is my love), killing jazz legends and shutting down performance spaces.
And then there's dance, an art form perhaps less-well-known and less appreciated than jazz. In Illinois alone, dance companies expect to lose $4.5 million in revenue through April 30, and more if (as is likely) the shutdown lasts longer. Hubbard Street Dance Company, for instance, ended up cancelling the last week of its Decadence tour in Italy in February and then, hours before it opened the performance in Chicago, Gov. Pritzker ordered closed gatherings of more than 1,000 people, closing the performance before it opened.
So how do arts organizations survive? Fortunately, the federal government has provided some help, including the Paycheck Protection Program and $75 million to be distributed by the National Endowment for the Arts.
State and local governments have been stepping up too. Chicago and Illinois have joined together with the Arts for Illinois Relief Fund, which provides grants to artists and arts organizations. The Fund is funded by the city, the state, and private philanthropy (of both the wealthy and the ordinary person type).
Still, the ability of arts organizations to weather this storm, while backstopped by state and philanthropic money, is, at best, tenuous. Once we get past the current crisis, arts organizations may need to rethink their funding models.
In the meantime, while I'm familiar with the steps Chicago and Illinois are taking to protect nonprofit arts organizations, I am less aware of what other cities and states are doing. Does anybody have examples of COVID-19-related support that their city or state is undertaking to protect and shore up the arts?
Samuel D. Brunson
Thursday, April 16, 2020
Coronavirus Nonprofit Law Additional Roundup: Chronicle on Philanthropy Coverage; JCT Scoring; DAFs & Private Foundations; State Guidance
Chronicle of Philanthropy Coverage: The Chronicle of Philanthropy is providing a series of articles to help nonprofits deal with the coronavirus crisis. Notable entries relating to legal topics include:
- How the New $300 "Universal" Deduction Works (flagging not only the uncertainty about how long the deduction is available but also whether a married couple filing jointly can claim a $600 deduction)
JCT Scoring of CARES Act: See the numbers below for the projected revenue effects of the CARES Act charitable contribution deduction provisions from Joint Committee of Taxation publication JCX-11-20. Perhaps most importantly, and as flagged by a commentator on my initial roundup, JCT takes the position that the $300, above-the-line charitable contribution deduction sunsets on 12/31/2020, although I still have not found statutory language to this effect.
Provision Effective 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2020-25 2020-30
4. Allowance of partial above
the line deduction for charitable tyba 12/31/19 -310 -1,241 --- --- --- --- --- --- --- --- --- -1,551 -1,551
contributions (sunset 12/31/20)
5. Modification of limitations
on charitable contributions tyea 12/31/19 -1,080 -3,748 2,403 741 367 45 179 --- --- --- --- -1,272 -1,093
[Millions of Dollars; Years are Fiscal Years; tyba = taxable years beginning after; tyea = taxable years ending after]
DAFs and Private Foundations: As many nonprofits and particularly charities brace for a sharp downturn in donations, numerous commentators are calling on advisers and sponsoring organizations for donor-advised funds and management for private foundations and other funders to increase and modify their giving. Examples from the Chronicle of Philanthropy include:
- David Biemesderfer, Grantmakers Must Put Equity at the Forefront of the Coronavirus Response
- Alan Cantor, Save Lives Now, Grant Makers and Donors
- Terry Mazany, The Coronavirus Outbreak Could Prove Why Donor-Advised Funds Serve Society
- Lauren Smith, How to Help the Most Vulnerable Through the Pandemic
State Guidance: The New York Attorney General's Charities Bureau has issued Guidance for Charitable Nonprofit Organizations Facing the Challenges of the COVID-19 Pandemic. Topics covered include:
- How the Charities Bureau Can Help
- Registration with the Attorney General's Charities Bureau
- Additional Extensions of Times to File
- IRS Extended IRS Form 990 Filing Date
- Reserves, Restricted Assets, and Use of Endowment Funds
- Filing a Complaint with the Charities Bureau
- Resources for Charities
Wednesday, April 15, 2020
This blog has been on hiatus as its contributors have dealt with moving their courses to online delivery, supporting students facing many stressful situations, and of course dealing with the personal impacts on us and our families of the pandemic. It therefore seems appropriate to start with an initial roundup of nonprofit law-related coronavirus topics before turning to other recent nonprofit law developments.
CARES Act: Many provisions of the CARES Act (Pub. Law No. 116-136) could be relevant to most nonprofits, but three provisions stand out in particular:
- Partial Charitable Contribution Deduction for Individual, Non-Itemizers (section 2204): Modifies Internal Revenue Code section 62 by adding paragraph (a)(22) and subsection (f) to allow individuals who do not itemize their deductions to deduct, above-the-line, cash charitable contributions (as defined in section 170(c)) of up to $300 total made in taxable years beginning after December 31, 2019. Supporting organizations and donor-advised funds are not eligible recipients, but private foundations are.
- Temporary Elimination or Increase of Limits on Certain Charitable Contribution Deductions (section 2205): Modifies IRC section 170 by eliminating the contribution base percentage limit on charitable contributions by individuals and increasing the taxable income percentage limit on charitable contributions by corporations from 10 percent to 25 percent for cash contributions made during the 2020 calendar year. Again, supporting organizations and donor-advised funds are not eligible recipients, but private foundations are.
- Small Business Administration Loans: Section 501(c)(3) organizations, including religious ones, are eligible to participate in the Paycheck Protection Program (sections 1101-1106) if they satisfy number of employee (usually 500 or less) and other requirements, and all private nonprofits are eligible to participate in the Emergency Economic Injury Grants program (section 1110) if they satisfy that program's number of employee (usually 500 or less) and other requirements. For more details about these programs, see the SBA website; there is also an informative webinar on the Pittsburgh Foundation's website (dated April 10th) on this topic, as well as additional webinars on other coronavirus, nonprofit-related topics.
Coverage: Independent Sector; National Council of Nonprofits. Interestingly, these summaries state that the above-the-line deduction provision applies to contributions made in 2020, but the statutory language appears to make this provision permanent in that it applies "to taxable years beginning after December 31, 2019" without any expiration date and so it should be available for cash contributions made after 2020 as well. An analysis by the University of Pennsylvania's Wharton School, which states the above-the-line deduction is only available for contributions made in 2020 (I believe incorrectly), predicts that deduction will cost $2 billion but will only increase charitable contributions in 2020 by $110 million.
Extended IRS and State Filing Deadlines: In Notice 2020-23, the IRS explicitly extended to July 15, 2020 the deadline for filing (and paying any related tax owed) Form 990-PF, Form 990-T, Form 990W, and Form 4920 if they otherwise would have been due on or after April 1, 2020 and before July 15, 2020. In addition, by cross-reference to Revenue Procedure 2018-58 (see Section 10) the IRS also also extended to July 15, 2020 the deadline for filing a wide range of forms relating to tax-exempt organizations, including Form 990, Form 990-EZ, Form 990-N, Form 1023, Form 8871, Form 8872, and Form 8976 if they otherwise would been due during the same time period. For an analysis of this cross-reference, see this post by Laura J. Kenney of Blum Shapiro. Hat Tip: EO Tax Journal.
The IRS has also announced in a memorandum that it is permitting examination agents and managers to use "an increased reasonable application of business judgment" when applying the otherwise applicable deadlines for responding to information document requests and follow-ups during enforcement actions. This "temporary deviation" from the otherwise applicable requirements for enforcing such deadlines is in effect through July 15, 2020.
Finally, states are extending deadlines for required filings by nonprofits. For example, the New York Attorney General's Charities Bureau has announced it will grant an automatic six-month extension for annual financial reports originally due after February 15, 2020.
More updates to follow. Stay safe.
Thursday, February 6, 2020
Giving Issues: Recent Trends, More Bad Publicity for DAFs, and Greater Transparency for the PayPal Charitable Gift Fund
Starting with giving trends, in a lengthy Nonprofit Quarterly article Patrick Rooney (IUPUI Lilly School of Philanthropy) documents in great detail "the continued decline of the small donor and the growth of megadonors," with the former trend possibly accelerating because of the 2017 federal tax changes. That said, the effects of these trends likely will not affect all charities equally - a CNBC report indicates that while the largest, well-known organizations are still seeing increasing giving, many smaller, local charities are facing giving declines even in the midst of a a growing economy. And according to a study by Wealth-X, younger "ultrawealthy" donors tend to focus on one or two causes, which may further skew changes in giving levels. That said, a report from Cygnus Applied Research (executive summary requires free registration; full report must be purchased) found that most donors planned to maintain their giving amount in 2019 as compared to 2018, with 29% planning to give more and only 10% planning to give less.
The Rooney article includes a section on donor advised funds, finding that they are both continuing to grow significantly and "remain largely the realm of large donors." That growth is despite continuing bad publicity for DAFs, including news stories that both Google's Larry Page (through $400 million in grants from the Carl Victor Page Memorial Foundation) and Facebook's Sheryl Sandberg ($230 million in Facebook stock) had used giving to DAFs to, respectively, satisfy the private foundation payout rate and (presumably) generate substantial charitable contribution deductions without having to transfer funds to actual operating charities. To be fair, the funds may have eventually ended up at operating charities; there is just no way to know for sure. At the same time, the Chronicle of Philanthropy reports (subscription required) almost half of nonprofits surveyed said that DAFs hamper their ability to build relationships with donors. But there is not a complete lack of regulation of DAFs, as Tax Notes reports (subscription required) that the National Outreach Foundation has been forced to go to court to challenge the IRS' revocation of its tax-exempt status for allegedly using its role as a DAF sponsor to facilitate a tax avoidance scheme similar to one flagged by the IRS in Notice 2004-30.
Finally, the NonProfit Times reports that last month nearly two dozen states and the District of Columbia settled a dispute with the PayPal Charitable Gift Fund, Inc., the charitable arm of PayPal. According to a press release from the New York Attorney General (which also provides a link to the actual agreement), the Fund agreed to make sure donors know they are giving to the Fund, the timeframe for the selected ultimate charitable recipient to receive the donated funds, the difference between "enrolled" and "unenrolled" charities on the platform, and whether the donor's gift has been diverted to a different charity than the one the donor designated. The Fund also agreed to pay $200,000 to the National Association of Attorneys General, to be used to defray investigation and litigation costs relating to charities and to provide training and education for charity regulators.
Even though President Trump appears to have finally settled the legal issues arising out of his private foundation with the payment of the $2 million in damages owed late last year, other charity-related issues have arisen for organizations and individuals associated with him. These include renewed allegations that one of the President's impeachment lawyers and his family improperly benefitted from a network of charities to the tune of $65 million, a lawsuit by the District of Columbia Attorney General against the section 501(c)(4) 58th Presidential Inaugural Committee and for-profit entities owned by Mr. Trump and his family for alleged private inurement, reports that a section 501(c)(3) charity is giving away amounts totaling tens of thousands of dollars to hoped-for African American Trump supporters, which may not be a charitable activity, and a megachurch hosting a Trump political rally, raising questions about whether doing so violated the section 501(c)(3) prohibition on political campaign intervention.
But President Trump and those around him are far from the only political actors to engage in allegedly questionable behavior when it comes to charities, as Jack Siegel documented more than 10 years ago in The Wild, The Innocent, and the K Street Shuffle: The Tax System's Role in Policing Interactions Between Charities and Politicians (subscription required). Here is an undoubtedly incomplete list of such stories from across the political spectrum:
- As Florida House Starts Investigating Domestic Violence Nonprofit, Exec Has No Answers (Miami Herald): This investigation grew out of earlier reports questioning the high compensation paid to the CEO of this politically connected charity, which state law requires be contracted with by the Florida Department of Children and Families.
- Lawmaker Accused of Theft From Charity Announces Resignation (U.S. News/AP): A Pennsylvania state representative stepped down in the wake of the state Attorney General filing criminal charges against her, alleging that she stole more than $500,000 from a charity she operated.
- Minnesota Attorney General's Suit Accuses Former Ramsey County Commissioner of Mismanaging Charity's Funds (Star Tribune): The lawsuit alleges that the former Commissioner and others at a now-defunct veterans charity had mismanaged government funds, including through engaging in self-interested, related party transactions.
- Sloppy Accounting, Funding Debts: A Look at Maya Rockeymoore Cummings's Charity (Washington Post): This story documents a close financial relationship between a charity run by the widow of Elijah Cummings (and now candidate for his congressional seat) and her for-profit consulting firm, a relationship that was apparently not fully reported on the charity's IRS returns.
- State AG Probes Lawmakers' Charity Over Failed Minority Student Scholarships (N.Y. Post): The New York Attorney General's office has reportedly launched an investigation into whether a charity associated with a number of state lawmakers failed to pursue its stated mission of providing scholarships to needy minority students, instead focusing on events for its lawmaker members and other activities.
Wednesday, January 29, 2020
As reported in the Honolulu Civil Beat, in late November 2019, the Hawaii Attorney General issued a subpoena seeking a nonprofit organization’s bank records for nearly three years (2017 through most of 2019), including monthly statements, deposit tickets and ATM surveillance photos. What might seem like a routine exercise of AG oversight over a charitable organization within its jurisdiction, the history between the AG and the nonprofit, KAHEA: The Hawaiian Environmental Alliance, presents a different optic. KAHEA has been at the center of the fight against the Thirty Meter Telescope on Mauna Kea on Hawaii's Big Island, including adversarial court proceedings between the two parties. Shrugging off any claims that its subpoena action constitutes "retaliation and harassment," the AG argues that it is fulfilling its responsibility of regulating charitable organizations and presents two primary justifications for its investigation: (1) the use of tax-deductible donations for activities of civil disobedience are not permitted under the tax laws (specifically, federal tax law); and (2) KAHEA’s purported non-filing of the Attorney General’s annual disclosure form (Federal Form 990) for several years.
In response to KAHEA's motion to quash the subpoena, the AG asserts that donations to KAHEA have supported "non-violent direct actions"--namely, the "five-month-long illegal blockade of Mauna Kea Access road in protest of the construction of the thirty-meter telescope.” In support of its argument that nonprofits are not permitted to engage in civil disobedience activity, the AG cited an IRS ruling [Rev. Rul. 75-384] that denied federal tax-exempt status to a charitable organization that sponsored protests to promote world peace with illegal actions including blocking vehicle traffic and disrupting government work and the movement of supplies.
Neither of [the AG's] reasons justifies this kind of overreach.
Contrary to the AG's assertions, there is no prohibition on a charitable organizations' participation in nonviolent protest, including acts of civil disobedience.
Although the IRS has occasionally denied tax exemption for organizations whose sole or primary activities have been to violate the law, the IRS has never revoked an organization's tax-exempt status merely because it (or its members) occasionally took part in acts of civil disobedience or constitutionally protected Free Expression. KAHEA also engages in a variety of legitimate activities that qualify it as a 501(c)(3) organization.
The suggestion that these activities are not permitted is therefore dangerous and misleading, not only to nonprofits, but also to the social change they seek.
Moreover, it is not the role of the AG to enforce IRS requirements; that is a federal responsibility.
In today's hearing on the subpoena, according to the Honolulu Star Advertiser, a Hawaii Circuit Court judge stated that he was "inclined to allow . . . the subpoena" but articulated concerns regarding the subpoena's scope; specifically, the AG's request for surveillance photos taken from ATM machines. Postponing a ruling on the motion to quash the subpoena, the judge gave the AG and KAHEA until Feburary 7, 2020, to reach an agreement about the extent to which KAHEA's financial information should be disclosed.
According to the Civil Beat article, the KAHEA subpoena isn’t the first AG subpeona related to the Mauna Kea protests. In September 2019, the AG issued a subpoena to the Office of Hawaiian Affairs for information related to that public agency's financial support of the Mauna Kea protest movement.
[For more information on the Mauna Kea protests, see here].
Wednesday, November 27, 2019
The Miami Herald reports that the nonprofit Florida Coalition Against Domestic Violence is stonewalling a state audit that was triggered by an earlier report that the group's chief executive office was paid over $761,000 for the fiscal year that ended on June 30, 2017. While that amount might not seem high for those familiar with the top salaries at hospitals and universities, it raised eyebrows both because the group income consists almost entirely of more than $51 million in government funding (that it distributes to 42 domestic violence center) and because the compensation only reached that level after pay raises totaling over $313,000 during a two-year period. Again to the latest report, the nonprofit has refused to provide the Florida Department of Child and Families with basic financial and governance documents, leading to the Department suggesting that it will end its contracts with the organization. However, for now the existing contract extends to June 2020.
In other compensation news, AZCentral (part of the USA Today Network) reports that the Chief Executive Officer of nonprofit Valleywise Health earned a total of $25.5 million in 2017, including a one-time $17 million retirement plan payment. That means that even without taking into account this one-time payment, which came from a Supplemental Executive Retirement Plan or SERP and so presumably was earned over multiple years, that still leaves annual compensation of $8.5 million. Concern about his compensation led to a split board vote on raising his base salary, even though even with the approved increase that base salary is only $685,000 annually (with the rest of the compensation presumably reflecting bonuses and other incentives).
Saturday, November 9, 2019
On November 7, New York Supreme Court Judge Saliann Scarpulla ordered President Trump to pay $2 million in resitution to charity for his breach of his fiduciary duties as an officer and director of the Trump Foundation. The link attached to ordered above is the Judge's actual order. Since this is written up a lot in other places, like here by David Fahrenthold who has been the best chronicler of the Foundation, I only provide resources here for digging deeper into the case.
To fully comprehend what has happened to the Trump Foundation, President Trump, and his children, you have to read more than the order. They all entered into a series of stipulations with the NY AG Letitia James. The stipulations spell out a series of significant admissions of wrongdoing made by President Trump and his three children who sat on the board. The press release issued by the NY AG does a nice job of summarizing all that has taken place. I recommend reading all three.
If interested in seeing all of the evidence held by the NY AG you can go to the NY Supreme Court and search in the case index for the index number of the case (451130/2018). That should take you here, which if it works would save you the time of searching the case index. More information can be found from CREW who did a FOIA search that yielded the Form 4720s and checks filed by the Foundation with the IRS.
I have written about the matter on The Conversation here. In that piece I try to grapple with whether there are any situations in history that place this occurrence in proper historical context. If you get a chance to look at that, and have thoughts about the choice, let me know what you think.