Nonprofit Law Prof Blog

Politics & Nonprofits: Déjà Vu All Over Again

Anyone who tracks legal developments relating to the involvement of nonprofits in politics would be forgiven if they felt they were in a particularly drawn out version of the movie Groundhog Day. That is because it appears everything that is new is something we have seen before. Here are some recent examples:

• DISCLOSE Act Introduced (again): U.S. Senator Sheldon Whitehouse (D-RI) and Representative David Cicilline (D-RI), along with 162 colleagues, reintroduced the Democracy Is Strengthened by Casting Light On Spending in Elections (DISCLOSE) Act in the new Congress. As noted in the press release, "Senate Majority Leader Chuck Schumer first introduced the DISCLOSE Act in the wake of the disastrous Citizens United decision in 2010, and Whitehouse has led the introduction of the legislation in every subsequent Congress."

• Treasury/IRS Barred From Issuing 501(c)(4) Guidance (again): The Consolidated Appropriations Act, 2023 (Pub. L. No. 117-328) continues the now longstanding prohibition on the Treasury Department, including the Internal Revenue Service, using any funds to develop guidance "relating to the standard which is used to determine whether an organization is operated exclusively for the promotion of social welfare for purposes of section 501(c)(4)" (Division E, Title I, Section 123, under Administrative Provisions - Department of the Treasury). The Act also continues now longstanding prohibitions on the IRS using any funds "to target citizens of the United States for exercising any right guaranteed under the First Amendment" or "to target groups for regulatory scrutiny based on their ideological beliefs." (Division E, Title I, Sections 106 & 107, under Administrative Provisions - Internal Revenue Service).

• A Politician Benefitting from a Friendly 501(c)(4) (again): Politico reports that "A new nonprofit group is helping DeSantis go national." The new nonprofit, named And to the Republic, is reportedly a section 501(c)(4) organization that "is supporting Ron DeSantis’ national political activity."

• A Politician Accused of Misusing a Nonprofit (again): The Arizona Republic reports that a former Democratic primary candidate for Secretary of State Reginald Bolding is facing allegations of wrongdoing relating to a nonprofit he founded and helped lead ("Bolding, his nonprofit, referred to AG for investigation of connections, donations"). The referral from Arizona Secretary of State Katie Hobbs states there "is reasonable cause to believe [Bolding]  violated campaign finance law" based on a complaint filed by a Phoenix resident. The nonprofit is named Our Voice Our Vote, and according to IRS records it is a section 501(c)(4) organization.

Lloyd Mayer

AGs in Action: NASCO Report, Ohio "Charitable University", and Massachusetts Revised Guide for Board Members

With the well-known limits on IRS oversight of tax-exempt nonprofits, the burden of regulating charities has increasingly fallen to state attorneys general and other state officials. And the these officials have been active, both with respect to enforcement and education. This activity is demonstrated by several recent developments:

• The National Association of State Charity Officials issued last fall a Report on State Enforcement and Regulation. Covering the period from January 2021 to September 2022, it provides "[a] sample of cases in which NASCO members were involved in 2021 in these key areas: a. Deceptive Solicitation b. Nonprofit Governance c. Trust and Estates" and a summary of "[o]utreach efforts and published guidance issued in 2021 and 2022."

• As reported by WDTN, the launch by Ohio Attorney General Dave Yost earlier this year of "an effort to educate members of Ohio charity boards" under the heading Charitable University.

• The publication late last year by Massachusetts Attorney General Maura Healey of a revised Guide for Board Members of Charitable Organizations that "is provided by the Attorney General’s Office to help board members of charitable nonprofit organizations carry out their important responsibilities."

Lloyd Mayer

Pittsburgh Announces Audit of Nonprofit Property Tax Exemptions

In late January, the city of Pittsburgh Mayor Ed Gainey announced that it will review whether the cities many nonprofits qualify for property tax exemption. The call notes that about one third of city property is exempt from taxation.

From the story:

"Mayor Ed Gainey signed an executive order Tuesday, allowing the finance and law departments to start looking into charitable organizations.

City leaders said the biggest concern is one-third of the City of Pittsburgh property is exempt, and the city loses millions of dollars. Now non-profit organizations must pass the Pennsylvania Purely Public Charity test.

Mayor Ed Gainey said, among the requirements, the organization must advance a charitable purpose, operate entirely free from a private profit motive and donate a substantial part of its services.

Mayor Gainey said this does not include religious institutions. However, this could impact certain health systems, universities and other organizations."

Here is a report from 2022 on the tax exempt properties in Pittsburgh. Pittsburgh conducted such a review ten years ago in 2013.

Philip Hackney

Feb. 12, 2023

 

Allocating State Authority Over Charitable Nonprofit Organizations

Click on the picture for an overview of Massachusetts AG Supervision of Charitable

Our co-editor, Lloyd of South Bend, has posted his forthcoming article, Allocating State Authority Over Charitable Nonprofit Organizations.  Here is his interesting abstract:

This essay considers the allocation of state authority to enforce the legal obligations particular to charities and their leaders among state officials, including attorneys general, judges, and legislators, and private parties. It first describes the existing allocation. It then reviews the most common criticisms of this allocation, which primarily focus on two concerns: politicization and lack of sufficient enforcement. Finally, it evaluates the most notable proposals for re-allocating this authority, including reallocation of this authority in part to private parties.

This essay conclude that reform proposals have two fundamental flaws. First, proposals aimed at countering the political nature of state attorney general decisions fail to consider both the advantages of that nature and the existing restraints placed on it by state courts and resource limitations. Second, proposals aimed at addressing the admittedly low level of oversight provided by state attorneys general assume that there is significant undiscovered malfeasance at charities, the countering of which would justify the burdens these proposals would place on all charities, even though empirical data supporting this assumption are lacking.

That said, this essay supports more modest reforms. These are: requiring all attorney general negotiated settlements to be submitted to state courts for approval, permitting derivative suits by current fiduciaries, as is the law in most states, and by a significant proportion of members, as is the law in some states, and modestly expanding donor standing to allow substantial donors (but not their successors or heirs) to enforce explicit written terms on substantial gifts. These reforms would strengthen existing state oversight while being unlikely to significantly burden most charities.

For a survey of state nonprofit legal environments see here.

darryll jones

More on Pittsburgh's Audit of Nonprofits

The Cathedral of Learning at the University of Pittsburgh

 

PILOTS depend on public shaming for their implementation and perpetuation.  The process of imposing PILOTS invariably follows a well worn pattern:  (1) a local government official searches for revenues while maintain an incumbent's aversion to any type of tax increase.  (2) The official floats the idea that "hey, those rich nonprofits don't pay for anything!"  (3) There follows a media campaign -- press releases and the release of official reports, maybe a board of carefully selected local citizens appointed to study the issue -- to keep attention focused on the "rich" nonprofits.  (4) Nonprofits, fearing damage to their brands more than a legal challenge, eventually agree to another round of PILOTS.  Sometimes the nonprofits offer a feeble defense of their status, pointing to their economic impact on the city and county.  But they don't push too harshly, lest they erode their goodwill in the community.  When they inevitably pay, its all very much "voluntary," though. 

So Pittsburgh is at step 3.  Here is a recent editorial in the Pitttsburgh Tribune, following up on the Mayor's call for a complete audit of all nonprofits in the city.  

On Tuesday, Pittsburgh Mayor Ed Gainey called for a deep dive into the city’s “purely public charities.” According to Pa. Act 55 of 1997, a purely public charity has to meet certain requirements. It has to have a charitable purpose directed in one or more of six areas: poverty relief, education, religion, health care, government and “accomplishment of a purpose which is … important and beneficial to the public.” It also must be “entirely free from private profit motive.” It must “donate or render gratuitously a substantial portion of its services.” It must “benefit a substantial and indefinite class of persons who are legitimate subjects of charity.” And, notably, it must “relieve the government of some of its burden.” The problem is that charity is big business. Of the top 30 employers in Pennsylvania, 11 are nonprofits. They include UPMC, the University of Pittsburgh and Allegheny Health Network.

In some ways, this is a good thing. These are industries that rebuilt Pittsburgh’s economy as it transitioned away from steel. But they do so without paying taxes, which makes it a lot easier to expand. That means more of the tax map is ceded to nonprofits, which puts more of a burden on the government and other property owners. Gainey isn’t the first mayor to deal with it. His predecessor, Bill Peduto, tried to bring the government and charities together with his ONE PGH collaboration aimed at creating up to $115 million for city projects. Gainey walked away from it last summer, favoring pursuit of voluntary payments in lieu of taxes. But if payments are voluntary, unlike taxes, they are an unreliable foundation for building a budget. Gainey’s call is long past due. It isn’t because the nonprofits are untrustworthy. They are a critical part of the city, county and state economic infrastructure. It is important because, like a car’s inspection, it is an impartial assessment of where the entity stands.

darryll jones

California Proposes New Regulations Regulating Nonprofit Crowdfunding

Our colleagues over at the Nonprofit Law Blog, not to be confused with this Nonprofit Law Prof Blog, have an interesting post about Califo0rnia's proposed regulations pertaining to nonprofit online solicitation.  My first reaction was "good grief, 65 pages of regulations just to make sure that fools and their money are not parted via the internet!?"  Here is a summary from the Nonprofit Law Blog of what the law requires: 

• Charitable Fundraising Platforms and Platform Charities should ensure compliance with the law’s good standing requirements for charities.  (Gov. Code, § 12599.9, subds. (a)(3) and (d).)  The Attorney General’s Registry of Charitable Trusts maintains a list of charities that may not operate or solicit in California. For information on using this list, see Section 316 in the latest proposed regulations. The Internal Revenue Service’s list can be found here.
• Donations cannot be diverted or misused, and shall be maintained in a separate account from other funds belonging to a Charitable Fundraising Platform or Platform Charity.  (Gov. Code, § 12599.9, subd. (h).)
• Charitable Fundraising Platforms and Platform Charities are required to make disclosures that prevent the likelihood of donor deception or confusion, when applicable. (Gov. Code, § 12599.9, subds. (e) and (f)(2)(B).)  For information on the proposed regulations on this, see Section 314, subdivision (a), in the latest proposed regulations.
• Solicitations for “non-consenting” charities must comply with Government Code section 12599.9, subdivision (f)(2).

Here is a brief summary from that blog of some of the newly proposed regs:

In 2021, California passed a new set of laws (referred to as AB 488) regulating charitable crowdfunding that go into effect on January 1, 2023. The state’s Department of Justice (DOJ) initially proposed regulations implementing AB 488 in May 2022, but following comments and feedback at a public hearing in July, the DOJ proposed modified regulations on November 21, with a comment period that ended on December 7. There have been substantial revisions. Not surprisingly, the DOJ proposes to delay the effective date of the new and modified regulations to January 1, 2024. Below are some general summaries of the changes in Article 1, Registration, Reporting, and General Supervision of Trustees and Fundraisers (caution: many details and exceptions are not covered here, and the proposed regulations are not law).

Note the [extremely] long-arm [world-wide, even] jurisdiction implicitly asserted in the definition of a Charitable Fundraising Platform (snippets taken from the Nonprofit Law Blog):

Definition of a Charitable Fundraising Platform

Charitable fundraising platform means any person, corporation, unincorporated association or other legal entity that uses the internet to provide an internet website, service, or other platform to persons in this state, and performs, permits, or otherwise enables acts of solicitation to occur, which includes the following and any similar activity:

(A) Lists or references by name one or more recipient charitable organizations to receive donations or grants of recommended donations made by donors who use the platform.

(B) Permits persons who use the platform to solicit donations for or recommend donations to be granted to one or more recipient charitable organizations through peer-to-peer charitable fundraising.

(C) Permits persons who use the platform to select one or more recipient charitable organizations to receive donations or grants of recommended donations made by a platform, platform charity, or other third party person, based on purchases made or other activity performed by persons who use the platform.

(D) Lists or references by name one or more recipient charitable organizations to receive donations or grants of recommended donations made by the platform based on purchases made or other activity performed by persons who use the platform.

(E) Provides to charitable organizations a customizable internet-based website, software as a service, or other platform that allows charitable organizations to solicit or receive donations on or through the platform, including through peer-to-peer charitable fundraising. The customizable platform provided by the charitable fundraising platform does not include the charitable organization’s own platform, but may integrate with the charitable organization’s platform.

Gov. Code Sec. 12599.9(a)(1) . . . 

Registration and Filing Requirements for Charitable Fundraising Platforms (CFPs) and Platform Charities (PCs)

A CFP is subject to (1) an initial registration (Form PL-1) accompanied by a $625 registration fee and (2) an annual registration renewal (Form PL-2) due by January 15 of each applicable year.

A PC must also register and file annual reports. In addition, it must file a notification (Form PL-3) when it enters into a partnership with a CFP to facilitate acts of solicitation on the CFP no later than 30 days after the partnership was entered unless notification was previously provided.

A CFP or PC must file an annual report (Form PL-4) with the Attorney General (AG) on or before July 15 for fundraising activities of the previous year. Certain information that is confidential or a trade secret can be submitted in an attachment to keep it separate from the information available for public inspection. However, the AG can deny this with notification and require an amended Form PL-4.

When a registrant CFP retains a PC or another CFP (“Partner”) to facilitate solicitations performed, permitted, or enabled by the registrant CFP, the registrant CFP’s Form PL-4 may be filed by the Partner, subject to certain conditions.

Does this mean that a small charity in Bunnell, Florida that has a website visible by Clint Eastwood in his gazillion dollar California ranch home is subject to the law's requirements?  Here is a brief primer from ReedSmith.

 

dkj

NASCO Asks For Timely Availability of Form 990 Data and Revisiting Use of Form 1023-EZ

Responding to the IRS' request for comments on tax-exempt organization forms, the National Association of State Charity Officials (NASCO) submitted a letter late last month with two requests that highlight the extent to which state officials rely on the IRS in policing charities.

First, NASCO stated its members had noticed significant lags between when charities file Forms 990 and they become publicly available. It therefore asked the IRS to address delays in the timely availability of these forms.

Second, NASCO repeated its concerns about the Form 1023-EZ and continued to call for elimination or at least revision of this form.  The letter stated that among their concerns NASCO members "continue to be concerned that the ability to use Form 1023-EZ in place of Form 1023 has made it easier for 'scam' charities to obtain 501(c)(3) status," citing the recent Treasury Inspector General for Tax Administration report on this topic.

Lloyd Mayer

New NY Pennies for Charities Report; CVS Accused of Deceptive Fundraising

There are two recent developments relating to charitable solicitations. 

First, the New York Attorney General released the latest iteration of its annual Pennies for Charity Report.  Highlights from the press release announcing the report include:

Despite the pandemic’s continuing economic impact and limitations on in-person events, donations rose to over $1.7 billion in 2021 — an increase of almost $250 million from 2020 and over $400 million from 2019 pre-pandemic contributions. Other report findings include:  

• In 276 campaigns — 42 percent — charities received less than 50 percent of funds raised, with professional fundraisers retaining the rest. 
• In 96 campaigns — 15 percent — expenses exceeded revenue and cost charities over $10 million. This is fewer cases than last year for both findings. 

Second, the Boston Globe reports that a lawsuit has been filed against CVS alleging that checkout donations to the American Diabetes Association are actually being used by CVS to reimburse the company for $10 million it already owes to the charity. Here is the complaint, courtesy of the FastCompany website that also covered this story. The plaintiffs filed the lawsuit last May, but it apparently flew below the media radar screen until a recent Tweet highlighted it in the wake of CVS filing a motion to dismiss. CVS strongly rejects the accusation, saying it only agreed to top off the donations if customer donations over a three-year period (2021 to 2023) did not reach $10 milliion. If instead customer donations exceed $10 million, any excess would go the charity.

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

Something to Think About on Giving Tuesday...

"Giving Tuesday" is drawing to a close. My iPhone has been sounding off frequently all day as several non-profits have sent me word to "remember them" on this special day. Now that this day is drawing to a close, this report caught my ears (I am visually impaired; nothing catches my eyes anymore).

Monday's NonProfit Times reported that according to a new report from the New York state Attorney General’s office, commercial fundraising firms turn over an average of 73% of funds raised to the nonprofits that retain them. However, the report states, “there is a minority of [fundraising firms that] collect fees so large that charities receive only a small fraction of the total amount donated through a campaign.”    

According to the Times,

The authors analyzed data from 658 fundraising campaigns conducted either entirely or partially during 2021 by for-profit fundraisers in New York. That’s a dip from the 718 campaigns conducted the previous year, a drop attributed to COVID-19-related restrictions. “With vaccine eligibility limited until the second quarter of the year, live fundraising events remained difficult,” report authors wrote. “Charities and fundraisers had to pivot as the pandemic ebbed and flowed.”

The Times goes on to state that the report does not break out whether potential funders were from prospect databases or lists provided by the individual nonprofit. The two types of lists often have different remittance rates. Representatives for the New York state Attorney General’s office did not return messages at deadline seeking clarification regarding whether remittance rates on these types of lists differed.

Here is some more of what the Times had to say:

On the whole, the campaigns analyzed raised more than $1.71 billion, around $248 million more than was generated in 2020, despite the drop in the number of campaigns, according to Pennies for Charity: Funding by Professional Fundraisers, the new report from New York state Attorney General Letitia James’s office. Of that, the nonprofits received just less than $1.25 billion. More than half (60%) of the money raised was generated by two donor-advised funds – Network for Good, which coordinates Facebook-based campaigns, and Eaton Vance Distributors.

The $464 million retained by fundraisers made up 27% of all gross receipts, a percentage that has held more or less steady since 2018. But remittance rates to individual nonprofits varied widely: In 42% of the campaigns analyzed, charities received less than 50% of the funds raised. And in 15%, the expenses generated by the fundraisers exceeded the revenue generated, costing these charities an aggregated $10 million.

The report included at least three other interesting findings:

• Online funding, which had jumped 21% during 2020, continued its rise, growing an additional 9% during 2021.
• Millennials, the generation coming into its own as funders, are responsive to peer-to-peer fundraising efforts. Nearly four in 10 (39%) have made donations via social media in support of someone they know.
• Telemarketing use as a fundraising channel has been dropping. During 2020, 410 campaigns employed telemarketing, a figure that slipped to 401 in 2021. Part of the reason for telemarketing fundraising’s decline might be rooted in its efficacy – for the fundraisers. In 2019, 195 fundraisers retained more than 50% of the dollars collected via these campaigns. By 2021, that number had dropped to 158 fundraisers.

The report is based on the New York state database of charities and fundraising activity records. Individual campaign records include the name of the charity, name of the professional fundraiser, filing year, gross receipts, net remitted to charity, percentage remitted to charity and the amounts of uncollected pledges reported.

This might be something you want to look through as you reflect on all the money you gave away on Giving Tuesday.

Prof. Vaughn E. James, Texas Tech University School of Law

 

 

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

 

California Issues Modifications to Proposed Crowdfunding Regulations (Comments Due 12/7)

The California Department of Justice today issued modifications to its proposed regulations under a new charitable crowdfunding law enacted by the state legislature. The new law is effective on January 1, 2023, but the DOJ is proposing to delay the effective date of the modified proposed regulation sections until January 1, 2024. The California DOJ published the initial draft of the proposed regulations on May 27, 2022. Comments on the modifications are due by December 7, 2022. 

I have not had a chance to review the (many) modifications as the email announcing them just arrived in my inbox. But I suspect the NEO Law Group, which has been carefully following these new rules, will soon have a summary available.

Lloyd Mayer

California Proposes Rules Relating to Disposal of Charitable Assets (Comments Due 12/6)

The California Department of Justice is proposing new rules relating to transactions involving all or substantially all of the assets of a charitable corporation or trust, or assets in charitable trust held by a mutual benefit corporation. Comments are due by 5:00 p.m. December 6, 2022.

Here is a summary of the effect of the proposed rulemaking:

For purposes of giving notice to the Attorney General of certain transactions involving all or substantially all of the assets of a charitable corporation or trust, the proposed rulemaking defines “substantially all” assets to mean an asset or assets equal to or exceeding 75 percent of the value of all assets held at the time of the notice or at any time during the six-month period before submitting the notice.

The proposed rulemaking also sets a standard for the Attorney General’s review of requests for waiver of the notice requirements. The Attorney General may waive notice for a particular transaction if the Attorney General determines that the transaction poses no risk to the public interest and the financial cost to the charitable corporation, trust, or mutual benefit corporation of providing notice to the Attorney General outweighs the potential benefit to the public interest.

Lloyd Mayer

NYTimes looks at Hasidic Jewish Schools in New York City

The New York Times provided an interesting, though critical, look into Yeshivas in New York City. The two points that stand out are that the children of these schools, particularly the boys, are roundly not able to pass basic competency state tests assessing learning, and that the schools are taking in lots of public dollars to accomplish this result.

The story necessarily raises the issue of what role education plays within the nonprofit sector; what role nonprofits should play in primary and secondary education in a democratic order; what role primary and secondary education ought to provide in a democratic order; and what role religion should play in shaping any of that education. I have a draft paper thinking about charter schools within that order that I will be posting soon, that confronts some of those questions. But, it does not confront the role of religion in that order.

Primary and secondary education play many roles, but the two most significant that resonate in the US conception seem to be preparing individuals to be able to be employed and support themselves and also to support a democratic order. We are not born with the ability to do either of these things and it is in all our interests to ensure the children of the country have the ability to engage in both endeavors. From the description in the article, these schools are likely failing on both counts.

And yet, the notion of freedom of religion for parents to train children to uphold the values they uphold remains strong in our nation. This comes into stark contrast though with maintaining a just political order. I think there is a lot for the nonprofit world to reflect upon in this article. Worth some thought.

From the story: "The leaders of New York’s Hasidic community have built scores of private schools to educate children in Jewish law, prayer and tradition — and to wall them off from the secular world. Offering little English and math, and virtually no science or history, they drill students relentlessly, sometimes brutally, during hours of religious lessons conducted in Yiddish.

The result, a New York Times investigation has found, is that generations of children have been systematically denied a basic education, trapping many of them in a cycle of joblessness and dependency.

Segregated by gender, the Hasidic system fails most starkly in its more than 100 schools for boys. Spread across Brooklyn and the lower Hudson Valley, the schools turn out thousands of students each year who are unprepared to navigate the outside world, helping to push poverty rates in Hasidic neighborhoods to some of the highest in New York.

The schools appear to be operating in violation of state laws that guarantee children an adequate education. Even so, The Times found, the Hasidic boys’ schools have found ways of tapping into enormous sums of government money, collecting more than $1 billion in the past four years alone."

There are many highly critical responses of this article from the Orthodox community. Here is one.

Philip Hackney

"Millions donated after Uvalde shooting still haven't reached victims and families"

As appears to often be the case after a high-profile disaster or tragedy, organizers who collected funds for victims of the Uvalde school shooting are struggling with how best to distribute those funds to benefits the victims and their families. The Texas Tribune reports on the challenges relating to several different pots of money:

• At least $16 million flowed into GoFundMe accounts and local nonprofit organizations, under the umbrella of the Uvalde Together We Rise Fund that is overseen by a 10-member committee. The committee has held two town hall meetings and is researching how best to get the funds to needy families, including how to minimize negative tax consequences for them. The Fund's website now includes a draft protocol for distribution of the amounts raised.

• Texas Governor Greg Abbott announced an allocation of $5 million for a social services center to help grieving residents, with the first step being a temporary tent for counseling sessions. The county has also approved the purchase of a building to house the center. The governor also allocated $1.25 million to the local school district for counseling.

• According to the article, assistance is also available from other sources, including the state attorney general's Crime Victims' Compensation Program (but only certain costs are covered, and only $36,213 had been paid out relating to the Uvalde shooting as of August 15th), the Community Council of South Central Texas, and the state Department of Housing and Community Affairs (the latter two sources have provided more than $400,000 in gas cards, hotel stays, mortgage assistance, and utility assistance).

Lloyd Mayer

"Casa Ruby bank accounts frozen as D.C. investigates nonprofit's collapse"

The Washington Post reports that a District Columbia court has granted the request of the D.C. Attorney General to temporarily freeze the bank accounts of nonprofit Casa Ruby, an LGBTQ rights and support organization.  A pop-up announcement on the group's webpage says that the group is still open and all of its services are available. But the August 3rd article states that the group shut down most of its operations in July.

The attorney general's request came after an earlier Washington Post article reporting that the group's last board member had resigned in April and numerous bills, including wages owed to several employees, had not been paid. The group's founder and executive director resigned last fall, but according to these news reports maintained control over the group's funds and now is in her home country of El Salvador. The resignation followed shortly after a decision by the D.C. Department of Human Services not to renew an $850,000 grant to the nonprofit, which presenting a significant portion of the group's multi-million dollar a year budget. 

Lloyd Mayer 

NY Annual Charity Filings Move Online & IRS Revises Form 990-N Online Filing Process

Two recent examples of nonprofit reporting moving slowly into the 21st century. First, as of September 19, 2022 the New York Attorney General's Charities Bureau will require all annual filings to be submitted online. The website provides an instructional video and an interactive online checklist for charities unfamiliar with the online submission process. Second, earlier this week the IRS announced that Form 990-N filers will need to use the IRS authentication platform to submit this form. This requires either an active IRS username or an account with ID.me.

Lloyd Mayer

Charitable Solicitation Update: New California Rules for Charitable Crowdfunding; Article on Cause-Related Marketing

California is working on the implementation of its new charitable crowdfunding law, which has an effective date of January 1, 2023. The Attorney General's office has now released proposed regulations, with comments due by July 12th. For a summary of the proposed regulations, see this Adler & Colvin blog post. For more general coverage of the law's adoption, see this For Purpose Law Group blog post.

In other solicitation developments, researchers at the University of Michigan recently published a study titled How does regulatory monitoring of cause marketing affect firm behavior and donations to charity?, International Journal of Research in Marketing (online 2022; hard copy publication pending). Here is the abstract:

Cause marketing (CM) typically involves for-profit firms donating part of their sales revenue to a charity, with the hope that this will increase their revenue. We argue that it is important for a regulator to monitor firms’ CM activities, and to assess how differences in the enforcement of CM laws impact the CM practice by firms. Our analytical model uses a Stackelberg leader–follower game that endogenizes the regulator’s decision to enforce CM. The firm then decides whether to truthfully declare or overstate the amount it contributes to charity (and if overstate: by how much). We find the following results in equilibrium under different conditions: (i) CM campaigns are a win–win–win situation – they increase profit for the firm while being truthful, generate larger donations for the charity, and generate a cause marketing surplus for the regulator, resulting in doing well while doing good, (ii) the best response of the firm is to be strategic, even when the regulator is strict with monitoring, (iii) the regulator itself decides not to monitor CM, even though it knows that this results in untruthful behavior by firms. When we endogenize the extent of overstatement, we find that the firm tends to be strategic by overstating donation percentage, whether the regulator is strict or not. As the proportion of unsophisticated consumers (who believe a firm’s claims, whether truthful or not) increases, the donation proportion decreases in general, and the overstatement level increases when the regulator is lenient and decreases when the regulator is strict. In equilibrium, the regulator is strict if the market size is large, and lenient otherwise. A survey with consumers supports key modeling assumptions regarding consumers' lack of knowledge of CM laws.

Lloyd Mayer

Trump Organization & Donald Trump's Presidential Inaugural Committee Pay $750,000 to DC

District of Columbia Attorney General Karl A. Racine announced earlier this month that "the Trump Organization and Donald Trump’s Presidential Inaugural Committee (PIC) will be required to pay $750,000 to the District to resolve allegations that the PIC, the Trump International Hotel, and the Trump Organization illegally misused nonprofit funds to enrich the Trump family. Those funds will then be redirected to two nonpartisan nonprofit organizations – Mikva Challenge DC and DC Action – that promote civic engagement of youth in the District."

The payment settles a lawsuit filed by the AG alleging that Inaugural Committee provided improper benefits to the Trump Organization and Trump family members in a variety of ways, including by overpaying for event space, throwing a private party, and repaying a Trump Organization debt. The Consent Motion for the settlement includes language common to such docuoments stating that the resolution is made "without it being in any way deemed or construed as an admission of wrongdoing, unlawful conduct, or liability on the part of Defendants." 

Coverage: NPR, Reuters, Washington Post.

Lloyd Mayer

Charity Scandals: AME Church Suspends Pensions; Finance Director Stole $4.7 Million from WV Charity; Update on Minnesota's Feeding the Future

It sadly has become difficult to keep up with all of the news reports about charity insiders misusing funds - maybe it is time to update the 2003 paper by Marion R. Fremont-Smith and Andras Kosaras on Wrongdoing By Officers and Directors of Charities: A Survey of Press Reports 1995-2002, 42 Exempt Organization Tax Review 25. So I am going to limit my reporting here to several recent reports involving millions of dollars each:

• AME Church: The Wall Street Journal reports (subscription required) that the African Methodist Episcopal Church "has suspended retirement payments and discussed steep cuts to the savings of its ministers amid an investigation into missing funds." The church further said that there is an ongoing investigation, including by federal law enforcement, of a possible financial crime. The pension fund, which reportedly had about $120 million in assets as of 2017, serves about 5,000 retired clergy and church workers. Additional coverage: Religious News Service.

• River Valley Child Development Services (West Virginia): MarketWatch reports that a court has ordered the former director of business and finance of this charity to repay $4.7 million that she stole in the wake of her guilty plea and sentencing to seven years in prison. The article goes on to note that as part of her restitution agreement she has agreed to forfeit six airplanes apparently from a small aircraft charter and aviation services company she owned, the proceeds from the sale of three houses, and two cars.

• Feeding the Future (Minnesota) Update: I previously reported on the apparent diversion of tens of millions of dollars from federal funds provided to this charity. The Star Tribune reports that a judge will now oversee the closure of the charity after a request from the Minnesota Attorney General's office and the charity's board voting to voluntarily dissolve it. The court has begun the process of obtaining financial documentation and a complete inventory of the charity's assets. To date no charges have been filed, but federal and state investigations are ongoing. Extensive additional coverage: N.Y. Times.

Lloyd Mayer