Nonprofit Law Prof Blog

The 50-State Index of Charity Regulations

The Philanthropy Roundtable has prepared an impressive report in which it ranks all 50 states from least burdensome (from a regulatory standpoint) on Charities to most burdensome.  Here are snippets:

The five states with the friendliest regulatory environment toward charitable organizations are Montana, Wyoming, Nebraska, Delaware and Idaho. The five states with the most burdensome regulatory environment toward charitable organizations are Connecticut, Mississippi, New Jersey, Florida and Pennsylvania. Relating these rankings to the vibrancy of the charitable sector (as measured by the number of charities per billion dollars of GDP) provides initial perspective regarding the consequences from imposing a more burdensome regulatory environment on charitable organizations. There is, in fact, a strong correlation between the states that impose more burdensome regulatory environments and the vibrancy of the charitable sector. While more research is required, the results are an initial indication that the states imposing the most burdensome regulatory environments are dimming the vibrancy of the charitable sector.  Consequently, states should consider the benefits from streamlining state regulations and eliminating unnecessary burdens as a means for promoting a more efficient and effective charitable sector.
. . . 

• While there is a need for regulations on the charitable sector to foster accountability and trust in charities, excessive levels
  of regulation impose a burden on charities that outweighs the benefit of the regulation. 
• Little research has been done to examine the impact of overregulation on the charitable sector. This study is a first
  step toward gaining a better understanding of the regulatory burden imposed on charities.
• By comparing states along five categories of charitable regulations, one can see that overregulation is correlated with
  relatively fewer charities in a state.
• Our society and those in need depend on a thriving, vibrant charitable sector. The evidence in this study suggests excessive levels of regulation are counterproductive to fostering a positive environment for charities and those they serve.

Here is part of the overall rankings.  The entire table is available in the report.  

 

darryll jones

Give.Org Publishes 2022 Donor Trust Report

 

Give.Org published its 2022 Donor Trust Report last month.  The report provides data points from which to critique laws and rules designed to increase nonprofit transparency.  The report reminds us that the survival of the sector depends on the extent to which the sector's reputation and "halo" is maintained.  Here is the opening summary:

The 2022 Donor Trust Report marks BBB®’s Give.org (also known as BBB Wise Giving Alliance) fifth year tracking public attitudes about charity trust and giving. Every December (since December 2017) we survey more than 2,100 adults across the United States, and another 1,100 adults in Canada, to explore how the public feels, thinks, and intends to act around charity trust and generosity. In 5 years of donor trust surveys, we consistently find that there is ample space to build trust in the sector, with most participants expressing that it is essential to trust a charity before giving, but only 17-20% (depending on the year) reporting a high level of trust in charities. We know charities play a role in shaping the way donors feel toward the sector; and our surveys consistently remind us that reaching a diverse set of donors requires a deliberate strategy to connect with their preferences, language, and culture.

Since 2017, we have also explored certain special topics — including disaster relief; COVID-19; sexual harassment; charity impact; and diversity, equity, and inclusion — to help us identify opportunities to build trust or protect trust from being eroded. For example, we found that transparency and specificity in disaster relief appeals can help build trust; while red flags around sexual harassment or diversity, equity, and inclusion can fracture it. As stated in Most Trusted Brands’ 2022 Trust in Nonprofits special report, “High levels of trust put [nonprofits] in the position of needing to constantly defend their reputation. Nonprofits must take an active and consistent approach to maintain trust, while simultaneously avoiding actions that might endanger trust — not just for themselves, but for an entire sector’s reputation.”

darryll jones

Is Healthcare a Public Good or Private Commodity?

Here are some interesting Gallop Poll data points suggesting, I think, that Americans consider healthcare a public good, but prefer its dispensation through the private market.  We want universal subsidization but prefer private ownership, with its profit motive and monopolistic tendencies.  This might help explain our schizoid attitude regarding healthcare tax exemption.  We implicitly accept that socialized (as in publicly-subsidized) healthcare is worthy, whilst we cringe at the idea of providing healthcare without capitalism, and often resent tax exemption for its tendency to undercut capitalists monopolies.  

 

darryll jones

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TIGTA Recommends Training and Procedural Changes for EO Determinations

From TIGTA's report, issued December 19, 2022:

Why TIGTA Did This Audit

This audit was initiated at the request of 13 U.S. Senators. The overall objective of this audit was to evaluate the Tax Exempt and Government Entities Division’s oversight controls and procedures when issuing proposed adverse Internal Revenue Code (I.R.C.) § 501(c)(3) tax-exempt status determination letters.

What TIGTA Found

Determination case files were sometimes incomplete, and employees did not always document actions taken when processing proposed and final adverse determinations. Our review of all 68 proposed adverse determination case files closed in Fiscal Year 2021 identified 40 (59 percent) case files that were missing required documents or information needed to support the actions taken by EOD specialists and Quality Assurance reviewers. For example, in 18 (26 percent) of 68 cases, EOD specialists did not document their manager’s concurrence with the proposed adverse determination, as required. Due to the missing documentation, TIGTA could not always confirm that EOD specialists and Quality Assurance reviewers completed all the necessary actions to process proposed adverse determinations. In addition, EOD management does not always effectively use Quality Measurement Process results to address identified quality issues. The Quality Measurement Process evaluates work quality in four categories of accuracy and timeliness measures. Although the overall quality score for the four categories evaluated averaged 82 percent in Fiscal Year 2021, individual attributes received far less favorable ratings. For example, Fiscal Year 2021 quarterly reports consistently indicated low scores for the “Timely Actions Taken” attribute. Finally, EOD management has not established quantifiable goals for quality review results. Goals help measure how organizations perform relative to its past performance and shows the progress in management’s efforts to improve the quality of programs. EOD specialists, Quality Assurance reviewers, and managers received religious, civil, and Constitutional rights training on how to determine if an organization is a church and were participants in discussions about the Bill of Rights and the Civil Rights Act of 1964, including the freedom of religion and nondiscrimination based on religion.

What TIGTA Recommended:

TIGTA recommended that the Director, Exempt Organizations: 1) ensure that EOD specialists complete, and managers review, all required actions when processing proposed denials of tax exemption; 2) require EOD specialists to fully document discussions with taxpayers and actions taken; 3) require Quality Assurance reviewers to document that applicants did not submit a protest; 4) provide refresher training to EOD specialists and Quality Assurance reviewers; 5) ensure that actions taken to address common quality deficiencies resolve the issues; and 6) develop baseline goals for quality review scores and adjust them periodically, as needed. IRS management agreed with all six recommendations and plans to take corrective actions.

This article summarizes the report, and quotes EOD's response (the full response is included in the report):

In response to the report, Eric Slack director of employee plans at the IRS's Tax-Exempt and Government Entities division, pointed out that in fiscal year 2021, the IRS closed approximately 90,000 applications for Section 501(c)3 status, approving approximately 78,000 of them and denying only about 60 applications, while around 12,000 were closed in other ways, such as withdrawal by the applicant before a determination was made.

"We make determinations of tax-exempt status based solely on the facts, attestations and representations in the administrative file of each individual case," he wrote. "We are committed to respecting taxpayer rights in this process, including the right to be informed, to challenge the IRS's decision and be heard, and to appeal the IRS's position in an independent forum.

dkj

Dynasty Trusts

Americans for Tax Fairness, through principal author, Bob Lord with assistance from some academic smarty pants whose names are recognizable, published an interesting report earlier this year on the persistence of Dynasty Trusts.  Here is a sample from the Executive Summary: 

Dynastic wealth has been with us since before the American Revolution. But the accumulations of wealth by ultrarich families in recent decades now exceed even those from the Gilded Age of the late 19th century. And huge family fortunes continue to pile up day after day with no end in sight. This unceasing buildup of private wealth makes our society less equal, our economy less stable and our democracy less secure. Taxes levied on the intergenerational transfer of wealth are supposed to curb this accumulation, but big loopholes in federal tax law allow it to mostly proceed unchecked. Payment of estate, gift and generation-skipping taxes (collectively known as wealth-transfer taxes) have become for all practical purposes optional for the ultrawealthy. Ultrarich families use dynasty trusts—the term for a variety of wealth-accumulating structures that remain in place for multiple generations—to ensure their fortunes cascade down to children, grandchildren and beyond undiminished by wealth-transfer taxes.  

The picture below is from a different source but it alarmingly (I guess) depicts the problem.  

 

I should admit that I avoid estate and gift taxation like sick man avoids a conference of anti-vaxers.  I have ever since I finished my Estate and Gift tax exam many many moons ago.  I mean, if the estate tax is supposed to preclude the concentration and amassing of generational wealth . . . well, I got bad news for us all.  Anyway, the most I can intelligently state with regard to dynasty trusts and the report is that somehow I get the feeling it has something to do with charitable giving under the Income and Estate tax systems.  So rather than completely expose my ignorance, I will just paste the Table of Contents and let the estate and gift tax geeks out there figure it out:  

Table of Contents

2     EXECUTIVE SUMMARY
5     BACKGROUND: RISE AND DECLINE OF THE ESTATE TAX
7     SUPERCHARGED ESTATE TAX AVOIDANCE: THE RISE OF DYNASTY TRUSTS
10     Generation-skipping Tax Exemption Creates and Inflates Dynasty Trusts
12     Valuation Discounts for Interests in Family-controlled Entities
13     Intentionally Defective Grantor Trusts (IDGTs)
16     Zeroed-out Grantor Retained Annuity Trusts
17     Irrevocable Life Insurance Trusts (ILITS) and Use of “Crummey Powers”
19     Effective Gift Tax Rate
19     Impact of Stepped-up Basis on Dynastic Wealth Accumulation
22     SCALE OF WEALTH TRANSFER TAX AVOIDANCE
22     Estate Tax Avoidance by Dynasty Trust Assets Over the Next 30 Years
22     Extensive Exploitation of Tax Loopholes by the Ultrarich
25     Case Examples of the Use of Family Dynasty Trusts to Avoid Taxes
27     ALARMING FUTURE OF DYNASTIC WEALTH
30     WEALTH DEFENSE INDUSTRY FUELS DYNASTIC WEALTH ACCUMULATION AND FRUSTRATES CHARITABLE                     IMPULSES
31     SOCIETAL PROBLEMS OF DYNASTIC WEALTH
31     Concentration of Political Power
33     Dynastic Wealth Escapes Public Oversight or Regulation
35     REVERSING DYNASTIC WEALTH ACCUMULATION
37     CONCLUSION
38     ENDNOTES

dkj

Charitable Giving 1992-2021

The Dorothy A. Johnson Center at Grand Valley State released an informative 30 year retrospective on charitable giving.  Philanthropy 1992-2022:  Giving Changed -- How Much, Where To, and Who From discusses and links to a good bit of data to help inform charitable giving policy.  Here is a sample:

This essay not only reminds us what things looked like in 1992, but reveals how the practices of giving, the makeup and number of institutions, and the intensity and breadth of research and teaching about philanthropy have all expanded considerably and changed in sometimes dramatic ways.  Megadonors have become much more mega, the lines between the sectors have blurred more than anyone expected, and many more academic programs have opened their doors. Still, many aspects of the field and its institutions have endured — not always for the better. Nonprofit ethics scandals remain in the news as they were 30 years ago, and we still struggle with how to address persistent social and racial inequities. However, the overriding theme here is the incredible expansion and change in these past thirty years.

Giving increased in tandem with the economy, but the mix of giving sources shifted.

According to our best annual estimate of charitable giving, in the publication Giving USA, total giving from all sources in 1992 was $124.31 billion. In 2021 (the latest year calculated), that total rose to $484.85, an increase of $360 billion over 30 years.  However, this increase is not as astonishing as it might seem because the total giving figure has continued to track closely with the size of the overall U.S. economy. Giving now is roughly 2% of the national GDP, just as it was 2% back in 1992. As the economy grew, so did giving.  What has changed is the mix of charitable sources, as shown in Table 1. The most dramatic change is in the relative amount of total giving coming from individuals versus foundations. While individuals are still the largest source, they account now for only about two-thirds of total giving — whereas they were 82% of the total 30 years ago. This relative decline is less a result of individual giving declining, and more because the share of giving coming from foundations has risen so significantly, from less than 7% in 1992 to nearly 19% of all giving today.

 

dkj

 

 

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

 

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

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

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

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

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

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

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

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

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

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

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

Lloyd Mayer

Millennials and Impact Investing

According to an impact investing article from earlier this year, millennials are driving an increasing trend toward impact investment and away from traditional charitable giving.  The article addressees a 2021 study by Fidelity Charitable that revealed millennials are much more likely to engage in impact investing than older investors.  The study examined impact investing and charitable giving among 1,216 US investors, who have at least 25,000 in investable assets from sources other than an employer retirement plan.  Approximately 61% of millennials reported that they had participated in impact investing.  Tellingly, 62% of millennials reported that they believed impact investing has a greater potential than traditional philanthropy to “create long-term positive change.”  In sharp contrast, 72% of baby boomers reported that charitable giving rather than impact investing was the better course to create meaningful change.

Scott Nance, Vice President of Impact Investing at Fidelity Charitable, has remarked, “The trend toward values-based investing will only grow as millennials come to control a larger share of wealth.”  Millennials are focused on having their broader values and social good align with their investments.    The study also revealed that only one third of all investors engage in impact investing.  However, 40% of those surveyed responded that they would consider making their first impact investment in 2022. Of those investors who already participate in impact investing, 41% plan to dedicate an even greater amount to impact investments.

Among the participants, the most cited barrier to participation in impact investing is a lack of knowledge.  Interestingly, of those already participating in impact investing, 42% learned about it from a financial advisor and 30% from an investment firm. The most common vehicles for investment among those surveyed are mutual funds or individual publicly traded companies that meet criteria along environmental, social, or governance themes.  Of these three themes, environmental was at the top with half of impact investors polled citing it as their top concern.   Social themes garnered the second spot with 27% whereas governance themes came in last with 16%.

As discussed in yesterday’s post, it is interesting to note the ways that impact investing may work in tandem with traditional philanthropy.  Fidelity commented upon its Giving Accounts, which allows donors to combine philanthropy with impact investing.  Its Giving Accounts saw a 67% increase in assets allocated to impact investments, raising the total to $3 billion in 2021.  

 

Khrista McCarden

Hoffman Fuller Associate Professor of Tax Law

Tulane Law School

Hospital Charity Care in the Spotlight: Aggressive Bill Collection; Criticisms of Policies

There is continuing fallout for hospitals in the wake of N.Y. Times articles about a hospital chain's aggressive billing practices and another hospital's reliance on its poor patients to access a lucrative federal program. The hospital chain covered in the first article - Providence - has in response announced it will refund payments made by more than 700 low-income patients, according to a follow-up article by the N.Y. Times.  The Post Bulletin published an article titled "Medical bills can be crippling. Mayo Clinic's charity care? Arguably lacking." And Axios reported on a study that found pandemic-drive revamping of charity care policies often have vague criteria and sometimes increased restrictions on access.

Lloyd Mayer

IRS Reports on Individual Noncash Charitable Contributions for Tax Year 2019

The IRS Statistics of Income division has issued a 26-page report on individual noncash contributions for tax year 2019. Here is the introduction:

For Tax Year 2019, individual taxpayers who itemized deductions reported a total of $74.8 billion in noncash charitable contributions on 8.8 million returns. About 45 percent (3.9 million) of these returns carried $72.8 billion in charitable contributions to Schedule A, Itemized Deductions, using Form 8283, Noncash Charitable Contributions. Form 8283 is used by individual taxpayers when the deduction amount claimed for all noncash donations reported on Schedule A exceeds $500. The number of returns filed with Form 8283 declined from 2018 levels by 7.5 percent, and the amount claimed by these taxpayers increased 2.8 percent. The average amount per return increased 11.2 percent from approximately $16,760 to approximately $18,635.

Donations of corporate stock, mutual funds, and other investments accounted for 59.8 percent ($43.6 billion) of all donations. Of the $72.8 billion in total donations, foundations received the largest amount ($20.1 billion or 27.6 percent), followed by donor-advised funds ($14.3 billion or 19.6 percent). Individuals with an adjusted gross income (AGI) over $10,000,000 donated 42.7 percent ($31.1 billion) of all donations, a slight (1.7 percent) decrease from the previous year. Donors in the age 55- under-65 category had the largest increase in donations of all age groups, increasing the amounts they carried to Schedule A by 44.8 percent, from $15.4 billion in 2018 to $22.3 billion in 2019.

Lloyd Mayer

NY Times Reports on Nonprofit Hospital Collection Efforts

The New York Times today published the result of a long study of nonprofit hospitals, focusing on Providence Health Care's aggressive collection practices against indigent patients entitled to charity care.   Unsurprisingly, to those who follow nonprofit health care, the report is not positive:   

In 2018, senior executives at one of the country’s largest nonprofit hospital chains, Providence, were frustrated. They were spending hundreds of millions of dollars providing free health care to patients. It was eating into their bottom line.  The executives, led by Providence’s chief financial officer at the time, devised a solution: a program called Rev-Up.  Rev-Up provided Providence’s employees with a detailed playbook for wringing money out of patients — even those who were supposed to receive free care because of their low incomes, a New York Times investigation found.  In training materials obtained by The Times, members of the hospital staff were instructed how to approach patients and pressure them to pay. “Ask every patient, every time,” the materials said. Instead of using “weak” phrases — like “Would you mind paying?” — employees were told to ask how patients wanted to pay. Soliciting money “is part of your role. It’s not an option.” If patients did not pay, Providence sent debt collectors to pursue them. 

More than half the nation’s roughly 5,000 hospitals are nonprofits like Providence. They enjoy lucrative tax exemptions; Providence avoids more than $1 billion a year in taxes. In exchange, the Internal Revenue Service requires them to provide services, such as free care for the poor, that benefit the communities in which they operate.  But in recent decades, many of the hospitals have become virtually indistinguishable from for-profit companies, adopting an unrelenting focus on the bottom line and straying from their traditional charitable missions.

For another report focusing on the collection activities of nonprofit hospitals in New York, see Discharged Into Debt.  Also see this NY Times editorial published in February 2020.

 

dkj

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"Gilded Giving 2022: How Wealth Inequality Distorts Philanthropy and Imperils Democracy"

The Institute for Policy Studies has published Gilded Giving 2022: How Wealth Inequality Distorts Philanthropy and Imperils Democracy. Here is the introduction:

As inequality has grown in the United States, our nation’s charitable system is in danger of becoming a taxpayer-subsidized platform of private power for the ultra-wealthy. This poses risks to the independent nonprofit sector and our society as a whole.

Since our first edition of Gilded Giving 2016: Top Heavy Philanthropy in Age of Extreme Inequality, we have shown that charities are receiving shrinking amounts of revenue from donors at lower- and middle-income levels, and that they are more reliant on larger donations from smaller numbers of wealthy donors. And we have shown that wealthy donors tend to pour their dollars into foundations and donor-advised funds — charitable intermediary vehicles they control — rather than into public operating charities (i.e. active nonprofits on the ground).

This updated edition of Gilded Giving describes the extent of the capture of our charitable sector by the wealthy, the risks this poses, and how it has been exacerbated by the pandemic and other external factors. We also propose strong reforms that would reverse these trends and realign our charitable system to serve the public interest.

Hat Tip: EO Tax Journal.

Lloyd Mayer

Overall College Endowments Post Losses, But Largest Show Slight Gain

Bloomberg reports that Wilshire Trust Universe Comparison Service data shows U.S. college endowments declined by a median of 10.2% before fees in the twelve months through June 2022. But the largest funds, with more than $500 million in assets, reported a gain just under 1.0%. And this is after a very strong positive median return of 27% for U.S. college endowments for the 12 months ending in June 2021. 

Hat tip: TaxProf Blog.

Lloyd Mayer

Nonprofits Driving Increased Local News Coverage

The Institute for Nonprofit News reports that nonprofits are driving an increase in local news coverage based on its fifth annual survey. Here is the Executive Summary:

The 2022 INN Index Report shows that the nonprofit news sector largely weathered the threats and disruption of the COVID-19 pandemic and continues a growth cycle of more than a decade.

Growth can be measured across a variety of indicators, including the numbers of INN members, total revenue, philanthropic revenue, staffing size and audience reach. Collectively, these measures describe a robust field, increasing in capacity and influence. Beyond individual organizations’ growth, growing coordination in reporting and networked content distribution expand the impact of this journalism beyond the size and number of newsrooms.

Going deeper, the Index shows that growth is differentiated. For example, gains in philanthropic support to nonprofit news is most densely concentrated among larger national and global organizations.

Smaller, local news organizations are driving growth in the number of nonprofit news outlets. Roughly 4 in 10 nonprofit news organizations are local, up from about 2 in 10 in 2017. Based on these trends, INN projects local outlets will make up the majority of nonprofit news organizations in 2024.

The Index also demonstrates challenges that could slow growth and merit attention in coming years. These include: the capacity to attract and retain diverse staffs, especially beyond a cluster of newsrooms primarily focused on serving communities of color; access to philanthropic support for smaller and emerging newsrooms; and the cultivation of market-based revenue where it is possible and aligns with the public service mission.

This data is particularly timely given layoffs at numerous local news outlets owned by Gannett, the nation's largest newspaper chain, after a quarterly loss and drop in revenue.

Hat tip: NiemanLab.

Lloyd Mayer

Tax Policy Center Study Estimates Benefit from Income Tax Exemption

An interesting new Tax Policy Center study by Nathan Born and Adam Looney estimates how much nonprofits gain from income tax exemption. While they found most nonprofits do not benefit, a small group earns significant benefits

They state: "a minority of tax-exempt organizations do earn large, persistent profits, and benefit a great deal from the tax subsidy: We found they saved around $21 billion in 2018. The largest beneficiaries are hospitals that charge more in patient fees than they spend providing medical care. They saved about $10.7 billion in taxes on their profits, 62 percent of the total subsidy. Universities that charge more in tuition than they spend on education saved about $1.7 billion. Public charities (a catch-all category of organizations financed by gifts from the general public), make up 44 percent of charities. But they saved $1.4 billion or only 8 percent of the total tax benefits."

They do not focus on 501(c)(3)s alone: "Within the tax-exempt sector, charitable (501(c)3s) were the largest beneficiaries ($17.7 billion). Civic Leagues and Social Welfare Orgs (501(c)4s) saved about $1.2 billion, as did Chambers of Commerce and Real Estate Board (501(c)6) organizations. Labor, Agricultural and Horticultural Organizations (501(c)5s) saved about $600 million."

Unsurprisingly most colleges and universities lose money and gain nothing from the benefit. 

"Colleges and universities are a case in point. While in aggregate they earned about $31 billion in investment income (mostly from endowments) and received $230 billion in revenues (mostly from tuition), they spent about $323 billion on educational and research services. On a tax basis, they lost money. Hence, the sector’s $1.7 billion tax subsidy is less than one might infer from examining endowment income or tuition revenue alone.

Within colleges, the subsidy is concentrated among a few profitable organizations. Some are well-known institutions with large endowments, such as Yale and Princeton. But some just charge a lot in tuition for low-cost and online education, like Liberty University, Savannah College of Art and Design, Southern New Hampshire University, or Grand Canyon University."

Find the full report here.

Philip Hackney

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

Contribution Data: Giving USA 2022 Report; IRS Noncash Contributions Statistics

The GivinG USA Foundation published its annual Giving USA report on charitable giving in 2021. According to the Indiana University Lilly Family School of Philanthropy, which researches and writes the report, here are some of the highlights:

• Total charitable giving grew by 4.0% to $484.85 billion, with $326.87 billion or slightly less than 70% coming from individuals. The remaining giving came from foundations ($90.88 billion), bequests ($46.01 billion), and corporations ($21.08 billion).

• The largest recipient area remained religion at $135.78 billion, followed by education at $70.79 billion, human services at $65.33 billion, and foundations at $64.26 billion, with lesser amounts to public-sector benefit organizations (e.g., United Ways and national donor-advised fund sponsors), health, arts, international affairs, and environmental.

Separately, the IRS Statistics of Income Office released spreadsheets with data on Noncash Charitable Contributions by individuals for tax year 2019. Highlights include:

• Over 3.9 million returns reported over 12.5 million noncash charitable contributions on Form 8283, with a total fair market value of over $96.5 billion.

• Donated investments accounted for almost half of the value donated ($45.0 billion), with real estate (including land and easements) accounting for an additional $33.9 billion and other categories such as clothing, household items, and art/collectibles making up the rest.

Lloyd Mayer