Nonprofit Law Prof Blog

Philip Hackney Introductory Post

As this is my first post on Nonprofit Law Prof Blog, I thought I would do an introductory post. Excited to be blogging here. My name is Philip Hackney, and I am an Associate Professor of Law at the University of Pittsburgh School of Law. I primarily teach tax law related courses and my scholarship focuses on nonprofit organizations, tax-exemption, tax law, and the IRS. You can see my scholarship here and you can see some articles I have written for more popular press here. 

I worked for five years at the Office of the Chief Counsel of the IRS in Washington DC regulating the nonprofit sector. That work very much influences my research and scholarship and likely what I will blog about here. For instance, I will likely speak about stories like the Taxpayer Advocate Service ("TAS") criticizing the IRS on its new Form 1023-EZ. I note this story because in TAS's 2020 Objectives Report to Congress, TAS again criticizes the IRS's management of its tax-exempt application system. The Form 1023 EZ is a relatively new cursory form that allows small nonprofits to quickly qualify with the IRS as tax exempt organizations. The form was a response to chronic backups at the IRS for approval of routine applications for tax-exemption. TAS is not wrong about the problems raised by the adoption of Form 1023 EZ, a form that will be abused. Charities that should not get tax benefits will be approved by the IRS as a result of the cursory form. The IRS is not doing the kind of audit work that will ensure those organizations are caught. But the reality is that the IRS does not have the resources to do the oversight of the nonprofit sector to the extent many people seem to want. I don't want to get deeply into this issue here, other than to highlight a perspective that I try to bring to the table, which is that as we think about the nonprofit community it is important to be realistic about the resources we are willing to dedicate to their oversight -- not much -- and then work from there.

I will also blog about the role of nonprofits in our democracy. Values of democracy deeply inform my scholarship, and I will work to highlight the democratic role, or often lack thereof, of nonprofit entities in the US, states, and local governments. Because I believe the well-working of our nonprofit community in its democratic role is critical to the governance fabric of our nation, I think thoughtful laws and well operated oversight of the sector matters greatly. I hope to talk about that.

My wife, who is an artist, and I are deeply engaged in the arts community. I have taken an interest in art law as a result and will likely blog about art law matters as well, particularly as they intersect with nonprofits.

Look forward to interacting with this community. 

Philip Hackney

Buchanan's 5 Mistakes of Mega Donors

I saw the following tweet today (and yes, I really should get off Twitter ....) from Phil Buchanan about an article published today on Wired.com entitled "5 Mistakes MacKenzie Bezos and other Mega-Donors Should Avoid":  

	Phil Buchanan (@philxbuchanan)
5/31/19, 9:39 AM 5 mistakes MacKenzie Bezos & other mega tech donors should avoid -- just out in ⁦‪@WIRED⁩ wired.com/story/5-mistak…

You may remember Phil from my Wednesday post as the current President of The Center for Effective Philanthropy.  First of all, I didn't realize that Jeff Bezos was getting divorced, but that being said, apparently his ex-wife took the Gates/Buffett Giving Pledge and as a result has scads of money to give to charity.  Accordingly, Mr Buchanan has some helpful advice to give to Ms. Bezos as she contemplates her philanthropy.   I won't give away all five (so that you'll read his article), but here's the first few:

    1.   "Thinking a single, quick-fix 'innovation' will solve complicated social problems

    2.   "Looking for one-size-fits-all performance measures"

Read the article for 3. 4 and 5.   I personally would add two more mistakes, however:

    6.   Not funding overhead costs, and

    7.   Bribing your favorite nonprofit into mission creep.

If you've bee in the nonprofit grant-making world for even five minutes, then I don't need to explain 6.   I recognize it isn't sexy to pay for employee health care coverage or the light bill, but work - even charity work - does not get done by sick people in the dark.     Seven is related, however - all too often I've seen charities take on large projects that monopolize their time, assets, and people to the detriment of their core mission, including diverting resources to overhead to support donor vanity projects that can't be paid out of the grant funds.   

What would you all add to the list?

EWW

Thinking Big Thoughts: Nonprofits and Democracy… on Twitter….

With summer here and the day-to-day craziness mostly (!) under control, I have the luxury of a few moments of just … thinking.   It’s easy to get wrapped up in the text of the Code, the most recent case law, or the scandal du jour (I’m looking at you, NRA).   But I rarely have the time to step back and take a wider scope on things.   

At this particular moment, it is courtesy of Twitter, which seems somewhat antithetical to big thoughts (literally, given the word count), but one never knows from whence inspiration may come. In the matter of just a few days, a number of Twitter posts came across my feed that connect indirectly in my mind to a larger questions of the role of charity in a democracy. 

Twitter post number 1.  Nonprofit Quarterly posted an article on its website entitled “The Road Less Traveled: Establishing the Link between Nonprofit Governance and Democracy.”

https://twitter.com/npquarterly/status/1133559834203308033?s=20

This article discusses how best practices in nonprofit board governance increase the representation of the various communities served by a nonprofit.  The failure to follow these best practices results in a “’democratic deficit’ in board governance- that is, an absence of democratic structures and processes.” Addressing the democratic deficit doesn’t just benefit the charity – it benefits our democracy writ large: “Wider constituent participation in nonprofit governance will not only help citizens develop civic skills and democratic values … .”  

Twitter post number 2.   The second Twitter post links to a Nonprofit Quarterly podcast that discusses “No White Saviors,” a movement that discusses the impact of race on hierarchy and power in the international charitable economic development space.  

https://twitter.com/npquarterly/status/1132662674855202817

This links a Nonprofit Quarterly podcast that discusses “No White Saviors,” a movement that discusses the impact of race on hierarchy and power in the international charitable economic development space.   “Those with power hav[e] the resources and capability to make decisions on what should the outcome should be for vulnerable populations.” Podcast at 6:42.

Twitter post number 3. The third post is an interview with Phil Buchanan of The Center for Effective Philanthropy, posted on vox.com, where he responds to criticism of that wealthy philanthropy is undemocratic (set for the more fully in his book, Giving Done Right).

https://twitter.com/voxdotcom/status/1132995143378845697?s=20

In the interview, Buchanan is quoted as saying:

The structural critiques are important and they play out in our democratic politics. But in the meantime, here we are. We have significant wealth that’s been accumulated in this country. We have endowed private foundations that don’t even have a connection on the board to the original donor. These are institutions that are focused on a mission. They’re focused on the public good. I like working in the day to day, in the practical reality, where there are people with decision-making power to allocate these resources. I want to help them to do it effectively.

I think all of these pieces raise interesting views on the role of power and money and the role of the charitable sector in a democracy.  At the end of the Buchanan interview, he specifically asks if we should be subsidizing all of this through the tax code, and specifically the Section 170 charitable deduction (spoiler alert: he says yes, and expand it to non-itemizers).

I’m more interested, however, in the Section 501(c)(3) implications on all of this.  Since Section 501(c)(3) is the section that creates the boundaries between that which is charitable (at least, charitable in tax terms) and that which is not, does it make sense for those rules to play a role in policing this issue.   One could view the 1969 passage of the private foundation excise taxes as the historical pre-cursor for this discussion, as at least part of the background of that legislation was to minimize the benefit to and the influence of the most wealthy through charitable vehicles.  My thoughts aren’t fully formed on this, but I found it an interesting crossing of the Twitter streams in a very short 48 hour period.  Any musings and other big thoughts are, of course, most welcome.

EWW

Ellen Aprill's Review of Hamburger's "Liberal Suppression: Section 501(c)(3) and the Taxation of Speech"

Ellen Aprill (Loyola-LA) recently posted a review of Professor Philip Hamburger's (Columbia) "Liberal Suppression: Section 501(c)(3) and the Taxation of Speech" at HistPhil.org.     HistPhil, which is "a web publication on the history of the philanthropic and nonprofit sectors, with a particular emphasis on how history can shed light on contemporary philanthropic issues and practice."   Prof. Hamburger's book argues that, as a constitutional law matter,

    

...  theopolitical fears about the political speech of churches and related organizations underlay the adoption, in 1934 and 1954, of section 501(c)(3)’s speech limits. He thereby shows that the speech restrictions have been part of a broad majority assault on minority rights and that they are grossly unconstitutional.

 

Prof. Aprill bring a tax lens to this issue, highlighting the history of the Johnson Amendment.   The review introduces readers who might not be familiar with the public subsidy theory of exemption to a different approach to the Constitutionality issues and highlights much of the tax-focused scholarship in the area.

 

EWW

H/T to the Business Law Prof Blog: Alexander on Benefit Corporations

Haskell Murray, one of our co-conspirators over at the Business Law Prof Blog,  recently wrote about a recent post by Rick Alexander, the head of Legal Policy at B Lab (of B Corp certification fame) on Benefit Corporations.   Here's Prof. Murray's post:

Over at the Harvard Law School Forum on Corporate Governance and Financial Regulation, Rick Alexander has a post on benefit corporations. I plan to post some comments on Rick's post next week, when I have a bit more time, but for now, I will just bring our readers' attention to the post and include a small portion of his post below:

Benefit corporations dovetail with the movement to require corporations to act more sustainably. However, the sustainability movement often treats the symptom (irresponsible behavior), not the root cause—the focus on individual corporate financial performance. Proponents of corporate responsibility often emphasize “responsible” actions that increase share value, by protecting reputation or decreasing costs. Enlightened self-interest is an excellent idea, but it is not enough. As long as investment managers and corporate executives are rewarded for maximizing the share value of individual companies, they will have incentives to impose costs and risks on everyone else.

Personally, I would argue that part of the root cause is that corporate financial performance is not required to appropriate take into account societal externalities, such as pollution - the true root cause.    Nothing is going to make a corporation be a good citizen if it doesn't want to do so, even if it could under a benefit corporation structure.   But that's just me.   I am really looking forward to Prof. Murray's thoughts, and will try to post them when I see them.

EWW

 

 

501(c)(3) Organizations & the Ban on "Intervening" with Political Campaigns

A recent post by Benjamin Leff on The Surly Subgroup highlights the 50+ year ban on 501(c)(3) organizations (here, specifically churches) “intervening” in a campaign for public office. Arguments for and against the ban range from an infringement of free speech, to churches using their power to distort the electoral process. However, the main issue discussed is that although churches want to get in to court to challenge the ban, they believe the IRS won’t let them. For a compelling read on how these organizations may be granted their “day in court” and some possible reform suggestions, read the above linked post.

David Brennen

Non-Profit Hospitals and the False Claims Act

Brian Mahany (Mahany Law) posted Non-Profit Hospitals and the False Claims Act to his firm's Due Diligence (Blog):

 

Expect to See More False Claims Act Whistleblower Cases Against "Non Profit" Hospitals

 

It shouldn't shock anyone that the highest settlements under the False Claims Act have been for profit entities. Specifically, big pharmaceutical companies, defense contractors and banks. Our record $16.65 billion case against Bank of America last year still reigns over the top spot but it wouldn't surprise us to see unrestrained corporate greed propel some other business into the top spot. What does surprise us is the number of non-profits that are racking up huge settlements.

 

Traditionally, non-profits are motivated by the public good. Their mission isn't to turn a profit. Theoretically, any excess income a non-profit makes ought to be plowed back into its primary mission. For example, a nonprofit hospital that has excessive cash should strive to provide more charity care or do more disease prevention work.

 

Although I have never worked in a hospital, I served on the board of the Family Violence Project, an organization of dedicated volunteers and salaried employees. No one took a job there hoping to get rich. Our employees were every bit as motivated as our volunteers. We tried to pay staff livable wages while at the same time serving all the needs in the community.

 

Most employees at nonprofits choose to work there because they believe in the organization's mission. For example, the curator of an art museum, although paid, probably is very passionate about art. I don't think the average executive at an insurance company is at passionate about insurance.

When it comes to healthcare, the line between for-profit and not-for-profit has become quite blurry. We don't often see False Claims Act cases involving nonprofits, even though many receive government funds and grants. The big exceptions, of course, are in the healthcare sector – non-profit clinics and hospitals.

 

Earlier today I read an article in the New York Post that claims the CEO of the non-profit North Shore LIJ Health System earned $10 million last year in total compensation. North Shore operates Lenox Hill Hospital in New York and other facilities too. Their revenues are $9.5 billion.

 

Huge salaries aren't reserved for big New York City hospitals. Even the heads of smaller hospitals are making big bucks. I know that when I left Maine in 2006 one non-profit hospital CEO was making just shy of $1 million. (The salaries of the for- profit hospital CEO's is even more ridiculous including the $26.4 million reportedly paid to Community Health Systems' Wayne Smith last year.)

 

Some hospitals try to operate both as a for-profit and a non-profit entity. How is that possible? It probably takes an army of good accountants and tax lawyers! Basically, where it is advantageous to be a for profit, those functions of the hospital will operate that way while other affiliates operate as not-for-profit.

 

When that happens, it is usually nothing more than a charade deigned to maximize government funds and donations while minimizing any taxes on the for-profit side.

 

The proliferation of these hybrid arrangements and the huge C- suite compensation packages has resulted in these organizations often running as corruptly as their for-profit counterparts.

 

Traditionally the Justice Department was reluctant to pursue False Claims Act cases against non-profits. The False Claims Act is a 19thcentury fraud statute that punishes companies that misuse public funds. Under the Act, wrongdoers are subject to triple damages and penalties of up to $11,000 for each false claim (invoice) submitted to the government. Whistleblowers who file their claims in federal court can collect up to 30% of whatever the government collects.

 

Prosecutors didn't want to pursue a False Claims Act charge because of the belief that any fine money would come from donors or would reduce the ability of the hospital to perform charity work. Today, that is but a myth.

 

In recent years it isn't unusual to see multimillion dollar settlements against non-profit hospitals and even state and local government operated facilities.

 

Fraud is fraud and taxpayers have the right to expect that their hard earned tax dollars be spent properly. Hopefully more whistleblowers will step forward and join last year's record number of folks who filed False Claims Act cases. (Last year was also a record for payments to whistleblowers, over $435 million!)

 

Nicholas Mirkay

The new phone book's here! The new phone book's here!

One of the best resources out there for keeping track of state adoption of hybrid entities is socentlaw.com and specifically, the fantastic multi-colored map that keeps track of who has what where.   

So it is with a great excitement that would do Navin Johnson proud that we can share that Cass Brewer has updated his map.   Check it out!

EWW (dating herself....)

For Profit Law Schools: Campos on Florida Coastal School of Law and what it says about high cost nonprofit law schools

If you have not already heard about the huge ongoing gnashing of teeth regarding the legitimacy, or lack thereof, of for-profit law schools (nevermind the questioning of law schools themselves), you should take a look at Paul Campos' August 13th article in The Atlantic entitled "The Law School Scam".    Campos has a follow-up post to the article -- commenting on Florida Coastal School of Law's rather transparent PR counter-offensive lead by a person named "Mia" -- on his own blog.  The point relevant to this blog though regards the extent to which the profit motive necessarily, invariably or inevitably corrupts altruism in the managment of nominally nonprofit endeavors.  One might surmise that in the absence of so much government subsidized profit -- even still today -- gushing from law schools, we might have far fewer law schools perpetuating the ever increasing bubble.   I almost feel as though I am passing along some really juicy explosive gossip, except that the facts are verifiable even if his conclusions are arguable.    

The Atlantic article begins with a discussion of an infamous incident in which a Dean candidate was asked to get the hell off campus right in the middle of his vision talk for too insightfully addressing the conflict between profit making and charity as it relates to the impact on law school admissions:

Florida Coastal is a for-profit law school, and in his presentation to its faculty, Frakt [the Dean candidate] had catalogued disturbing trends in the world of for-profit legal education. This world is one in which schools accredited by the American Bar Association admit large numbers of severely underqualified students; these students in turn take out hundreds of millions of dollars in loans annually, much of which they will never be able to repay. Eventually, federal taxpayers will be stuck with the tab, even as the schools themselves continue to reap enormous profits.  There are only a small number of for-profit law schools nationwide. But a close look at them reveals that the perverse financial incentives under which they operate are merely extreme versions of those that afflict contemporary American higher education in general. And these broader systemic dysfunctions have potentially devastating consequences for a vast number of young people—and for higher education as a whole.  Florida Coastal is one of three law schools owned by the InfiLaw System, a corporate entity created in 2004 by Sterling Partners, a Chicago-based private-equity firm. InfiLaw purchased Florida Coastal in 2004, and then established Arizona Summit Law School (originally known as Phoenix School of Law) in 2005 and Charlotte School of Law in 2006. 

For the deeper questions provoked by the article, you just need to read the article.  I'm probably way too biased to even present the highlights. But here is one salient point regarding mainstream [i.e., nonprofit] law schools that cannot be ignored:

What, after all, is the difference between the InfiLaw schools and Michigan’s Thomas M. Cooley, or Boston’s New England Law, or Chicago’s John Marshall, or San Diego’s Thomas Jefferson? All of these law schools feature student bodies with poor academic qualifications and terrible job prospects relative to their average debt. In recent years, as law-school applications have collapsed, all of these schools have, just like the InfiLaw schools, cut their already low admissions standards. And, like Florida Coastal, Arizona Summit, and Charlotte, all of these schools now have a very high percentage of students who, given their LSAT scores, are unlikely to ever pass the bar. Ultimately, what difference does it make that none of these schools produce profit in the technical (and taxable) sense, because they are organized as nonprofits?  The only real difference between for-profit and nonprofit schools is that while for-profits are run for the benefit of their owners, nonprofits are run for the benefit of the most-powerful stakeholders within those institutions.

After describing the almost religious cult-like assumptions underlying American's blind subsidization of anything labled "higher education," including law school, Campos concludes, "these assumptions enabled InfiLaw’s lucrative foray into the world of for-profit education. But they have just as surely shaped the behavior of nonprofit colleges and universities."  he might have added, "all at the expense of most students whose promissory notes finance colleges and universities." 

dkj

Kristof on Charitable Giving: Where is the Love?

I was perusing the International New York Times when I came across this op-ed by Nicholas D. Kristof.  He asks a simple question at Thanksgiving time: Where is the Love?  I recommend it to you.

VEJ 

And We Thought It Was For The Tax Deduction....

With a hat tip to the TaxProf Blog, I simply must post regarding the most recent compelling and ground-breaking work done by the readers of Freakonomics.  (Should H&R Block Hire Models to Increase Charitable Giving?)  Freakonomics updated its readers on its fundraising campaign for Freakonomics Radio, as follows. 

Your comments and e-mails were also a great window into a better understanding of what makes someone want to donate to a given cause or not. You pointed out incentives we overlooked, or overvalued, or undervalued. ... Here, for instance, is one my favorite comments, from a reader named Eric Kennedy:

[Y]ou forgot a primary reason why people donate to charity: to impress their attractive tax preparers. I’m not kidding. I’m very attractive and worked as a tax preparer for two years. I’ve seen this first-hand. I now find myself considering the impression I will make on my attractive tax preparer. The most effective way to boost nation-wide charitable giving, would be to staff H&R Block with models and encourage them to make comments about the size of people’s annual donation amounts.

I must agree with Mr. Kennedy's assessment, although I will neither confirm nor deny whether I have participated in the preparation of tax returns that contain significant charitable deductions...and that fact would, of course, have no bearing on my scholarly assessment of Mr. Kennedy’s observations in this regard.

EWW