Tuesday, November 25, 2014

Esposito, McDonnell, Reiser, Yockey, and the HBLR on Social Enterprise

HBLRThe scholarly discussion of social enterprise and hybrid legal entities shows no signs of abating. The most recent crop of articles includes the following four plus an entire issue of the Harvard Business Law Review.

Robert T. Esposito (NYU Fellow), Using a Canon to Kill a Fly: Charitable Soliciation Acts and Social Enterprise, NYU Journal of Law and Business (forthcoming)

Brett McDonnell (Minnesota), Committing to Doing Good and Doing Well: Fiduciary Duty in Benefit Corporations

Dana Brakman Reiser (Brooklyn), Regulating Social Enterprise, 14 UC Davis Business Law Journal 231 (2014) 

Joseph W. Yockey (Iowa), The Compliance Case for Social Enterprise, Michigan Business & Entrepreneurial Law Review (forthcoming)

The Harvard Business Law Review, Volume 4, Issue 2 (2014) - Benefit Corporations includes five articles relating to these hybrid entities, including one by Delaware Chief Justice Leo E. Strine, Jr.

Lloyd Mayer

November 25, 2014 in Publications – Articles | Permalink | Comments (0) | TrackBack (0)

Monday, November 24, 2014

Seventh Circuit Rejects Minister Housing Allowance Challenge on Standing Grounds, But . . .

Clergy Housing Allowance no border_medEarlier this month the U.S. Court of Appeals for the Seventh Circuit issued an opinion in Freedom from Religion Foundation v. Lew, the Foundation's constitutional challenge to the ministerial housing allowance exclusion from gross income provided by Internal Revenue Code section 107.  A lower court had struck down the allowance, but the appellate court concluded the foundation and its two co-presidents lacked standing to pursue the challenge.  In doing so, however, the court may have provided a road map for a future challenge to this provision.

The appellate court based its conclusion that the plaintiffs lacked standing on the simple fact that they had never been denied the allowance because they had never applied for it.  While the plaintiffs argued it was enough that they were similarly situated to ministers who enjoyed this tax benefit except for the fact that they are not "ministers of the gospel" as that term is used in section 107 and also that applying for the benefit would be futile, the appellate court disagreed that these allegations were enough to demonstrate the particularized injury required for standing purposes.  The solution of course is obvious - the plaintiffs should now seek to claim the exclusion provided by section 107.   But the government's response is equally obvious, if the government does not want to litigate this case - choose not challenge their claim.   The latter tactic could, however, open the door for all section 501(c)(3) nonprofits to seek to provide tax-free housing for their senior staff, a situation that likely the IRS (and Congress) would not tolerate if done a large scale.  So the ministerial housing allowance challenge is likely only delayed, not eliminated, at least based on the Seventh Circuit's standing reasoning.

Lloyd Mayer

November 24, 2014 in Federal – Judicial | Permalink | Comments (0) | TrackBack (0)

Brewer on Recent PLRs regarding Reincorporation/Redomestication of 501(c)(3)s

Brewer_Cass-300x300Cass Brewer (Georgia State) provided the following analysis of two recent IRS private letter rulings that may indicate the IRS is rethinking whether a section 501(c)(3) tax-exempt nonprofit corporation that either changes its category of nonprofit corporation status in a single state or "redomesticates" by switching its state of incorporation has to reapply for recognition of its 501(c)(3) status.  

Lloyd Mayer

 

Reconsideration of Reincorporation/Redomestication of 501(c)(3) Corporations?

    Generally, if an IRC § 501(c)(3) organization changes its legal form (e.g., from a trust or unincorporated association to a nonprofit corporation), the new form of organization must reapply for tax-exempt status. See American New Covenant Church v. Commissioner, 74 T.C. 293 (1980)(unincorporated association becomes a nonprofit corporation); Rev. Rul. 77-469, 1977-2 C.B. 196 (same). Moreover, in Case 4 of Rev. Rul. 67-390, the IRS set forth its position that mere incorporation of an exempt corporation from one state to another requires a new exemption application. See Rev. Rul. 67-390, 1967-2 C.B. 179 (describing four distinct transactions—incorporation of an exempt trust, incorporation of an exempt association, reincorporation by Act of Congress, and reincorporation from one state to another—all requiring new applications for exempt status). The IRS’s restrictive position with respect to mere reincorporation transactions involving exempt corporations seems especially harsh, particularly when compared to the much more liberal approach taken for nonexempt corporations. See I.R.C. § 368(a)(1)(F) (allowing reincorporation from one state to another with no significant income tax effect whatsoever).

    Two recent private letter rulings, however, perhaps indicate that the IRS is reconsidering its position. Specifically, in PLR 201426028 (June 27, 2014), the IRS held that a legislatively mandated, intrastate conversion from “public nonprofit corporation” status to “nonprofit corporation” status did not require an organization to reapply for exemption. Then, in PLR 201446025 (Aug. 20, 2014), the IRS went one step further to hold that a “redomestication” of an exempt corporation from one state to another did not require a new exemption application. The “redomestication” in PLR 201446025 was effectuated by filing a “Certificate of Conversion” in the original state and filing “Articles of Domestication” in the destination state. According to the private ruling, the “redomestication” was undertaken because the corporate law of the destination state offered more flexibility.

    To reach these favorable holdings, the IRS distinguished American New Covenant Church, Rev. Rul. 77-469, and Case 4 of Rev. Rul. 67-390 primarily on two grounds. First, with respect to the exempt corporations involved in the private rulings, controlling state law and governing documents clearly provided that each corporation’s existence continued “uninterrupted” from its original incorporation and original exemption application. Second, each exempt corporation’s activities, assets, and obligations (including liabilities to the IRS) remained the same before and after the reorganization transactions.

    The IRS further reasoned that the state to state “reincorporation” transaction described in Case 4 of Rev. Rul. 67-390 (which required a new exemption application) was fundamentally different from the state to state “redomestication” in PLR 201446025 (which did not require a new exemption application). Without providing details, the IRS stated that the “reincorporation” in Case 4 of Rev. Rul. 67-390 resulted in a new legal entity whereas the “redomestication” in PLR 201446025 did not. Yet, in the author’s experience with nonexempt corporations, reincorporations and redomestications are effectively identical (i.e., despite changing the state of incorporation the corporation’s existence continues uninterrupted and the corporation’s activities, assets, and obligations remain the same).

    If in fact the IRS is reconsidering its position with respect to reorganization transactions involving exempt corporations, a published ruling clarifying Rev. Rul. 67-390 is critical. Otherwise, exempt corporations will be left wondering whether their reorganization transaction is a “reincorporation” demanding a new exemption application or a “redomestication” not requiring a new exemption application. In this regard it is worth noting that some states have fairly sophisticated “redomestication” statutes for nonprofit organizations (e.g., Indiana, Ind. Code Ann. §§ 23-17-31-1 through -6). Other states (e.g., Georgia, O.C.G.A. 14-3-101 through 1703) do not have such statues, relying instead on merger statutes to accomplish reorganization transactions across states. PLR 201446025 does not identify the states involved in the “redomestication” that was the subject of the private ruling. If, though, redomestication statutes are the key to avoiding a new exemption application after reorganizing an exempt corporation, this would be vitally important for tax advisors to know.

Cass Brewer

Assistant Professor

Georgia State University College of Law

 

November 24, 2014 in Federal – Executive | Permalink | Comments (0) | TrackBack (0)

Friday, November 21, 2014

Most Recent Nonprofit Advocacy Matters

The most recent issue of Nonprofit Advocacy Matters, published by the National Council of Nonprofits, is out. Stories include discussions of what is on the table in the lame duck session of Congress, the spending reduction pressures facing several state and local governments, statewide ballot measures and constitutional amendments that were passed by voters earlier this month and that affect nonprofits, and tax & fee proposals in Oregon and Hawaii of relevance to nonprofits.

 

In addition, in its “Worth Quoting” section, the issue highlights an interesting observation of Ann Goggins Gregory, COO of the Greater San Francisco Habitat for Humanity:

Overhead in the for-profit world—sales, general and administrative costs as a percentage of total sales—is 25% across all industries and 34% for service industries. The cruel irony of holding nonprofits to a much tougher standard is that donors often say that they do this because nonprofits ought to ‘run more efficiently, like a business.’ Most people don’t know the overhead of businesses because profitability matters more.

 

The point is rather thought-provoking, and prompts some questions.  The following come quickly to mind: At what point does too much emphasis on reducing overhead lead to work environments that hinder the productivity of nonprofits’ employees?  How much of for-profit firms’ overhead is better viewed as a form of disguised compensation to employees?  Can we devise better metrics of social value produced by nonprofits and examine correlations between social output and overhead?  Who receives the primary, direct benefit of various types of overhead?  Is there a way to analyze whether nonprofits in certain fields should have higher overhead than others by studying differences in overhead incurred by for-profit firms in different industries?

 

JRB

November 21, 2014 in Current Affairs | Permalink | Comments (0) | TrackBack (0)

IRS Issues Favorable PLR on Change of Charity’s Domicile

In Private Letter Ruling 201446025 (Aug. 20, 2014), the Internal Revenue Service (“IRS”) ruled that a charitable nonprofit would maintain its tax-exempt status after changing it state of domicile by filing Articles of Domestication in the new state.  The organization, originally incorporated under the laws of State 1, received a favorable determination of its exemption under Internal Revenue Code section 501(c)(3).  It planned thereafter to file "Articles of Domestication" with State 2 and a Certificate of Conversion in State 1 in order to change its state of domicile.  The organization sought assurance that it would continue to be recognized as tax-exempt without filing a new Form 1023 with the IRS.

According to the IRS, the conversion would not constitute “the creation of a new organization for purposes of I.R.C. § 508(a) and Treas. Reg. § 1.508-1 (a).”  The IRS further concluded that the change of domicile “will not be considered a substantial change in [the entity’s] character, purposes, or methods of operation under Treas. Reg. § 1.501 (a)-(1)(a)(2) for purposes of reliance on [the organization’s] prior determination of exempt status.”  Consequently, after the change in its state of domicile, the organization may “rely on the determination of tax exempt status” previously issued to it. However, amendments to the organization’s governing documents related to the change of domicile “should be reported on Form 990 as significant changes,” the IRS concluded.

The IRS also stated that its analysis “would be different if a new corporation were created in State 2” and the two entities were merged, or the old corporation transferred assets to the new corporation.

Tax Notes Today (see 2014 TNT 224-4) reports that practicing attorneys are viewing the ruling favorably.

 

JRB

November 21, 2014 in Federal – Executive | Permalink | Comments (0) | TrackBack (0)

Thursday, November 20, 2014

New York Times on Al Sharpton’s Nonprofit

In As Sharpton Rose, So Did His Unpaid Taxes, the New York Times has presented quite a few details concerning the “more than $4.5 million in current state and federal tax liens against [Al Sharpton] and his for-profit businesses.”  What is worthy of noting on this blog is what the story has to say about the nonprofit that Mr. Sharpton founded, the National Action Network, a section 501(c)(4) organization (according to the entity's donation webpage).  This nonprofit, says the Times, “appears to have been sustained for years by not paying federal payroll taxes on its employees.”   Here are some of the most troubling excerpts:

With the tax liability outstanding, Mr. Sharpton traveled first class and collected a sizable salary, the kind of practice by nonprofit groups that the United States Treasury’s inspector general for tax administration recently characterized as “abusive,” or “potentially criminal” if the failure to turn over or collect taxes is willful.

 

Mr. Sharpton and the National Action Network have repeatedly failed to pay travel agencies, hotels and landlords. He has leaned on the generosity of friends and sometimes even the organization, intermingling its finances with his own to cover his daughters’ private school tuition. …

 

Even though state law prohibits nonprofits from making loans to officers, Mr. Sharpton said National Action Network had also once lent him money to cover his daughters’ tuition. …

 

With the National Action Network’s finances always tenuous, that year it quietly paid $70,000 toward the judgment against one of Mr. Sharpton’s co-defendants in the case, Alton H. Maddox Jr., a lawyer who was suspended for refusing to cooperate with a grievance committee investigating his conduct in the Brawley case. Mr. Sharpton acknowledged the payment in an interview last week, saying the nonprofit’s board had supported the idea that Ms. Brawley deserved to be represented.

 

With Mr. Sharpton focused on the 2004 presidential race, National Action Network’s finances were reaching crisis levels, tax documents and other public records show. The group’s revenues totaled just over $1 million in 2004, about half of what they had been two years earlier. Nevertheless, it picked up expenses from Mr. Sharpton’s presidential bid: $181,115 in consulting and other costs that should have been charged to his campaign, the Federal Election Commission later found. …

 

In 2009, when the group still owed $1.1 million in overdue payroll taxes, Mr. Sharpton began collecting a salary of $250,000 from National Action Network. …

 

These excerpts raise issues that, if factually based and resolved against the nonprofit, could suggest grounds for revocation of its federal income tax exemption.

Mr. Sharpton is not taking the story passively.  His response to the piece, also in the Times, appears here – along with rebuttals from the Times.

JRB

November 20, 2014 | Permalink | Comments (0) | TrackBack (0)

Harvard Students Sue over University Investments

The Boston Globe reports that seven Harvard students (including some at the Harvard Law School) have filed a lawsuit in Suffolk County Superior Court against the president and fellows of Harvard College for its investment in stocks of companies that produce fossil fuels.  The complaint – said to contain 167 pages of exhibits – reportedly alleges “mismanagement of charitable funds” and asserts a tort, “intentional investment in abnormally dangerous activities.”  The story states that the 11-page complaint seeks a judicial order to compel divestment.     

 

Relatedly, the law students filing the complaint have taken the opportunity to publicize their effort through an op-ed, also appearing in the Boston Globe.  Among the more interesting remarks:

 

Our legal claims are simple. Harvard is a nonprofit educational institution, chartered in 1650, to promote “the advancement and education of youth.” By financially supporting the most dangerous industrial activities in the history of the planet, the Harvard Corporation is violating commitments under its charter as well as its charitable duty to operate in the public interest.

 

Our suit charges that the Harvard Corporation is breaching its duties under its charter by investing in fossil fuel companies. Our second count is a novel tort claim, intentional investment in abnormally dangerous activities, that is based in well-established legal principles regarding liability for promoting especially hazardous behavior.

 

I certainly appreciate that the filing of this lawsuit has given these students a springboard for publicizing their viewpoint.  While I would benefit from a review of the complaint (which I do not have), just by reading the press reports, I believe the suit clearly faces obstacles, both procedural and substantive. 

 

The most obvious procedural issue is whether the students have standing.  Although some have argued for student standing to bring lawsuits alleging mismanagement by university fiduciaries, see, e.g., Sara Kusiak, Comment, The Case for A.U. (Accountable Universities): Enforcing University Administrator Fiduciary Duties Through Student Derivative Suits, 56 Am. U. L. Rev. 129 (2006), I am skeptical that a court would grant standing to the students in this case.  For one thing, I doubt that they are harmed more particularly, in any material way, by Harvard’s investment policy than is the public at large – assuming that the public is harmed in the first place.

 

Even more important, it seems to me, is the difficulty of convincing a judge that the claims of the students have substantive merit.  One could plausibly argue that an environmental organization is violating its mission by investing in fossil fuel company stocks solely for the prospect of earning profits.   But Harvard?  It is far from clear that Harvard’s investment policies are anti-educational.  Of course, one could argue more broadly that all charities must operate in a manner consistent with the public interest by not violating public policy (remember Bob Jones in the tax-exemption qualification context?).  However, could we really expect a court to conclude that buying oil company stocks is contrary to established public policy?  Imagine the implications!  (I say that with a modest chuckle, for “imagining the implications” may be precisely what is driving the legal action.)

 

And as for that “novel tort claim, intentional investment in abnormally dangerous activities” – I do not know what sanctions apply for raising frivolous claims in Massachusetts state courts, but if I were one of the plaintiffs, I would be concerned enough to research the issue thoroughly (if I had not yet done so) and prepare myself to drop that one from the complaint.

 

One final point.  To doubt the legal merits of the students’ claims is not to deny the ability of charities, such as Harvard and its nonprofit affiliates, to engage in socially conscious investing.   There is a major difference between (1) maintaining that charity fiduciaries are free to engage in socially conscious investing without violating their duties to the nonprofit corporation/its charitable purposes, and (2) asserting that charity managers violate their fiduciary duties by making investments that some consider contrary to socially conscious investing.  The former respects the right of charity managers to exercise discretion on the matter.  The latter can easily take the form of supplanting fiduciaries’ judgment with the judgment of others.

 

Those interested may wish to consult additional coverage in the New York Times.

 

 

JRB

November 20, 2014 in State – Judicial | Permalink | Comments (0) | TrackBack (0)

Wednesday, November 19, 2014

Former Controller of the Hereditary Disease Foundation Charged with Embezzlement

In Former Controller of Medical Nonprofit Is Charged With Embezzling $1.8 Million, the New York Times reports that Karen Alameddine, who served as the controller of the New York-based Hereditary Disease Foundation from September 2005 through January 2014, has been charged with embezzling more than $1.8 million of the nonprofit’s funds.  Further details appear in the story: 

Federal prosecutors in Manhattan said in a criminal complaint unsealed on Tuesday that Ms. Alameddine began diverting money by disguising entries in the foundation’s accounting software “to make what in reality were transfers to her personal bank account appear as if they were wire or bank transfers” to grant recipients.

 

The government said Ms. Alameddine, who also went by Karen Dean, worked for the organization in recent years from her residence in Perris, Calif. The funds she diverted went into accounts she controlled with names like Abacus Accounting, Chez Cheval Ranch, Dean & Co. and Karen Dean Exports, the complaint said.

The alleged scheme reportedly came to light after Alameddine’s departure, when the foundation investigated a complaint from a grant recipient that he had not yet received his check from the foundation.

JRB

November 19, 2014 in Current Affairs | Permalink | Comments (0) | TrackBack (0)

Tuesday, November 18, 2014

Avoiding Mistakes in Nonprofit Personnel Matters

In You Hired Who? Top 10 Nonprofit Employment Mistakes, a brief article appearing a few weeks ago in The NonProfit Times, Siobhan Kelley discusses several mistakes to avoid in the process of hiring and managing personnel.  Because nonprofits must practice good governance, the article is worth a look.  The article identifies and discusses the following mistakes: 

  1. Rushing To Fill An Empty Seat With A Warm Body: Mistakes In Hiring
  2. Failing to Maintain Performance/Disciplinary Records
  3. Not Requiring Managers To Document Performance Problems
  4. Misclassifying Employees as Independent Contractors
  5. Making All Employees “Salaried”
  6. Letting Employees Work “Off The Clock” Or Volunteer
  7. Drafting “Overly Optimistic” Personnel Policies
  8. Not Appropriately Addressing Disability Issues
  9. Treating Employees As Clients
  10. Forgetting About The Employee On A Leave Of Absence

 JRB

November 18, 2014 in Other | Permalink | Comments (0) | TrackBack (0)

Monday, November 17, 2014

D.C. Circuit Rejects Challenge to Accommodation under Affordable Care Act

In an Associated Press story, the Tulsa World reports that the United States Court of Appeals for the District of Columbia Circuit has rejected a challenge by religious groups, including Priests For Life and the Roman Catholic Archbishop of Washington, to an accommodation devised by the Obama administration to enable the groups to avoid paying for contraception under the Affordable Care Act.  The court concluded that the accommodation does not impose an unjustified substantial burden on religious exercise in violation of the Religious Freedom Restoration Act (“RFRA”). 

The facts are likely familiar to most readers, and are summarized in the story as follows:

The Affordable Care Act requires that women covered by group health plans be able to acquire Food and Drug Administration-approved contraceptive methods at no additional cost. In response to an outcry from religious groups, the government devised the accommodation, but the groups continued to oppose the regulations.   

To be eligible for the accommodation, a religious organization must certify to its insurance company that it opposes coverage for contraceptives and that it operates as a nonprofit religious organization.

The opinion succinctly captures the plaintiffs’ objection to the accommodation:

The contraceptive coverage opt-out mechanism substantially burdens Plaintiffs’ religious exercise, Plaintiffs contend, by failing to extricate them from providing, paying for, or facilitating access to contraception. In particular, they assert that the notice they submit in requesting accommodation is a “trigger” that activates substitute coverage, and that the government will “hijack” their health plans and use them as “conduits” for providing contraceptive coverage to their employees and students. Plaintiffs dispute that the government has any compelling interest in obliging them to give notice of their wish to take advantage of the accommodation. And they argue that the government has failed to show that the notice requirement is the least restrictive means of serving any such interest.

 The court rejected the plaintiffs’ RFRA claim.  Said the court:

We conclude that the challenged regulations do not impose a substantial burden on Plaintiffs’ religious exercise under RFRA.  All plaintiffs must do to opt out is express what they believe and seek what they want via a letter or two-page form.  That bit of paperwork is more straightforward and minimal than many that are staples of nonprofit organizations’ compliance with law in the modern administrative state. Religious nonprofits that opt out are excused from playing any role in the provision of contraceptive services, and they remain free to condemn contraception in the clearest terms. The ACA shifts to health insurers and administrators the obligation to pay for and provide contraceptive coverage for insured persons who would otherwise lose it as a result of the religious accommodation.

The court further concluded that, even if the law were deemed to substantially burden the plaintiffs’ exercise of religion, the regulation is supported by compelling governmental interests, and the accommodation “requires as little as it can from the objectors” while still serving those interests.

In the AP story, the Archdiocese of Washington is quoted as characterizing the decision as "very troubling and deeply flawed."

Here is the opinion.   Here is an entry on the opinion from the SCOTUSblog.

JRB

November 17, 2014 in Church and State, Federal – Judicial | Permalink | Comments (0) | TrackBack (0)

Philadelphia-Area Nonprofit Illustrates the Changing State of International Adoption

In Era Ending in International Adoption, The Philadelphia Inquirer reports that Pearl S. Buck International, a nonprofit that for years has worked to find homes for children unlikely to be placed in families through typical adoption agencies, has terminated its international adoption operations.  The change is portrayed as a sign of the times – a perfect storm of legal, economic, and cultural factors now stifling international adoptions.  According to the story,

A paradigm shift is taking place in countries across the globe, including the United States, that have enacted more restrictive adoption policies. As a result, the international adoption rate has plummeted by 70 percent since 2004 and squeezed out some long-established programs, such as the one founded by Buck.

"What we're seeing is the end of an era," said Adam Pertman, president of the Massachusetts-based National Center on Adoption and Permanency and author of the book Adoption Nation. "International adoption as we've come to know it is morphing into something new and something different and something that involves far fewer children."

Factors reportedly contributing to the legal restrictions that are reducing international adoptions include nationalism, economic improvement in some countries that historically have welcomed international adoptions, and concern over past illegal trafficking in babies and profit-motivated corruption.

Also mentioned is the United States’ ratification of the Hague Convention on Intercountry Adoption.  The story continues:

The new regulations, which advocates support, have added extra financial burdens in the way of more social workers as well as more costly insurance and fees. For Pearl S. Buck International, the confluence of higher costs and fewer children led to the program's demise, CEO Janet Mintzer said.

"You can't really support an adoption program when you have seven adoptions," she said. "It just doesn't make sense for us as an organization."

For Pearl S. Buck International, the new reality means that it “will continue its mission of serving children through child sponsorship and running cultural exchange programs” with foreign countries.

JRB

November 17, 2014 in Current Affairs | Permalink | Comments (0) | TrackBack (0)

Thursday, November 6, 2014

Privacy Debate Returns To Harvard

 

Last year a privacy debate erupted at Harvard when it was revealed that the university had searched the email accounts of 16 junior faculty members.  The debate prompted a major self-examination and promises by the administration to do better.

Today's New York Times is reporting that the prickly topic is back.  This time, the university has acknowledged that as part iof a study of attendance at lectures, it had used hidden cameras to photograph classes without telling the professors or the students.

While students and faculty members did not view the secret photography as serious as looking through people's email, it struck them as out of bounds -- or, at least, "a little creepy."  It also set off more argument about the limits of privacy expectations. 

The Times reports Jerry R. Green, a professoir of economics and former university provost, as saying, "I wouldn't call it spying, but I don't think it's a good thing."

The Times continues:    

Some students called the secret photography a violation of trust, while others shrugged it off because cameras are already ubiquitous, said Sietse Goffard, a junior who is vice president of the Harvard Undergraduate Council. “It’s a question I’m still really conflicted about,” he said.

The episode comes as the university is getting familiar with a new honor code that will go into effect next year. That code, Mr. Goffard said, “stresses the importance of transparency and community trust.”

Carolyn O’Connor, a first-year student, said she would be concerned if the pictures were made public. But “if it’s for academic reasons, I don’t have a problem with that,” she said.

Researchers at the Harvard Initiative for Learning and Teaching set up the cameras to investigate professors’ complaints that many students skipped lectures, and that attendance dropped as a semester wore on. (The photos confirmed both points.) The researchers were concerned that letting professors or students know could skew the results.

They received clearance from Peter K. Bol, a vice provost, and took still images in the spring in 10 classes, which have not been identified, with a total of about 2,000 students. Administrators said that students were not tracked, that professors were not judged on the results, and that after attendance figures had been compiled, the pictures were destroyed.

Harvard's respect for privacy is a touchy subject because of the email search of last year.  When word broke of those searches, many professors were furious, arguing that although the university owned the email system, the professors had an expectation of privacy.  In response, the administration adopted a policy on electronic privacy.

This time around, the photography has not drawn the same kind of reactions.  "This should have been done better," the Times quotes Wilfried Schmid, a mathematics professor, as saying.  "This is not in the same league as the email searches.  It's more like a lack of courtesy."

Vaughn E. James

 

November 6, 2014 in Current Affairs, In the News | Permalink | Comments (0) | TrackBack (0)

Prospects for Nonprofits Under GOP-Controlled Senate

With Republicans poised to take control of the Senate following Tuesday's elections, Alex Daniels writes in the Chronicle of Philanthropy that it is likely that lawmakers will dig deep into the Internal Revenue Code soon after a new Congress is sworn in next year.  Daniels continues:

While that means added scrutiny on the charitable deduction and the tax treatment of nonprofits, charity leaders are confident a solidly Republican Congress will keep their cherished provisions intact.

Before the current Congress wraps up its business, however, charity officials expect lawmakers to consider certain items in the tax code, including moving the deadline for claiming the charitable deduction from the end of the year until April 15 as well as a set of tax preferences that are usually renewed each year.

Also, Congress has yet to take action this year on the "tax extenders," expiring provisions of the tax code that include benefits for land conservation, donations to food banks, and contributions to charity made from certain retirement accounts.

Republicans strengthened their hold on the House of Representatives, and will hold at least 52 seats in the Senate. Michelle Nunn, a nonprofit executive who ran for the Senate in Georgia, was among the candidates Democrats were counting on to help them keep control of that chamber, but she was defeated handily by Republican David Perdue.

Next year, when Republicans control the Senate and operate with an even stronger hand in the House, they are likely to consider a much more comprehensive tax overhaul. While the chances of enacting the first major changes to the tax code since 1986 are slim, some say, any legislative action during the next session of Congress will set the stage for future tax debates during the 2016 presidential campaign.

Daniels lists five top issues he says nonprofit organizations are watching for legislation and executive action:

  • Internal Revenue Service rules governing 501c(4) social-welfare organizations. The IRS is considering what constitutes political activity by these groups and whether their donors can remain anonymous.
  • Foundation excise taxes. The House has passed a measure to simplify and lower this tax to 1 percent.
  • A proposal to require donor-advised funds to pay out at least 5 percent of their assets each year.
  • The provision of federal support for social-impact bonds that fund "pay for success" efforts at the state and local levels.
  • Pending rules that limit how to conduct federated campaigns. The United Way hopes a Republican Congress will remove recently added federal regulations.

Time will tell whether Alex Daniels is correct. 

Vaughn E. James

   

November 6, 2014 in Current Affairs, In the News | Permalink | Comments (0) | TrackBack (0)

Wednesday, November 5, 2014

As Economy Improves, Large Corporations Increase Charitable Giving

Yesterday's NonProfitTimes had some pretty good news: as the economy continues to recover from what the Times labels "the Great Recession," the nation's largest corporations have increased their charitable giving.  Between 2010 and 2013, says the Times, nearly two-thirds of these corporations increased their giving.  This increase in giving is often driven by performance: "revenue increased a median of 11 percent among companies giving 10 percent or more between 2010 and 2013."     

The Times explains that

Those were some results from Giving In Numbers, an analysis of corporate giving by the Committee Encouraging Corporate Philanthropy (CECP) and The Conference Board, both based in New York City.  Data comes from 261 corporations representing more than $25 billion worth of giving in 2013.  Median total giving was $18.46 million per company.

Central to the study was a matched subset of 144 companies that provided giving data in all four years, 2010 through 2013.  More than half of the 64 percent of those companies in the matched set that increased giving increased by 10 percent or more.  In that matched set, aggregate giving went up 15 percent, from $15.22 billion in 2010 to $17.55 billion in 2013.  Non-cash contributions — product donations and pro bono services — accounted for 90 percent of that increase.

Pro-bono service is the fastest growing employee engagement program.  Companies offering pro-bono service jumped from 35 percent in 2010 to 50 percent in 2013. However, pro-bono was only 19 percent of all noncash giving.  Product donations were king in 2013, making up an average of 60 percent of noncash giving.  Other noncash contributions clocked in at 21 percent of noncash gifts.

Growth, however, slowed last year compared to prior years analyzed in the study.  Among companies that increased their giving, their change in median giving was 6 percent, down from 17 percent in 2012 and 21 percent in 2011.  Companies that decreased their giving did so by 6 percent in 2013, compared to 1 percent in 2012 and 5 percent in 2011.

For the 10 percent of organizations in the matched set that reported a slight decrease (less than 10 percent), many cited a one-time spike in giving in response to Hurricane Sandy in 2012 as the reason for a slowdown in 2013.  Those companies giving significantly less (10 percent or more) reported company-wide cost reductions, corporate divestitures and transitioning away from cause areas previously supported.

While respondents classed as Fortune 100 companies (of which there were 52) gave much higher than average, giving fell for those companies between 2012 and 2013, from a median $66.29 million in 2013 to $62.94 million in 2013.  “Several (Fortune 100) companies have begun better aligning their corporate giving focus with their business strategy, resulting in a transition away from unaligned partnerships.  Several survey respondents cited this as a reason for the decrease in giving,” wrote report author Michael Stroik, manager of research and analytics at CECP.

As giving climbed, the number of corporate grants dropped from a median of 1,000 in 2010 to 701 in 2013.  Grantmaking expenses also fell: median $2.2 million in 2010 to $1.8 million in 2013.  “Companies are clearly making fewer grants and contributions staff likely have greater bandwidth to monitor and evaluate grants on an ongoing basis.”  More than three-quarters of corporate giving departments measured the outcomes or impacts of the grants they made in 2013.

More than one in three survey respondents (38 percent) expect their giving levels to increase for 2014.  About half, or 48 percent, expect no change, and only 13 percent expect a decrease.  “Two cause areas, Higher Education and Health and Social Services, could have a strong year in 2014, based on the fact that these two areas were supported more in 2013 by companies that expect to increase their giving than by companies that expect to decrease their giving,” wrote Stroik.

Stroik sees the trends found in the Giving In Numbers report as a continuation of business practices established during the recession.  “Companies implemented more strategic and business-aligned community investment strategies during the recession, which continue today,” he said via a statement.  “They continue to see the win-win of their more strategic — and in many cases increased — community investments as their revenues rise with their societal engagement.”

 

Vaughn E. James

 

November 5, 2014 in Current Affairs, In the News | Permalink | Comments (0) | TrackBack (0)

Monday, November 3, 2014

Nonprofit CEOs Say Board Members Need to be Better Fundraisers

 

The Chronicle of Philanthropy is reporting that a recent "Living with Intent" survey conducted by the nonprofit watchdog group BoardSource found that nonprofit leaders gave their boards an average grade of B minus, and judged trustees to be better at technical tasks like financial oversight than at setting strategy or reaching out to the community.

As in years past, the CEOs cited fundraising as a significant concern: 60 percent of them said it was the area their boards most needed to improve.

BoardSource works to improve nonprofit governance.

According to the Chronicle:

In 1994, chief executives said that 60 percent of their board members gave money to the organization, a figure that grew to 85 percent in this year’s survey. But giving by 100 percent of all board members—the gold standard espoused by BoardSource and other nonprofit experts—was reported by only 60 percent of the respondents in this year’s survey.

Many nonprofit organizations set minimum donations expected by trustees and encourage them to contribute at least that amount and ask others to follow their example. But trustees remain challenged when it comes to asking family members, friends, and colleagues for donations; 43 percent of board members in this year’s survey, about the same as in previous years, said they are uncomfortable asking for money.

The survey also found some signs of improvement in boards’ racial and ethnic diversity, which was rated as more important for boards than including equal numbers of male and female trustees or making sure that organizations recruit trustees of different ages. Respondents reported that 20 percent of their board members, on average, are people of color, up from 16 percent in 2010, but a quarter of the respondents said their boards are all white and nearly 70 percent of respondents indicated they are dissatisfied with the racial and ethnic composition of their boards.

Gender representation among the executive ranks of nonprofit organizations in the survey has improved over the years, but women remain underrepresented as chief executives in large organizations. Women accounted for 65 percent of chief executives in groups with budgets under $1-million; 75 percent among nonprofits with budgets of $1-million to $9.9-million. But among groups with budgets of $10-million or more, only 37 percent of chief executives were women.

Nonprofits appear to be recruiting more board members under 40 years old, with 17 percent of respondents in this year’s survey reporting trustees in that age group, up from 14 percent in 2010.

Nonprofits also are recruiting smaller boards, the survey found. In 1994, the first year of the survey, respondents reported 19 trustees, on average. In this year’s survey, that number dropped to 15.

According to the Chronicle, 850 chief executives and 246 board chairs responded to questions posed by the survey.  A free coipy of the findings are available online.  BoardSource says it will publish a more complete report on its website in December. 

 

Vaughn E. James

November 3, 2014 in Current Affairs, In the News, Other | Permalink | Comments (0) | TrackBack (0)

Sunday, November 2, 2014

Donor Advised Funds – A Hornet’s Nest for the Charitable Sector.

What to do about donor advised funds is likely to be a perennial and growing feature of debate about charitable nonprofits. Are donor advised funds a vacuum for dollars that otherwise would be spent right away for charity? Or are DAFs an efficient giving vehicle, promoting more and better philanthropy? Or both? For a recent example of commentary on the issue, see Allen Cantor’s article in the Chronicle of Philanthropy. 

The key initial question is whether contributions to DAFs are substitutes for charitable contributions that would otherwise be made, but just not to a DAF. To the extent DAF contributions are not substitutes for other charitable giving, the policy concerns with DAFs are diminished. The DAF money then would represent new charitable dollars, and many of the claims about DAFs democratizing philanthropy would have merit. So long as DAFs on average pay out at a high rate, and there is active monitoring of dormant accounts and noncash contributions by sponsoring organizations, the DAF revolution could be embraced as a great way to raise new money for charity.

But if most DAF contributions are substitutes (as Allen Cantor argues), meaning that the DAF is a substitute for another charity, then DAFs potentially are more menacing. There are two preliminary questions here. If the DAF is a substitute for private foundation giving, as many DAF proponents claim, then the issue is whether DAFs or private foundations are better custodians of charitable dollars. The private foundation model is highly regulated and subject to a payout. The DAF has fairly light touch regulation and no payout requirement, but are less costly to run and many DAFs pay out at a higher rate than private foundations, which tend to stick to the statutory minimum. Private foundations on the other hand over time become established sources for charitable funds and have an independent mission. By contrast, many DAFs may add little to no value, but serve more as a way-station. These are just some of the issues in comparing DAFs to private foundations.

More worrying is the extent to which DAFs are a substitute for giving to other public charities. Because many DAFs (i.e., those with ties to large commercial investment firms like Fidelity or Vanguard) really are just conduits, the DAF then simply represents delayed charitable activity without a matching delay in tax benefits. Other public charities, and their beneficiaries, suffer the delay. Donors and DAF sponsoring organizations (and investment managers) benefit. This is a serious issue, which motivates Allan Cantor’s piece and other DAF critics.

How to resolve these issues? More study on the extent to which DAFs are substitutes or represent new giving would be useful. We also need to consider whether DAFs present sufficient issues of tax policy to warrant distinct tax treatment – i.e., different from private foundations or other public charities. The reforms in the Pension Protection Act of 2006 took a first step to segregating the DAF as a charitable activity, subject to a special set of hybrid rules. Should we go further, and have special payout rules, as proposed by the Camp tax reform draft (proposing a five-year spend down of contributions, sec. 5203, page 160)? Should the charitable deduction for DAFs be delayed until the money is spent?

Note that it is easy to suggest high DAF payouts as a solution, but query the outcome: would sponsoring organizations just default to private foundation status so as to secure the lower payout, notwithstanding the increased cost of business? And should all DAF sponsoring organizations be treated the same? DAFs at community foundations or other public charities do not necessarily raise the same issues as DAFs that are more akin to conduits.

In short, DAFs raise a hornet’s nest of issues for the charitable sector. It is a debate we should have, and we can expect that the issues will not subside anytime soon.

Roger Colinvaux

November 2, 2014 | Permalink | Comments (0) | TrackBack (0)

Friday, October 31, 2014

Ebola is a Qualified Disaster

The IRS has designated the outbreak of the Ebola virus as a qualified disaster under section 139 of the Internal Revenue Code. In the past, most qualified disaster designations have been for weather related events, or terrorism. Query whether this is the first time a qualified disaster has been declared for an infectious disease.

The principal consequence of the designation is to provide that victims who receive certain types of payments to relieve burdens suffered because of Ebola do not have income as a result of the payment (to the extent not compensated for by insurance). 

In addition, a qualified disaster designation has implications for spending by charitable organizations, particularly private foundations. For example, the IRS states that as a general matter corporate foundations “may choose” to provide assistance to employees of the corporate sponsor who are harmed by Ebola. This statement oversimplifies the issues involved, though IRS does note that “private foundations should exercise due diligence when providing disaster relief as set forth in Publication 3833, Disaster Relief: Providing Assistance Through Charitable Organizations.” 

The concerns are that employers will funnel aid to select employees through the corporate foundation. This could be an act of self-dealing, the aid might not be based strictly on an objective determination of need, and further, the aid program might not be designed to serve a broad or charitable class of beneficiaries and so may really be for private not public purposes. Accordingly, the IRS details the due diligence required to prevent against such possible abuses (see pages 20-22 of the Publication). Foundations and other charities (including donor-advised funds) getting involved in disaster relief would do well to look at this guidance.

Interestingly, the sensible if elaborate due diligence regime outlined in Publication 3833 is not based on the text of the Internal Revenue Code (section 139), which makes no mention of charities or private foundations. Rather, the law here comes directly from 2001 legislative history under the heading “Rules applicable to charitable organizations making disaster relief payments.” It is a noteworthy example of law arising from the penumbra of legislation. In effect, the IRS was told in the aftermath of 9/11 to relax its attitude to foundation provision of disaster relief, but to provide for essential prophylactics. This now survives as part of section 139 qualified disaster relief.

The IRS has also provided guidance (Notice 2014-68) on leave-based donation programs in connection with Ebola. Under such a program, an employee may forego sick or annual leave in exchange for the employer making payments to a charitable organization for the relief of Ebola victims. The guidance explains that the employee does not have income as a result, nor may the employee take a charitable deduction. To qualify, the employer must make the payment to the charity before January 1, 2016.

Roger Colinvaux

October 31, 2014 | Permalink | Comments (0) | TrackBack (0)

Wednesday, October 29, 2014

Recent conferences of note

Last week, the National Center on Philanthropy and the Law at New York University held a conference titled “Regulation or Repression: Government Policing of Cross-Border Charity.” The agenda for the conference is available here and papers from the conference will be posted in due course. Papers from past conferences are available here. The NCPL website and annual conference papers are an excellent resource for scholars, practitioners, and policymakers.

In addition, the Urban Institute in Washington DC hosted a conference titled “Increasing Philanthropy through Policy and Practice.” The website describes the conference as follows:

"In the midst of recent attention to ways in which the charitable deduction might be pared, worries loom about how giving might decline. Join the Urban Institute’s Tax Policy and Charities project in examining the flip side of the issue, as we explore ways that existing incentives, along with new platforms and better practices, can be leveraged to encourage philanthropy. . . . Topics will include the proposal to extend the giving deadline for the charitable deduction to April 15 (as with individual retirement accounts), whether expanded use of donor-advised funds has encouraged greater giving, how new platforms for giving provide new opportunities, and nonprofit organizations’ efforts to improve their fundraising effectiveness." 

The webcast is accessible here.

Roger Colinvaux

October 29, 2014 | Permalink | Comments (0) | TrackBack (0)

Sunday, October 26, 2014

Study Shows Marked Increase in Charitable Giving; Number Projected To Rise

    The U.S. Trust, in conjunction with the University of Indiana Lilly Family School of Philanthropy published an interesting study this month. The study found a marked increase in charitable giving among high net worth donors for 2014. The study also concludes that the trend is projected to increase in the coming years. The biennial study found that 98.4% of high net worth households donated to charity—the highest it has been since the study began in 1996. The study also found that the amount each household pledged has increased by 28% from last year.

     The study also tracks the reasons why donors give. The top cited reason was the belief that the donor’s gift can make a difference while only one-third cited favorable tax treatment as a determinative factor in giving. The study also tracked why donors stop giving. Some of the reasons cited were too frequent solicitations asking for inappropriate amounts, ineffectiveness of the organization, and change in organizational leadership. Read more on the article HERE.

    How may this study help charities and nonprofits going forward?  

DAB   

October 26, 2014 | Permalink | Comments (0) | TrackBack (0)

IRS Court Victory Over Teaparty Still Leave Open Questions of Enforcement

    The IRS secured a victory over the Tea Party in a ruling by the United States District Court for the District of Colombia in Linchpins of Liberty v. United States and True the Vote, Inc. v. IRS. The District Court found that the cases were now moot after the IRS ultimately approved the parties’ application for tax-exempt status.

    The case began after a highly controversial scandal after the IRS delayed a number of applications for tax-exempt status as a 50(c)(3) or 501(c)(4). The IRS delayed applications based on, among other things, the applicants’ name. For example, the IRS flagged applications containing words such as ‘patriot,’ ‘freedom,’ and ‘liberty’ and gave them further review. The IRS’ rationale was that an influx of applications for 501(c)(3) and 501(c)(4) status, along with the dubious nature of many of the applicants’ dealings, caused significant backlogs. The result was a significant delay in processing applications.

    Instead of litigating the case, the IRS ultimately granted tax-exempt status to most of the parties involved rendering the lawsuit moot. While this may be the end for now, this raises serious questions for the IRS going forward. What, if anything, may the IRS do to review the merits of 501(c)(3) and 501(c)(4) applications—especially those that appear suspect?     

DAB

October 26, 2014 | Permalink | Comments (0) | TrackBack (0)