Sunday, April 22, 2018
In his article Albert Crenshaw discusses tax abuse in nonprofit organizations. He explains that the IRS is finding problems with every type of nonprofit organization, from charities to pension plans. He also says that the IRS has no precise way to gauge the revenue impact of these problems. He explains that localities and transit systems were collecting fees for allowing corporations to benefit from tax shelters to help finance public works. Another problem that has been identified are nonprofits and charities committing abuse and fraud themselves. This can occur when a charity is established to benefit their primary donor, or when the nonprofit organization acts as a tax shelter. To learn more about nonprofit tax abuse, click here: http://www.washingtonpost.com/wp-dyn/articles/A26388-2005Apr4.htm
In this article, Joan Renner discusses how charities can engage in political activity while maintaining tax-exempt status. She first explains that board members and CEOs of nonprofits must speak as individuals and not as the nonprofit itself. She explains that board members and CEOs are permitted to support individual candidates, but they must do so individually. She says that if a nonprofit holds an event that includes political candidates they must refrain from fundraising at the event. She then discusses that when advocating for issues that are important to your nonprofit not to mention the upcoming election. She explains that nonprofits are permitted to advocate their positions on certain legislative issues if it’s not a substantial part of their activities. However, if that issue becomes prominent in the election, tying their positions on those issues to the election becomes prohibited political activity. She finishes the article by discussing that making campaign statements on the nonprofit’s website is prohibited. To learn more about to protect nonprofit tax-exempt status while engaging in political activity, click here: https://www.nonprofitaccountingbasics.org/federal-tax-issues/charities-political-activity—steering-clear-risks-election-year
Friday, April 20, 2018
In this article, Robert Logan discusses the new Tax Cuts and Jobs Act recently signed by President Trump. He begins by explaining that the new act contains features that adversely affect many nonprofit organizations. He first discusses how the act now requires separate computation of unrelated business income for multiple businesses. The act eliminates the ability of nonprofits to offset income from one unrelated business with the losses from another. He then discusses the new tax on nonprofits that compensate their executives excessively. The act imposes a 21% excise tax on the sum of annual remuneration above $1 million, plus certain separation payments that exceed three times an average base salary measure. Finally, he discusses how nonprofits must now include fringe benefits from unrelated business income. To learn more about the adverse effects of the new Tax Cuts and Jobs Act, click here: https://www.pillsburylaw.com/en/news-and-insights/key-tax-reform-issues-for-nonprofit-membership-organizations-associations.html
Gene Takagi writes this article about his belief that 2018 will see an increase in the number of 501(c)(4) organizations being formed and receiving contributions. He argues that with the increased standard deduction more people will take that instead of itemizing their deductions. This means that 501(c)(3) charity organizations will see a drop in the amount of contributions they receive because people cannot deduct their contributions. He argues that because of this more people will decide to donate to 501(c)(4) organizations since neither type of nonprofits are deductible. His second argument is that people will want to donate to an organization that can engage in unlimited lobbying to further their social agenda. To learn about the rise of 501(c)(4) organizations, click here: https://www.linkedin.com/pulse/prediction-nonprofits-2018-gene-takagi/?trackingId=G5dMq4bRbaBltSbr371lig%3D%3D
Wednesday, April 18, 2018
In this article, Laura Kalick explores the tax consequences surrounding common business transactions, such as a merger or acquisition. She first discusses the tax consequences of merging two nonprofits. When merging two nonprofits, the two organizations will combine via state law, ending with one entity surviving and the other no longer existing. If either of the nonprofits had any outstanding tax liability before the merger, those liabilities do not disappear and could be transferred to the new organization. Also, both nonprofits must report the merger on their Form 990. The nonprofit that dissolves must file their Form 990 five months and 15 days after it has been terminated. To learn more about what happens in joint ventures of nonprofits, conversion between nonprofit and for profit organizations, click here: https://www.bdo.com/blogs/nonprofit-standard/september-2015/five-common-nonprofit-deals-with-complex-tax-conse
Tuesday, April 17, 2018
In this article, Michael Sorrells explains how 501(c)(3)s maintain their public charity status. Many charities must undergo an annual public support test to maintain their public charity and tax exempt status. The test is completed annually on Schedule A. Organizations like churches, schools, hospitals, etc. must only complete part I of the test, which identifies the type of organization because they are exempt from parts II and III. Other 501(c)(3) organizations must complete one of two support schedules, either part II or part III depending on what type of organization the charity is. Part II organizations normally receive a substantial part of support from a governmental unit or from the general public. Part III organizations normally receive (1) more than 33.33% of its support from contributions, membership fees, and gross receipts, and (2) no more than 33.33% of its support from gross investment income and unrelated business expenses. Each of these tests looks at the cumulative support for the year reported and the prior four years. For more information of how to maintain public charity status, click here: https://www.nonprofitaccountingbasics.org/federal-tax-issues/schedule-key-maintaining-public-charity-status
In this article, Michael Sorrells discusses why the IRS is so interested in 501 (c)(4) organizations with political agendas. He first explains what a 501(c)(4) organization is and how it differs from charitable organizations. 501(c)(4) organizations are defined as civic leagues or organizations not organized for profit, but operated exclusively for the promotion of social welfare. Some differences between 501(c)(4) organizations and 501(c)(3) charities is that donations to 501(c)(4) organizations are not deductible as charitable contributions, 501(c)(4)s can engage in unlimited lobbying, if the lobbying is not the primary purpose of the organization. 501(c)(4)s can engage in political activity so long as it is not the primary purpose of the organization. He then explains the Citizen’s United case and how after it was decided many 501(c)(4) organizations began to sprout up – raising concerns for the IRS. The IRS was concerned about whether “political activity” was the primary purpose of these organizations and whether the organizations were organized to primarily benefit a private party (such as a political candidate). To learn more about why the IRS is concerned about 501(c)(4) organizations with a political agenda, click here: https://www.nonprofitaccountingbasics.org/federal-tax-issues/501c4-organizations-irs-little-background-controversy
Wednesday, April 11, 2018
Matthew A. Bruckner (Howard University School of Law) recently posted "Terminating Tenure: Rejecting Tenure Contracts in Bankruptcy" to SSRN. Here is the abstract:
Many institutions of higher education are in dire financial straits and will close, merge, or file for bankruptcy in the near future. This Article considers the effect of bankruptcy laws on the ability of higher education institutions to restructure their workforces and, in particular, the impact that a bankruptcy filing may have on tenured professors. It also addresses how some tenured professors may be able to complicate their employer’s reorganization to their own strategic advantage.
In this excellent article, Bruckner considers how the crisis in legal education may affect the obligations of law schools facing bankruptcy to their tenured faculty, as well as how tenured faculty members at those institutions may respond to the threat of restructuring. Currently, colleges and universities are unusually vulnerable to financial crises, because they cannot be reorganized in bankruptcy. A bankrupt school loses accreditation and with it the ability to receive federal loan money, effectively a death sentence. But if Congress amends the Higher Education Act to allow schools to reorganize in bankruptcy, it will inevitably present a range of issues, including the bankruptcy treatment of tenure contracts. Bruckner argues that law schools can probably abrogate tenure contracts in bankruptcy, but observes that the bankruptcy process may enable tenured faculty members to delay or frustrate that abrogation in order to increase their leverage with the institution.
Wednesday, April 4, 2018
CJ Ryan (Roger Williams University School of Law) and I recently posted to SSRN a draft article titled The 2018 Revealed-Preferences Ranking of Law Schools. It is an update of our article A Revealed-Preferences Ranking of Law Schools, 69 Alabama Law Review 495 (2017) Here is the abstract:
In 2017, we published A Revealed-Preferences Ranking of Law Schools, which presented the first (intentionally) subjective ranking of law schools. Other law school rankings are objective because their purpose is to tell prospective law students where to matriculate. Our “revealed-preferences” ranking is subjective because its purpose is to ask where prospective law students choose to matriculate. In other words, objective rankings tell students what they should want, but our subjective ranking asks what students actually want.
In this article, we present a law school ranking based exclusively on the combined scores of the students in a school’s 2017 incoming class. We also compare this ranking to our previous ranking, as well as other objective ranking systems, and provide regional rankings of law schools.
Of course, comments and suggestions are most welcome.
Brian L. Frye
Sunday, March 18, 2018
Professor Ellen P. Aprill of Loyola Law School, Los Angeles has published an interesting op-ed in The Hill, arguing that the tax bill may cause an increase in the number of organizations that opt for 501(c)(4) social welfare status, rather than 501(c)(3) charity status. Donations to 501(c)(3) organizations are potentially tax deductible, but the organizations cannot engage in substantial lobbying or any campaigning. While donations to 501(c)(4) organizations are not deductible, the organizations can engage in substantial lobbying and at least some campaigning (arguably as much as 49% of their activities).
Aprill observes that the tax bill's increase in the standard deduction will significantly decrease the number of taxpayers who itemize. Because only itemizers benefit from the charitable contribution deduction, many commentators have observed that charitable giving may decrease significantly.
But Aprill observes that if non-itemizing taxpayers continue to give, they should also become indifferent between donating to 501(c)(3) charities and 501(c)(4) social welfare organizations. This may encourage more organizations to choose 501(c)(4) status, rather than 501(c)(3) status, especially because the choice would come with the ability to engage in considerably more political speech. In other words, the tax bill may (inadvertently?) lead to more 501(c)(4)s, more lobbying, and more campaigning.
It will be interesting to see how Aprill's observation plays out in practice. I can only imagine that at least some additional organizations will choose 501(c)(4) status. But there are benefits to 501(c)(3) status other than the charitable contribution deduction. Among other things, most foundations can only make grants to 501(c)(3) charities, and that is a larger source of funding for many organizations than individual donations.
UPDATE: Professor Aprill observes that private foundations can make grants to 501(c)(4) organizations by exercising expenditure responsibility, which is not necessarily a significant burden on the foundation or the use of its granted funds, so the benefits of 501(c)(3) status may be more limited than they appear at first glance.
Brian L. Frye
Friday, March 2, 2018
Nonprofit Organizations Committee
FOR IMMEDIATE RELEASE
CONTACT: David A. Levitt
Seeking Nominations for the
2018 Outstanding Nonprofit Lawyer Awards
WASHINGTON, D.C.—February 27, 2018: The Committee on Nonprofit Organizations of the American Bar Association’s Business Law Section is calling for nominations for the “2018 Outstanding Nonprofit Lawyer Awards.” The Committee presents the Awards annually to outstanding lawyers in the categories of Academic, Attorney, Nonprofit In-House Counsel, and Young Attorney (under 35 years old or in practice for less than 10 years). The Committee will also bestow its Vanguard Award for lifetime commitment or achievement on a leading legal practitioner in the nonprofit field. Nominations are due by April 2, 2018.
For a nomination form, please go to the Nonprofit Lawyer Awards Subcommittee's webpage and scroll down to find the form under "Nonprofit Lawyer Awards Documents" on the right hand side. You will also find a list of prior award recipients. The Awards will be announced at the Business Law Section's Spring Meeting in April.
Send nomination forms by April 2, 2018 to:
David A. Levitt
Adler & Colvin
235 Montgomery Street
San Francisco, California 94104
(415) 421-0712 (fax)
Monday, February 26, 2018
Merryn Somerset Webb penned an op-ed in The Financial Times entitled The charitable giving model is an undemocratic use of funds. Focused on the UK, the piece proposes that "99 per cent of the organisations with charitable status in the UK should have it removed." Instead, tax subsidies would apply to a limited number of official charities that would be tightly regulated. Read the entire piece at: https://www.ft.com/content/1093fcec-187a-11e8-9376-4a6390addb44
Sunday, February 25, 2018
In this piece, Professors Adam Chodorow and Ellen Aprill discuss section 107(2), which permits churches and other religious organizations to provide tax-housing to their ordained ministers, in the context of litigation involving the provision. They argue that the exemption provides special benefits unavailable to laypeople and thus raises serious establishment clause concerns.
Readers please note: After this piece went to press, the court enjoined enforcement of section 107(2) beginning 180 days after the later of the conclusion of any appeals or expiration of time for filing any appeal.
Is is timely because an appeal has just been filed in Gaylor v. Mnuchin, seeking to overturn the federal district decision concluding that the parsonage allowance found in section 107 of the Internal Revenue Code is an unconstitutional establishment of religion. We therefore will eventually know whether the U.S. Court of Appeals for the Seventh Circuit agrees with Chodorow and Aprill or with those, such as Edward Zelinsky (Cardozo), who take a contrary position.
The Association for Research on Nonprofit Organizations and Voluntary Action (ARNOVA) has extended to February 28 its call for proposals for its June 2018 ARNOVA-Asia Conference in Hong Kong. From the conference website:
We are calling for papers that advance the theoretical understanding of factors activating and shaping the changing dynamic between government and the third sector, and the implications of the change for public governance and the sector’s development. We encourage diverse theoretical approaches and methodologies including both qualitative and quantitative research; and also studies with a focus at the individual, organizational or sectoral levels. As we strive to bridge the academic and professional communities in the study and practice of nonprofits and philanthropy, we also welcome proposals for professional exchange sessions by practitioners which address the opportunities and challenges they face amid the changing government-third sector relations. For these practitioner-oriented sessions, innovative modes of presentation and discussion are encouraged; they may be short presentations on case studies to provoke thoughts and discussions, panel discussions of best practices, or provocative talks. Roundtable sessions in which academics and practitioners share their views and experiences of seizing the opportunities and meeting the challenges are also welcomed.
On Friday, the New York Times Editorial Board penned an opinion piece entitled, "When Charity Workers Turn Predatory." It concludes:
the Oxfam scandal has sounded an alarm across the entire nongovernmental aid profession that it must heed if it is to retain the public trust on which it depends. There must be zero tolerance for misuse of power by staff members in the field and swift and transparent action against any appearance of abuse.
Read the entire thing (paywall) at: https://www.nytimes.com/2018/02/23/opinion/when-charity-workers-turn-predatory.html
I missed this last fall, but Joel L. Fleishman (Duke) has written a new book, Putting Wealth to Work: Philanthropy for Today or Investing for Tomorrow? Here is the abstract:
By 2025, Americans will likely be donating over half a trillion dollars annually to nonprofit organizations. Those philanthropic gifts will transform significant parts of America’s civic sector landscape.Philanthropy is entering an era of unprecedented growth and innovation. Established foundations such as Ford and Rockefeller are doubling down on programs tackling long-simmering problems, including global inequality, less-than-stellar education, and uneven access to health care. Many foundations are engaging in advocacy on controversial issues, exploring venture philanthropy solutions, and experimenting with impact investing. And philanthropists such as Bill Gates, Warren Buffett, New York’s high-profile financiers, and Silicon Valley’s billionaires are planning to put their wealth to work as never before: Mark Zuckerberg and Priscilla Chan recently pledged to donate 99 percent of their Facebook shares during their lifetimes, and nearly 150 others have signed the Giving Pledge to increase dramatically their “giving while living.”In Putting Wealth to Work, Joel L. Fleishman provides expert analysis of contemporary philanthropy, offering invaluable insight for those engaging with and affected by charitable foundations. This is the fascinating and definitive account of philanthropy today, and an indispensable guide to understanding its inner workings, impact, and expansive potential.
Brian D. Galle (Georgetown) has posted Design and Implementation of a Charitable Regulation Regime. Here is the abstract:
Why is regulation of charity so pervasive? Is regulation justifiable from a perspective of economic theory? How can it be squared with the fundamentally private—that is, non-governmental—nature of charitable firms? This chapter explores five major questions in the design and implementation of regimes for regulation of charity, with the analysis centered in transaction-cost economics.
I first consider the bedrock issue of what, if anything, justifies the extensive modern role government regulation plays in the private nonprofit sector. In many respects the question is not particularly different for charitable firms than it is for commercial operations. Unlike many commercial firms, however, charities in many developed countries are subsidized by the state, and these subsidies offer additional reasons for public oversight.
The second and third sections are closely related, and examine from different perspectives the extent to which regulation of charity need be provided by government, rather than by private auditors or other monitors. The second section reviews the alternative of "voluntary regulation" or "self-regulation." In the third section, I evaluate arguments about whether private parties should be granted the right to sue charitable organizations to enforce compliance with law or self-imposed governance standards. In both sections I conclude that, while active government monitoring is likely essential to any effective regime, there also are openings for important contributions from private oversight.
The fourth section considers a recurring tension in public supervision of charities, namely: how can charities represent a diverse array of private views when closely supervised by a possibly unsympathetic government? Courts and scholars of charity law tend to favor minimalist, bright-line, and procedure-based rules for charity governance, on the theory that these approaches reduce the room for bureaucratic discretion. I argue, to the contrary, that other institutional design choices can strike a better balance between safeguarding public interests and minimizing damage to the charitable sector.
Lastly, in the fifth section, I examine what little is known about charitable compliance with law. The section provides an overview of compliance theory and evidence in the context of commercial firms, as well as the limited evidence available for charity.
I have posted Fiduciary Principles in Charities and Other Nonprofits, which will be published in The Oxford Handbook of Fiduciary Law (Evan J. Criddle, Paul B. Miller, and Robert H. Sitkoff, eds.). Here is the abstract:
This book chapter provides an overview of the fiduciary principles that apply to charities and other nonprofit organizations. More specifically, it discusses the criteria that trigger a fiduciary relationship, the duties of loyalty and care, other legal obligations that may apply to nonprofit fiduciaries, and the extent to which those duties and obligations may be modified or avoided. In the course of doing so, it discusses and critiques the approaches taken to these principles by the draft Restatement of the Law, Charitable Nonprofit Organizations.
Saturday, February 24, 2018
Alicia E. Plerhoples (Georgetown) has published Nonprofit Displacement and the Pursuit of Charity Through Public Benefit Corporations in the Lewis & Clark Law Review. Here is the abstract:
Nonprofits dominate the charitable sector. Until recently, this statement was tautological. Charity is increasingly being conducted through for-profit entities, raising concerns about the marketization of the charitable sector. This Article examines for-profit charity conducted through the public benefit corporation, a new corporate form that allows its owners to blend mission and profit in a single entity. Proponents of public benefit corporations intended it as an alternative to a for-profit corporation and largely ignored its impact on the charitable sector. While public benefit corporations are ripe for conducting charity because they can pursue dual missions, they lack the transparency and accountability mechanisms of charitable organizations.
This Article: chronicles the supply and demand for public benefit corporations that conduct charity (i.e., “charitable public benefit corporations”) and hypothesizes the micro and macro level harms caused by them. At the micro level, the harm is fraud or “greenwashing,” i.e., deceiving unwitting stockholders, customers, or other stakeholders into investing or spending their time and money in the negligent or fraudulent enterprise. At the macro level, the more pernicious harm is that “market-based charity” injects individualistic and autocratic business values and methods into charitable work. Proposals have been made to mitigate these harms, but none are satisfactory, making additional measures necessary.
Natalie Silver (Sydney) has posted Regulating the Foreign Activities of Charities: A Comparative Perspective, Report for the Pemel Case Foundation. Here is the abstract:
The globalization of charity has provided enormous challenges for governments in regulating the foreign activities of charities. As the subsector of charities operating internationally continues to evolve in the wake of new technologies and financing mechanisms used to transfer charitable funds across borders, as well as the advent of new terrorism challenges, it is critical for governments to re-examine their regulatory objectives for charities operating overseas and adjust their strategies accordingly. This paper, commissioned by the Pemsel Case Foundation in Canada, examines the different approaches undertaken in four jurisdictions – Australia, the United Kingdom, the United States and Canada – to regulate the foreign activities of charities. The aim is to inform the development of law and policy for governments seeking to undertake reform in this important area of cross-border regulation.