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Employing the disabled and other low-income individuals?
Selling gift baskets from needy third-world countries?
If this nonprofit sounds like a model of social enterprise, that's because, well, it is.
And besides exemplifying the triple bottom line, it also illustrates how the commercial character of such ventures can cause serious trouble with the IRS.
Click through the jump to read some key points from the Service's explanation for denying this nonprofit tax-exempt status under 501(c)(3). Remaking charity in the image of commercial business can yield certain benefits, but failing to respect the design logic of nonprofit form can create far more trouble than your business plan may anticipate.
One of my law class students asked me about certain popular arguments made by tax protestors. It's a subject well known to pretty much anyone who has ever clerked for a federal appeals court, because the courts get a fair number of these cases coming through every year and they always lose. Big.
The IRS explains why in its comprehensive new point-by-point refutation of the leading tax protestor arguments.
Craig Weinrich of the Nonprofit Coordinating Committee of New York left a comment below with some useful resources. So no one misses it, here it is, with links:
NPCC usually gets about a dozen calls a week on starting a nonprofit, and although we do not assist in this area, aside from the checklist, we refer people onto Community Resource Exchange (www.crenyc.org) who have a fantastic book called "From Vision to Reality" as well as workshops and consultants to help. Additionally, we refer people to both Lawyers Alliance for New York (www.lawyersalliance.org) and New York Lawyers for the Public Interest (www.nylpi.org) for legal assistance.
- Nolo's intro article covering basic elements in forming a nonprofit organization.
- The Foundation Center's instructive tutorial (with sample documents) on starting a nonprofit.
- A thorough checklist of "things ya gotta do" from the Nonprofit Coordinating Committee of New York
The issue: whether the charity had paid excessive compensation by approving a 1.265 million dollar retention bonus. The AG
ultimately was comfortable with the process because of the following factors: (i) the board was consistently involved in setting Spaulding's compensation and reviewing his performance; (ii) independent comparables were used by the compensation committee in developing Spaulding's pay package; (iii) there was no evidence that Spaulding attempted to assert undue influence; (iv) the amounts of the deferred bonus were consistently disclosed in regulatory filings; and (v) with one exception, the minutes reflected the major decisions.Re the last point, Siegel highlights a recommendation that I also make to my nonprofit law classes:
The most significant problem that Spackman [the AG] pointed to was a missing set of minutes for an important meeting (the May 3, 2001 one). Spackman made it very clear that the decision, including the reasoning behind it and the economic analysis, should be reflected in the minutes of the board and the committee. This simply reinforces our continuing belief that meeting minutes should be more detailed than many lawyers currently prefer. In our view, boards and their lawyers make a serious mistake when they claim they are avoiding potential board liability by stripping meeting minutes of any meaningful content. As we continue to observe practices, we find that more detailed minutes often would have avoided embarrassment and provided a solid defense for board decisions.
Yesterday in my law class we reviewed how good record-keeping can be key to defending a lawsuit against a nonprofit's directors and officers.
But what if you lose? Or, even if there isn't a lawsuit, how can you minimize the risk of loss for your organization's leaders?
We cover a lot of ground in my nonprofit law course, and at times it may seem that the penalties on groups that do wrong have little application to mainstream charities.
After all, we're all good here, aren't we?
Except good intentions can lead to any number of bad acts--and because these things are done in the name of doing good, even the most respectable group won't see anything wrong.
Here's an interesting case study from California. Although some legal details may differ from state to state--not all states would apply the language of trust law to gifts to a corporate charity, for example--the core principles and lessons remain the same. In a nutshell, a California United Way spun off a separate charity to manage charitable contributions, and then . . .
When you cut through the numbers, the problems and issues are relatively straightforward. The court concluded that PipeVine was undercapitalized when it split off from United Way, with the result that PipeVine was forced to use new contributions to meet its obligations to remit amounts attributable to older contributions. The court also concluded that Pipeline's financial statements, as a result of an adjusting entry, hid these facts by overstating PipeVine's worth.
Click the link for a full summary and essential advice.
Accountability works only so long as we know how to read the numbers. Case in point: this Harvard Crimson op-ed condemning gross fiscal irresponsibility by some of the nation's leading charities:
For all their publicity stunts and feel-good lines, many of todayâ€™s powerhouse nonprofits are extremely inefficient. They commit the majority of their resources to pulling in potential donors through razzle-dazzle, so that there is little left in the way of resources for their actual causes. Inevitably, every organization has overhead costs, but a staggering number of charities today are falling out of control in this respect.
Sounds bad, doesn't it . . . until you read the corrections:
The May 15, 2006 op-ed, â€œCorrupt Charities,â€ incorrectly stated the percentage of donations to several charities that goes towards the people and programs that the charities exist to serve. According to Charity Navigator, a non-profit organization that reviews charitable groups, the Susan G. Komen Breast Cancer Foundation spends 76.2 percent of money on its causes, not 13 percent. The Greenpeace Fund spends 78.8 percent on its causes, not 18 percent. The March of Dimes Birth Defects Foundation spends 75.1 percent, not 18 percent. Charity Navigator does, however, rate the efficiency of Greenpeace and March of Dimes as deserving only two stars, which signifies that it â€œneeds improvement.â€ The Komen Foundation received a three-star â€œgoodâ€ rating.
These significant mistakes occurred because the writer did not correctly read the information on the organizations listed on Charity Navigatorâ€™s website. Though Crimson policy is that all pieces must be fact-checked by an editor, the editor of this piece also misread the numbers.
The Crimson will investigate how the writer, the editor of the piece, and two proofers missed the factual inaccuracies, and will move to ensure that existing fact-checking policies are strictly followed so that similar errors will not happen in the future.
All the questions in the interview were drawn from actual questions I've received from students, nonprofits or other social enterprises. And here are a couple follow-ups:
Q: Can a nonprofit get a trademark, since it's not a business?
A: Yes. A trademark is a symbol used to identify the source of goods or services in the marketplace. Even if a nonprofit does not perceive itself as a business, it may actually enter the marketplace in any number of ways, not least of all by fundraising. For more on nonprofits and trademark, check out the article linked here.
Q: When I start my nonprofit, do I have to register its name as a trademark?
If you are going to use the name on goods or services, then it's a good idea to protect yourself by registering the name as a federal trademark rather than simply relying on common law trademark protection. On the other hand, the name of a nonprofit (or for-profit) organization cannot be registered as a trademark unless it is also applied to goods or services.
Q: Can a church get a trademark?
A: Yes. Here's an example of how the Presbyterian Church (USA) uses trademark law to avoid confusion with other churches and to prevent unauthorized use of its name. Similarly, here's the trademark policy of the Seventh Day Adventists. Religious groups may generally be full of peace and light, but mess with their trademarks and they can get pretty badass.
And finally, here are the web sites noted in the podcast, plus one extra:
This question flows from one of the tax code's more insidious and retrograde provisions with regard to tax exemption.
First, some background.
In a nutshell, the Internal Revenue Code divides 501(c)(3) organizations into two major categories: public charities and private foundations. Both are 501(c)(3)s, but private foundations are subject to a few more restrictions. (Folks who want a short-and-sweet summary should really click that last link. Really.) In order to avoid these restrictions most 501(c)(3)s prefer to be treated as public charities.
But how do you get recognized as a public charity? The right side of the chart below sums it up: you want to meet the standards set out in one of the sections in Code Section 509(a). For most organizations the path lies in sections 509(a)(1)-(3), although 509(a)(4) also provides a way out for organizations testing for public safety.
The groups listed above "Section 509(a)(1)" take us to our main question. Publicly supported public charities have to meet complicated mathematical tests, as do 509(a)(2) public charities. 509(a)(3)s have to meet complex tests relating to organizational structure, and they're also subject to some additional rules. However, churches, schools and hospitals have it easier--if they fit the relevant definition, they don't have to bother with the mathematical or structural tests.
What are the relevant definitions? They can be a bit hard to remember, but fortunately the main details are spelled out for you in the application for recognition as a 501(c)(3) organization, IRS Form 1023--and I've clipped the pertinent parts here.
Read the standards carefully and you'll get a sense as to why this subset of 509(a)(1) organizations is sometimes referred to "traditional public charities." The standard explanation for the grouping is that churches, schools and hospitals have traditionally been associated with serving the interests of the general public, but the definitions follow tradition in deeper sense:
To qualify as a church, school or hospital, your organization has to look like something out of 1954.
A church has such things as a hierarchy, a place of worship, a code of doctrine and Sunday school.
A school has a faculty, curriculum, buildings (or other physical "facilities") and enrolled students.
A hospital is, well, a hospital, a real-world facility providing discrete medical services to patients.
And that's the real story. These organizations were not given privileged treatment because they are most responsive to the public--if they were, the standards would be written so as to allow the categories to adapt as society itself evolves. Rather, this is yet another example--all too common in law--of the wealthiest, most powerful organizations using their influence to get out of burdensome rules that apply to less well connected groups.
An established "church" doesn't have to meet either the mathematical or supporting organization tests; an upstart "religious organization" does, in part precisely because its approach to worship is non-traditional. No accident, this--at the time the rules were written, mainstream Christian churches were a central component of America's civic identity. Similarly, private schools and hospitals were seen as an extension of the governmental system of education and medical care, with entrenched bureaucracies, a fixed infrastructure and centralized control.
In sum, the grouping of these three institutions is designed to keep privileged social status as the status quo, all in the guise of protecting the organizations most responsive to ordinary people.
Another excellent question I've received: If a person donates property to a charity, how much can they deduct? The scenario that sparked the ask: an artist donating her art to a church for it to sell. She can deduct the price the art sells for, right?
Artists can only deduct the cost of the items used to create art of their own that they've donated--and if they deducted those items as a business expense, they can't deduct 'em again as a charitable deduction! The same thing goes for donations of personal papers. You also can't deduct the value of your time--for example, I could not deduct the value of free legal consultation to a charity, nor could a carpenter deduct the value of time spent helping to build a house with Habitat for Humanity.
But what about gifts of property more generally? Let's say the church member donated someone else's painting or some jewelry or stock?
Charitable business has been in the news quite a bit, and once again the fact that charities don't pay taxes on much of that business is attracting a fair bit of negative attention, especially from commercial competitors. We can expect the complaints to grow louder as the economy gets worse.
I've been asked to provide a brief overview of UBIT. Since it was just my dumb luck to get sick I've decided to set aside the podcast format for a day or two and set the answer out in writing.
Click below for more:
Class meetings today, so no podcast. Â Tomorrow's will cover the topic in the title of this post. Â Until then, by special request, here are the core documents.
A few years ago the Smithsonian honored Martha Stewart in an exhibit.
(My opinion about the Showtime-Smithsonian venture? I'd be all for it if it meant that Dexter could travel through time!)
The Wall Street Journal today has an op-ed criticizing Nancy Pelosi's attempt to spike a proposal to make employers immune from federal civil-rights lawsuits for requiring workers to speak English.
What prompted this proposed amendment?
The EEOC's lawsuit against the Salvation Army, which fired two clothes-sorters for failing to adhere its English-only policy.
Now some of you might wonder, aren't charities already supposed to be free from lawsuits under the doctrine of charitable immunity?
Short answer: Not this kind of lawsuit, and more generally, not as much as you think.
Charitable immunity is a state-law doctrine--it has no bearing on an organization's liability under federal law, including federal anti-discrimination law.
Beyond that, charitable liability is not an absolute absolution from all liability. Generally, charities in states that recognize charitable immunity protect charities from liability due to the negligence of their employees. (The level of protection does vary; some states grant total immunity; others merely limit it.)
Note that I said "charities in states that recognize charitable immunity." Not all states do, and last I knew, New York was one of the exceptions.
Why would a state not choose to recognize charitable immunity? Historically, attempts to limit or eliminate the doctrine have followed some egregious incident of perceived wrongdoing, such as medical malpractice or, more recently, the sex scandal in the Catholic Church.
Although charitable immunity is not a federal law, Congress has extended limited protection to volunteers under the Volunteer Protection Act of 1997. Click here for a brief overview of its main provisions.
IRS model articles of incorporation
Delaware Certificate of Incorporation: A Non-Stock Corporation
New York model not-for-profit certificate of incorporation
Forming a Not-for-Profit Corporation in New York State
This week in my nonprofit law class: a look at the not-so-wonderful world of UBIT, the unrelated business income tax.
And just in time for it: a nifty New Yorker survey of the contents of NYC museum gift shops. The article: "Art and Commerce," by Patricia Marx. It's not online yet & it has, well, pretty much nothing in the way of legal analysis, but once you grasp the basics of UBIT the stuff in the article makes a lot more sense.
Are all charitable organizations considered NGO's by definition?
That's an excellent question, not least of all because of its final two words. Â Precise definition is one of the keys to law--when Bill Clinton said "it depends what the meaning of 'is' is" he may have seemed too clever by half, but he was talking like the lawyer he is. Â Â
Whatever that may mean.
Anyway, back to the question. Â The answer depends on how we define our terms. Â
In this instance, all charities are NGOS, since 501(c)(3) does not encompass the federal government, states or their political subdivisions. Why doesn't 501(c)(3) apply to governments? Â In a nutshell, commentators point to three reasons:
- Our constitutional structure does not allow states to be taxed.
- The tax code does not define the scope of taxable entities to include sovereign political entities.
- A government's power to tax, power of eminent domain and police power go beyond the purposes specified in 501(c)(3).
That may seem to be a clear enough answer, but the devil's in the details. Â Although 501(c)(3) does not encompass governmental units, there are nonetheless a bunch of separately organized governmental organizations that can qualify as tax-exempt under 501(c)(3). Â A few common examples (assuming they're organized the right way) include public libraries, public hospitals and state universities. Â
In fact, one of the country's largest charities--the American Red Cross--is chartered by an Act of Congress and also recognized as exempt under 501(c)(3). Â It is what some would call a GONGO, or government organized nongovernmental organization.
Which leads to another answer to our main question. Â There are a number of folks who see governmental involvement to be inherently contradictory to being an authentic nongovernmental organization. Â From their perspective, an organization created by or working for the government is not an NGO, at least not in the sense of being a voluntary organization formed outside the sovereign political structure. Â That means a charity could be exempt under 501(c)(3)--or, more globally, be a nonprofit serving a public purpose--and yet not fit their definition of what constitutes an NGO.
What's the right answer?Â
I don't think there is one. Â Terms such as nonprofit, charity and NGO are inherently contingent--their particular meaning depends on their immediate context. Â
Case in point: Â the very fact that American corporate law tends to use the term "nonprofit" or "not-for-profit" while NGO prevails in the context of international associations and public interest work is itself a historical accident. Â "Nonprofit" form reflects its origins in a reaction against industrial-age commerce and the accumulation of capital, while the term "NGO" reflects a twentieth-century reaction against provincial nationalism and authoritarian political sovereignty. Â Â
So here's your takeaway:
Is every charity by definition an NGO?
It depends what the meaning of "is" is!
BONUS RESOURCE: Â For more information on this topic, hearty souls may want to consider the helpful summary provided by Jody Blazek and David Nelson in the September 2006 Exempt Organization Tax Review: Â "When Can a Governmental Organization Qualify as a 501(c)(3) Organization and What is the Tax Reporting Consequence?"
Whenever I tell folks in the social enterprise that I think the time may be turning against their hybrid model of charity, the reaction is typically disbelief.
This year, for instance, the U.S. Treasury will be receiving about $40 billion less than it would if the tax code didn't allow for charitable deductions. (That's about the same amount the government now spends on Temporary Assistance for Needy Families, which is what remains of welfare.) Like all tax deductions, this gap has to be filled by other tax revenues or by spending cuts, or else it just adds to the deficit.
I see why a contribution to, say, the Salvation Army should be eligible for a charitable deduction. It helps the poor. But why, exactly, should a contribution to the already extraordinarily wealthy Guggenheim Museum or to Harvard University (which already has an endowment of more than $30 billion)?
(from Is Theater Really a Charity? by Robert Reich)
Worth noting: Reich's emphasis on wealth and quid-pro-quo exchange versus the traditional understanding of charity as poor relief. Reich's op-ed points to where public policy is likely to shift, particularly if there's a recession.
OK, not to be a grinch or anything, but there's a slight problem with the promotion for the One Laptop Per Child buy-two-give-one for $399 special. The concept is good--you get to keep one, and you get a tax deduction for donating the other. Here's the legal language from the site:
OLPC Foundation is a tax-exempt U.S. charitable organization. If you make a donation to OLPC Foundation and do not elect to receive an XO laptop, your entire payment will be treated by OLPC Foundation as a charitable contribution. For participants in the G1G1 initiative, to the extent your payment exceeds the fair market value of the XO laptop(s) you receive, you may be able to claim a charitable contribution deduction against your U.S.-source income. OLPC Foundation estimates that the fair market value of an XO laptop is $199.
So far, so good. But look carefully at the promotion and you'll see that your $399 is not only getting you two XO laptops. To sweeten the deal, T-Mobile is also throwing in a year's free Wi-Fi Hotspot access. And what a good deal that is:
T-Mobile HotSpot broadband Internet service is available at more than 8,500 locations throughout the United States. Your complimentary year of service is valued at more than $350!
In other words, more than $150 over the value of your charitable contribution, assuming you keep one of the laptops for yourself.
My guess is the OLPC folk would argue that your purchase only covers the laptops and that T-Mobile is providing the Wi-Fi itself at no cost to OLPC. However, you could you a similar argument to patch around the sponsored goodies offered at any number of charitable benefits ("You're only paying for the dinner and a contribution--Tiffany's giving you a free diamond ring on its own!"). The reason stuff like that reduces or eliminates the deductible amount: the IRS applies the relevant statute so as to make the pertinent factor the consideration received by the purchaser, not the cost of the item to the charity.*
Further weakening the exclusion: the OLPC website presents the computers+hotspot as a unified transaction--it's not just something T-Mobile is offering independently off-site, say, if you bring in a receipt. Let's face it--since the price of the OLPC laptop is normally $199 anyway, the only tangible financial incentive to take advantage of the promotion is the free wireless.
In short, the IRS could make a strong argument that only the people who donate both computers can take advantage of a tax deduction for the 2-for-1 OLPC purchase, in the amount of ($399 - $359.88, the retail value of the T-Mobile subscription).
Into this golden age of all things eco-friendly comes a quirky new fashion line called William Good.
Nick Graham, the eccentric San Francisco designer and founder of Joe Boxer, the company that gave boxer shorts personality, has teamed up with Goodwill to produce the line, which is made entirely from items from the discard bins.
Refashioned clothing is nothing new of course. It is, after all, how Banana Republic came to be, in 1978, when San Franciscans Mel and Patricia Ziegler redesigned Army surplus clothes.
What's different here is the green goal. The Bay Area Goodwill is the first in the country to try this pilot project, with the ultimate ambition of taking the line to the mass market and, in the process, saving 75 percent of all its donated items from ending up as landfill.
"We think this will spread across the country," says Deborah Alvarez-Rodriguez, the president and CEO of Goodwill Industries of San Francisco, San Mateo and Marin. "It's no accident that the CEO of the New York Goodwill was just here and will be coming back with his production people to look very seriously at this."
Goodwill has expanded in other ways as well, including offering a link to eBay, where it sells more expensive pieces that have been donated, such as a silver and ivory cuff bracelet for about $200. To jump-start the William Good promotion, Graham and Alvarez-Rodriguez flew to Los Angeles last week with about 100 items of the new line for an informal presentation at L.A. Fashion Week. On Nov. 11, the collection will be on sale for a 24-hour period in a temporary pop-up boutique in Los Angeles.
. . .Â
Alvarez-Rodriguez says she wants to employ 75 to 100 disadvantaged or impoverished people, for whom Goodwill provides job training, to work on the new line.
"I wouldn't be interested in doing this if we couldn't really build this into a viable business. We don't know yet if we can produce 10,000 pieces four times a year ... a million pieces? We're still working that out."
- Does your venture offer value-added beyond what other groups are already providing? Â For example, is it solving an unsolved problem, offering a better solution, working in a different geographical area or helping people yet unserved?Â
- Is there an existing organization you can join and perhaps improve?
- Are there identifiable funders likely to support your effort over the long term? Â Or, if you're selling goods or services, is there truly a sufficient market to support an organization that is financially self-sustaining organization or financed through a blend of earned revenue and grants?
In a recent nonprofit law class, a student asked whether a charity could enforce a pledge the donor did not honor.
Short answer: yes, it's possible, but as with many legal issues the precise answer will depend on the circumstances. A pledge agreement could be viewed as an enforceable contract. If the charity has acted in reliance on the pledge, the likelihood a court would find the pledge enforceable increases.
To see the power of an agreement and reliance, check out the tragic story of the Mondavi family, which lost control of its eponymous wine empire after the family patriarch overextended their finances in a pledge to the University of California at Davis.
Things get a bit more complicated when a donor goes into bankruptcy. Not only might the charity have to get in line with other creditors, the creditors might be able to reclaim part of the donation from the charity--in fact, the 2005 amendments to U.S. bankruptcy law significantly increased the risk for charity to sustain substantial loss when a wealthy donor files for protection.
For example, Saturday's New York Times recounts the tragic story of a philanthropic investment manager who committed suicide when investors discovered that he was actually running a Ponzi scheme. The trustee of his estate
said he was negotiating with the Country Music Hall of Fame and the university in an effort to recoup some of Mr. McLeanâ€™s donations on the ground that they were â€œfraudulent conveyancesâ€ owed to investors. The university is stripping his name from the music school.
What should a charity do to minimize the impact of a gift gone bad? Lawyer and consultant Jack Siegel offers these useful recommendations:
Pledges should be in writing, state that they are a binding contract, and provide for payment schedules that are consistent with the needs of the project that they will fund. If the pledge is to fund construction, the pledge should be secured so that the charity knows that the funds will be available as needed. Finally, before accepting a pledge, the charity should take a hard look at the donor.
Submerged in class prep today.
Pictured above: railway museum "stock certificate" (i.e., donation receipt)
And in this afternoon's web design class: more on usability & design (including this essential article by Jason Hudnall), an overview of tech resources + an introduction to shopping carts--hopefully without another fire alarm.
Above: "Fire drill!"
Churches don't have to file 1023s (applications for recognition of tax-exemption) or 990s (annual information returns). Some do anyway, in order to promote trust among regulators, potential donors and the general public.
And here's a breaking news story illustrating why that's not a bad idea.
Lesson: the larger you are, the more you're a target.
A large charity, particularly one that has a lot of money, engages in commerce or has notable fundraising activity, must redirect attention away from finance. If it does not, it risks not only negative stories from the mass media and watchdog groups, but regulatory activity that could affect countless other organizations--particularly small groups for whom the cost of navigating the legal maze is becoming prohibitive.
An update on the case of the French NGO workers in Chad arrested on kidnapping charges for the efforts to relocate refugee children from Darfur:
Seven of the seventeen arrested have been released.
But they're not getting much help from the UN. UNICEF has stated that it considers the would-be rescuers' actions "not consistent with international norms or practices or laws."
Last month, the people of Big Valley Church noticed their pastor dressing nicer, giving more passionate altar calls and making more frequent appeals for volunteers.
Â Â Â What they didnâ€™t know was that the church board had quietly begun using PayPerform, a program that determines how well a pastor is performing in ministry, how much he should be paid, and at what point he should be fired.
Â Â Â "Carrying out the Great Commission is a quantifiable activity," says PayPerform creator Kevin Dolan. "Public companies donâ€™t tolerate sub-par performance. They oust bad CEOs and reward good ones. Why should churches be any different? Our mission is vastly more important."
Â Â Â Programs like the PayPerform Accountability System use in-depth demographic studies to set targets for a specific churchâ€™s attendance, conversions and "capture and retention" rates of visitors. It even determines what the average tithe level should be, based on local giving rates.
Â Â Â "We love it," says one church board member. "It gives us something to stand on instead of the soft and mushy goals we used to make up every year out of thin air."
Yale Vice President for Development Inge Reichenbach said the dispute provides an important lesson for all universities accepting restricted gifts.
â€œThe Princeton situation highlights the need for all institutions accepting gifts from donors to carefully determine the expectations of the donor and the institutionâ€™s ability to fulfill them, not just in the short term, but also longer term,â€ she said in an e-mail.
It is important for universities to inform the donor how his donation is spent, Reichenbach said. Such a step, she said, can help prevent misunderstandings from growing into significant disputes.
When accepting a restricted gift, Yale always considers whether or not it can sustain the giftâ€™s original purpose over time, Reichenbach said. While creating an agreement for a restricted gift, she said Yaleâ€™s donors are asked how they would like their funds to be used if the needs for the money evolve over time.
Yale has taken special precautions to prevent disagreements with donors, Reichenbach said. After a dispute during the 1990s with billionaire donor Lee Bass â€™79, University President Richard Levin established the â€œGift Stewardship Committee,â€ which regularly compares the stipulations of a restricted gift with the way it is actually being used.
Another thing I'm up to tonight: a brief overview of donor-advised funds. Particularly after the 2006--cough, choke--reforms, the law in this area offers yet another sterling example of how difficult it's becoming do good without the government getting medieval on your @$$.
What Congress fails to grasp in its ongoing effort to extirpate private interest in charitable giving is that charity is, like any medium, an extension of the self. Rigging up ever more draconian and arcane laws will not only fail to bring about an end to private influence on public action; they'll actually push people to find ways of making their influence stronger.
Google.org is a perfect example--despite the dot-org extension, G.o is not a nonprofit or a charity. It operates within Google's for-profit network. The logic: a little tax is a worthy price to pay for freedom.
Anyway, here are few links worth reading re donor-advised funds. There are a lot of others, of course, but it's late and I'm sleepy.
My top secret plan for tonight's nonprofit organization's law class is to use the Princeton case to provide an overview of prudent (and imprudent) management practices.
The case is a classic example of why you want a lawyer who can sift out the losing claims. The lawsuit reflects a number of legitimate concerns arising from lack of attention to donor intent, but damn, the plaintiffs' lawyers make so many crappy arguments that my neck got worn out from how hard I was shaking my head. They would have done much better to laser in on the strong points (I mean, a 71 page complaint?!?), because the obvious longshots seriously diminish the overall credibility of their clients' case.
The family's lawyers would have also strengthened their case by seeking a less extreme remedy--say, an injunction ordering Princeton to avoid certain practices and to engage in others--instead of the attention-getting but most likely futile bid to get a judge to hand over an 800-million-dollar Ivy League academic center to the original donors' kids.
Want to know all the juicy details in the Oral Roberts University lawsuit?
Illegal campaign activity!
Designer dresses in Oklahoma?
Excessive use of ALL CAPS!
This case has it all!
Click the link below for the University's Scandal Vulnerability Assessment and the full complaint filed in court.
Look carefully at the ways people do to feel good about themselves and to make others feel good about them, and you'll see a few things again and again.
Perhaps the most prominent: children.
Protecting kids is hardwired in our genes. They're vulnerable little critters, and their cute soft burbling li'l selves trigger self-sacrificing protective behaviors that go way, way back, apparently from before we were human.
Dogs picked up on this long ago, which is one big reason they evolved from nasty bitey S(andD)OBs into adorable puppies whose lives are little more than a prolonged pre-adolesence. To see the benefit of this, we need only look back to the Ellen dog adoption dust-up from earlier this week, which highlights how we have come to equate dogs with kids.
Like dogs, people have evolved their own adaptive strategies leveraging children for their own personal advantage. The charitable strippers controversy is a Russian nesting doll in this regard: puppeteers cast themselves as a children's charity and hold their annual fundraiser at a middle school, and a strip club tries to rehabilitate its own image by sending its employees to serve as volunteers. We see a similar dynamic in the viral spread of blogger support for DonorsChoose, a charity that connects donors to unmet needs in schools.
And here's another one. The BitTorrent community has come under a lot of fire for turning a blind eye to illegal file sharing. A popular counter-strategy has been to highlight the instances in which copyright enforcers file suit against children, but now, as the ever informative TorrentFreak reports, the community is raising the stakes:
Together with p2pnet, TorrentFreak adopted 29 little children who are in desperate need for food, clothing and a decent place to sleep. The Child Orphanage is for kids in Nepal whose parents were killed by Maoists demanding the abolition of the countryâ€™s monarchy.
Banning torrents hurts orphans. Now that's a powerful argument!
For more info, check out p2pkids.org.
(Students in my nonprofit law class will definitely want to read this, since we'll be talking about it on Wednesday.)
For example, here's a blog post from Counterfeit Chic about Major League Baseball's practice of sending fake goods seized here to charity overseas, particularly in Africa. If piracy is truly evil, is it right for charities to be one of the continent's leading importers of counterfeit clothes?
Sorry, beg to differ.
While the social enterprise establishment has been celebrating American Apparel for its commitment to the public good, folks in business and advertising--you know, the soulless corporate drones that nonprofiteers want to save--have for years highlighted American Apparel's reckless and blatant degradation of women.
Most notoriously, in the name of a maintaining a libertarian workplace culture American Apparel's infamous founder, Dov Charney, flouts his penchant for sleeping with American Apparel's female employees and models. The result has been a play-to-get-paid workplace culture that belies Charney's assertion that it's OK because the women consent. As I emphasize in my law classes, rewarding a woman for consenting to sex is as much a violation of sexual harassment law as firing her for refusing. Both scenarios create an environment in which employment is contingent on sex. From the Business Week article linked above:
But BusinessWeek spoke with seven former workers who say they were offended by what they called a highly sexual atmosphere at American Apparel. They told stories of senior managers who pursued sexual relationships with less senior colleagues and rewarded their favorites with promotions, company cars, and apartments. "It was a company built on lechery," says a former stock person. "I thought it was a male contemporary perspective on feminism, but it turns out to be just a gimmick," says another ex-employee. And another: "I made sure to stay away from the store when I knew [Charney] was coming into town. It's not one person -- he's aiming for all women."Does American Apparel get sued for sexual harassment? Sure, by the women courageous enough to risk their careers to file. But prosecuting a lawsuit is painful and expensive, and American Apparel has the money to shut down the cases with settlement payouts.
As for the ads, click here for how one New York hipster neighborhood--which American Apparel portends to represent--is responding to the company's signature imagery of women as playthings.
Why do I harp on this subject? One reason is to call attention to how good actions can blind us to behavior we would otherwise condemn. You might think that nonprofits and social enterprise are less likely to indulge bad behavior. Perhaps, sometimes. But all too often the reverse is true. We conflate the virtue of the mission with the individuals who further it, to the point where we can't see their flaws. Or worse, we strategically calculate that we must protect the mission's reputation at all costs, even if it means some people must suffer in silence.
Another reason is rooted in social enterprise itself. The turn to the market has naturally led the movement to gravitate toward promotional practices that maximize immediate return on investment, and explicit references to sex are an easy way to get attention fast. Bit by bit our culture is changing--sexually charged ads, indulgence of high-impact executives, hiring on the basis of flirtatious sex-appeal.
The longer we pretend it's not a problem, the more likely we'll become what we set out to stop.
NTen, one of the world's leading organizations specializing in social enterprise, has added its voice to the outcry against Comcast's now confirmed practice of throttling BitTorrent seeders. NTen comes down on the side of the Net Neutrality movement, which is citing Comcast's actions as a sign of things to come should broadband providers be allowed to discriminate in favor (and against) various nodes on the web.
The movement faces substantial (and well-moneyed) opposition, but that's not the only challenge it has to overcome. The elephant in the room is the nature of the practices that the movement seeks to protect. The calls for action focus on blogging and benign torrenting, such as open-source software distributions. In fact, the Comcast torrent controversy hit the mainstream news when reporters testing rumors of the Comcast throttling tried to torrent the King James Bible, which in the U.S. (but not in England!) is in public domain.
Sounds inspirational, but are telecom companies truly hunkering down to squelch bloggers and Linux distros? Or are they more concerned with the massive bandwidth consumed by the illegal sharing of music, movies, software and porn?
Pretending that the latter isn't an issue renders the arguments made in favor of net neutrality far less compelling than they seem within the movement. Case in point: the question raised at the end of the NTen post:
While it's most likely that Comcast has instituted the measures as a means of controlling traffic and server load, it raises a fine point: Why are movie downloads from iTunes ok, but not file sharing via BitTorrent?
You don't have to be a Yale-trained lawyer to guess that the answer lies somewhere in the fact the iTunes downloads are legal and can factor bandwidth costs into the price.
Would the Net Neutrality movement be more credible if it also called for file-sharing communities--many of which are nonprofit in practice if not formally under the law--to crack down on illegal file-sharing--including bootleg Bibles in Britain?
Two high-profile charity news stories from the past couple weeks:
may benefit some good causes, but they also echo the kind of actions that, in the 1960s, gave rise to today's complex rules governing private foundations and public charities.
Back then, a number of politicians were upset by how certain wealthy charities supported causes and politicians they (the politicians) didn't like. It was a rather motley alliance of constituencies that saw themselves as disenfranchised: white southerners opposed to the civil rights movement (which major foundations were funding), Western politicians who saw the major foundations giving grants to power brokers from the Northeast and industrial states; Christians upset that money was going to fund charities supported by candidates who were . . . can you believe it, I mean, here in All-American New York City? . . . Jewish!!!
While the complaints and political alignments may seem odd today, the laws they produced live on, and there's a real possibility that high-profile politicized charity could prompt another round of so-called reforms. Imagine--
Conservatives upset by Bill Clinton using charity to build support for his wife . . .
Liberals upset that a family charity could pay 2.1 million dollars in an eBay auction that also serves to promote the Rush Limbaugh show . . .
Who knows what could happen if these wacky kids get together?
Stranger things have happened in charity law--just another reason why it's said that politics makes strange bedfellows.
In my law classes I like to talk about different kinds of law: the law enacted by governments, organizational rules and social norms. Above we got a passel of the latter two.
The scene: Ellen DeGeneres crying because a nonprofit adoption agency re-claimed the dog she had adopted after she gave it to her stylist.
Although such a publicized dispute between rescue groups and adoptive animal owners is rare, it reveals something that pet lovers have known for years: Private rescue groups are legendary for their stringent requirements and hurdles for prospective adopters.
Long applications, home visits and strict diet regimens are the hallmarks of some rescue groups' adoption processes. To some, it can rival the complexity of adopting or fostering a child.
The organization's name, "Mutts and Moms," points to what is going on here.
In nature, the relationship between dogs and pet owners is an example of symbiotic mutualism--in short, they exhibit traits we like, and we give 'em stuff.
However, for various reasons some people frame this relationship in terms of the metaphor of parenthood. From this perspective, they don't own dogs; the dogs are their children, and they are dog's mom or dad.
This way of seeing can give rise to its own set of norms, rules and even laws grounded in the image of the dog as a human child.
Ellen treated the dog as something of a hybrid, which is not unusual--child and friend in some spheres, animal and property in another. The key sphere in which it was animal property: transfer of ownership. Ellen saw giving the dog to her friend as a responsible extension of her care; the animal "adoption agency"--again, note the metaphor--viewed it as abandonment.
Whatever side you're on in this incident, the key thing to remember from an organizational management standpoint is to maintain the ability to look beyond your own group's perspective. It's easy to be a cyclops--dogs are kids and that's that, tough luck for you. But life is a complex phenomenon, and sometimes a wiser principle is one that combines elements from various parts.
Salisbury University's president removed her Facebook profile after being questioned about apparently unprofessional captions posted alongside photos on the Web page.
Janet Dudley-Eshbach, president of Salisbury University, had a photo on her profile showing her pointing a stick toward her daughter and a Hispanic man with a caption saying she had to ''beat off Mexicans because they were constantly flirting with my daughter.''
A caption accompanying a photo of a tapir referred to the large size of the piglike animal's genitalia.
Dudley-Eshbach removed her profile from the social networking Web site hours after reporters asked her about the captions Monday. She did not immediately return a call seeking comment by The Associated Press on Wednesday.
In a statement, Dudley-Eshbach said the photos were taken during a family vacation to Mexico and that she wrongly thought the public couldn't see them.
In my nonprofit law class tonight we're going to talk about puppies, unicorns, flowers . . . and, oh yeah, the support tests for distinguishing public charities from private foundations.
Also known as the seventh circle of charity hell, the support tests are Congress's way of taking your idealistic enthusiasm for changing the world and bludgeoning it out of existence. Ever want to know what it feels like to be a seal pup in hunting season? Well, the support tests are your hakapik.
That said, here's a blog post that can help make this experience a bit less painful.
Bernadette Price tips us off to a trenchant analysis of the Wall Street Journal's recent write-up of the Armand Hammer Museum's attempt to use trademark law against a museum that actually displays hammers. The author highlights the importance of reputation--here, the ill will that could be generated against the larger Armand Hammer Museum for trying to squelch a smaller, remote entity which arguably has a stronger claim to "The Hammer Museum" name.
Intellectual property is an issue of increasing importance to social entrepreneurs--if you hear any other good news stories, send 'em in!
A long time ago in a blog post far far away, a commenter inquired about the difference between a trust and private foundation. In class I explained that a trust is property held for the benefit of a third party--in the case of a charitable trust, the "indefinite class" (as opposed to specific individuals) benefited by the trust's charitable purpose.
The term private foundation, however, has a somewhat more slippery legal definition. It arose as a way to describe--and condemn--charitable organizations funded by a small number of individuals, who presumably veered more toward their own interests as opposed those of the general public.
Quick aside: I'll be talking about that a bit more on this site, but suffice it to say that while the term "private foundation" still retains the connotation of private interests vs. public good, defining what constitutes a private foundation turned out to be a task too tough for the legislators determined to regulate 'em--which is why the tax code classifies all charities as private foundations unless they meet one of the rather complicated tests for public charity status. But that is a tale for another day . . .
Occasionally a news story bubbles up to remind us why U.S. law came to distinguish between private foundations and public charities. Here is one such story.
In Tuscaloosa, Alabama, a college has come under fire for certain transactions in which state funds ended up going to a related private charity. Frankly, the sort of things described in the article could--and probably do--occur in any number of charities without anyone being too upset, but here ya go--the state Department of Examiners of Public Accounts is laying the smacketh down on good ol' Shelton State Community College because "contractual agreements are being utilized to divert public funds to foundations."
Now you might be saying, hey, what's the big deal--aren't private foundations charities too?
And you'd have a point. But there's something else going on here that says a lot about the values embedded in law and how they shift and evolve. Is this small Southern skirmish a sign of a swing back toward the government as the hub of social benefit?
So I was walking down Park Avenue on my way home from the office when a tourist comes up to me and asks, "How do you get to Carnegie Hall?"
And I said, "
Practice Marry the chairman's daughter!"
Ba-dum-bump. I'm here all week, and remember to tip your server.
Why the stupid joke? Check out the deets of this news story--
Carnegie Hall's chairman and current major donor is Sanford Weill, who used to head Citigroup.
The architect chosen for the Hall's 150 million dollar renovation? His son-in-law, chosen ostensibly because of his previous work for another charity . . .
. . . led by Sandy Weill's wife.
The lawyers offering their opinion in this NY Times article distinguish between law and reputation, and it's a principle every nonprofiteer needs to remember: just because it's legal doesn't mean it's right. In this instance, I would imagine that the Carnegie Hall board followed the "disclose and abstain" procedures common in standard conflict-of-interest policies, and they probably also set a market-rate compensation supported by analysis of comparable practices in similar situations (more on that soon!).
Still, it looks skeezy, doesn't it?
Note Sandy Weill's defense against accusations of nepotism. One argument is clever, the other, not so much.
- The not-good-because-it-only-reinforces-the-criticism argument: â€œIâ€™m proud of what he does. I think thereâ€™s nothing wrong with being proud of a son-in-law.â€
- The clever (if transparent) anti-discrimination argument: â€œYou canâ€™t actually disqualify someone because theyâ€™re somebodyâ€™s son-in-law.â€
Key paragraphs after the jump:
Can a social enterprise be sued just for putting up a website?
Check out this announcement of the latest court ruling in the case of National Federation for the Blind v. Target. The claim: the NFB is seeking an injunction and monetary damages arising from Target's alleged failure to make its website accessible to the blind. The case is far from over, but the judge is allowing the case to proceed.
How can a website be made accessible to the blind? And does the law require organizations to design their sites so the blind can read them? The NFP states its position here.
Target will most likely settle out with a bit of (expensive) tinkering with its site. But will smaller organizations--especially businesses and noncommercial nonprofits--have the resources to make their sites conform to Web Accessability standards, not just for the blind but all people with usability challenges rooted in a disability?
The discussion at Slashdot has some helpful advice (look for comments rated 4 or 5 for good ones). Note especially the following advice, which I'm going to remember going forward:
Where the text is on the page is irrelevant, as long as the page has good structure: headings, lists, blockquotes, em tags, strong tags etc. a screen reader will be able to read it perfectly well. The Web is for communicating information, text is the best way of achieving that in most cases and where images are used all that's needed are the trivial additions of alt tags to provide a quick description of what the image contains.
Don't know what an alt tag is? I'll be covering that soon in both my classes, given the legal issue; for a brief explanation, click here.
In my nonprofit law class we've had an overview of state nonprofit law and a brief introduction to federal tax exemption. Traditionally you could distinguish between state and federal law governing nonprofits as two substantially different spheres, with states regulating organizations' formation and governance and the federal government determining which organizations qualify for exemption and deductible gifts.
But the times they are a changin', with federal tax law playing an increasingly more prominent role in standardizing principles of corporate formation and governance.
One example we've already seen: the recommended--as in necessary--standardized language that the IRS advises charities to include in their articles of incorporation in order to qualify for exemption under Section 501(c)(3).
And here's another example: the IRS draft "Good Governance Practices for 501(c)(3) Organizations."
Yes, state law still requires directors of for-profit and nonprofit social enterprises to be mindful of their fiduciary duties, such as the duty of care and the duty of loyalty. But while state law fiduciary standards can be--to use a high falutin' technical term--squishy--the IRS has been hard at work to spell out the principles of good governance in detail. The draft brings together a number of recommended management practices, such as
- preparing a clear mission statement
- adopting a code of ethics and whistle-blower policy
- exercising due diligence consistent with the duty of care
- fulfilling the duty of loyalty, including the adoption of a recommended conflict of interest policy
- making information about mission, activities and finances available to the public (i.e., "transparency")
- adhering to state and federal rules as to fundraising
- preparing accurate financial statements and obtaining an independent audit of accounts
- paying officers and staff no more than reasonable compensation
- adopting a clear policy for retaining and destroying documents
As you can see, serving on a board of directors involves a lot of hard work!
As you can see, serving on a board of directors involves a lot of hard work!
Case in point: here's a news item about nonprofit intellectual property, a subject we'll be covering in class in a couple weeks. A New York nonprofit theater is sending cease and desist letters to a Seattle nonprofit theater with the same initials.
Is this the right thing to do, or is the NY theater all WET?
Minneapolis is abuzz with news of a most unusual gift to its local Catholic homeless mission: handmade Italian shoes donated by the Pope.
As we discussed in class on Wednesday, tax-exempt status under 501(c)(3) means that an organization does not have to pay federal income tax on accessions to wealth . . . including designer shoes from the Pope.
If this were a for-profit corporation, this transaction would raise some interesting tax questions. Back when I was a tax lawyer, for example, I worked on complex transfer pricing issues raised by the transfer of goods from the overseas division of a sneaker company to one in the U.S.*
But the Pope's donation is a different matter entirely, no? Yes, a related subsidiary of a global corporation received items from an overseas branch, but the recipient organization transferred these items to the poor. At a fundamental level something seems not quite right about the government taking a cut of items that would otherwise go to charity--and pretty soon we'll be talking a bit more about why.
While we're at it, let's explore a somewhat different scenario. What if, instead of giving the shoes to the homeless, the charity had sold the shoes in a charitable thrift shop? As I mentioned briefly in class, the unrelated business income tax (UBIT) applies to an exempt organization's regularly carried on commercial activity that is not substantially related to furthering the organization's exempt purposes. It's not enough for the proceeds to go to charity--the revenue is still taxed, because the trade or business is itself unrelated. However, there are a few key exceptions that would most likely keep this sale from being taxed.
- UBIT does not apply if substantially all of the items sold were donated.
This exception is what enables groups such as the Salvation Army, Good Will, the City Opera, the National Council of Jewish Woman and the Society of St. Vincent de Paul to operate thrift shops without having to pay tax on their profits. Also,
- UBIT does not apply if substantially all of the work is performed for the organization by volunteers.
Staff your store with volunteers, et voila--even if you buy a bunch of things to sell (e.g., a church gift shop), the profits are still not taxed.
Selling things without having to pay tax?
It's a miracle!
*Note to nonprofit law class students: no, you don't have know anything about transfer pricing for the exam!)
Now it seems obvious: free-and-easy subprime mortgages were a bad idea. Countless repossessions, a lifetime of pain.
Just a few months ago, however, the subprime boom was turning banks into little social enterprises.
The ad pictured above is a snapshot I took back in July a few steps from New York's City Hall. The image is one all too common from the time before the fall: happy families living the dream.
The loans were legal. Everything was done in keeping with the lenders' internal rules, at least as amended during the boom. The emerging social norm of ownership for all was passing from ideal to reality.
But was it wise?
Probably not, as the industry lost sight of the inevitability of a market correction and the pain that would result. Yes, the repossessions are themselves within state law and contractual rules, but images of people being tossed to the street violate deeper principles not formalized in law . . .
Yet. We have already begun to see the system adapt, with promises of government support to certain people facing steep loss.
It's a cycle we see time and again throughout society, including nonprofit law: we do what is allowed, and a foreseeable negative reaction prompts corrective law. Sometimes the law is good; other times--and we'll see a lot of this--the new law creates problems worse than those it set out to correct.
The lesson for a manager of a social enterprise, whether for-profit or non-: Look beyond the now. Think about what might happen, how it will look and how people who don't think like you might respond. When your organization depends on the goodwill of others--whether for donations, purchases, tax-exemption or investment--failing to do so could turn your short-term success into longer-term frustration.
1% For the Planet is a modern variant on the Judeo-Christian tithe (zakat in Islamic charity). In 1 for the P, businesses donate 1/100 of the their revenues to approved environmental charities. 1FTP annually certifies participation in the program, and the biz can advertise its commitment to sustainability.
The ad above, though? The use of sex as an attention grabber is an old, um, trick, and it has become so pervasive that it's practically a visual cliche'. While this design strategy may attract short-term attention (especially among men), does it truly engender long-term support?
Today was a long teaching day, with a between-class dash from City Hall to Grand Central for class #2 in White Plains. (Basically the place where I teach is structured like the old MX missile array--we shuttle from silo to silo thoughout the New York area to evade attack by rival universities.) On my way to Metro-North a crowd caught my eye . . .
a crowd around a car . . .
could it be . . .
Yes! Another Grand Central charity raffle!
Today's bait: a blue Maserati.
The cause: The Scholarship Fund of the Columbus Citizens Foundation.
The odds: Pretty good, since the number of tickets is limited to 500.
At one thousand dollars apiece.
You can buy an entry online here with the click of a nifty web button.
No ticket for me, but I did get to see a guy try to get the phone number of the PR woman by the car.
SMALL PRINT HERE'S-THE-CATCH BONUS:
OK, so you think to yourself, that raffle ticket ain't such a bad deal. After all, if you win, you get a $110,000 for less than 1/100th of the price, and you have a decent shot of winning.
Except . . . well, read this from the full solicitation:
Winner is responsible for all applicable Federal and State Taxes. Prior to delivery, the Columbus Citizens Foundation will collect the withholding tax from the prizewinner.
That's right, buckaroos. The government makes you pay taxes on windfalls, including that spiffy Masariti you just won in a charity auction. You'll get kicked up a tax bracket or three, and you won't get to claim the car until you pay up.
In sum, if you lose you're completely out of the price of the ticket--you can't deduct the value of the raffle ticket, since technically it's not a donation--you bought a chance to get something of value. On the other hand if you win, you're essentially buying the car for the amount you'll have to pay in taxes. Add in the exorbitant cost of insuring a Maserati in New York and the precipitious plunge of a Maserati's value after purchase . . .
I guess it's a better deal than if you'd bought the car new off the showroom floor, but if you're on a budget, you'll probably end up having to sell the car to pay the taxes, and even then you might not do much better than break even.
Starting a social enterprise involves a series of choices. For the record, here are a few that we've started to cover in class or in our reading:
- Choice of entity:
- Corporation (Advantages: Limited liability; familiarity; ease of contracting)
- Trust ("Property with a purpose"; can be more difficult to change)
- Unincorporated association (Advantages: flexibility, ease of formation; disadvantage: greater potential for personal liability; might not be able to open bank account)
- Choice of purpose:
- For-profit: Distribute profits to shareholders; typified by commercial activity
- Nonprofit: Devote profits to mission; serve nonprofit purposes (which might include business activity)
- Charity: serve the public benefit; no private inurement
- Mutual benefit: serve the benefit of member
- Can a for-profit organization be a social enterprise? Answer: yes, and in several ways.
What does this have to do with social enterprise? Plenty. Because charitable organizations view themselves through the lens of public benefit, they can actually be more resistant to acknowledging problems in their midst than pure for-profit business.
Here are three important lessons from the Isiah Thomas case that every manager should keep in mind:
- Don't fire the accuser. The MSG exec who boasted on the stand that he fired the accuser because she was bad for the organization--uhhhhh, no. Not a good move. This is textbook retaliation, and it's illegal.
- Don't promote people as an incentive for changing their testimony. Yes, MSG won a short-term victory by promoting the intern who had sex with Stephon Marbury. She changed her story soon afterwards, much to the delight of the defense. However, providing a positive job benefit in such circumstances can be as much a violation of sexual harassment law as firing an accuser. Should she so choose, the intern herself could file suit for being promoted as a quid-pro-quo. And she'd have a strong case.
- Don't view any executive as too important for the organization to punish. They're not. For example, the nonprofit that produces the Grammys indulged their highly paid prez for years despite widely circulated complaints regarding his behavior, to the detriment of the group's reputation in the industry and, yes, their fundraising. He eventually got fired, with high-dollar settlements for both him and two accusers. The whole debacle could have been avoided if the organization had disposed of him much earlier.
Sounds impressive, no?
Except that's not quite right. Unless I've missed something, the Hero Initiative is not the "first-ever federally chartered not-for-profit corporation" etc. etc.
Scandal? Nope. Just a lack of clarity about nonprofit and charity law.
Here's the deal. A federally chartered not-for-profit corporation is one that is, essentially, incorporated through U.S. law as opposed to the corporate law of a state. The American Red Cross, for example, was incorporated by an act of Congress, as described here.
The Hero Initiative was not incorporated by or through the federal government. However, the IRS did recognize it as an organization exempt from income taxes under Section 501(c)(3) of the Internal Revenue Code--in other words, it's a 501(c)(3) organization, like a gazillion or so other charities.
Tax and corporate law can be quite confusing, and of all the ways one could get confused the one described above is pretty minor. Still, state and federal regulators can get pretty picky about how a charity promotes itself, so it's best to be as accurate as you can.
Over the weekend the New York Times featured an article on what some see as a growing problem in the charitable trust world: banks managing the property for charitable purposes that differ from the specific causes supported by the trust's original creators.
The scenario the article describes goes something like this:
- Mr. and Mrs. Wealthy-Couple in Omaha want to help their favorite local causes.
- Mr. and Mrs. Wealthy-Couple create a charitable trust managed by Local Bank.
- Local Bank gives money to a cowboy museum and other local causes favored by Mr. & Mrs. Wealthy-Couple, who express their wishes to Local Bank officials.
- Mr. & Mrs. Wealthy-Couple die.
- Local Bank gets sold to Huge National Bank.
- Huge National Bank gives the trust money to the East Village Vegans against the War.
We'll talk about the tension between donor control and charitable mission throughout the semester. For now, here's a blast from the recent past in New York City:
Yesterday's news brought us an article from a group of anarchists about incorporation, and you may have noticed a bit of reluctance toward getting any more entangled with the government than is absolutely necessary. Not surprising, that--that's part of the anarchist value system.
But you don't have to be an anarchist to want to avoid dealing with the government when starting up a social enterprise. Doing good can be challenging, but it has other words; paperwork can be messy, hard, expensive and--when you add the possibility of tax audits and attorney general investigations that come with getting on the radar screen--risky.
So why bother?
Here are a few key advantages of incorporating. Later next week we'll add some details regarding a few other options, such as forming a trust ("property with a purpose") or an unincorporated association.
- Limited liability: Forming a corporation means that insiders are not personally liable for the group's obligations. In other words, your house is not on the line when the group gets sued for not honoring a contract or accidentally hurting someone.
- Contracting: If you want the organization to open a bank account, to acquire property or to enter into other agreements, incorporation helps clarify the legal relationships and may even be required.
- Decision-making rules: Corporate law is not just a bunch of requirements. It also provides a set of standard decision-making rules. You can change many of them in your bylaws to suit your organization's particular needs, but when disagreements arise it can be useful to have a set of procedures for resolving them ready-made out of the box.
- Funding: Grantmakers & other venture funders are often more comfortable giving money to corporations--which are legally distinct from their members, directors and officers--than to individuals in an unincorporated association.
Is nonprofit law obsolete?
Do some due diligence on the background and qualifications of your leading candidates. For example, if you're a nonprofit representing survivors of the 9/11 attacks on the World Trade Center, you might want to check into whether a woman's heartwrenching tale of her struggle to safety isn't actually an attention-grabbing con before you make her president.
The infoshop movement is an anarchist news distribution network. Yesterday the movement's online hub--infoshop.org--featured an interesting article forming a local infoshop center, with a particular reference to obtaining 501(c)(3) status in the U.S. There's some imprecision in the article's legal language and I don't endorse all the advice, but the article has a lot of good stuff. Below, some key points from the piece worth highlighting for all nonprofit organizations:
- The terms "nonprofit" and "501(c)(3)" are not synonymous. "Nonprofit" refers to a category of legal status under state law (for example, a nonprofit as a opposed to a for-profit corporation), while 501(c)(3) refers to an organization's status under federal law as a charity exempt from federal income tax.
- Not all nonprofits are charities. Not all tax-exempt organizations are charities. More on this soon!
- It's all too easy to get distracted by complex legal issues at start-up, to the point of not getting anything done.
- However, incorporation is typically advisable, even necessary, if your organization needs to get a bank account or sign any other contracts. Filing basic articles of incorporation can be done quickly with the assistance of a competent lawyer or incorporation service.
- The details of your organization's structure will be spelled out in its bylaws. Tony Mancuso's Nolo book on forming a nonprofit organization has a decent set of model bylaws.
- Obtaining recognition as a 501(c)(3) organization requires a fair bit of time and effort as well as specialized knowledge about the language of tax law.
- Your organization might be able to find an existing recognized 501(c)(3) that will serve as a "umbrella" or "fiscal sponsor" for purposes of federal tax-exemption and deductible gifts. For an example of such an umbrella program in New York, check out Fractured Atlas or the Tides Center.
- An effective organization "is one that is built on healthy human relationships between the participants, not on some perfect organizational plan committed to paper." Amen!
What is social enterprise? Let's see . . .
Tonight I attended a wonderful gathering of social entrepreneurs organized by JustMeans. We got to talking about social enterprise technology, and one of the attendees told me the following story. A few years ago her grandmother, new to computers, was using a program when everything froze and the following error message popped up:
So she did the only thing a decent person should do in that situation--she called the police!
This is one of those stories that should be true even if turns out to have been just a cute joke. It captures the importance of language in context--the same word can trigger different responses in different environments.
Remember this as we move forward with various kinds of code, from graphic design and web development to corporate and tax law. Words that inspire the supporters of your social enterprise could lead the Attorney General to investigate and the IRS to revoke your tax exemption--what seems charitable to you could seem criminal to them!
One of things that my classes this semester share is the word "nonprofit" in the title. While "Web Design for Nonprofits" and "Law for Nonprofit Managers" both have the advantage of serving an identifiable constituency, they nonetheless don't reflect the reality of today's professional do-gooder. Sure, people still work for nonprofits, but the more conspicuous trend is to integrate for-profit and nonprofit characteristics in what many people call a "social enterprise."
There are about as many definitions of social enterprise as there are, well, social enterprises, but you can boil 'em all down to a single word: hybrid. Just like hybrid cars blend traditional internal combustion mechanics with engineering that is more environmentally friendly, social enterprise represents a fusion of for-profit and nonprofit organizational cultures. Some social enterprises are nonprofit; some are for-profit; some are a mixture of the two, such as nonprofit businesses, networks combining nonprofit and for-profit organizations, or even for-profit corporations committed to corporate social responsibility and environmentally friendly business practices.
My own take on this movement? I'll say more on that front as we go on. For now, over the next few posts, let's take a brief look at a few social enterprises and what we can learn from their design.
The screenshot below offers a sneak preview of what we'll be covering in tomorrow's web design class and in the nonprofit law class a few weeks from now. Click through to the pic's Flickr page for more.
How did I get this old screenshot? Click here.
Pictured above: The Movable Type template editor for this website
Students reading this site no doubt have already noticed that it includes posts from both my classes. This is not an accident. A social entrepreneur wrestling with issues in nonprofit law does not do so in a vacuum. As we shall see, law intersects with all aspects of organizational life, including web design--rest assured that if you don't see the connection, the IRS and your donors will.
The same goes for someone doing web design for any type of corporate enterprise. Your job is not just to throw any old words and pictures on a screen. You are creating a group identity, which if done well will accurately reflect--or at least not contradict--the rules that shape its organizational life.
In fact, the connection between legal and web design go even deeper. In last Wednesday's nonprofit law class I likened articles of incorporation and bylaws to DNA. I could have expressed the same point by likening them to the code that gives life to this very site. Organizational documents, like a computer program, contain a series of coded instructions. Get the code wrong one way and the object in question won't exist--just like when something I botched Saturday night wiped out this entire site! Similarly, it's possible to completely change the appearance of the resulting form with relatively minor changes in the underlying the code, from the color of a link or the position of the page title to legal status as a for-profit or nonprofit organization.
Pageants have long tried to foster an image of being concerned with more than beauty. One key design strategy: scholarships as prizes.
Except all is not as it seems. Check out this article from the New York Times, which explains how pageants use arcane rules to keep winners from actually receiving promised scholarship payments.
Few people today would regard corporate governance to be particularly exciting. Necessary, boring, occasionally hard, but dangerous? Nahhhhh.
But it wasn't always that way. Over the past thousand or so years countless people lost their lives as a consequence of documents we now call corporate articles and bylaws. Religious wars, the rise of the nation state, even our modern sense of personal identity flow out of a corporate revolution.
Ground zero for the past millennium is arguably the 910 C.E. Foundation Charter of the Abbey of Cluny in France. In some ways the document is pretty mundane--"every five years, moreover, the aforesaid monks shall pay to the church of the apostles at Rome ten shillings to supply them with lights"--but amidst all the Latin legal language there's a revolution in the works.
The Cluny monastery changed the world by creating what was in effect a centrally governed transnational corporation distinct from local bishops and feudal landowners. Click the link below for a couple key passages:
A hearty welcome to students from both of my classes! As I mentioned today, I'll be posting additional material here regularly for fun and not-for-profit.
It's been a long day, so for now just a few quick notes.
- Computer class folks in 102W curious about what I meant by CSS might want to check out the free Lynda.com vids on the subject by Eric Meyer, whose print guides on CSS are essential toolkits for coding web design. The "What is CSS?" vid offers a crisp 5-minute intro, and the "Installing the Web Developer toolbar" shows how you can easily trick out your Firefox browser to read & experiment with CSS on any site on the web.
- If the design on this website seems pretty simple, that's because it is. All I did was download the latest Movable Type install, pick its blue minimalist template and arrange the widget sets to taste. Pretty soon you'll know how to do this yourself, if you don't already--with this alone you could set up a basic blog for yourself or an organization. Templates can be your friend even if you're an expert coder--for example, uber-geek Wil Wheaton built one of the largest and most loyal followings on the web with just a slightly modified old Movable Type blue minimalist template, followed by a newer template on Typepad. Of course, Wordpress and Blogger templates are equally popular.
- As promised, everything we covered in today's Law for Nonprofit Managers class will be on the web soon enough, with useful additions. Here are the sample articles of incorporation from the IRS that I mentioned in class, and here's the Tony Mancuso book from Nolo Press.