lawclass: November 2007 Archives
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.