James J. Fishman’s Stealth Preemption: The I.R.S.’s Nonprofit Corporate Governance Initiative, recently posted on SSRN, joins the growing chorus of critics of the IRS’s preemption of state nonprofit corporate law via the addition of an entire “governance section” to Forms 1023 and 990. The underlying hypothesis is, of course, that by virtue of asking particularized questions regarding governance, the IRS will affect changes to facilitate the provision of the “right” answers on the respective forms; the IRS specifically acknowledges that no federal tax law addresses most of the issues about which it inquires. The article is a great survey of the bases of criticism of the IRS foray into governance reform, particularly as it applies to the medium to small nonprofit. It also catalogues examples of applicants being denied 501(c) (3) exemption as a result of concerns about, for example, conflicts of interest which, Fishman explains, the IRS appears to believe are per se bad, without an acknowledgement of why they may be necessary and appropriate for the small nonprofit, and can be managed, as is required by state law, to avoid foreseeable evils. An important theme of Fishman’s article is the lack of empirical data showing that the IRS’s structural governance preferences actually have a positive substantive impact on the operation of nfps.
John D. Columbo’s The NCAA, Tax Exemption, and College Athletics, 2010 U.Ill. L. Rev. 109 is simply fun for those academics who enjoy complaining about the outrageous salaries of coaches, or who flinch at the reference to the “scholar athlete.” More relevantly, however, Columbo’s article comprehensively outlines the doctrine relevant to analyzing the sparse legal guidance available regarding the assessment of the reasonableness of executive compensation, and whether it violates the prohibition on inurement or excess private benefit. This analysis is timely as well: the IRS may be on the verge of delving into the salaries of coaches as part of its college audits. The article also makes incredibly accessible UBIT analysis, also of importance in teaching health law. Like most of Columbo’s work, he makes hard concepts seem easy. As the IRS may be taking a closer look at coaches’ salaries.
Filed under: 501(c)(3), Nonprofit, Recommended Reading
Miranda Perry Fleischer’s Theorizing the Charitable Tax Subsidies: The Role of Distributive Justice, just published at 877 Wash. U.L. Rev. 505 is a must-read for anyone asking what justifies hospitals’ tax-exemption in a post-reform world. The least that can be said for this incredibly thoughtful article, which is apparently the first in a series on the topic, is that it provides a superb overview of tax-exemption theory for those who do not regularly read this literature. It is perfect background reading for the non-tax teacher who introduces students to the topic in her health survey class, or the person who just wants a quick overview of the extant theoretical justifications for the charitable tax exemption. Fleischer makes two primary points. First, she chides tax theorists for their failure to acknowledge that tax exemptions for charities, and the attendant deductibility of charitable contributions, are redistributive. Second, she seeks a clearer justification for the determination for the charitable exemption, and convincingly enumerates disparate examples that prove the lack of coherence of current IRS policy, particularly with respect to the question as to whether charities are expected to serve the poor. Unsurprisingly, hospitals are but one example. She urges the adoption of a moral theory to facilitate the development of a coherent system of tax exemption, and starts the process of describing potential outcomes if we subscribed to a utilitarian, maximin, egalitarian or capabilities approach to defining charity. Apparently, this project will be further developed in future articles, which is just in time, at least for the health care sector.
Jessica Berg’s Putting the Community Back into the “Community Benefit” Standard, just published at 44 Ga. L. Rev. 375, represents one of the first articles of what can be expected to be a flurry of post-PPACA proposals to reform the criteria for hospitals’ tax-exempt status when charity care begins to decrease, at least in some markets (undocumented aliens will continue to be a significant burden in several states). Professor Berg seeks to shift the focus from the provision of individual charity care as a means to satisfy the community benefit standard, to the provision of population health care benefits, which can be measured by local, state and federal authorities to justify their respective tax exemptions. Berg seeks to avoid adopting a method for quantifying the value of the hospital’s community benefit that encourages hospitals to expend resources for the purpose of earning the tax exemption, rather than promotion of population health. Consequently, she proposes that tax authorities measure the value of the effect or outcome of the hospital’s population health programs, by analyzing participation, mind states, behavior, health status, sickness care utilization, sickness care expenditures, and community value, which can be accomplished by looking at statistical lives saved, lack of pain and suffering, gains in productivity, and risk reductions. Berg also proposes the administrative mechanism, which would include community participation, for identifying appropriate programs for hospitals’ implementation. As is generally the case with Professor Berg’s scholarship, this article proposes on-the-ground solutions to pressing problems of the day worthy of serious consideration.
The Chronicle of Philanthropy lead off its annual executive compensation story with the headline that “Nearly three in 10 of the leaders of the nation’s biggest charities and foundations have taken pay cuts in the past year as the recession causes donations to drop and batters endowments”.
USA Today interpreted the annual survey results differently, with yesterday’s headline: “Non-profit execs make millions: Big organizations have highly paid leaders,” coupled with the usual USA Today chart, this one listing the leaders of the pack, compensation-wise. The accompanying article questioned why nonprofit compensation is so high.
How much is too much is a fair question, and one readers of this blog will recall that Attorney General Ann Milgram is asking about Stevens Institute’s President. The ubiquitous Senator Grassley thinks non-profit salaries are too high, and is using health care reform as an opportunity for reforming more than the health sector — one of the 500+ amendments to the Baucus healthcare reform bill comes from Grassley, who wants to eliminate the presumption of reasonableness afforded federally tax exempt organization salaries as long as boards obtain inter alia a comparability study (which unsurprisingly, most do).
According to a recent IRS hospital study, “Although high compensation amounts were found in many cases, generally they were substantiated based on appropriate comparability data”. The IRS is currently focusing on salaries at colleges and universities. Somewhat unclear is whether the comparability study may include salaries from the business sector — the IRS has waffled so far, but then-New York Attorney General Spitzer was pretty clear in his mind that it was improper for Richard Grasso’s friends on the compensation committee to have relied on for-profit numbers when it came to setting Grasso’s $187 million compensation package as head of the then-nonprofit NYSE.
Some are outraged by non-profits’ salaries, which are, after all, subsidized by donors and the tax-payer, while others think that politicians should let nonprofit boards run their own show. The argument is that nonprofits have to compete with the business-world for the best talent.
Is there any law on the subject? Yes, but it’s rarely enforced. State nonprofit corporate law contains a non-distribution constraint–that is, nonprofits can’t pay out dividends or excessively pay its employees or those with whom they do business — the money is supposed to be used to further the entity’s mission. On the tax side, federal law prohibits private inurement and excess benefit, which essentially seeks to accomplish the same goals. So, on the one hand, critics of excessive compensation do have a legal leg to stand on. On the other, all anyone seems to do about the issue is complain – neither the IRS nor state AG’s have boards particularly concerned about their compensation decisions. In fact, all boards have to do is follow the right procedure, and their CEO salaries are presumptively reasonable. So, if all non-profits essentially use the same small group of compensation consultants, and set salaries coincidentally high, then it’s a self-reinforcing system and nobody gets in trouble.
I have little hope that the real questions will be seriously considered, which include what the role of the nonprofit is in our society, and what we expect of nonprofits in exchange for their not having to pay taxes, and for their donors getting tax deductions. The IRS has begun collecting information on the revised 990 about hospital “community benefit”, but the real question is whether any real change will come out of the whole thing, and whether it will go further than health care. Nudge would suggest that merely by asking the right questions behavior will change! I’m more in the Grassley camp of being a noodge….