Recommended Reading: Nonprofit & Tax Law

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.

Recommended Reading: Nonprofit & Tax Law

James R. Hines, Jill Horwitz & Austin Nichols’ The Attack on Nonprofit Status: A Charitable Assessment, just posted on SSRN, forthcoming in 108 Mich L. Rev. 1179 responds to the literature advocating for tax benefits to any entity, including the for-profit, that engages in charitable activity, regardless of organizational status.  Ultimately, the authors argue for the exclusive retention of tax exemption for the nonprofit firm, employing economic analysis and extant though limited empirical data to suggest the superior efficiency, higher quality and lower costs of nonprofits for at least some charitable activities.  The article is rich with empirical data about the demographic differences between the for-profit and non-profit employee, from which it suggests employees of the two sectors may be differently motivated –  by altruism as opposed to monetary incentives — thereby reducing costs and arguably increasing efficiency and quality.  Professor Horwitz’s work always makes an important contribution to the literature, and she doesn’t disappoint in this article either.

Lloyd Hitoshi Mayer and Brendan M. Wilson’s Regulating Charities in the 21^st Century: An Institutional Choice Analysis, available on SSRN, forthcoming in Chicago-Kent Law Review, invokes institutional choice theory to determine the best locus for the regulation of the charitable sector.  The article concludes that charity governance, comprising rulemaking and enforcement, best resides in a state agency independent of but related to the attorney general.  This outcome respects the historic role of the state in regulating charities, takes advantage of the state’s expertise in nonprofit oversight, and enables the state to be nimble in its regulatory approach.  The provision of sufficient funding remains a concern with this choice. Also of concern is inter-state consistency in regulating the multi-state nonprofit charity; inconsistency can foster regulatory arbitrage.

Nonprofit Hospital Tax Exemptions Worth $638 Million, Exceed “Community Benefit” by $373 Million for 10 Nonprofit Hospitals in Massachusetts

Caritas, Stanislaw Wyspianski (1895)

In recent posts we’ve pointed out some of the questionable characterizations of “community benefit” by nonprofit hospitals under 501(c)(3), a portion of the Internal Revenue Code which garners tax exemptions for those entities, such as nonprofit hospitals, which it harbors. In particular, we’ve focused on how matters such as “bad debt,” Medicare “shortfalls,” and even Private Insurer “shortfalls” have often been construed by nonprofit hospitals to constitute the conveyance of a community benefit. A “shortfall” may be deemed to have occurred when although the hospital receives the amount it had agreed to with a Private Insurer, or which was designated by the government through Medicare, that amount is less than the hospital’s “list price” for such a services.

Despite this rather lax standard, Kaiser.org reports that an in-depth review by the Boston Globe determined that “the value of abundant tax exemptions extended to Massachusetts General Hospital, and other private non-profit hospitals, ‘far exceeds the amount the state’s leading hospitals spend on free care for the poor and other community benefits.’”

Kaiser reports that in Massachusetts

The ten biggest hospitals in the state benefited from $638 million in tax breaks in 2007, but reported only $265 million in “community benefits” provided that year, the Globe found.

Even if one accepts the questionable characterizations of community benefits, that still leaves an excess of $373 million in tax exemptions–for merely 10 hospitals–in only one state.