Nonprofit Law Matters

New York College Cannot Change Its Name in Return for a Proposed Donation

Posted in Charitable Gift Planning, IRS, FTB & Attorney General Controversies, Public Charities

Paul Smith’s College, “the College of the Adirondacks,” was established in 1937 and remains the only baccalaureate-degree-granting institution in Adirondack Park, New York.  Paul’s son, Phelps Smith, bequeathed the bulk of his estate to create a college in his father’s name, and his bequest required that the college “be forever known” as Paul Smith’s College of Arts and Sciences.

Fast forward to the present.  Joan Weill, the spouse of the former chief executive and chairman of Citigroup, Sanford I. Weill, proposed a $20 million gift to the College, provided that the College change its name to Joan Weill-Paul Smith’s College in honor of Ms. Weill’s contributions and her commitment to the future of the school.  According to the New York Times, College officials characterized the proposed donation “as a lifeline that could allow them to recruit students nationally and draw more donations from the couple’s wealthy friends” and concluded that “in order to consummate the gift, it needed to undo the century-old naming restriction, which it said nearly fatally impedes the ability of Paul Smith’s to seek large gifts from a single donor in order to make the investments it needs to remain viable.”

The State Supreme Court in Franklin County, New York, disagreed.  Under the equitable doctrine of cy pres, a court may reform a written gift instrument to reflect the donor’s intention as closely as possible, if changed circumstances have rendered the administration of the gift according to its literal terms impracticable or impossible.  The Court determined that the College failed to show “that its name is holding the College back from being a shining success both in enrollment and in producing successful college graduates” or that the College could not operate effectively without the name change.  Therefore, the court concluded that the existing name requirement was not impracticable to a degree that it frustrated the charitable purpose of Phelps Smith’s gift.  As a result, Ms. Weill is not now making her gift.

There are other recent examples of a prominent charity changing its name, or attempting to do so, in order to generate revenue.  For instance, last year Lincoln Center agreed to change the name of Avery Fisher Hall to David Geffen Hall in connection with a $100 million donation. In that case, Lincoln Center negotiated with the Fisher family to relinquish the name and did not go to court.

For the full New York Times article reporting this court decision, see

Proposition C Impacts Nonprofit Organizations Lobbying in San Francisco

Posted in Nonprofit Governance & Ethics, Public Charities, Tax Treatment of Lobbying & Political Activities, Unions, Associations, Clubs & Other Tax-Exempt Organizations

The City and County of San Francisco’s lobbying ordinance (Campaign and Governmental Conduct Code §§2.100-155) currently requires any person influencing local legislative or administrative actions through contacts with city officials or their staff to register with the Ethics Commission, but the ordinance provides an exemption for certain nonprofits (all 501(c)(3)s and some smaller 501(c)(4)s). The Ethics Commission of San Francisco has placed Proposition C (“Prop. C”) on the November 2015 ballot, which would expand the definition of lobbyist and covered lobbying activities without similarly expanding the exemption for nonprofits.

If passed, Prop. C would create a new category of lobbyist, the “expenditure lobbyist.” An entity or individual would become an expenditure lobbyist if it directly or indirectly made payments totaling $2,500 or more in a calendar month to solicit, request, or urge other people to communicate with a city or county official in order to influence local legislative or administrative action. Unless an exception applies, each expenditure lobbyist would be required to pay a $500 registration fee and file monthly reports with the Commission. Failure to pay an annual fee terminates registration under the current ordinance. The proposed measure does not change the registration termination provisions or clarify whether these registration and reporting obligations continue even after the lobbying activities have ceased.

Because the definition of “expenditure lobbyist” has a low dollar threshold, and because there is no exemption for nonprofit organizations, Prop. C could affect many nonprofit organizations that are active in the City and County of San Francisco. The proposed ordinance expressly identifies as covered an expenditure for any of the following: public relations, media relations, advertising, public outreach, research, investigation, reports, analyses, and studies to the extent those activities are used to further efforts to solicit, request, or urge other persons to communicate directly with an officer of the City and County of San Francisco.

For public charities, Prop. C would cover grassroots lobbying efforts urging others to contact city and county officials. The measure’s inclusion of administrative lobbying could also cause private foundations to be characterized as expenditure lobbyists if they spend more than the threshold amount urging others to contact officials regarding administrative actions. Although prohibited from engaging in legislative lobbying, private foundations are generally permitted under federal tax law to influence administrative actions. However, under Prop. C such private foundations may nonetheless be deemed expenditure lobbyists, and their registration and public reports could generate audit flags for the IRS.

The Alliance For Justice has taken a stance against this measure. Organizations interested in taking a similar position on this measure may wish to seek counsel to determine if their activities qualify under the self-defense exception to the federal lobbying rules.

IRS Commissioner Hints at Timing for New Political Regulations, Summarizes Thousands of Public Comments

Posted in AG, IRS, FTB, & Property Tax Proceedings, Private Foundations, Public Charities, Tax Treatment of Lobbying & Political Activities, Unions, Associations, Clubs & Other Tax-Exempt Organizations

We looked at IRS Commissioner John Koskinen’s written statement to the Senate Finance Committee, with attached documents, submitted with his testimony on Tuesday, October 27, at

Here’s what’s newsworthy:

First, from the Commissioner’s oral testimony and from his prepared statement, the IRS and Treasury have not been intimidated by Republican calls to discontinue the rulemaking process.  He emphasized that the IRS aims to “clarify” the political activity rules, not change them to deprive organizations of their free speech rights.  The Commissioner said there was no timetable for the release of the second version of the proposed regulations, but that there would be “ample, additional opportunity” for public commentary and public hearings.

He did say in his oral testimony that the next version might come out in early 2016, and be finalized “before the election,” but his previously-stated position has always been that the new rules would not be “effective” (legally binding) on organizations or activities until after the 2016 elections.

What’s new is the IRS effort to summarize public comments received (160,000) since the first version was released in November 2013, almost two years ago.  No precise prediction can be gleaned from its rendition of the comments on three key issues: how much political activity should be permitted under 501(c)(4), the scope of the definition of political campaign activity, and the potential use of a uniform definition for all 501(c) groups.  However, the summary does perhaps reveal a bit about the thought process of the lawyers drafting the new rules—what they take from the public comments and what legal arguments might be used to support certain outcomes.

From what we’ve seen, a common theme is apparent.  Social welfare 501(c)(4) organizations cannot be viewed in isolation; both the range of public comments and the fabric of the law itself require considering the interplay between section 501(c)(4) and section 527 (political organizations), as well as among the other main categories–501(c)(3) (charities), (c)(5) (labor unions), and (c)(6) (business and professional associations)—that may be active in election periods.


  • The IRS and Treasury appear to remain open to various arguments on “how much” political activity is too much for 501(c)(4) exempt status, considering the existing “primarily” standard, an “exclusively” standard, or a “no substantial part” standard, as well as a percentage-of-expenditures limit.  Over 3,000 commenters expressed opinions on this topic, and many “generally supported” retention of the “primarily” standard.  The IRS concludes by citing comments arguing that Congress, by adopting section 527 in 1975, recognized that 501(c) groups may engage in “some” political activity taxable under 527(f). In that view, Congress essentially ratified the IRS position rather than “amending the existing ‘primarily’ standard under the 1959 regulations.”
  • The IRS goes into some detail on the definition of “candidate” that it proposed in 2013, sweeping in appointees for public office as well as those running for election.  From the strong objections it received containing rather persuasive legal analysis, it appears the IRS may be convinced to drop that suggestion and focus only on electoral campaigns for public office.
  • On issue advocacy, the IRS notes the arbitrariness of timeframes, such as 30 or 60 days before an election, used to capture any public communication that mentions the name of a candidate.  As commentary (from the Bright Lines Project, actually) pointed out, the result could be under-inclusive, failing to capture “politically motivated” messages outside of the timeframe, yet be over-inclusive, limiting “legitimate policy advocacy inside it.”
  • 20,000 comments, the largest segment reported by the IRS, complained that classifying all forms of voter education and outreach as political campaign activity would have an adverse impact on nonpartisan social welfare activities that encourage civic participation and engage the public.
  • Finally, the IRS addresses comments related to the “potential application of a uniform definition of political campaign intervention across section 501(c).”  Seven thousand commenters saw the 2013 first draft of regulations as inequitable because it did not apply to other tax-exempt organizations.  Some argued that (c)(4), (5) and (6) entities “are often prominent and competing players in the same advocacy space,” so that singling out the (c)(4)s for regulation “would create an uneven political playing field.”  Further, commenters noted, if the same definitions did not apply to 501(c)(3) charitable organizations (for which political intervention is completely prohibited), the result could be a system of burdensome, multiple standards with a chilling effect on nonpartisan activities historically permitted under section 501(c)(3).  Again, the IRS recognizes the interaction of sections 501(c) and 527, noting comments suggesting a single definition of political intervention for all categories.

I chair the Drafting Committee of the Bright Lines Project, which has been pressing for clearer IRS definitions of political intervention for over five years.  We are heartened to see the IRS and Treasury continuing their work to pursue better political activity rules, building on the wealth of public input and the harmonization of existing tax code distinctions.  As I said in testimony to a Senate Judiciary subcommittee in July, “we don’t want bad political rules that apply only to (c)(4)s, but good rules for everybody.”

Good News on the Investment Front!! California Passes AB 792, Harmonizing Investment Standards for Nonprofits in California

Posted in Charitable Gift Planning, Private Foundations, Public Charities, Religious Institutions

The stock market may be in shambles, but California charities have reason to celebrate.  Historically, charities formed as California nonprofit public benefit corporations have had to satisfy two state law investment standards:  Corp. Code Section 5240 and UPMIFA (found at Probate Code section 18501 and following).  Corp. Code Section 5240(b) provides that in making investments, a board must “avoid speculation, looking instead to the permanent disposition of the funds, considering the probable income, as well as the probable safety of the corporation’s capital.” On the other hand, UPMIFA sets forth a modern prudent investor standard – it sets forth several factors which are to be considered when making investment decisions, states that investment decisions are to be applied to the fund as a whole, and provides that an individual investment must be analyzed in the context of the total portfolio and the overall risk-reward objectives. These two standards have been very difficult for charities and their advisors to reconcile, in great part because the Corp. Code: (a) appears to focus on individual investments (whereas UPMIFA focuses upon the portfolio as a whole); and (b) directs the charity to “avoid speculation,” a term which does not appear to have a precise legal definition.

Fortunately, AB 792 provides that effective January 1, 2016, compliance with UPMIFA will be deemed to be compliance with Corp. Code Section 5240(b).  There is a similar provision for religious corporations subject to Corp. Code Section 9250. Thus, beginning in 2016, California charities need to focus only on satisfying the UPMIFA standard (of course, charities which are private foundations also have to be concerned with IRC Section 4944, which prohibits jeopardizing investments).  Note that the other provisions of Corp. Code Section 5240 still apply – importantly, the ability of a donor to “authorize” or “require” a charity to retain a contributed asset, which can ease the directors’ standard of care as to the investment and re-investment of that asset.

Treasury Releases Final Regulations for Private Foundations Making International Grants Using Foreign Public Charity Equivalence Determinations

Posted in Grantmaking & Social Investing, International Charitable Transactions & Operations, Private Foundations

Treasury will release tomorrow final regulations regarding private foundations and their use of a process called “foreign public charity equivalence” or “equivalency determination.” Treasury’s hope in issuing these regulations is to facilitate international grantmaking while ensuring that foundation equivalency determinations are appropriately made.

Background and 2012 proposed regulations. As explained in a prior post, before the 2012 proposed regulations, private foundations wishing to make grants to non-U.S. charities generally had to exercise expenditure responsibility over their grants, or use equivalency determination. Under equivalency determination, a private foundation would make a good faith determination, based on a grantee-completed affidavit or opinion of counsel, that the foreign charity met the basic requirements of a Section 501(c)(3) public charity, but for the fact that the IRS had not recognized the foreign charity as such. Among other things, the 2012 proposed regulations expanded the class of tax practitioners on whose opinion the private foundation could rely, from counsel only to include CPAs and enrolled agents, collectively known as “qualified tax practitioners.”

Final regulations. The final regulations adopted the expansion of the class of “qualified tax practitioners” in the proposed regulations, but otherwise substantially revised them. Key changes include:

  • Relying solely on grantee affidavits. Previously, a private foundation grantor could “ordinarily” rely solely on a grantee affidavit to make its good faith determination, without an opinion of a qualified tax practitioner. Now, a grantor may only rely on an affidavit as the sole basis for making a good faith determination where “reasonable and appropriate under the facts and circumstances.” As examples, reliance only on an affidavit may still be appropriate where a foundation manager of the grantor understands U.S. tax law sufficiently to assess the reliability of grantee affidavits, or where the grantee understands U.S. tax law sufficiently to ensure that it has completed the affidavit appropriately.
  • DAFs. The final regulations clarify that sponsoring organizations of donor advised funds may use these regulations as guidance for grantmaking to foreign organizations.
  • Foreign counsel. The final regulations clarify that foreign counsel may assist in gathering information relevant to the equivalency determination and provide advice to a qualified tax practitioner providing an opinion to the grantor. Unless the foreign counsel is also a “qualified tax practitioner,” however, the grantor may not rely directly upon the foreign counsel’s opinion to make its good faith determination.

Other important items include:

  • Shared advice. While acknowledging that grantors’ sharing the advice of a qualified tax practitioner with one another may be economical, IRS and Treasury expressed concern that the foundation receiving shared advice may not be in a position to evaluate its reliability. Therefore, a grantor wishing to rely on written advice from a qualified tax practitioner must receive the advice directly from the qualified tax practitioner (which includes qualified equivalency determination repositories), and not from another grantor.
  • Reliance period. For grantees meeting a public support test, the final regulations clarify that the organization may be treated as publicly-supported for two years immediately following the end of the five-year support test period.
  • Update to Revenue Procedure 92-94. Treasury intends to update Rev. Proc. 92-94, the revenue procedure outlining the affidavit process that practitioners agree is largely outdated.
  • Conforming changes. The final regulations also make minor changes for consistency with prior changes in law, such as the 2006 Pension Protection Act changes that eliminated certain 509(a)(3) supporting organizations from the class of organizations that may receive distributions treated as qualifying distributions and that may receive grants for which expenditure responsibility is not required.
  • Transition period. The final regulations provide for a 90-day transition period (through December 24, 2015), during which foundations may distribute grants in accordance with former regulations. Also, a grantor that has made a written commitment on or before September 25, 2015, in accordance with prior procedures may rely on those prior procedures if the committed amount is distributed by September 25, 2020.

Practical aspects. Many private foundation grantors have been using qualified tax practitioners in any event. (This includes, for example, both in-house and outside counsel and CPAs, as well as repositories.) For these grantors, not much may change. Grantors who have been relying on gathering affidavits and making their own good faith determination without the involvement of a qualified tax practitioner, however, should promptly reassess this aspect of their international grantmaking processes.

IRS Clarifies Position on Private Foundation Mission-Related Investments Under Section 4944

Posted in Grantmaking & Social Investing, Private Foundations, Social Enterprise

In Notice 2015-62 issued on Tuesday, the IRS explained that a private foundation and its managers will not necessarily be penalized under Internal Revenue Code Section 4944 for a mission-related investment that does not qualify as a program-related investment (PRI) and that offers a lower return than more standard alternatives, since a foundation’s charitable purposes are relevant to determining whether its managers have exercised ordinary business care and prudence in making investment decisions.

Section 4944 of the Internal Revenue Code imposes an excise tax on a private foundation, and in some situations the foundation’s managers, for any investments that are deemed “to jeopardize the carrying out of any of [the foundation’s] exempt purposes.” PRIs are a statutory safe-harbor, but to qualify as a PRI an proposed investment must meet several criteria, namely:  (i) the primary purpose of the investment must be to further one or more exempt purposes of the foundation; (ii) the production of income or the appreciation of property may not be a significant purpose of the investment; and (iii) the PRI cannot be used to fund electioneering or lobbying activity.  Where the PRI recipient is not a U.S. public charity, the foundation is additionally required to exercise expenditure responsibility over the investment, in accordance with the very specific requirements of the Treasury regulations.

The regulations to Section 4944 define a “jeopardizing investment” in part as one where foundation managers “have failed to exercise ordinary business care and prudence, under the facts and circumstances prevailing at the time of making the investment, in providing for the long- and short-term financial needs of the foundation to carry out its exempt purposes.” (Treas. Reg. Section 53.4944-1(a)(2)(i)).

Notice 2015-62 clarifies that the relevant facts and circumstances foundation managers may consider in exercising “ordinary business care and prudence” can include the relationship between a particular investment and the foundation’s charitable purposes.  Consequently, even where an investment doesn’t qualify as a PRI because, for example, the production of income is a significant motivation behind it, the fact that the investment was made to further a charitable purpose of the foundation may help to avoid having it classified as a jeopardizing investment under Section 4944.

As Notice 2015-62 explains, this clarification helps to make IRS guidance consistent with the standard under the Uniform Prudent Management of Institutional Funds Act (UPMIFA), adopted by most states, which provides that managers may take into account any special relationship between a proposed investment and the organization’s charitable purposes.  (See UPMIFA Sections 3(a), 3(e)(1)(H) and accompanying comments, as well as, for example, California Probate Code Sections 18501-18510.

The following resources provide further background on private foundations, PRIs, and mission-related investing:

Proposed Regulations Would Bring Program-Related Investments into the 21st Century, by David A. Levitt and Robert A. Wexler, Journal of Taxation, August 2012

Investing In The Future: Mission-Related And Program-Related Investments For Private Foundations by David A. Levitt, The Practical Tax Lawyer, Spring 2011

Unscrambling ‘MRIs’ and ‘PRIs’ by David A. Levitt, Philanthropy Journal (on-line), April 5, 2011

A Smart Pitch for Nonprofit Advocacy

Posted in Grantmaking & Social Investing, Private Foundations, Public Charities, Tax Treatment of Lobbying & Political Activities

Campion Foundation Trustee Sonya Campion recently made an intelligent pitch for private foundation directors, and their institutions, to arm themselves with knowledge about the rules governing advocacy by foundations and their grantees, and to use the powerful tools that the tax code provides for funding change.  We couldn’t agree more!

Want to get started?  These free resources might help.

California Tax Lawyer Publishes “Proposed Guidance for Donor Advised Funds”

Posted in AG, IRS, FTB, & Property Tax Proceedings, Charitable Gift Planning, Nonprofit Structures, Relationships & Transactions, Public Charities

The California Tax Lawyer recently published Proposed Guidance for Donor Advised Funds, a policy paper co-authored by Adler & Colvin associate attorney Jorge Lopez and Courtney Nash of Farella, Braun + Martel.  The authors describe the history of DAFs, and explain the changes made with adoption of new rules as part of the Pension Protection Act of 2006 (“PPA”).  The authors then discuss the need for IRS guidance on several issues of primary concern or common confusion among donors, sponsoring organizations, and practitioners regarding the rules applicable to Donor Advised Funds.  The paper addresses questions concerning the application of the definition of Donor Advised Funds; excise taxes with respect to receiving, directly or indirectly, a “more than incidental benefit” in the Donor Advised Fund context; excise taxes related to distribution to disqualified supporting organizations and excise taxes in connection with excess business holdings.  The authors offer proposed guidance addressing these issues, and conclude that the continuing lack of guidance from the IRS, nine years after the change in law, unnecessarily limits the flexibility of Donor Advised Funds and inhibits compliance with the PPA.

Proposed Guidance for Donor Advised Funds was published in Volume 23, Number 3, of the California Tax Lawyer and is available (with the permission of the California Tax Lawyer) on our website.

Senate Judiciary Oversight Subcommittee Hearing on IRS and Political Tax Law

Posted in Private Foundations, Public Charities, Tax Treatment of Lobbying & Political Activities, Unions, Associations, Clubs & Other Tax-Exempt Organizations

I had the honor of testifying in Washington, D.C., on July 29, 2015, before the Senate Judiciary Subcommittee on Oversight, Agency Action, Federal Rights and Federal Courts, chaired by Senator Ted Cruz, about the current IRS work on developing regulations to define political campaign activity for tax-exempts.  (The picture below shows us, the witnesses, being sworn in.)


(Chip Somodevilla/Getty Images)

My written statement as Chair of the Drafting Committee of the Bright Lines Project, sponsored by Public Citizen, is posted here.

Here is the video.

If they interest you, here are some passages to which you could scroll:

* IRS Commissioner Koskinen, describing the political rulemaking underway in his opening statement, 41:10 to 42:10 minutes

* Senator Coons’ question to Commissioner Koskinen and his answer on the benefits of the rulemaking, and the rationale for covering all tax-exempts, 53:50 to 55:47 minutes

* My opening statement for the Bright Lines Project, 2:44:23 to 2:48:30 minutes

* Senator Coons’ question to me, and my answer on drawing lines between (c)(3) and (c)(4) activity, etc., followed by a quip by Senator Cruz, 3:38:20 to 3:43:00 minutes.

FASB Proposes Significant Changes to Nonprofit Accounting Standards

Posted in Charitable Gift Planning, Private Foundations, Public Charities

The Financial Accounting Standards Board (“FASB”) recently issued a Proposed Accounting Standards Update (“ASU”) specific to Not-for-Profit Entities (Topic 958) and Health Care Entities (Topic 954).  The ASU seeks to improve net asset classification reporting requirements, as well as require expanded information on liquidity, financial performance, and cash flow.  The full scope of proposed changes is too extensive to address here. We highlight three categories of changes that could have a significant impact on the way nonprofits report (and think about) their finances.

Revised Net Asset Classifications

FASB’s current standards require that net assets be divided into three categories:

  1. Permanently restricted assets, meaning assets whose use is limited by donor-imposed stipulations that will not expire by passage of time and cannot be fulfilled or removed by the organization. Endowments are the classic example of permanently restricted assets.
  2. Temporarily restricted assets, meaning assets whose use is limited by donor-imposed stipulations that may expire by passage of time or can be fulfilled or removed by the organization. Funds that are restricted to a particular purpose are an example, as once the organization spends the funds for the purpose, it has fulfilled the restriction.
  3. Unrestricted assets, meaning assets that are neither permanently nor temporarily restricted.

The ASU proposes replacing these categories with two classifications only:

  1. Assets with donor restrictions, which would include both permanently and temporarily restricted assets; and
  2. Assets without donor restrictions, which include unrestricted assets and assets restricted internally by Board designation.

FASB asserts that eliminating the distinction between resources with permanent restrictions and those with temporary restrictions will reduce complexity, while requiring enhanced disclosures in the notes (explained below) will allow nonprofits to detail the types and effects of the different donor-imposed restrictions.  FASB also notes that “[t]he currently required distinction … has become blurred by changes in state laws that diminished its relevance and rendered that distinction less useful ….”  (see the discussion of UPMIFA below).

Enhanced Expense Disclosures

The ASU provides several opportunities for nonprofits to report more effectively on their expenses.

  • The ASU would require organizations to report functional expenses by both nature (salaries, grants, occupancy, etc.) and function (program, fundraising, management, etc.). Although many nonprofits already do this, current rules allow reporting by either nature or function or both.
  • The ASU would require enhanced disclosures as to the method(s) used to allocate costs among “program” and “support” on the statement of functional expenses. Currently, nonprofits have no clear and consistent guidance about how to allocate costs among program and support functions. The Form 990 Instructions, for example, indicate that “the organization can use any reasonable method of allocation.” The new disclosures would presumably increase transparency and promote consistency in classification methods across organizations.

Given that many charity “watchdog” and rating services, like Charity Navigator or the Better Business Bureau, measure nonprofits’ success based on their functional expense reporting, these enhanced disclosure requirements may shed light on why one organization’s reported expenses differ from another’s.

Underwater Endowment Disclosures

An endowment is “underwater” when the fair value of the fund has fallen below the original, permanently restricted gift amount. The Uniform Prudent Management of Institutional Funds Act (UPMIFA), which has been adopted in almost every state, now permits a charity to appropriate for expenditure so much of an endowment fund as the charity determines is prudent for the purposes for which the fund was established, taking into account certain factors.  Under UPMIFA, an organization is not bound to preserve the original “historic dollar value” of the fund in all circumstances (this was the rule before UPMIFA), and may instead continue to spend from an underwater fund if the organization determines it is prudent to do so.  The ASU would require nonprofit organizations to disclose the aggregate amount by which funds are underwater, as well as the original gift amounts, and any governing board policies or decisions to spend or not spend from such funds.

If you feel strongly about any of these proposed changes, we urge you to read the ASU in its entirety, and send any comments and suggestions to FASB to ensure that it takes into account the practical impact of these changes on nonprofit organizations.  FASB has requested public comment on the proposed guidance, no later than August 20, 2015.