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Abstract:
Are nonprofit organizations 'different' from firms with owners? The accepted economic account holds that nonprofits are more trustworthy than business firms because nonprofits cannot distribute profits to owners. However, all firms, nonprofit or proprietary, have converged into similar patterns of behavior. Firms, whether nonprofit or proprietary (or even public), are subject to many of the same economic forces, such as resource dependency, institutional isomorphism, and organizational slack. Even in the absence of shareholders somebody still has to run the enterprise: to decide what objectives to pursue, and how; to manage its financial and human resources; and to span the boundaries of the organization in interacting with the key constituencies, other organizations, and the public. While nonprofits have shareholders privileged with rights of accountability, in most of the business sector shareholders have long lost effective control to firm management. In short, management in both sectors has decisional authority, whether de facto, as in the proprietary sector, or de jure, as in the nonprofit sector.

Moreover, the 'nondistribution constraint' cannot guarantee that the nonprofit operates better or worse than a proprietary enterprise in overcoming information asymmetries. The absence of shareholders demanding profits enables the organization to relax into productive inefficiencies, or to cross-subsidize activities the patron would not want to pay for (could she only observe them). Such inefficiencies or cross-subsidization might 'cost' more than the profits the enterprise might otherwise distribute to shareholders if it operated in a proprietary form. Separately, in an industry with more than one nonprofit, the nondistribution constraint cannot help patrons choose between competing nonprofits.

It might be difficult to find enough differences on other grounds to justify continued subsidies based on organizational form. Subsidies might need to be targeted to desired services, provided either in the nonprofit or for-profit sector.

non-profit, proprietary

Abstract:
The bankruptcy of a charity represents the clash of two policy regimes: charity law's willingness to preserve assets for the public purpose determined by the donor as against bankruptcy law's desire to maximize assets for distribution to creditors. As a general rule, assets will be distributed to creditors; as the courts say, 'a man must be just before he is generous.' However, when a charitable donee goes out of existence or otherwise becomes unable to perform a charitable trust or restricted gift, the courts will try to identify those charitable assets that are restricted in such a manner that they survive the bankruptcy proceeding. These assets excluded from the bankruptcy estate are instead subject to the venerable doctrine of cy pres, regardless of whether the charity is a charitable trust or a corporate charity. Charitable trusts and restricted gifts, if they can no longer be performed as originally specified, are modified for another use by the same charity or are transferred to another charity, subject to the same or modified purpose. It is common for the cy pres proceeding to occur in state court, rather than in the federal bankruptcy proceeding.

This approach views any particular charity holding a restricted gift as distinct from the contemplated beneficiaries of that gift. Despite its benefits to society, such a policy also carries negative implications for the governance of individual nonprofit organizations. Sympathy for charitable beneficiaries in bankruptcy can make it harder for all charities - including those not in financial distress - to obtain needed financing. Less obviously, but perhaps more seriously, over accommodating courts that wall off charity assets from bankruptcy creditors can further an already pervasive view that charitable property is 'public' to an inappropriate degree.

Bankruptcy, charitable assets, charity law, restricted gifts, trusts

Abstract:
U.S. charities have two main options for their legal form, the nonprofit corporation and the charitable trust. But choice of form is not destiny for charitable organizations: Trust and corporate law standards are substantively identical in a considerable range of circumstances. These include the standards of behavior required by charitable fiduciaries (converging on the corporate standard); the process for modifying an outmoded use of a gift made for a restricted charitable purpose (converging on the trust standard); and the relevant supervisory and regulatory regimes (the same regardless of organizational form). On a few key issues, however, the trust and corporate form have certain irreducible differences. Notably, trust law permits the settlor to assign differing duties to trustees of a trust having multiple trustees (and absolving those trustees not assigned particular duties); by contrast, all directors of a nonprofit corporate board are equally responsible for participating in oversight.

To the extent trust and corporate law remain different and organizational form remains the determinative factor, well counseled charity founders may choose the content of the law that binds them. An important goal of the American Law Institute's project on Principles of the Law of Nonprofit Organizations (for which the author is Reporter) is to further the convergence of legal principles that apply regardless of organizational form.

American Law Institute, charity governance, nonprofits, trust law

Abstract:
This piece explores the broad financial relationship between the public and the charitable sectors. Tax exemption operates as a peculiar subsidy - offering the greatest benefits to charities carrying on the most profitable activities and owning the most valuable property. Perhaps, then, the property tax and income tax exemption of charities can be explained by a 'sovereign' view of the charitable sector. Resembling the federal tax treatment of state and local governments, exemption for charities respects the independence of the nonprofit sector, and minimizes the involvement of charities in the political process. Unfortunately, the long history of Anglo American philanthropy also contains a great deal of mistrust by the state of the economic power of charities, and a sovereign view of charity can explain as well some of the peculiar rules that reduce, rather than enhance, the value of tax exemption.

Charity law, non-profits, tax exemption

Abstract:
This piece was inspired by the increasing tendency of State attorneys general - backed up by courts and legislatures - to effectively confiscate the assets of wealthy nonprofits through overreaching enforcement actions. The article develops a legal framework for ascertaining the proper State role. It reviews many case studies including, most notoriously, the thwarted diversification of the Milton Hershey School Trust out of Hershey Foods Corporation (an investment worth over $5 billion) - thereby preserving the local operations of a publicly traded company. While few state attorneys general have the funding and inclination to engage in aggressive charity enforcement, the very lack of state involvement with the organization and operation of nonprofit entities might explain how legislatures, attorneys general, and even courts can misconstrue their proper roles in the regulation of charities and other nonprofits.

Assets of nonprofit organizations are not governmental assets. Rather, a given nonprofit serves the indefinite class of beneficiaries chosen by its creators, funders, governing board, and, in some cases, members - but not by the local community, the state, or any other public that constitutes the constituents of an attorney general, a legislature, or a judge. Inevitably, if the proper legal bounds of legitimate enforcement do not become clearer, the role of charities in society could suffer. Charities facing state attorney general inquiry worry about loss of donations, loss of contracts and patronage, and retention of staff and volunteers. If, though, charities too quickly accede to state demands over matters of discretionary governance, the sector as a whole can see a degradation in charities' willingness to take risks, and in volunteer board members' willingness to serve.

Charity law, charity enforcement, Milton Hershey, non-profits

Abstract:
Trustees of charitable trusts and directors of nonprofit corporations operate under legal regimes designed for their for-profit cousins. In the absence of private beneficiaries or shareholders to look after their own interests, however, charity fiduciaries frequently escape accountability for their self-dealing and neglect or mismanagement. Few charities have members endowed with voting rights, and state attorneys general have limited resources to devote to monitoring the nonprofit sector. Similarly, at the federal level, the Internal Revenue Service is a tax collector, not a policing agency (although its new powers to tax excess benefits will undoubtedly draw it further into charity operations). As a result, the charitable sector must improve its own efforts to educate and review the behavior of fiduciaries, in order to retain the confidence of the donating public and the independence so cherished by all charities.

charity fiduciary, nonprofits

Abstract:
Our political and economic system contains three seemingly distinct sectors: public, proprietary, and nonprofit. This division masks serious issues of who should provide welfare services, schooling and health care; who should build infrastructure; who should control private wealth. The nonprofit law takes a laissez faire approach to permissible nonprofit activities, leading many to lament the increasing 'commercialization' of the nonprofit sector. However, an examination of historical as well as current activities engaged in by firms in all three sectors reveals that the basis terms of the social debate are eternal, while institutions dominant at different times and in different places resolved the sectoral debate in different ways. Rather than amend nonprofit corporate law to lock in 'nonprofit' activity, society might better target subsidies to desired services, provided either in the nonprofit or for profit sector.

nonprofits, sectoral

Abstract:
Fundamental tax reform would do far more damage to charities than the obvious repeal of the deduction for charitable contributions. Over the decades, charities have quietly garnered billions of dollars worth of indirect benefits. For example, the largest tax expenditure - the exclusion from workers' income of employer-provided health insurance - has fattened nonprofit hospitals, and the new tuition tax credits promise to spur tuition inflation. Tax reform presents an opportunity to eliminate tax subsidies and enact any desired direct expenditures for specific public goods and activities. However, converting tax expenditures to direct outlays would likely take the form of vouchers, which could be used with any type of provider - nonprofit, government, or for-profit. From a public finance perspective, the concept of a charitable sector could largely become an historical relic.

Tax Reform, non-profit, charities, contributions

Abstract:
Norman Silber's exploration of a near-century of jurisprudential subjectivity reveals an extraordinary hunger for uniformity in the conception of the public good. In 1961, the New York Court of Appeals effectively ended the practice of substantive judicial review of nonprofit charters when it ordered the lower court to approve the articles of a white supremacist group. In the end, judicial discretion over charity incorporation fell during the general social rebellion against orthodoxy, the rise of advocacy and identity groups (notably the NAACP), the legal-process reform against ad-hoc judicial rulings in favor of administrative deliberation and consistency, and the reconception of property rights to include government licenses. The great irony that Professor Silber observes is that the corporate form no longer was the bane of liberals, but rather their salvation: as his book is titled, a 'corporate form of freedom.'

As Professor Silber's study shows, we can add the act of obtaining nonprofit corporate status to the list of once-hotly-debated legal issues that no longer trouble us, but whose ghostly outlines remain. To the perplexity of law students, corporate statutes continue to explicitly grant perpetual life, the right to acquire and alienate property, and the power to sue and be sued. Going forward, the legal system will concern itself more with the harder questions of regulating charitable activity, and less with how charitable activity is organized.

illiberal groups, non-profits, Norman Silber

Abstract:
In Camps Newfound/Owatonna, the petitioner charity - with important assistance from friends-of-the-court charities - persuaded the Supreme Court to overturn a Maine statute that granted property tax exemption only to those charities primarily serving state residents. Camps Newfound/Owatonna, Inc. v. Town of Harrison, 117 S. Ct. 1590 (1997). Given this statute's facial discrimination, why was victory a 5-4 squeaker? The charities naturally reasoned that coming within the Commerce Clause requires proving that charities engage in commerce (particularly interstate commerce). In their focus on the financial impact of the discriminatory statute, however, the charities never offered a positive construct of property-tax exemption that ignores the residency of the charity's beneficiaries. The charities' omission left them vulnerable to an attractive articulation of property-tax exemption, whose very definition limit-ed exemption to charities serving state residents.

The charities might have achieved a short-run tactical victory at the cost of their long-term strategic interests. Once they decided to participate in the Camps Newfound litigation, the amici charities had no choice but to cast their activity in as commercial a form as possible. Dropping the pretense that charity is not 'big business' might simply declare what all could see if they would only look. However, the strategy of the charities in Camps Newfound might encourage society to rethink its favorable view of the charitable sector. The Supreme Court suggested that the Constitution would not prevent a state from repealing charitable tax exemptions and using state resources instead to pay direct subsidies to residents. As improbable as this result sounds, the very argument made by the charities in Camps Newfound that the charitable sector engages in commerce 'just like the big boys' jeopardizes the special protected view of charities, making society more willing to reconsider public subsidies long taken for granted by charities.

Camps Newfound/Owatonna, charity law, non-profits, property tax exemption

Abstract:
Despite the central role of organized groups as intermediary bodies in American society, the constitutional right of association is surprisingly recent and limited. As the Supreme Court struggles to define the bounds of 'the' freedom of association, it is time to take a critical look at a difficult set of questions. First, many private organizations engage in various types of selection criteria, but what subjects the Jaycees to State anti-discrimination laws but insulates the Boy Scouts of America? Second, the typical American nonprofit organization is a corporation that lacks both shareholders and members, so are there any 'associates' whose rights are entitled to protection, or is the corporation's freedom of speech all that constitutionally matters? Third, regardless of whether an organization comprises members, not all (few?) private entities operate 'democratically'; does the law care? Finally, even if voice is democratic, how do we protect dissenters if exit is not voluntary?

As we examine the structure for regulation of association and the role of the courts, we will appreciate the limits of the law in remedying private discriminatory and anti-democratic behavior. In general, the associational jurisprudence draws from our broader political structure that enshrines individual autonomy as its core norm. This Article does not, however, attempt to set out a normative prescription for creating political and moral values. For every advocate of group rights and group autonomy is an advocate of individual autonomy and protection from group tyranny. In the end, the debate leads me to caution that while we have a social and political obligation to exercise vigilance over how associations form and operate, we must recognize that our fundamental constitutional norms protect the rights of organizational autonomy in governance and functioning. The greatest challenge to a liberal society -a topic beyond the scope of this Article - will be whether and how to protect the rights of minority members of illiberal groups.

Boy Scouts of America, nonprofits, regulation of association

Abstract:
This piece, included in the University of Hawaii Law Review's symposium issue on the Bishop Estate, explores the relationship between the new intermediate sanctions law and the IRS's power to revoke tax exemption under § 501(c)(3). Inspired by the storied setting, I indulge in a fantasy: This article pretends that the IRS revoked the Estate's exemption, and takes the form of the Tax Court declaratory judgment opinion. I reluctantly 'rule' that exemption was not appropriate, because State enforcement action against the trustees was proceeding. (However, this forum allows me to hedge my argument by producing two concurring and one dissenting opinion!) Better would be for Congress to take up the recommendation of the staff of the Joint Committee on Taxation that the IRS be permitted to share with the States information from ongoing investigations of tax-exempt organizations.

exemptions, intermediate sanctions law, IRS, nonprofits

Abstract:
This article uses the case of paying for a college education to study broad issues of equity, both between families and between generations. As a normative matter, I argue that we should subsidize the education of those who are disadvantaged, but that is because a college education generally 'pays off,' society as a whole should not subsidize most students. Rather, the government can serve the valuable function of simply ensuring that students have access to sufficient loans to finance their education. Congress recently enacted President Clinton's proposal to convert the federal role from a guarantor of student loans to a direct lender (for a phased-in portion of student loans). Direct lending will allow a novel repayment option: the graduate can elect to repay the government out of a modest percentage of her future income.

Much of the article explores the difficulties of trying to determine an individual's financial resources, so that the government can best target its subsidies. When do we view the child separately from his family? When is it proper to look to a student's lifetime rather than current resources? Using the public finance literature, I examine the limitations of our governmental redistributive tools.

Happily, most of the conceptual difficulties melt away in the face of an income-contingent repayment mechanism, which basically matches payments of principal and interest to the profits from an education. For most graduates, a percentage-of-income cap is the only real insurance they need against doing poorly in the job market. However, because President Clinton's proposal perpetuated existing federal subsidies in the guaranteed student loan program, Congress missed the opportunity to make the program fairer by applying analyses based on intergenerational equity and lifetime income.

Bill Clinton, equity, FAFSA, finance, higher education, loans

Abstract:
Charitable endowments and other passive investments exceed $425 billion. Why do many donors require that the principal of their contribution must be held in perpetuity, and that only the income may be used for charitable purposes? Why do most charity managers voluntarily accumulate operating surpluses, and reinvest a portion of real endowment income? This Article suggests that rather than looking at how charities use their endowment income, we should focus on what happens to the endowment principal. It appears that the taste for perpetual charitable endowments persists as the happy co-incidence of donors' desire for immortality for themselves and their cultural beliefs, the professional staff's desire for employment and authority, and society's (apparent) desire for narrowly controlled investment capital. To explain charitable endowments, however, is not to justify them. If society views these as wasteful, it can reduce subsidies to them. Moreover, society might better direct subsidies to any provider of public goods, regardless of the organizational form of the provider.

Abstract:
In this report, Brody examines the IRS's settlement with the Bishop Estate and the lessons that can be drawn from that settlement for the intermediate sanctions regime.