Washington Snapshot - June 5, 2015

News IconLeading Together to Advance Philanthropy

Joint Letter Published in The New York Times

On Sunday, a New York Times opinion piece offered a troubling take on the state of the charitable sector. David Callahan, who writes for Inside Philanthropy, expressed his view that the sector is the “wild west” and is not properly regulated, using the example of the cancer charities fraud case that we reported on last week. Callahan takes a “kitchen sink” approach to calling out what he perceives as other issues within the sector, including accountability and transparency, payout rates, measures of effectiveness, and whether certain activities should be considered charitable. The points Callahan raises are not new, and have surfaced on and off for years.

The Council and other sector leaders seized the opportunity to respond and address the many inconsistencies and misperceptions about the sector that dominate Callahan’s piece. Of prime concern is the fact that Callahan’s sweeping approach is vastly over-simplified, and ignores the clear legal and practical distinctions between foundations and charities, let alone more subtle differences within those categories of organizations. He also misses the point of the cancer charity story entirely in his demand for more nonprofit oversight—the case against the cancer charities demonstrates exceptional oversight and cooperation by state attorneys general and the federal government.

“This effort should be applauded as an example of how to maintain the integrity of our charitable sector,” the Council’s response states. Others from the sector, including the Center for Effective Philanthropy, chimed in as well to point out that “Callahan’s proposed solutions are neither practical nor grounded in any sense of what’s transpired in the nonprofit sector in recent decades.”

The Council takes strong exception to this piece, and will continue our work to dispel such misguided notions about philanthropy. We urge our readers to check out the Council’s full response here.

News IconHappening Around the Globe

Letter Submitted to FATF

Last week, the Council, the European Foundation Centre, WINGS, and DAFNE co-signed a letter to the President of the Financial Action Task Force (FATF) requesting adoption of a formal engagement process with the global non-profit sector.

As we’ve mentioned in previous editions of Washington Snapshot, FATF is undertaking two proceedings in 2015 which will have a significant impact on the future shape of the regulatory environment for cross-border giving. One of these proceedings, revision of its Best Practices Paper on Recommendation 8 for combatting the diversion of the charitable funds to terrorist purposes, is well underway and will be finalized at the FATF plenary in June.

The Council on Foundations, working closely with partners in the sector, has mobilized global funders to ensure we can prevent detrimental changes and increase global philanthropic investments. This letter submission is a continuation of the Council’s work on FATF over the last 18 months. We will also work with the U.S. nonprofit sector on the upcoming FATF evaluation of domestic laws and regulations on anti-terrorist financing and money laundering, which impact the inflow and outflow of U.S. philanthropic dollars.

If you would like to learn more about FATF and why it’s relevant and important to US foundations, please join us for an upcoming webinar on Tuesday July 9th with WINGS, EFC, and the Spanish Association for Foundations – more information about the webinar is available here.

Council Submits Comments on Proposed Chinese Legislation

This week, the Council submitted comments to the Chinese government during their open comment period for their second draft of a new Overseas NGO Management legislation.

As our readers will recall, the Council held a call with members last week to discuss the law and its possible implications on non-Chinese foundations and nonprofits working in China. Following this discussion and continued analysis of the legislation, the Council drafted comments to express our concern that, if enacted in its current form, this legislation could significantly reduce the positive impact of philanthropic gifts and investments in China.

The Council’s comments highlight five primary concerns, including:

  1. The law is ambiguous as to which foreign organizations are required to register and comply with the law, and for what types of activities.
  2. The proposed dual-management system would require foreign organizations to obtain sponsorship and registration with a professional supervisory unit, and also be monitored by public security agencies.
  3. The assignment of the public security agencies to be in charge of registering and managing nonprofit organizations signals an inherent skepticism of foreign organizations.
  4. The requirement for foreign organizations conducting activities within the mainland for less than one year to obtain a professional supervisory unit, Chinese partner unit, and a temporary activity permit, is overly burdensome.
  5. The requirement for annual approval of an organization’s work plan by a professional supervisory unit will make it very difficult for foreign organizations to respond to time-sensitive needs like natural disasters.

You can read the Council’s full comments here. We will continue to monitor the progression of this legislation and provide updates on any new developments.

State Policy IconHappening in the States

States Looking to Nonprofits, Foundations to Fill Budget Gaps

Exclusively from our Colleagues at the National Council of Nonprofits

Several states continue to struggle with budget deficits in the aftermath of the Great Recession, leading many governors and legislators to look to nonprofits and private philanthropy as sources of revenue or alternatives to state-funding for programs.

To fill a budget deficit, the Vermont House sought to cap all itemized deductions, including for charitable giving, and the Senate considered several limits to charitable giving incentives such as restricting the deduction to donations to Vermont-based nonprofits. Effective advocacy by nonprofits and philanthropy in the state – up to and through the last night of the legislative session – ensured that neither option ultimately prevailed.

Efforts of Maine’s Governor to repeal itemized deductions and tax the property of some nonprofits have so far been unsuccessful, but the legislature remains in session for another two weeks. Kansas legislators still have not closed a $400 million budget gap, but rejected an effort to repeal nonprofit sales-tax exemptions. North Carolina policymakers continue to consider a cap on charitable deductions and drastic limits on sale-tax refunds to nonprofits.

The proposed budget submitted by Illinois’ new Governor called for drastic spending cuts, but not revenue increases, to close the state’s $6.6 billion deficit. The proposed cuts are so significant that private foundations have stepped forward to correct the perception that philanthropy can bail out the state and pay the tab for hundreds of programs providing vital human services. On May 19, Donors Forum of Illinois hosted a news conference to make clear that those in government “looking to philanthropy for a magic bullet to make the budget hole go away would have to look in other directions.” “These government cuts seriously undermine community resilience,” said Grace Hou, President of the Woods Fund Chicago. “They will directly affect thousands of working families and their children, seniors, veterans and others — forcing them to make even more difficult decisions about how to make ends meet.” Don Cooke with the Robert R. McCormick Foundation and Donors Forum Board Chair spoke for many when he warned, “We will do our best to help, but the impact will be even more dire as the starvation diet, begun in 2008, continues for years to come.”

Legal IconTrending in Legal Affairs

Answer: Unless it qualifies as one of these, IRC § 4944 subjects a private foundation to a 10% penalty for investing in a manner that ‘jeopardizes’ the carrying out of its exempt purposes.

What are Program-Related Investments?

From time-to-time, the Council’s legal team will receive inquiries regarding a foundation’s investment portfolio strategy. Often times, these strategies involve inexpensive financing mechanisms—like loans or lines of credit—to help charitable organizations and communities create jobs, acquire property or develop products or services and the like. Such program-related investments, or PRIs, are excepted from the jeopardy investment prohibitions of section 4944, which are defined as investments in which “the primary purpose” is to accomplish one or more charitable purposes, and that no significant purpose is the production of income or the appreciation of property.

The question then, which would certainly be worth Double Jeopardy! points, is: how would a foundation’s investments qualify as a PRI?

The legal team advises that in order to qualify as a PRI, the foundation’s investments, generally, must satisfy the following conditions:

  1. Pursuant to the treasury regulations, the “primary purpose” of the investment must be to accomplish one or more of the foundation’s exempt purposes.
  2. There must be “no significant investment purposes.” Usually, this requirement can be satisfied by providing for a below-market rate of return or a lower rate of return than what profit-seeking investors would demand.
  3. There must be “no lobbying or political purpose” behind the investment.

For more information on this or any other tricky legal matters, please contact the Council’s Legal Affairs team at legal@cof.org.

Access to the Council’s legal team is a valuable member benefit. Council attorneys are available to discuss your legal questions and to provide legal information by telephone, email and through our various publications and newsletters. This information is intended for educational purposes and does not create an attorney-client relationship. The information is not a substitute for expert legal, tax or other professional advice tailored to your specific circumstances, and may not be relied upon for the purposes of avoiding any penalties that may be imposed under the Internal Revenue Code.

News IconPhilanthropy News and Op-Eds

Knight Foundation Releases Report on Mayoral Elections and Millennials

The 2016 General Election season is certainly heating up, with new candidates entering the field nearly every week. With that in mind, we note with interest a new report from the Knight Foundation: Why Millennials Don’t Vote for Mayor – Barriers and Motivators for Local Voting.

In a blog post highlighting the release, Jonathan Sotsky, the Director of Strategy and Assessment for the Knight Foundation, describes how the research focused on the divide between millennials voting in national, but not local, elections. The report raises important questions and identifies several key reasons for low voter turnout by millennials at local elections, including a lack of: information, desire to seek accurate information, and understanding of the role and importance of local government.

To learn more, you can join the Knight Foundation for a Twitter chat at 1 p.m. ET on June 11 to discuss the findings and get public feedback. Follow @knightfdn and use #votelocal to participate.

New Federal Resource: Community Health Improvement Tools from the CDC

The Centers for Disease Control and Prevention (CDC) recently released the Community Health Improvement Navigator, a resource that is designed to support community organizations that are interested in improving the health of their communities. It contains targeted tools—including guidance, templates, and examples. A key feature of this Navigator is the search engine and database of proven, community-based interventions that can help move partnerships to improve community health and well-being from the planning stages to implementation and action.

This resource may be of particular interest to our readers who fund community health improvement initiatives, or work with organizations that focus their work in this area.