Washington Snapshot - March 4, 2016

News from the Hill

Congress Grows More Skeptical of Universities

This Wednesday, the Ways and Means Oversight Committee held a hearing entitled: Protecting the Free Exchange of Ideas on College Campuses. Though the motivation for this hearing perhaps stemmed from previously expressed skepticism among lawmakers on the Hill, this hearing did not make mention of university endowments.

Oversight Committee Chairman Peter Roskam (R-IL-6) shared his thoughts, stating that “Most colleges and universities—both public and private—are [in some way] tax-exempt” and that the 501(c)(3) tax-exempt status that many of them enjoy comes with the responsibility to fulfill their “educational mission” by providing value to society. He questioned whether universities may be jeopardizing their educational missions by implementing overly-restrictive rules for political activity on campus to preserve 501(c)(3) status.

Other members of the committee, including Representative Joe Crowley (D-NY-14), voiced concerns that the committee was “searching for a problem where no problem exists.”

New Bill on Interest and Dividend Contributions

Just yesterday, Representative Erik Paulsen (R-MN-3) introduced a bill that would exclude from a donor’s gross income up to $50 of interest or dividends contributed by an individual, trust, or estate to an organization described in section 170(c) of the Internal Revenue Code, which includes gifts to qualifying private foundations, public charities, and supporting organizations of donor advised funds. Representative Paulsen’s bill, named the Interest for Others Act of 2016 (H.R. 4706), would make contributions of up to $50 in interest or dividends an “above-the-line deduction” available to all taxpayers.

As a reminder, the charitable deduction is a “below-the-line-deduction” that is only available to taxpayers who itemize their deductions. Representative Paulsen’s bill would exclude from gross income Interest or dividends earned in an account with a “financial institution” or dividends paid with respect to shares in a “money market fund,” and contributed to a qualifying organization under a “qualified program” adopted by a financial institution or money market fund. These “qualified programs” would be formally adopted by institutions, and would allow the account owner to elect to have interest or money market fund share dividends contributed an account directly to one or more specified charities.

The Council will follow this bill closely and let our readers know if it advances past the committee level.

Executive & Regulatory News

IRS Speaks on Scholarship Grant Procedures for Private Foundations

A private foundation seeking advance approval by the IRS on its proposed scholarship grant procedures received a ‘thumbs-up’ from the IRS.

The proposed scholarship grant procedures would “provide tuition assistance to members of the [redacted] chapter of [redacted] at [anonymous institution]” for “certain academically qualified students only for the spring semester who are pursuing an undergraduate, graduate, or post-graduate education.” Scholarship application requirements include information such as: name, hometown, anticipated year of graduation, major/minor, cumulative GPA, other sources of funds available to pay tuition, and a description of the applicant’s involvement with [redacted]. Scholarship recipients are selected by a committee of the foundation on an objective, non-discriminatory basis.

The IRS determined that, so long as the foundation executed these procedures as written and in accordance with all other provisions set forth in the tax code to regulate the awarding of scholarships, this proposal would meet the requirements laid out in section 4945(g)(1) of the Internal Revenue Code.

Though this determination was case-specific for only one foundation and does not establish explicit precedent, it provides some insight into how the IRS may handle similar cases.

Nonprofit Engagement with SCOTUS Nomination

With the unexpected passing of U.S. Supreme Court Justice Antonin Scalia, there has been a great deal of discussion around the country about the nomination and appointment of a new justice.

Among many 501(c)(3) tax-exempt organizations that engage in mission-driven advocacy, this matter is a topic of interest for engagement and advocacy. As is the case with any matter of interest, nonprofits are certainly allowed to share their opinions and expertise on this topic—so long as all activity is within the limits of permissible activity for advocacy and lobbying.

Additionally, there is a further layer of precautions that organizations should consider in light of the fact that this is an election year. For more information on the topic of permissible advocacy and lobbying activity by foundations, we suggest checking out the following resources:

• Webinar Recording: Washington Update – The Rules of Engagement for 2016
• For Council Members: Election Year Politics – What Foundations Need to Know
• Learn Foundation Law: Advocacy and Lobbying Rules for Private Foundations

If you have any questions about advocacy or lobbying as it relates to this topic, please contact the Council’s Legal Affairs team at legal@cof.org.

FASB Seeks Foundation Input

The Financial Accounting Standards Board (FASB) has reached out to the Council in order to gather input on how possible changes to nonprofit accounting guidance might affect the programmatic and investment activities of foundations.

Specifically, FASB is working to determine whether there is a need to clarify when a nonprofit entity that is a general partner of a for-profit limited partnership should consolidate that LLP (or similar vehicle).

If you would like to learn more about these proposed changes, or give insight about how this would impact your organization, please contact Associate Director of Social Innovation John Cochrane.

Trending in Legal Affairs

DAFs & Successors: Can't We All Just Get Along?

A community foundation recently contacted the Council’s legal team with an inquiry about naming a successor—or successors—for a donor advised fund (DAF).

In this particular situation, a potential donor wished to establish a DAF where his children are named as the successors—but was concerned that the different siblings may disagree about distributions from the fund when they acquired control as successors. The donor wondered whether the agreement for establishing a DAF could include a provision that would split the DAF into multiple, separate funds with his children named, individually, as a successor to each.

The legal team advised that including such a provision in the agreement was permissible, so long as the power for deciding to split the fund ultimately belonged to the foundation. For example, using language to indicate that: in the instance of having multiple successors named one fund, where the successors’ interests are incompatible, the foundation may use its discretion to divide the fund into two or more funds, subject to the same terms and conditions as the original fund, and also subject to separate fees.

The legal team emphasized that the most important requirement here is that the decision-making authority to split the fund remain with the foundation rather than occur at the directive of a donor.

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.

Happening in the States

Exclusive from our colleagues at the National Council of Nonprofits.

Nonprofits, Constitution Face Challenges Across the States

Several bills working their way through state legislatures this session could be dangerous to well-settled principles of law, constitutionally protected rights, or generally accepted business practices.

Executive compensation is in the spotlight at the Connecticut and Florida Legislatures, as politicians consider imposing caps on salaries in order to achieve other policy objectives. A Connecticut bill would make nonprofit hospitals liable for local property taxes if they pay individual hospital administrators more than $500,000 per year. A bill in the Florida House seeks to cap employee salaries at “nongovernmental,” “quasi-governmental,” or “not-for-profit” organizations that contract with the state. The legislation would prevent contractors from paying employees more than the highest paid government official at a relevant state agency.

Scandal in the Governor’s office and at a nonprofit human service provider motivated an Oregon legislator to introduce a bill mandating that public employers and all nonprofit employers, but not for-profit employers, establish whistleblower policies, require attorneys to report perceived law violations, and impose liability for violations of the legislation. As a result of aggressive advocacy efforts, the bill has been revised to apply only to nonprofits that have government contracts and grants, which are already required to provide whistleblower protections under current law. The bill passed both houses and is awaiting the new Governor’s expected signature.

Finally, advocacy rights, and the constitution, are on the chopping block in Oklahoma as legislators and agricultural interests seek to reign in fundraising and speech of “animal rights” organizations. Legislation passed the Oklahoma House this week that would prohibit animal rights nonprofits from soliciting contributions in the state for programs or functional expenses outside of Oklahoma, or raising funds intended to be used for “political purposes” inside or outside the state. The Supreme Court has consistently ruled that fundraising is an exercise of free speech and that the Commerce Clause protects nonprofits and others from state-imposed limits on interstate commerce, raising the specter that the proposed legislation is unconstitutional on many levels.

Philanthropy News and Op-Eds

The Potential and Limitations of Pay for Success

On Wednesday, Council staff attended an event hosted by the Brookings Institution, The Global Potential and Limitations of Impact Bonds, to discuss new research into emerging tools for philanthropy.

The day-long event began with an overview of existing social impact bonds (SIBs), which are often referred to as “pay for success contracts” in the United States, before exploring the specific ways they can be used to support global programs in early childhood development.

In his keynote address, Sir Ronald Cohen discussed efforts to promote Impact Investing in the US through the application of federal policy. Sir Ronald is founder of Social Finance, an impact bond intermediary organization with arms in the US and UK, that was instrumental in promoting the creation of funds to finance SIBs in the UK. Specifically, he expressed his hope that legislation currently stalled in committees of the House and Senate might move forward before this Congress adjourns.

One such piece of legislation, the Social Impact Partnerships Act - S.1089, would create a federal fund to support state and local initiatives that base payment on results. The legislation has bipartisan support, with Speaker Ryan included among the House co-sponsors. Nevertheless, questions over how to fund the $300 million proposal, amidst broader partisan gridlock over the budget, have led the bills to languish since being introduced.

Though most of the presenters at the event came from organizations actively promoting SIBs, the Brookings researchers were careful to point out some of the limitations of the model and the results so far. For instance, the research noted the relative lack of scale in deals to date, the largest of which targets a population of 18,000. Skeptics in the audience also raised concerns over the ability of SIBs to attract enough new capital for social projects to justify the costs of rigorous evaluation and added overhead for structuring. Proponents responded that the more important goal was not to “increase the pie,” but rather to improve the efficiency with which public and philanthropic resources are deployed through an outcomes based approach.

For more information about impact investing, please contact Associate Director of Social Innovation John Cochrane.