Nonprofit Law Blog

AB 624 - PRE Critical Issues Forum

The Philanthropic Initiative for Racial Equity (PRE) published Critical Issues Forum – Measuring What We Value in April 2008.  The Forum was prompted by California Assembly Bill 624, legislation mandating the collection and disclosure by large foundations of data about their grantmaking to minority and low-income communities.

In the Foreword, Gara LaMarche, president and CEO of the Atlantic Philanthropies, recognizes the slippery slope associated with passage of AB 624 and that “philanthropic pluralism and independence are not trifling concerns.”  Nevertheless, LaMarche cautions –

…foundation leaders should be careful not to over-argue our case.  It’s especially important in a time when the foundation field is increasingly preoccupied with “metrics,” outcomes and impacts, grantee accountability and the like, that we not exempt ourselves – and of all issues, the continuing barriers of race – from measurement.  Without measurement, you have no idea how much you have accomplished or how far you have to go.

Lori Villarosa, executive director of PRE, asserts that PRE’s goal at this stage “is to look beyond AB 624, with interest in reframing much of the debate toward meaningful and long term strategies to increase philanthropic support for racial and social justice.”

Rick Cohen, national correspondent of Nonprofit Quarterly magazine, in his overview analysis of AB 624, criticizes the response of three California grantmaker associations – “Rather than engaging the process, recognizing the legitimacy of the concerns … and designing a muscular approach to metrics for racial/ethnic equity, these associations are buying time.”  David Cournoyer, co-chair of the board of directors of Native Americans in Philanthropy, states that “[i]t’s difficult to have an honest discussion about diversity – much less equity and justice – when one side won’t put all its cards on the table.”  Rinku Sen, president and executive director of the Applied Research Center, offers recommendations for racial justice work and notes that “[l]egislation mandating that foundations gather data to reveal their funding patterns may be a start, but it may not, in the final analysis, lead to new racial outcomes in poverty, education, housing and health numbers.”  Makani Themba-Nixon, executive director of The Praxis Project, claims that data collection is not enough; what’s needed is “vigorous research that tells us how marginalized communities are faring; that can tell us if foundation grants are really making a difference in helping communities to achieve equity and justice.”  Arturo Vargas, executive director of the NALEO Educational Fund, argues that “for some in the nonprofit sector to suggest that gathering these data [required by AB 624] is inappropriate undermines our most fundamental values of social justice.”  Karen Zelermyer, executive director of Funders for Lesbian and Gay Issues (FLGI), states that “while almost all of these foundations [studied by FLGI] articulate a shared commitment to racial equity, very few translate their stated commitment into their grantmaking practices or internal operations.”

LaMarche concludes the Forward by echoing the theme of the Forum:

We should take advantage of the proposed legislation to elevate the discourse beyond the pros and cons of the bill’s proposed mandatory reporting requirements to focus on what philanthropy – and indeed the entire nonprofit sector – should be doing and asking not simply about commitments to diversity, but about advancing the cause of racial and ethnic justice.

Council on Foundations - 2008 Philanthropy Summit

The Council on Foundations is hosting Philanthropy's Vision: A Leadership Summit 2008 in the Washington Metropolitan Area from May 4-7.  The Summit represents the largest convening in the Council's history.

Monday's Lunch Plenary, Philanthropic Partnership:  Improving the Lives of Our Fellow Citizens, moderated by Gara LaMarche, featured Mary Robinson, Anthony Romero, and Kumi Naidoo.  The panel discussed domestic and international human rights issues and the role of philanthropy.  LaMarche is president and CEO of The Atlantic Philanthropies.  Robinson, the former president of Ireland and former United Nations high commissioner for human rights, is the president of Realizing Rights: The Ethical Globalization Initiative. Anthony Romero is executive director of the ACLU. Kumi Naidoo is secretary general of Civicus.

Robinson noted that this year marks the 60th anniversary of the Universal Declaration of Human Rights, which was adopted by the United Nations General Assembly in 1948 and represents the first comprehensive agreement among nations as to the specific rights and freedoms of all human beings.  She encouraged everyone to read the Declaration.  Robinson added that philanthropy can make a difference by funding grassroots NGOs that monitor enforcement of these international laws on human rights.

Robinson also observed that we operate with different definitions of human rights.  While many of us think of human rights to include such rights as those to free speech, freedom of religion and assembly, and due process, we must remember that they also include rights to food and security.  The current food riots are examples of what can occur when such rights are neglected.

Romero confessed that in his role with the ACLU, he was concerned with only domestic human rights.  However, we don't need to look past our borders to see government practices of torture (waterboarding), illegal spying, no due process, and the destruction of habeas corpus.  The War on Terror has also been a war on our civil rights and civil liberties.  Yet, there has been a lack of philanthropic funding of efforts to reclaim and protect our human rights.

Naidoo discussed one of the problems associated with foundation funding of human rights organizations - the need for short-term measurable outcomes.  He emphasized that the measurements for the effectiveness of these organizations should not be seen through the perspective of a race because "it's a marathon."  Naidoo paraphrased Einstein saying:  "Not everything that counts can be measured; and not everything that can be measured counts."

Naidoo added that wealthy countries have a responsibility to help poorer countries to ensure that their citizens have basic human rights.  Such citizens are not to be seen as charity cases.  As the world shared its sadness, sympathy, and support for America in the aftermath of 9/11, America should show similar compassion and support for Africa, where everyday is the equivalent of five 9/11s in terms of loss of life.  We are all connected, and global climate change will prove why we must pay attention to what is happening outside of our own country.

Review: Grassroots Philanthropy: Field Notes of a Maverick Grantmaker

Grassroots Philanthropy:  Field Notes of a Maverick Grantmaker by Bill Somerville* with Fred Setterberg is a book with a clear message to foundations:  accomplish more through grassroots grantmaking.  Somerville, President and Founder of Philanthropic Ventures Foundation and former longtime Executive Director of the Peninsula Community Foundation, suggests that this can be done by following his five-point program:

1. Locate outstanding people doing important work.
2. Move quickly (and shred paper).
3. Embrace risk.
4. Focus on ideas instead of problems.
5. Take initiative.

While these common sense ideas may not seem to be products of a maverick, their widespread implementation certainly would be revolutionary.  Somerville notes that foundations have enormous potential to transform American lives, but asks:  "Why aren't we - the entire philanthropic sector - doing  a much better job?"

Somerville emphasizes the importance of finding and investing in outstanding leaders.  To do so, foundation executives must spend more time in the communities in which they invest and less time reviewing documents behind their desks, and foundation boards must grant greater discretion to their executive directors and staff.  The book also advocates timely grantmaking in furtherance of innovative solutions and taking calculated risks.  Hear, hear.

Grassroots Philanthropy is just the kind of short, easy-to-read book of valuable insights that an executive might pass out to each of the directors at a board meeting.  A book club-style discussion at a following meeting might be one of the most productive sessions a foundation board can have.

"Blue Avocado" Launched April 15

Jan Masaoka, former long-time Executive Director of CompassPoint Nonprofit Services, started her next big thing by launching Blue Avocado this morning.  The online magazine for people involved with nonprofits is described by Jan in a message she sent to some of us bloggers:

Blue Avocado is a new online magazine--half magazine, half blog, half website--for people working and volunteering in nonprofits.  On the 1st and 15th of every month an email newsletter will be sent to subscribers, and the newsletter is replicated on the website. At the site, however, people can comment on articles, and see archives of all previous issues.  The newsletter I've been writing for 10 years--the Board Café (for nonprofit board members)--has expanded its scope and upgraded its technology to Blue Avocado.  Blue Avocado will be free to subscribe and free to register (in order to post comments), and will ask for public television-like member support.

Some insider info you won't find on the site:

• We're launching with 57,000 opt-in subscribers, and the first issue will be delivered 10,000 at a time over a period of six days.
• One of our upcoming features is "Worth Reading and Why," which is where we'll be able to promote items from your blogs or the blogs themselves. We expect to start this feature with the third issue (May 15).
• Blue Avocado will implicitly (rather than be lecturing) promote the racial, ethnic, age and sexual orientation diversity of the sector and a belief in cultural pluralism.
• Just as actors have "sub-texts" that are the backstory for a character, Blue Avocado has a sub-text of building the movement of community organizations for community good and social change. Community organizations are criticized by everyone these days: consultants tell them they're doing everything wrong; government tells them they're too small or mismanaged; donors tell them there are too many nonprofits, and foundations tell them their logic models aren't good enough. This very large group of organizations and people--the overwhelming majority of the nonprofit sector--are actually the ones doing most of the work and coming up with the most innovative ideas and energy.  But too often they've gotten infected with the self esteem crisis and victim mentality that is constantly being pushed on us.

There's a lot to like about this new site.  On my first visit, I enjoyed reading the following articles:

• Reasons to have - and reasons not to have - an attorney on the board
• Abolish board committees?
• Five Ways to Let Government Money Run You Over
• What Should We Do About an Employee's Outrageous Blog?
• Promises, Promises:  Rural Advocates vs. Big Philanthropy

Draft Instructions to 2008 Form 990 Released for Comment

The IRS released draft instructions to the 2008 Form 990 on April 7, 2008 and is seeking public comments on the draft.  The instructions are for the redesigned Form 990 that organizations will file for their 2008 tax year (returns filed in 2009), which was released in final form in December 2007.  The comment period is open until June 1, 2008.

Click here for access to the draft instructions.

California Assembly Bill 624 - Amended March 3, 2008

The controversial California Assembly Bill 624 was amended again on March 3, 2008, deleting the requirement that large private foundations (those with assets over $250 million) collect and report the following information:

• Business contracts awarded to businesses owned by lesbian, gay, bisexual, or transgender people.
• Percentage of grant dollars* awarded (i) to organizations serving different minority groups, (ii) to organizations where a majority of the board consists of minority members, and (iii) to low-income communities.

* Instead of requiring disclosure of a percentage of grant dollars, the amended bill requires disclosure of the number of grant dollars.

In addition, the bill now makes clear that it is interested in the disclosure of the number of grants and grant dollars awarded to organizations specifically serving minority and underrepresented communities.  Prior to the latest amendment, the bill referred to organizations serving such communities without adding the clarifying word "specifically."

The Nonprofit & Unincorporated Organizations Committee of the Business Law Section of The State Bar of California reaffirmed its opposition to the bill, as amended, in a statement of position dated March 27, 2008.  The Committee's opposition is based on the following factors:

• Unconstitutionality of intruding into the personal affairs of the board members and staff of foundations, grant recipients, beneficiaries, and businesses that interact with foundations.
• Cost and burden to the covered foundations and to their grant recipients and their beneficiaries.
• Doubt as to the foundations covered by the bill because of use of undefined terms and ambiguous phrases (e.g., corporations "deemed" to be "corporate" or "private operating" foundations).
• Rights of donors in the voluntary sector to choose how their donations are to be spent (within the scope of the law), which would be compromised by the political considerations of not including the promotion of ethnic and gender participation created by the bill.

The Committee also criticized the bill for its textual defects and the practical problems of interpretation and compliance that would result with its passage.  The Committee adds that "even fixing these problems will not overcome the fatal failures of the bill mentioned above."

As a person of color who is critical of the lack of foundation support to minority communities, I understand and sympathize with the goals of the legislation (but I remain unconvinced that legislation is the best solution).  As a lawyer, I am perplexed by the poor drafting (even after multiple amendments).  And as an advocate of the nonprofit sector, I question why the Greenlining Institute, the organization whose research and advocacy prompted Assemblyman Joe Coto's introduction of the bill, did not seek the input of the Council on Foundation identity-based affinity groups such as Asian Americans/Pacific Islanders in Philanthropy, Hispanics in Philanthropy, Native Americans in Philanthropy, and Funders for Lesbian and Gay Issues; and other organizations with a vested interest in these issues such as the National Center for Black Philanthropy and Bay Area Blacks in Philanthropy.

On March 3, Orson Aguilar, associate director of the Greenlining Institute, contacted me to set up a meeting "to provide more background the lack of foundation support to non profits that serve and are run by people of color."  I'm hoping to hear back from him. In the meantime, you can find notes on Greenlining's nationwide briefing on March 12 here.

Read the amended AB 624 here.

Final 501(c)(3) and 4958 Regulations Released - Part II

The IRS released final regulations that clarify (i) the substantive requirements for tax exemption under section 501(c)(3) of the Internal Revenue Code; and (ii) the relationship between the substantive requirements for tax exemption under section 501(c)(3) and the imposition of section 4958 excise taxes on excess benefit transactions.  The regulations became effective March 28, 2008.

Another change made by the final regulations is the addition of new paragraph (f), which discusses the interaction with section 4958.  (Note that the former paragraph (f) is redesignated as paragraph (g).)  Generally, the regulations make clear that an organization may be subject to revocation of its exempt status as a 501(c)(3) organization at the same time its disqualified persons are subject to excise taxes under section 4958.  The IRS will consider the following facts and circumstances, among others, in determining whether to revoke exempt status of an applicable organization that engages in an excess benefit transaction:

• The size and scope of the organization’s regular and ongoing activities that further exempt purposes before and after the excess benefit transaction or transactions occurred;
• The size and scope of the excess benefit transaction or transactions (collectively, if more than one) in relation to the size and scope of the organization's regular and ongoing activities that further exempt purposes;
• Whether the organization has been involved in multiple excess benefit transactions with one or more persons;
• Whether the organization has implemented safeguards that are reasonably calculated to prevent excess benefit transactions; and
• Whether the excess benefit transaction has been corrected (within the meaning of section 4958(f)(6) and section 53.4958-7), or the organization has made good faith efforts to seek correction from disqualified person(s) who benefited from the excess benefit transaction.

The examples illustrating the application of the above factors in the decision to revoke 501(c)(3) status place great weight on the implementation of safeguards reasonably calculated to prevent future excess benefit transactions.  The fact patterns in the examples include an art museum that purchases art from its trustees at more than fair market value; an organization whose CEO diverts charitable funds to pay his or her own personal expenses; an organization that sells its building to a company owned by its CEO for less than fair market value; a large organization that pays $2,500 of its CFO's personal expenses, but not pursuant to an accountable plan and without reporting such payment as income; and a large organization that pays excessive compensation to its top executives despite following the rebuttable presumption procedures.  In the last fact pattern, the board renegotiates salaries to ensure that they are just and reasonable but does not seek avoidance of the employment contracts or correction of the excess benefit amounts.  Nevertheless, the organization's tax-exempt status would not be revoked.

The Final Regulations are available here.   

Final 501(c)(3) and 4958 Regulations Released - Part I

The IRS released final regulations that clarify (i) the substantive requirements for tax exemption under section 501(c)(3) of the Internal Revenue Code; and (ii) the relationship between the substantive requirements for tax exemption under section 501(c)(3) and the imposition of section 4958 excise taxes on excess benefit transactions.  The regulations became effective March 28, 2008.

One of the changes made by the final regulations is the addition of examples to Treasury Regulation 1.501(c)(3)-1(d) (Exempt purposes) which illustrate the requirement that an organization serve a public rather than a private interest.

The first example involves an educational organization that focuses on the genealogy of one family and actively solicits for membership only the members of such family.  This example may have derived in part from the controversy over Health and Human Services Secretary Mike Leavitt's family charitable foundation, The Dixie and Anne Leavitt Foundation.  The Leavitt Foundation is a Type III supporting organization that supports such public charities as the Western Association of Leavitt Families ("WALF").  WALF's activities focus on research of the Leavitt family genealogy and include publishing a genealogical book for sale, erecting monuments to deceased family members, and paying for a genealogical trek commemorating the path of Leavitt ancestors.  The new example makes clear that such activities primarily serve the private interests of the members of one family rather than a public interest, and the educational organization in the example would consequently fail the operational test.

The second example involves an art museum that exhibits and sells art created by a group of unknown artists.  The sales price for such art is determined by the artist and the museum retains 10 percent of the sales price under a consignment agreement.  Such an arrangement causes the museum to be operated for the benefit of private interests, and the museum would consequently fail the operational test.

The third example involves an educational organization whose sole activity consists of training individuals in a program developed by the organization's President and owned by the President's company (the "Company").  The organization licensed the program from the Company, which was the former operator of the program.  Under the license agreement, the Company provides the organization with the services of trainers and course materials, sets the tuition, and retains ownership of any new course materials that the organization develops in connection with the program in return for royalty payments.  Such an arrangement causes the organization to be operated for the benefit of private interests, and the organization would consequently fail the operational test.

AAPIP Conversation with Leaders: Gordon Chin and Jan Masaoka

On March 13, the San Francisco Bay Area chapter of Asian Americans/Pacific Islanders in Philanthropy (AAPIP), an affinity group of the Council on Foundations, held a program featuring two prominent nonprofit leaders:  Gordon Chin, founding Executive Director of the Chinese Community Development Center (CCDC), and Jan Masaoka, former Executive Director of CompassPoint Nonprofit Services and current Editor-in-Chief of Blue Avocado, an online magazine launching in April.

Some of the gems I got from the program -

• Young leaders in the nonprofit sector need to receive more criticism.  We're good at giving and receiving positive feedback, but often what's most needed is honest feedback that tells us where we're doing a bad job and need to improve.
• A great way to get this type of feedback is to ask your board after each meeting:  What is the best thing I did at this meeting?  What is the worst thing I did at this meeting?
• CCDC serves the community; CCDC is not the community.  The community will persist even if an organization serving the community does not.
• A leader may best serve his or her organization by being the type of person who the organization needs him or her to be at that time.  Sometimes that may be the quiet, thoughtful leader; other times that may the vocal advocate. 

From a legal perspective, great leadership lowers the risk of liability to an organization and its directors and officers.  Education, support, and constructive criticism can help develop great leaders.

The Carissa Project - Bay Area Screening

On March 18, I attended the Bay Area screening of Carissa, a documentary about Carissa Phelps, an incredibly strong young woman who went from being an abandoned and victimized street kid to a graduate of UCLA with both a law degree and an MBA.  Carissa brings Ms. Phelps back to "Motel Drive," a gritty street in Fresno where she once worked as a child prostitute.

The movie is both heartbreaking and inspiring.  No child should have to overcome such obstacles, but far too many kids can identify with Carissa's past.  And far too few are able to achieve their dreams.

Carissa credits her counselor and her algebra teacher at Fresno's juvenile hall with her turnaround.  They cared about her, and they believed in her.  After the screening of the film, Carissa left us with these words from her algebra teacher - "A girl with the potential to go anywhere she wants, and she has!"

Now, Carissa is focused on fulfilling her destiny to eliminate street prostitution of children, one neighborhood at a time.  She has started her efforts in Fresno, a city in the Central Valley which has always struggled to attract philanthropic funding.  Here's hoping that Carissa and Carissa will achieve her goal and find the support so badly needed.  If you'd like to make a difference, investing in a project led by this amazing, intelligent woman should give you confidence of a great return.  I particularly urge California foundation leaders and staff to take a closer look at The Carissa Project's efforts.

Click here to learn more about The Carissa Project.