The search for greater accountability of nonprofit organizations: Recent legal developments and proposals for change

Fordham Law Review

Volumn 76, Issue 2, 2007, Pages 609-646

  Fremont Smith, Marion R ^a  

^a HARVARD UNIVERSITY   (United States)

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EID: 38049153417     PISSN: 0015704X     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Conference Paper

References (256)

1. The term "charities" as used herein refers to organizations described in § 501(c)(3) of the Internal Revenue Code that are eligible to receive contributions that are deductible by their donors for federal tax purposes. In some instances it also includes organizations exempt from tax by virtue of being described in Internal Revenue Code § 501(c)(4), many of which are considered charities under state law. The remaining universe of nonprofit organizations described in § 501 are not subject to the constraints under either federal or state law described herein, nor are they the focus of current interest in reform.
2. See generally Marion R. Fremont-Smith, Governing Nonprofit Organizations: Federal and State Law and Regulation (2004) (providing detailed descriptions of the history of charity, existing laws, and enforcement regimes referred to herein together with proposals for reform).
3. Restatement (Third) of Trusts: Prudent Investor Rule § 227 (1992).
4. See Unif. Prudent Investor Act, 7B U.L.A. 15 (2006); see also Cornell Univ. Law Sch., Uniform Business and Financial Laws Locator (Apr. 2003), http://www.law.cornell.edu/uniform/vol7.html#pruin (listing state statutes).
5. See Nat'l Conference of Comm'rs on Unif. State Laws, A Few Facts About the Uniform Trust Code, http://www.nccusl.org/update/ uniformact_factsheets/uniformacts-fs-utc2000.asp (last visited Sept. 28, 2007).
6. Unif. Trust Code § 413 cmt. (amended 2005), 7C U.L.A. 509.
7. Id. § 405 cmt.
8. Unif. Mgmt. of Inst. Funds Act, 7A pt. 3 U.L.A. 11 (2006).
9. See Nat'l Conference of Comm'rs on Unif. State Laws, A Few Facts About the Uniform Prudent Management of Institutional Funds Act, http://www.nccusl.org/nccusl/uniformact_factsheets/uniformacts-fs-upmifa.asp (last visited Sept. 28, 2007).
10. Principles of the Law of Nonprofit Orgs. (Council Draft No. 4, 2006); see Garry W. Jenkins, Incorporation Choice, Uniformity, and the Reform of Nonprofit State Law, 41 Ga. L. Rev. 1113, 1139-41 (2007).
11. Revised Model Nonprofit Corp. Act (RMNCA) (1987).
12. Unif. Supervision of Trs. for Charitable Purposes Act, 7C U.L.A. 350 (2006).
13. See Fremont-Smith, supra note 2, at 311-17.
14. See generally Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745 (codified in scattered sections of 11, 15, 18, 28, 29 U.S.C).
15. Nonprofit Integrity Act of 2004, Cal. Gov't Code § 12586 (West 2004).
16. See Cal. Assembly Comm. on Judiciary, S.B. 1262 Bill Analysis (2004), http://www.leginfo.ca.gov/pub/03-04/bill/sen/sb_1251-1300/ sb_1262_cfa_20040621_122508_asm_comm.html;
17. Cal. Senate Judiciary Comm., S.B. 1262 Bill Analysis (2004), http://www.leginfo.ca.gov/pub/03-04/bill/sen/sb_1251-1300/ sb_1262_cfa_20040421_152826_sen_comm.html.
18. Eliot Spitzer, Attorney General's Legislative Program Bill No. 68-05 (n.d.), available at http://www.oag.state.ny.us/charities/char_pdf/ag68- 05memo.pdf;
19. see also N.Y. Legislative Bill Drafting Comm'n, Program Bill No. 68-05 (2005), available at http://www.oag.state.ny.us/charities/char_pdf/ ag68-05.pdf.
20. S.B. 4836-B(g)(1), 226th Leg., Reg. Sess. (N.Y. 2003).
21. N.Y. Att'y Gen.'s Legis. Prog. B. No. 68-05, available at http://www.oag.state.ny.us/charities/char_pdf/ag68-05.pdf.
22. N.Y. Not-for-Profit Corp. Law § 1002 (Consol. 2006).
23. S.B. 1215, 79th Leg., Reg. Sess. (Tex. 2005).
24. S.B. 73, 24th Leg., Reg. Sess. (Haw. 2007).
25. Mass. Gen. Laws ch. 12, § 8F (2006); N.H. Rev. Stat. Ann. § 7:19 (2006).
26. Cal. Gov't Code § 12586 (West 2004).
27. See Fremont-Smith, supra note 2, at 55, 476-95.
28. See Cal. Assembly Comm. on Judiciary, supra note 16; Cal. Senate Judiciary Comm., supra note 16; see also Marion Fremont-Smith, Summary Charts: State Nonprofit Corporation Act Requirements and Audit Requirements for Charitable Organizations (2007), available at http://www.ksg.harvard.edu/hauser/PDF_XLS/MFS_Summary_Charts.pdf.
29. Cal. Corp. Code § 5227 (West 2006); Me. Rev. Stat. Ann. tit. 13-B, § 713A (2006); N.H. Rev. Stat. Ann. § 7:19-a (2006); N.D. Cent. Code § 10-33-27 (2006); Vt. Stat. Ann. tit. HB, § 8.13 (2006).
30. N.H. Rev. Stat. Ann. § 7:19-a (2006).
31. See Fremont-Smith, supra note 2, at 52.
32. See generally Proposed Model Nonprofit Corp. Act, Third Ed., source notes (Exposure Draft 2006), available at http://meetings.abanet. org/webupload/commupload/CL580000/sitesofinterest_files/MNCAexposuredraft.doc.
33. Id. § 8.12(c).
34. See, e.g., Michael Klausner & Jonathan Small, Failing to Govern? The Disconnect Between Theory and Reality in Nonprofit Boards, and How to Fix It, Stan. Soc. Innovation Rev., Spring 2005, at 42.
35. Principles of the Law of Nonprofit Orgs. § 320 cmt. b(2) (Discussion Draft 2006).
36. See id.
37. Id. cmt. g(3).
38. See Fremont-Smith, supra note 26.
39. Commentators offered their comments on tax-exempt reform proposals in a roundtable discussion held July 22, 2004. See S. Finance Comm., Papers for Charitable Roundtable, http://finance.senate.gov/sitepages/round.htm (last visited Oct. 6, 2007).
40. Staff of S. Fin. Comm., Staff Discussion Draft, 108th Cong. 13 (2004), available at http://www.senate.gov/~finance/hearings/testimony/2004test/ 062204stfdis.pdf.
41. Spitzer, supra note 17 (summarizing New York Attorney General's Legislative Program Bill No. 68-05).
42. Principles of the Law of Nonprofit Orgs. § 370 (Discussion Draft 2006).
43. Revised Model Nonprofit Corp. Act § 8.30(d) (1987) (shield); id. § 2.02(b)(5) (exception).
44. Statute of Charitable Uses, 1601, 43 Eliz., c. 4 (Eng.).
45. See Fremont-Smith, supra note 2, at 118-21.
46. See id.
47. Restatement (Second) of Trusts § 368 cmt. a (1959).
48. Id. cmt. b.
49. Restatement (Third) of Trusts § 28 cmt. a (2003).
50. Restatement (Third) of Trusts § 28 cmt. a (2003); Restatement (Second) of Trusts § 368 cmt. b (1959).
51. See Fremont-Smith, supra note 2, at 122.
52. See id. at 117-25.
53. See id.
54. See Treas. Reg. § 1.501(c)(3)-1 (2006); Principles of the Law of Nonprofit Orgs. § 210 (Preliminary Draft No. 3, 2005); Restatement (Third) of Trusts § 28 (2003).
55. Charities Act, 2006, c. 50 (Eng.).
56. See id. pt. I, § 2.
57. See Explanatory Notes to Charities Act, 2006, c. 50 (Eng.) para. 25, available at http://www.opsi.gov.uk/acts/en2006/2006en50.htm.
58. Unif. Mgmt. of Inst. Funds Act, 7A pt. 3 U.L.A. 35 (2006).
59. Susan N. Gary, Revisions to the Uniform Management of Institutional Funds Act § 6 (2004), available at http://www.abanet.org/rppt/ meetings_cle/spring2004/pt/UMIFA/gary.pdf.
60. Unif. Prudent Mgmt. of Inst. Funds Act § 6(a), 7A pt. 3 U.L.A. 20 (Supp. 2007).
61. Principles of the Law of Nonprofit Orgs. § 430(b) (Preliminary Draft No. 3, 2005).
62. Id. § 450 cmt. c.
63. Restatement (Third) of Trusts § 67 cmt. d (2003) (emphasis omitted).
64. Id.
65. Id. § 8.
66. Id. § 8 cmt. g.
67. See id.
68. Unif. Trust Code § 413(b), 7C U.L.A. 509 (2006).
69. Id. § 413 cmt.
70. Principles of the Law of Nonprofit Orgs. § 425 (Preliminary Draft No. 3, 2005).
71. Id. § 425(b).
72. See L.B. Research and Educ. Found, v. UCLA Found., 29 Cal. Rptr. 3d 710 (Ct. App. 2005); Smithers v. St. Luke's-Roosevelt Hosp. Ctr., 723 N.Y.S.2d 426 (App. Div. 2001).
73. Principles of the Law of Nonprofit Orgs. § 750 cmts. a-b (Preliminary Draft No. 3, 2005).
74. See Fremont-Smith, supra note 2, at 341-42.
75. Unif. Trust Code § 405, 7C U.L.A. 485 (2006).
76. Id. § 405(c).
77. Id. § 405 cmt.
78. Id. § 413 cmt.
79. Id. § 405 cmt.
80. See Ronald Chester, Grantor Standing to Enforce Charitable Transfers Under Section 405(c) of the Uniform Trust Code and Related Law: How Important Is It and How Extensive Should It Be?, 37 Real Prop. Prob. & Tr. J. 611, 614 (2003).
81. See generally Evelyn Brody, From the Dead Hand to the Living Dead: The Conundrum of Charitable-Donor Standing, 41 Ga. L. Rev. 1183 (2007).
82. See Smithers v. St. Luke's-Roosevelt Hosp. Ctr., 723 N.Y.S.2d 426 (App. Div. 2001).
83. See L.B. Research & Educ. Found, v. UCLA Found., 29 Cal. Rptr. 3d 710 (Ct. App. 2005).
84. See generally John K. Eason, Private Motive and Perpetual Conditions in Charitable Naming Gifts: When Good Names Go Bad, 38 U.C. Davis L. Rev. 375 (2005).
85. See id.
86. See supra note 57.
87. Unif. Prudent Mgmt. of Inst. Funds Act § 6, 7A pt. 3 U.L.A. 20 (Supp. 2007).
88. 75 Del. Laws 97 § 3 (2005) (amending Del. Code Ann. tit. 12, § 3303 (2001)).
89. See Fremont-Smith, supra note 2, at 174-82.
90. See id.
91. Restatement (Second) of Trusts § 399 (1959).
92. Restatement (Third) of Trusts § 67 (2003).
93. Id.
94. Id. § 67 cmt. c.
95. Unif. Trust Code § 413(a), 7C U.L.A. 509 (2006).
96. Id. § 413 cmt.
97. Id.
98. Id.
99. Id.
100. Id.
101. Id. § 405 cmt.
102. Id. § 405(b).
103. Id. § 405 cmt.
104. Principles of the Law of Nonprofit Orgs. § 440 cmt. a (Preliminary Draft No. 3, 2005).
105. Id. § 440(d).
106. Unif. Prudent Mgmt. of Inst. Funds Act § 2(5), 7A pt. 3 U.L.A. 6 (Supp. 2007), available at http://www.law.upenn.edu/bll/ulc/umoifa/ 2006final_act.htm.
107. Id. § 6(b)-(c).
108. Id. § 6(b).
109. Id. § 6(c).
110. See id. § 6(d).
111. See Fremont-Smith, supra note 2, at 179.
112. See U.S. Trust Co. v. Att'y Gen., 854 N.E.2d 1231 (Mass. 2006).
113. Id. at 1232.
114. Id. at 1235.
115. Id.
116. Id.
117. See infra notes 191-95 and accompanying text.
118. Charities Act, 1993, c. 10, § 13 (Eng.).
119. Charities Act, 2006, c. 50, § 18 (Eng.).
120. See id. § 18(4).
121. Id.
122. Restatement (Third) of Trusts § 67 (2003); Restatement (Second) of Trusts § 399 (1959).
123. See Principles of the Law of Nonprofit Orgs. § 240 cmt. a (Preliminary Draft No. 3, 2005).
124. See id.
125. See id. § 240(c)(1).
126. See id. § 240(c)(2).
127. See id. § 240(a).
128. See id. § 240 cmt. a.
129. See id.
130. See id. § 240 cmt. d (quoting Att'y Gen. v. Hahnemann Hosp., 494 N.E.2d 1011, 1021 n. 18 (Mass. 1986)).
131. Id. § 245.
132. Id. § 245 cmt. a.
133. See Fremont-Smith, supra note 2, at 185.
134. N.Y. Not-for-Profit Corp. Law § 1005 (Consol. 2006).
135. Treas. Reg. § 1.501(c)(3)-1(b)(4) (2006).
136. See Rev. Proc. 82-2, 1982-1 C.B. 367.
137. See Fremont-Smith, supra note 2, at 476-95.
138. See id. at 317.
139. See Nonprofit Integrity Act of 2004, CaL Gov't Code § 12586 (West 2004); N.Y. Not-for-Profit Corp. Law § 1002 (Consol. 2006).
140. Compare Office of Mass. Att'y Gen. Tom Reilly, An Act to Promote the Financial Integrity of Public Charities: Summary of Draft 1.0 (n.d.), available at http://www.cof.org/files/Documents/ Building%20Strong%20Ethical%20Foundations/Mass_AG. Act_to_promote_fin_integ_pub_charities.pdf (last visited Oct. 27, 2007), with H.B. 4347, 184th Gen. Court, Reg. Sess. (Mass. 2005).
141. Ohio Att'y Gen., Proposed Changes to Ohio Administrative Code 109:1-1, http://www.ag.state.oh.us/spotlight/cgrules.asp (last visited Oct. 27, 2007).
142. See id.
143. Revised Proposed Changes to Ohio Administrative Code 109:1-1 (n.d.), available at http://www.oano.org/Docs/AG_Revised.pdf (last visited Oct. 27, 2007).
144. See David Biemesderfer & Andras Kosaras, Forum of Reg'l Ass'ns of Grantmakers & Council on Founds., The Value of Relationships Between State Charity Regulators & Philanthropy (2006), available at http://www.givingforum.org/s_forum/bin.asp?CID=4115&DID=9298&DOC=FILE. PDF (conducting a study of several models of nonprofit sector and attorney general working relationships).
145. Solicitation for Charity Act, 225 Ill. Comp. Stat. Ann. 460/23 (West 2007).
146. See Nonprofit Organizations Oversight Improvement Amendment Act of 2007, 54 D.C. Reg. 4085 (Apr. 19, 2007) (amending D.C. Code §§ 28-3901(a)(3), 29-301.53, 44-1712(c) (2001)).
147. S.B. 1215, 79th Leg., Reg. Sess. (Tex. 2005).
148. S.B. 73, 24th Leg., Reg. Sess. § 2 (Haw. 2007).
149. Id. § 6(g).
150. See Fremont-Smith, supra note 2, at 432.
151. See id.
152. See id. at 366-67.
153. See Staff of S. Fin. Comm., supra note 38.
154. See Taking the Pulse of Charitable Care and Community Benefits at Nonprofit Hospitals: Hearing Before the S. Comm. on Finance, 109th Cong. (2006) (statement of Sen. Chuck Grassley, Chairman, S. Fin. Comm.).
155. See Minority Staff of S. Comm. on Fin., 109th Cong., Investigation of Jack Abramoff's Use of Tax-Exempt Organizations (Comm. Print 2006) [hereinafter Abramoff Investigation].
156. See The Tax-Exempt Hospital Sector: Hearing Before the H. Comm. on Ways and Means, 109th Cong. 4-7 (2005) [hereinafter The Tax-Exempt Hospital Sector] (statement of Bill Thomas, Chairman);
157. Review of Credit Union Tax Exemption: Hearing Before the H. Comm. on Ways and Means, 109th Cong. 4-6 (2005) [hereinafter Credit Union Tax Exemption] (statement of Bill Thomas, Chairman).
158. See Staff of J. Comm. on Taxation, 109th Cong., Options to Improve Tax Compliance and Reform Tax Expenditures (Comm. Print 2005) [hereinafter Staff of J. Comm.], available at http://www.house.gov/jct/s-2-05.pdf.
159. See Fremont-Smith, supra note 2, at 72-76.
160. See Letter from Sen. Chuck Grassley, Chairman, S. Fin. Comm., & Sen. Max Baucus, Ranking Member, S. Fin. Comm., to Diana Aviv, President and CEO, Indep. Sector (Sept. 22, 2004), available at http://www.nonprofitpanel.org/about/SFCltr.pdf.
161. See Panel on the Nonprofit Sector, Interim Report Presented to the Senate Finance Committee (2005), available at http://www.nonprofitpanel. org/interim/PanelReport.pdf.
162. See Panel on the Nonprofit Sector, Strengthening Transparency, Governance, Accountability of Charitable Organizations: A Final Report to Congress and the Nonprofit Sector (2005) [hereinafter Panel, Final Report], available at http://www.nonprofitpanel.org/final/Panel_Final_Report.pdf.
163. See Panel on the Nonprofit Sector, Strengthening Transparency, Governance, Accountability of Charitable Organizations: A Supplement to the Final Report to Congress and the Nonprofit Sector (2006) [hereinafter Panel, Supplement], available at http://www.nonprofitpanel.org/supplement/ Panel_Supplement_Final.pdf.
164. See Panel on the Nonprofit Sector, New Committee to Advise the Panel on the Nonprofit Sector on Self-Regulation (2006), http://www. nonprofitpanel.org/press/advisorygroup/index.html.
165. See Panel on the Nonprofit Sector, http://www.nonprofitpanel.org (last visited Sept. 17, 2007).
166. See Pub. L. No. 104-168, § 1311, 110 Stat. 1452, 1475-79 (1996) (codified at I.R.C. § 4958 (2000)).
167. See I.R.C. § 4958(a)(1)-(2) (2000).
168. See Treas. Reg. § 1.501(c)(3)-1(c)(2) (2006); id. § 1.501(c)(3)-1(d)(1)(ii).
169. See I.R.C. § 4958.
170. See id. § 4958(f)(1); Treas. Reg. § 53.4958-3 (2002).
171. See I.R.C. § 4941.
172. See id. § 4958(c)(1)(A); Treas. Reg. § 53.4958-1; id. § 53.4958-4.
173. See Fremont-Smith, supra note 2, at 99-100, 379.
174. See Staff of S. Fin. Comm., supra note 38.
175. See id. at 16-17.
176. See id. at 17-18.
177. See Staff of J. Comm., supra note 154.
178. See id. at 220-337.
179. See, e.g., The Tax-Exempt Hospital Sector, supra note 153;
180. Credit Union Tax Exemption, supra note 153.
181. See Taking the Pulse of Charitable Care and Community Benefits at Nonprofit Hospitals: Hearing Before the S. Comm. on Finance, supra note 151.
182. See id.
183. See Pension Protection Act of 2006, Pub. L. No. 109-280, 120 Stat. 780 (codified in scattered sections of the I.R.C. and 29 U.S.C.).
184. Rep. Bill Thomas, H. Comm. on Ways and Means, The Pension Protection Act of 2006: Detailed Summary of Charitable Provisions 2 (2006), available at http://waysandmeans.house.gov/media/pdf/taxdocs/072806charitable.pdf.
185. See Pension Protection Act of 2006 § 1223, I.R.C. § 6033 (West 2007).
186. See id. § 1212, I.R.C. §§ 4941-4945, 4958.
187. See id. § 1225, I.R.C. § 6104.
188. See id. §§ 1218-1219, Pub. L. No. 109-280. 120 Stat. 780, 1080-86 (codified in scattered sections of the I.R.C).
189. See id. § 1220, I.R.C. §§ 501, 513.
190. See Credit Union Tax Exemption, supra note 153.
191. See, e.g., Charities and Charitable Giving: Proposals for Reform: Hearing Before the S. Comm. on Finance, 109th Cong. 33-35 (2005) (statement of Dr. Jane Gravelle, Senior Specialist in Economic Policy, Congressional Research Service).
192. See Pension Protection Act of 2006 § 1241, I.R.C. § 509(a)(3).
193. See id. § 1226, Pub. L. No. 109-280, 120 Stat. 780, 1094 (codified in scattered sections of the I.R.C).
194. See id. §§ 1231-1235, 1241-1245, Pub. L. No. 109-280, 120 Stat. 780, 1094-1108 (codified in scattered sections of the I.R.C).
195. See id. § 1224, Pub. L. No. 109-280, 120 Stat. 780, 1091-93 (codified in scattered sections of the I.R.C).
196. 854 N.E.2d 1231 (Mass. 2006).
197. Id. at 1232-33.
198. Id. at 1233.
199. Id. at 1233-34.
200. Id. at 1235; see also I.R.C. § 4942 (2000); Mass. Gen. Laws ch. 68A, § 2 (2007) (applying as a matter of state law the provisions of I.R.C. § 4942 to Massachusetts private foundations).
201. U.S. Trust Co., 854 N.E.2d at 1235.
202. Id.
203. In re Will of Crabtree, 865 N.E.2d 1119, 1135 n.33 (Mass. 2007).
204. Id.
205. Staff of J. Comm. on Taxation, 109th Cong., Description of the Chairman's Modification to the Provisions of S. 1321, The "Telephone Excise Tax Repeal Act of 2005" and S. 832, The "Taxpayer Protection and Assistance Act of 2005" (2006).
206. See id. at 14-15.
207. See id. at 21.
208. See id. at 22.
209. See id. at 58-60.
210. See id. at 62-64.
211. See id. at 123.
212. See Staff of S. Fin. Comm., supra note 38, at 1.
213. See id. at 7-9.
214. See id. at 9.
215. See id.
216. See id. at 11-14.
217. See id. at 5-6.
218. See id. at 13.
219. See id. at 15.
220. See id. at 13-16.
221. See id. at 16.
222. See id. at 17-18.
223. See id. at 6-7.
224. See Panel, Final Report, supra note 158, at 39-48.
225. See id. at 24.
226. See id. at 26.
227. See id. at 35.
228. See id. at 37.
229. See Panel, Supplement, supra note 159, at 13-15.
230. See id. at 5-6.
231. See id. at 16-17.
232. See Panel, Final Report, supra note 158, at 33-34.
233. See Panel, Supplement, supra note 159, at 18-20.
234. See id. at 28-29.
235. See id. at 10-12.
236. See id. at 26-27.
237. I.R.C. § 508(e) (2000).
238. Treas. Reg. § 1.508-3(d) (as amended in 1980).
239. Fremont-Smith, supra note 2, at 267.
240. See id.
241. See Panel, Final Report, supra note 158, at 24-25.
242. See Me. Rev. Stat. Ann. tit. 13-B, § 718 (2003).
243. See H.B. 4347, 184th Gen. Court, Reg. Sess. (Mass. 2005).
244. See Fremont-Smith, supra note 2, at 462-63.
245. See id. at 461-66.
246. See, e.g., Fremont-Smith, supra note 2, at 471; Panel on the Nonprofit Sector, Work Group No. 14: Funding for Federal and State Enforcement (2005), available at http://www.nonprofitpanel.org/ workgrouprecs/Initial14.pdf.
247. See Marcus S. Owens, Charity Oversight: An Alternative Approach (2006), available at http://www.ksghauser.harvard.edU/PDF_XLS/ workingpapers/workingpaper_33.4.pdf.
248. See id. at 9-14.
249. See Fremont-Smith, supra note 2, at 460.
250. See I.R.C. § 507(g) (2000).
251. See Abramoff Investigation, supra note 152.
252. See id. at 9-51.
253. See id. at 52-55.
254. See id. at 54.
255. See id.
256. See Mass. Gen. Laws ch. 12, § 8F (2006).