Franklin on the Regulation of Charities

Eric Franklin (UNLV) has posted A More Charitable Charity: Administrative Necessity Provides an Opportunity to Promote Altruism in Charities on SSRN with the following abstract:

The law of charities governs an absurdly wide-ranging field of organizations. A small group of antiquated statutes purport to govern a diversity of entities that range from hospitals worth millions of dollars to purely volunteer-run organizations that provide free childcare. Given the expansive nature of the law of charities, perhaps it is understandable that the law lacks a coherent guiding principle. This alone would not be problematic if not for the fact that most tax-exempt organizations do not comport with the general public’s idea of charity. An intuitive definition of charity relies upon a lack of self-regard. In other words, charity requires some level of altruism. But many charities pay lavish salaries and some are major players in the crass commercialism of the private market; such activities are far from any reasonable definition of altruism. Thus, to the extent that we expect charitable organizations to exhibit some level of altruism, the concept of charity has been stretched to a level that is almost unrecognizable.

In addition to diluting the concept of charity, the over-inclusive nature of tax-exempt law resulted in an unreasonable administrative burden for the IRS. Entities vying for charitable status flooded the agency with tax-exempt applications, crippling the IRS and resulting in an unacceptable backlog. To address this, the IRS created a streamlined application to make the application process more efficient. But critics claim that the streamlined process lacks anything resembling rigor and provides precious little data for evaluation.

Somewhat surprisingly, and certainly unintentionally, the IRS’s solution to its administrative burden provides an opportunity to address the law allowing charities to act in a less-than-altruistic manner. The IRS’s desperate attempt to curtail its administrative burden presents the occasion to create a new family of charities — one that does not strain any traditional definition of “charity.” This Article argues that, in exchange for the use of this streamlined process, charities should agree to forgo salaried employees and commercial activity. Such charities will, in a very real sense, be forced to operate in a more altruistic manner. Thus, these charities will be, in a sense, more charitable.

–Eric C. Chaffee