HB 2208, the Endow Kansas Tax Credit Act, is a bill currently being considered by the Kansas House of Representatives Committee on Taxation. The bill would establish a new 70% tax credit for qualifying gifts to qualifying endowment funds at qualifying community foundations.
You can learn more about the bill and the credit it would create in Part 1 of this series.
In this part, I offer some criticisms of the bill’s text, most of which focus on its definitions, so let’s start there.
HB 2208’s flawed definitions
HB 2208’s definitions have some problems. For one thing, there is a mismatch between the terms used in the bill and the terms the bill defines. But several of the definitions themselves also pose problems. Finally, the bill is missing one important definition, and its approach to dealing with that omission can only lead to confusion.
Internally mismatched definitions
In the first post in this series, I pointed out that the phrases used in the operative text of the bill don’t match the phrases defined in the definitions section. Section 1(b)(1) states that the 70% tax credit is available for “an endowment gift . . . to an unrestricted permanent endowment fund or field of interest permanent endowment fund held by a qualified community foundation” (emphasis added).
Of the terms I’ve bolded in the preceding sentence, only two are defined in the statute: Endowment Gift and Qualified Community Foundation. “Unrestricted permanent endowment fund” and “field of interest permanent endowment fund” are not defined, though the similar “field of interest endowment fund,” “permanent endowment fund,” and “unrestricted endowment fund” are.
Is a “field of interest permanent endowment fund,” which is not defined, supposed to be the same thing as a “field of interest endowment fund,” which is? Or are we supposed to interpret “field of interest permanent endowment fund” as referring to a “field of interest endowment fund” that is also a “permanent endowment fund”? Either approach could work, but the bill should make clear what’s intended.
Similarly, an “endowment gift” is defined as a type of contribution to an “endowed fund,” and “field of interest endowment fund” and “unrestricted endowment fund” are defined as types of “endowed funds.” But “endowed fund” isn’t defined in the bill. Instead, it defines a “permanent endowment fund.” Again, are these supposed to be the same thing, or does the fact that different phrases are used indicate that different meanings are intended?
The Permanent Endowment Fund definition imposes unclear requirements
A Permanent Endowment Fund under HB 2208 is “a fund . . ., the principal of which is permanently restricted and the growth is used to provide charitable assistance exclusively to support nonprofit organizations and programs that benefit residents of the state of Kansas and is intended to exist in perpetuity.”
This prolix provision perplexes me. First, what does it mean by “principal” and what by “growth”? Is a gift made after the fund’s establishment “principal” or “growth”? If a noncash asset is donated to a fund, appreciates in value, and is then sold, is the amount by which the proceeds exceed the asset’s value on the donation date “principal” or “growth”?
Second, what is meant by “restricted”? Is a fund’s principal only “restricted” when it can’t be spent? Or is it “restricted” when it can be spent, but only for specific charitable purposes?
And “permanently”? If a fund’s establishing document states that any restrictions in it can be modified by the foundation’s board if the restriction becomes unnecessary, incapable of fulfillment, or inconsistent with the charitable needs of the community or area served—a standard provision in community foundations’ fund agreements implementing what’s known as the variance power—would that restriction count as “permanent” or not?
Fourth, does “that benefit residents of the state of Kansas” modify both “nonprofit organizations” and “programs”? Or only “programs”?
Fifth, what is intended to exist “in perpetuity”? I think it’s supposed to be “a fund” from the start of the definition, but the way the sentence is written, the reference seems to be to “growth.”
Finally, this definition and the next two I’ll discuss focus on how a fund is “used,“ but that seems backwards to me. Focusing on how a fund is “used“ suggests that new endowments could never qualify for the Endow Kansas program, because they haven’t yet been “used.“ It makes more sense to focus on how a fund is restricted rather than how it is used.
The other fund-type definitions are too broad
The bill includes definitions for the two types of funds that are supposed to be eligible to support an Endow Kansas tax credit, field of interest endowment funds and unrestricted endowment funds. But the definitions given fail to distinguish these two types of funds from other types of funds that a Qualified Community Foundation may hold.
Field of interest endowment fund
HB 2208’s definition of “field of interest endowment fund” includes two types of endowed funds: those that are “used for a specific charitable purpose, such as education, health[,] or other areas of community need” and those that are “used for a . . . geographic location such as a city or county.”
Here’s the problem: isn’t an endowment that grants only to a nonprofit hospital, for instance, “used for a specific charitable purpose, . . . health”? So why wouldn’t an endowed agency or designated fund meet this definition? And isn’t an endowed scholarship fund “used for a specific charitable purpose, . . . education”? So why wouldn’t endowed scholarship funds qualify?
And, since the bill’s definition of a Qualified Community Foundation eligible to participate in the Endow Kansas program requires that it be “organized . . . to serve the state of Kansas, or one or more Kansas counties or municipalities, or a combination thereof,” shouldn’t any endowment at a Qualified Community Foundation qualify as one that is “used for a . . . geographic location”?
Even donor-advised funds (DAFs) could satisfy either of these tests. What distinguishes DAFs from other fund types (at least under federal law) is a donor’s privilege to advise as to distributions or investment of amounts held in the fund. But there’s nothing about that feature that would prevent the DAF from being “used for a specific charitable purpose” or “used for a . . . geographic location such as a city or county.”
Unrestricted endowment fund
The bill would define “unrestricted endowment fund” as “an endowed fund . . . that allows the community foundation to determine how grant dollars will be used.”
This definition captures every endowed fund at a community foundation, because every fund agreement will incorporate the community foundation board’s variance power.
The definition of Qualified Community Foundation needs work
Parts of the definition of Qualified Community Foundation should be refined. Specifically:
To serve the state
The first requirement for a Qualified Community Foundation is that it be a nonprofit organization “organized . . . to serve the state of Kansas, or one or more Kansas counties or municipalities, or a combination thereof.”
The references to “the state of Kansas” and “Kansas counties or municipalities” makes it sound like only organizations that serve the state or local government(s) would satisfy this definition. I don’t think that’s what’s intended; I think the reference is meant to be geographic, not political. Easy fix: “to serve the residents of the state of Kansas or one or more Kansas regions, counties, or municipalities.”
[Is] comprised of
If a community foundation is not accredited with the Community Foundations National Standards, then the Department of Revenue must certify that it “is comprised of permanent, component funds established by multiple separate donors” and be “directed by a board of directors comprised of community representatives,” among other things.
“The phrase is comprised of is increasingly common but has long been considered incorrect,” according to the fifth edition of Garner’s Modern English Usage. Garner recommends: “Replace it with some other, more accurate phrase.” I replaced it with “comprises” and “comprising” in my paraphrase, but a better approach would be for the bill to adopt UPMIFA’s reference to funds being “held” by institutions.
Legally a part of . . . policies and operations
The final sentence of the definition of a Qualified Community Foundation states that the term includes “its affiliate funds . . . that are legally a part of, and subject to, the policies and operations of the qualified community foundation.” That second comma should be moved to after the second “of.” It makes no sense to speak of a fund being “legally a part of . . . the policies and operations” of a community foundation, but it makes perfect sense to speak of them as “legally a part of” a community foundation and “subject to [its] policies and operations”.
Speaking of affiliates: the missing definition
HB 2208 has a conception of community foundation “affiliates”—well, conceptions, really—but it never defines the term. Instead, it refers to “affiliates” of a Qualified Community Foundation, nonprofit organizations “affiliated with” a community foundation accredited with the Community Foundations National Standards, and “affiliate funds” of a Qualified Community Foundation.
I think these terms are all supposed to refer to the same thing, but the fact that different expressions are used and in different contexts could lead one to read them as distinct concepts.
Affiliates
“Affiliates” are referred to in section 1(c)(2), which describes the per-community-foundation limit on credits. That limit applies to “a single qualified community foundation, excluding affiliates, or . . . a single affiliate of a qualified community foundation.”
But what’s an affiliate? The bill never explains.
Affiliated with
Section 1(f)(5)(D) is the part of the definition of Qualified Community Foundation that refers to the Community Foundations National Standards. It is satisfied when a nonprofit organization is accredited with those standards “or is affiliated with such an accredited community foundation.”
So what does it mean to be “affiliated with” an accredited community foundation?
Take the example of a Kansas 501(c)(3) health clinic that seeks to address all the so-called social determinants of health within a set region of the state. The clinic’s services go well beyond the provision of medical care and include providing public transportation; helping operate a food pantry; providing clothing, diapers, and baby supplies to young mothers; educating medical students through rural internships; and housing the homeless. The clinic receives grants from its local community foundation and is the designated beneficiary of an endowment fund at the community foundation.
If that local community foundation is accredited with the National Standards, shouldn’t the clinic qualify as a Qualified Community Foundation on account of being “affiliated with” that foundation?
Consider:
- The clinic is a nonprofit organization organized under the laws of Kansas to serve one or more Kansas counties.
- It is exempt from federal income taxation under section 501(c)(3) of the Internal Revenue Code.
- It supports broad-based charitable interests that benefit the residents of a Kansas region.
So the clinic meets at least three of four requirements for certification as a Qualified Community Foundation. If receiving grants from, or benefiting from a designated endowment held by, its local community foundation counts as being “affiliated with” the foundation, then it should be certified as a Qualified Community Foundation.
The use of inconsistent terms in HB 2208 invites such questions and will invite such creative lawyering should the bill become law.
Affiliate funds
As mentioned earlier, the final sentence of the definition of Qualified Community Foundation says that a Qualified Community Foundation “includes its affiliate funds benefitting a defined geographic area”.
I have some questions about this:
- Does “affiliate funds” mean “affiliated funds,” such that all of a Qualified Community Foundation’s funds are referred to here? That seems unlikely but possible—this sentence could convey that certification of a community foundation makes all its funds eligible for participation in the Endow Kansas program (provided that they meet the other eligibility requirements described in the operative provisions of the law).
- Does “affiliate funds” mean “funds of an affiliate”? This is one of two possible readings that I consider most likely what is intended.
- Does “affiliate funds” mean “affiliates”? This is the other reading I consider most likely what is intended.
- How does this provision relate to the per-Qualified-Community-Foundation limits? Given that this statement appears in a part of the bill that describes what the Department of Revenue must certify, I think the most natural reading is that this is only about certification, not about that limit. In other words, if a community foundation is certified as a Qualified Community Foundation, then so are each of its affiliates, even though the parent community foundation and its affiliates are subject to separate limits.
- How does this provision apply to Qualified Community Foundations accredited with the National Standards? It may not apply to them at all; it could be the counterpart to the “affiliated with” rule for accredited foundations. Or it might be meant to help define what the terms “affiliate” and “affiliated with” mean throughout the bill.
All that to say this bill should define “Affiliate” and use it consistently.
HB 2208’s flawed procedures
Section 1(d)(2)(B), which describes the process by which the Department of Revenue is to allocate tax credits, is a bit of a chonker. As a result, some gaps in its logic have gone unnoticed beneath all the verbiage. Specifically:
- The Department is only directed to notify taxpayers applying for a credit that a limited credit is available or that no credit is available. The bill doesn’t explicitly require the Department to notify the taxpayer that a full credit amount has been allocated, even though the taxpayer must make a qualifying gift no later than 30 days after the date of allocation.
- On that note, starting the time limit for a donation with the date of allocation rather than the date on which a taxpayer is notified that an amount has been allocated is a strange choice.
- The Department is directed to notify taxpayers of a limit on the credit amount (or that none is available) only if the applicable limit is the statewide limit or the per-community-foundation limit. The bill says nothing about the per-taxpayer limit.
These are issues that could be easily fixed, and they should be.
Conclusion
HB 2208’s text contains multiple issues that should be addressed before the bill is passed—and that’s to say nothing of the policy questions the proposed credit raises. Stay tuned for a third post in this series on that very topic.