When discussing the sweeping federal health care reform of today, we can’t help but hear the political pundits’ constitutional perspective, the political perspective, and even the corporate “health care as a business” perspective. Coverage of the health care reform debate is on every television news network, Internet blog, and print medium in the galaxy. Set within the context of our current recession, most individuals are worried about their own bottom line and less concerned with contributing to the common good.

In such a financially perilous time, Congress has enacted the most comprehensive overhaul of health care delivery our nation has witnessed since Congress established Medicare and Medicaid in 1965.1

Ironically, for those of us insured with private employer-sponsored health care coverage, how we access our health care will not change dramatically.2 However, for those uninsured, under insured and those enrolled in Medicaid and Medicare, the Patient Responsibility and Affordable Care Act of 2010 expands insurance coverage while tackling the intrepid goals of increasing coverage while driving down the exponential growth of health care costs in the United States – two goals that are traditionally thought to be disparate.

Within the morass of individual concern about the costs (both in dollars and in liberty) and amid the 1,000-plus pages of the mammoth legislation lies the health care grail for the poor and disabled. So, why is the Affordable Care Act so good for the poor and disabled? An initial understanding of how the current Medicaid and Medicare systems operate is important to answering this question.

Medicaid

Medicaid was established in 1965 within the Social Security Act with the goal of standardizing different state health care programs for the poor and disabled. 3

It is a joint state-federal health insurance program. You can only receive Medicaid if you are financially eligible.4 The federal government sets guidelines for state Medicaid programs (called state plans) and provides a portion of funding for the programs.5 Each state promulgates its own rules on how to administer the program and also pay a portion of funding. States may also choose to expand coverage to other non-mandatory individuals and may also make financial eligibility requirements more generous.6

Medicaid eligibility is determined by an individual’s income and assets.7 Almost 62 million individuals currently receive Medicaid in this country through their state programs.8 Of those, almost half these recipients are children, who comprise the largest pool of Medicaid recipients. The other recipients are adult caretakers of children, adult disabled individuals and low-income elderly adults.9

As Medicaid roles rise, so does the federal government’s financial contribution to state Medicaid programs. Each state has a different ratio of federal-to-state spending, but the federal portion of Medicaid subsidy is anywhere from 50-75 percent of each state’s Medicaid budget.10

Medicare

In contrast, Medicare is a federal health insurance program for individuals age 65 or older and individuals with disabilities receiving Social Security disability income. Medicare’s original purpose was to provide older Americans with health care services.

Disabled individuals were not added to the program until 1972 and, to-date, disabled individuals have to wait two years after their Social Security disability determination to begin receiving Medicare coverage.11 The only two exceptions are for end-stage renal disease and amyotrophic lateral sclerosis (ALS), also known as Lou Gehrig’s disease. The end-stage renal disease exception was created in 1972 at the same time disabled individuals became entitled to Medicare.12 The ALS exception was created by Congress in 2000.13 All other disabled individuals must wait the 24-month period for Medicare coverage and, unfortunately, four percent die waiting for Medicare coverage.14

Medicare includes hospital insurance (Part A), doctors visits (Part B), supplemental insurance (Part C) and prescription drug coverage (Part D). Part A is mandatory, and all individuals enroll in Part A without having to pay monthly premiums. Part B is optional and requires payment of a monthly premium. If an individual is on traditional Medicare and receiving Social Security benefits, the $99.90 premium is deducted from the beneficiary’s check before being mailed.15 If a person chooses not to enroll in Part B, a 10 percent penalty is imposed for each 12-month period an individual fails to enroll for Part B, if the individual chooses later to enroll.16

Supplemental insurance (also known as Part C) is not required but may cover some of the everyday health care expenses not covered by Part B, such as vision and dental care. These Part C benefits can be Medigap insurance policies (through the federal government) or Medicare Advantage Plans (privatized managed care of Parts A-D). Supplemental insurance benefits vary widely, and as benefits increase, so do the monthly premiums.

Part D was created during President George W. Bush’s tenure and signaled the largest expansion of Medicare since the creation of the program by President Lyndon B. Johnson in 1965.17 Prescription drug coverage is offered either as individual policies or as benefits of Medicare advantage plans (privatized Medicare).18 Additional premiums apply, and the program is privatized, meaning that it is administered through private health insurance companies rather than the federal government.19

The Uninsured

Although all individuals, regardless of income, receive Medicare at age 65, and although Medicaid is available to qualified indigent persons, a huge swath exists of Americans who are either under insured or uninsured.20

The Affordable Care Act’s main goals include reining in health care expenditures generated by under insured and uninsured Americans while expanding health care insurance coverage and access to them.21 Changes to Medicaid and Medicare will provide better coverage to more individuals beyond the current scope of coverage as well as reducing some consumer expenses such as the Part D coverage gap, known as the “donut hole,” and demanding more efficiency for health care delivery.

There are thousands of uninsured individuals suffering from pre-existing or disabling conditions that aren’t covered by Medicaid and Medicare.22

Individuals can wait as long as 36 months for a disability determination from the Social Security Administration without any health insurance coverage,23 and once approved, wait an additional two years if they will receive Medicare as stated above.24

Under the Affordable Care Act, insurance companies will no longer be able to deny coverage based on a pre-existing condition.25 Therefore, individuals previously “uninsurable” will have options in the private market through health care exchanges, or through Medicaid.26 Each state has already implemented a temporary “high-risk pool” insurance option for chronically ill individuals if they have been uninsured for over six months.27 Non-disabled adults without children were ineligible for Medicaid, even if they were financially eligible prior to the passage of the Affordable Care Act.28

As of 2014, anyone with income within 133 percent of the federal poverty level may apply and receive Medicaid, regardless of family status or disability.29 Increasing the financial eligibility standards and allowing “healthy” individuals access to Medicaid health coverage will expand coverage to previously uninsured individuals and will ultimately curb health care costs by providing preventative care and avoiding costly uncovered health care services to chronically ill, uninsured individuals.30

States with ever-shrinking budgets but ever-expanding Medicaid costs balk at the prospect of more individuals receiving eligibility under the Affordable Care Act.31

Anticipating reticence from state governments, the Affordable Care Act increases the ratio of federal dollars paid to state governments to pay for 100 percent of the Medicaid expansion for 10 years.32

The Affordable Care Act puts restrictions on the growth of payments to medical providers and hospitals with the goal of slowing growth of Medicare costs.33 The tighter rein on health care providers results in slower increases in Part B premiums as well as lower copayments and coinsurance for individual beneficiaries.34 By eliminating the Part D “donut hole,” the Affordable Care Act will save beneficiaries thousands of dollars in out-of-pocket expenses.35 This “phase-out” is expected to save Part D beneficiaries from $631.00 in 2011 to almost $2,400.00 in 2026.36

Medicaid Waivers

State governments have focused on reforming Medicaid recently to address increasing growth in Medicaid costs. Privatization through health maintenance organizations, establishment of medical homes and fraud/abuse reduction measures serve as innovative vehicles to achieve program cost containment.

Each state has a Medicaid state plan that conforms to federal requirements under Section 1905(a) of the Social Security Act. If a state wishes to amend its state plan, it must complete the state plan amendment process through the Centers for Medicare and Medicaid Services (CMS).37 State Plan Amendments are required when federal law creates new Medicaid requirements such as the Deficit and Reduction Act of 2005.

If states wish to offer Medicaid coverage outside of the federal guidelines, they must get permission from the federal government in the form of a waiver. There are several types of waivers, but those that affect Medicaid redesign are generally covered under Section 1115 of the Social Security Act. Called research and demonstration waivers, 1115 waivers can be requested by states that wish to offer an innovative, experimental program.38

The waivers must be budget neutral (meaning that it cannot cost the federal government more than the regular state plan Medicaid). These waivers have a specific timeline, reporting requirements and a research component with goals of curbing costs, expanding coverage to otherwise ineligible beneficiaries or providing tailored Medicaid benefits to a specific population. It gives states the opportunity to try new programs within a definite time period without a long-term state plan commitment.39 Additionally, when the federal government is only required to provide as little as 50 percent in matching funds toward each Medicaid state plan, federal contributions to a 1115 waiver can reach 80 percent of the total cost of the waiver, making it an attractive cost-saving incentive for state Medicaid budgets.40

State Reform Efforts 

Back in 2005, Florida launched the Medicaid Reform Research and Demonstration Waiver, a pilot program based on Medicaid privatization and consumer choice.41

The original pilot covered four counties. In 2011, Governor Rick Scott signed legislation that would expand Medicaid reform across the state. The program eliminates the traditional fee-for-service Medicaid payment model and, instead, pays private health insurance companies a per-beneficiary fee for managing care called “capitation.” In reform, managed care plans that provide for services on a prepaid, capitated basis agree to accept the capitation payment and assume financial risk for delivering all covered services. A major concern of this approach is that chronically ill Medicaid beneficiaries will be refused necessary services if their medical expenses exceed the capitated rates.42

California cut Medicaid spending by reducing services for in-home supports and increasing beneficiary copayments and premiums in 2010.43 Additional cuts included caps on services as well as reductions to provider rates.44

Innovations to Medicaid delivery include amendment of California’s 1115 Comprehensive Demonstration Waiver as a “bridge to reform,” whereby the state implements federal health care reform measures early with an added benefit of increased federal dollars.45 California’s “bridge to reform” enables federal money to flow to the state to create a smoother transition in 2014 when the Medicaid expansion takes place.46

Improving quality, improving health and reducing Medicaid costs are the three main goals of New York’s Medicaid reform initiatives.47 New York’s 1115 waiver application, which implements a global Medicaid spending cap, was recently approved by the federal government. This cap differs from individual capitated plans. This “cap” refers to the state Medicaid budget. If costs exceed the cap, the Secretary of Health has the discretion to adjust provider reimbursement and incorporate other cost-saving measures to radically reduce spending.48 This “cap” creates an incentive for providers and health management entities to efficiently manage care to meet the Medicaid budget to avoid reimbursement reductions.

In the shadow of Affordable Care Act implementation, many state leaders propose Medicaid block grants to take the regulation of federal Medicaid powers away from the federal government and shift them primarily to states.

Despite radical differences in ideologies, most health care reforms focus on better coordination of care, reduction of health care fraud and controlling the rising costs of health care. The Affordable Care Act creates tools to meet those goals while also providing for expansion of coverage to under- or uninsured individuals through reforms of the Medicaid and Medicare programs. Because many of the initiatives of the Affordable Care Act are in various stages of implementation, the overturn of the landmark legislation will create logistical issues forcing Congress to readdress federal health care reform legislation.

Without the implementation of the Affordable Care Act, the state and federal governments will have to continue partnering to solve the health care crisis affecting so many poor Americans. Entitlement reforms are inevitable as our government stretches to meet the ever-increasing health care needs of the most vulnerable.

1 42 USC §§1395, 1396 (1965).

2 45 CFR 147.140 (2011).

3 42 U.S.C. §1396-1 (1965).

4 Id.

5 42 U.S.C. §1396a (2012).

6 States may participate in “optional” programs to individuals designated in 42 U.S.C. 1396d(a).

7 42 U.S.C. §1396a(a)(10)(i)(2011).

8 Total Medicaid Enrollment, FY 2009, http://www.statehealthfacts.org/comparemaptable.jsp?ind=198&cat=4 (last update April 19, 2012).

9 Id.

10 76 FR 74061 (November 30, 2011).

11 42 U.S.C. 426 (2012).

12 Id.

13 Id.

14 Bob Williams, Adrianne Dulio, Henry Claypool, Michael J. Perry and Barbara S. Cooper, “Waiting for Medicare: Experiences of Uninsured People with Disabilities in the Two-year Waiting Period for Medicare,” The Commonwealth Fund and Christopher Reeve Paralysis Foundation (October 2004).

15 76 Fed. Reg. 67,572 (November 1, 2011). Individuals earning more than $85,000.00 pay a larger premium.

16 73 Fed. Reg. 36,463 (June 27, 2008).

17 Supra n. 1.

18 42 U.S.C. 1395w (2012)

19 Department of Health and Human Services Center for Medicaid and Medicare Services, “Medicare Advantage Plans (Part C),” http://www.medicare.gov/navigation/medicare-basics/medicare-benefits/part-c.aspx (accessed June 11, 2012).

20 The Kaiser Commission on the Uninsured, “The Uninsured, a Primer. Key Facts About Individuals With out Health Insurance,” http://www.kff.org/uninsured/upload/7451-07.pdf (October 2011).

21 U.S. Department of Health and Rehabilitative Services, “Reducing Costs, Protecting Consumers: The Affordable Care Act on the One Year Anniversary of the Patient’s Bill of Rights, http://www.healthcare.gov/law/resources/reports/patients-bill-of-rights09232011a.html (September 23, 2011).

22 Emily Carrier, Tracy Yee, and Rachel L. Garfield, “The Uninsured and Their Health Care Needs: How Have They Changed Since the Recession?” Kaiser Commission on Medicaid and the Uninsured (October 2011).

23 United States House of Representatives, Serial No. 111-38 (HOUSE Hearing) – “Clearing the Disability Claims Backlogs: The Social Security Administration’s Progress and New Challenges Arising From the Recession.” (November 19, 2009).

24 Supra n. 11. Ironically, individuals that haven’t “paid into the system” receiving SSI receive Medicaid automatically upon a successful disability determination.

25 42 U.S.C. 18001 (2010).

26 Supra n. 20.

27 45 CFR 152.2 (2011).

28 Kaiser Commission on Medicaid and the Uninsured, “Where Are States Today? Medicaid and CHIP Eligibility Levels for Children and Non-Disabled Adults” (March 2012).

29 77 Fed. Reg. 17,144 (March 23, 2012 ).

30 42 CFR Parts 431, 433, 435, and 457 (2012).

31 27 States filed suits in Federal Court regarding the Medicaid expansion based on a states’ rights argument.

32 76 Fed. Reg. 51,148 (August 17, 2011).

33 76 Fed. Reg. 73,026 (November 28, 2011).

34 United States Department of Health and Human Services, Office of Assistant Secretary for Planning and Evaluation, “Medicare Beneficiary Savings and the Affordable Care Act” (February 2, 2012).

35 Id.

36 Id.

37 Department of Health & Human Services, Centers for Medicare & Medicaid Services, Letter to State Medicaid Directors and State Health Officials. SMD #10-020, http://hsd.aphsa.org/SMD_letters/pdf/ SMD/MedicaidSPAReviewProcess10-01-10.pdf (October 1, 2010).

38 Charles Milligan, “Section 1115 Waivers and Budget Neutrality: Using Medicaid Funds,” The Robert Wood Johnson Foundation (May 2001).

39 Id.

40 Id.

41 Florida Statutes, § 409.91211 (2012).

42 Id.

43 California Budget Project, “Recent Cuts to Medicaid Services Have Impaired Access to Services,” http://www.cbp.org/pdfs/2011/110610_Medi-Cal_Cuts.pdf (June 10, 2011).

44 Medicaid rates are already the lowest rates paid to providers.

45 Kaiser Commission on Medicaid and the Uninsured, “California’s ‘Bridge to Reform’ Medicaid Demonstration Waiver” (October 2011 update).

46 Id.

47 New York State Department of Health, “A Plan to Transform the Empire State’s Medicaid Program” http://www.health.ny.gov/health_care/medicaid/redesign/docs/mrtfinalreport.pdf (accessed June 11, 2012).

48 Id.

Stereotypes notwithstanding, the term “pirate” covers a much broader spectrum of activity than swashbucklers swinging from ship to ship, claiming booty as they go.

Watching Johnny Depp portray Jack Sparrow or Errol Flynn take the big screen as Captain Blood gives the viewer some idea of the answer.¹ We may also remember Long John Silver and Captain Hook from our childhoods.² 

In fact, the law of piracy is a mix of national and international laws dating back hundreds of years. Most of these laws provide specific acts in which an individual must engage to be considered a pirate. However, as the world’s political climate, technology, and tactics change, the legal definition of a pirate has remained remarkably stable.

The Term “Pirate” as Vaguely Defined by the United States 

The United States Constitution gives Congress the power to “define and punish Piracies” under the Offense Clause.³ Pursuant to this clause, Congress set out its definition and punishments under Title 18, Chapter 81 of the United States Code.

Section 1651 states, “Whoever, on the high seas, commits the crime of piracy as defined by the law of nations, and is afterwards brought into or found in the United States, shall be imprisoned for life.”⁴ This definition is weak on a number of fronts. Most glaring is that it delegates the definition of piracy to “the law of nations” without giving any clear limitations on what nations should be included in determining the definition or what defines “the law of nations.” Is a judge interpreting section 1651 required to make a survey of all the foreign nations’ laws regarding piracy? If so, should the judge limit the survey to the law, as it existed at the time section 1651 was enacted or survey the nations’ current law on the subject? While international treaties do exist that define piracy, is a judge allowed to rely solely on those treaties?⁵ Do a certain number of nations need to agree in order for the specified act to be considered that of a pirate?

Looking to the plain meaning of the language used is not helpful in determining the answer to our questions. As was already discussed, the phrase “the law of nations” is open to interpretation. In 1820, the United States Supreme Court, in United States v. Smith, answered the questions surrounding “the law of nations” quandary.⁶

In 1819, a jury found Thomas Smith committed a number of acts and submitted a special verdict for review by the Supreme Court.⁷ The trial court, it turned out, was uncertain as to the definition of piracy.⁸ The special verdict stated as follows:

We, of the jury, find, that the prisoner, Thomas Smith, in the month of March, 1819, and others, were part of the crew of a private armed vessel, called the Creollo, (commissioned by the government of Buenos Ayres, a colony then at war with Spain,) and lying in the port of Margaritta; that in the month of March, 1819, the said prisoner and others of the crew mutinied, confined their officer, left the vessel, and in the said port of Margaritta, seized by violence a vessel called the Irresistible, a private armed vessel, lying in that port, commissioned by the government of Artigas, who was also at war with Spain; that the said prisoner and others, having so possessed themselves of the said vessel, the Irresistible, appointed their officers, proceeded to sea on a cruize, without any documents or commission whatever; and while on that cruize, in the month of April, 1819, on the high seas, committed the offence charged in the indictment, by the plunder and robbery of the Spanish vessel therein mentioned. If the plunder and robbery aforesaid be piracy under the act of the Congress of the United States, entitled, ‘An act to protect the commerce of the United States, and punish the crime of piracy,’ then we find the said prisoner guilty; if the plunder and robbery, above stated, be not piracy under the said act of Congress, then we find him, not guilty.⁹

Upon reaching the Supreme Court, the defendant argued that Congress had a duty to define piracy in terms and not to leave the definition to judicial interpretation.¹⁰ He held to the position that the Constitution’s requirement that Congress define piracy illustrated the framers’ belief that the law of nations was an insufficient source for the task.¹¹ As Congress had been given the task of defining what constitutes piracy, it was necessary for Congress to create a definition of acts that amounted to piratical conduct.¹² The defendant believed that if the constitutional framers had confidence in the definition provided by the “law of nations” they simply would have given Congress the power to punish the offenses and relieve it of the duty to define piracy.¹³

The argument was made that “Congress must define [piracy] as the constitution has defined treason, not by referring to the law of nations in one case, or to the common law in the other, but by giving a distinct, intelligible explanation of the nature of the offence in the act itself.”¹⁴ This was a strong argument as the law of nations provided a definition for treason, but the constitutional drafters chose to define it in spite of such a body of law.¹⁵ The defendant argued that a crime should have a strict definition as to place the violators on notice the acts they are engaged in are against the law;¹⁶ that such matters should not be left to the whims of judicial interpretation.¹⁷ It was also brought to the Court’s attention that the “writers on public law do not define the crime of piracy with precision and certainty.”¹⁸

The Supreme Court rejected the defendant’s text-based arguments as taking “too narrow a view of the language of the constitution.”¹⁹ Instead, the majority relied upon “the works of jurists, writing professedly on the public law; or by the general usage and practice of nations; or by judicial decisions recognizing and enforcing that law” to define the law of nations.²⁰ In order to develop a definition, the Court reviewed a long list of legal scholars’ opinions. They also examined court decisions on the subject. Most of the authorities reviewed were included in a rather lengthy footnote.²¹ Based on these sources, the Court stated the common law defined piracy as a punishable offense that is against the law of nations and a pirate an enemy of the human race.²²

Of particular interest to the Court were the writings of Sir Charles Hedges and William Blackstone. The English Admiralty Court under Sir Charles Hedges had declared the crime of piracy as “being a robbery committed within the jurisdiction of the admiralty.”²³ Blackstone was referenced by the Court as stating, “he considered the common law definition as distinguishable in no essential respect from the law of nations.”²⁴

In the end, the Court stated the following definition of piracy:

So that, whether we advert to writers on the common law, or the maritime law, or the law of nations, we shall find, that they universally treat of piracy as an offence against the law of nations, and that its true definition by that law is robbery upon the sea. And the general practice of all nations in punishing all persons, whether natives or foreigners, who have committed this offence against any persons whatsoever, with whom they are in amity, is a conclusive proof that the offence is supposed to depend, not upon the particular provisions of any municipal code, but upon the law of nations, both for its definition and punishment.²⁵

The Court’s opinion on the matter was not unanimous. Justice Livingston provided a dissenting opinion that raised serious constitutional concerns. He believed that Congress was obligated to give a definition of piracy “in terms, and not to refer the citizens of the United States for rules of conduct to the statutes or laws of any foreign country, with which it is not to be presumed that they are acquainted.”²⁶ Justice Livingston supported the position that it was not fair to punish someone with death when Congress subjected its citizens to a law of nations definition.²⁷ The key finding by Livingston was “that there is not to be found in the act that definition of piracy which the constitution requires.”²⁸

Perhaps not being comfortable with leaving the whole issue of defining piracy to the law of nations, several additional statutes were passed by Congress to further define what acts are piratical. The first of these statutes is currently found at § 1652 of the United States Code. It states as follows:
Whoever, being a citizen of the United States, commits any murder or robbery, or any act of hostility against the United States, or against any citizen thereof, on the high seas, under color of any commission from any foreign prince, or state, or on pretense of authority from any person, is a pirate, and shall be imprisoned for life.

While this definition does a great job of defining what acts someone must engage in and where those acts must occur in order to be considered a pirate, it limits its scope to U.S. citizens. This became an issue in the case of United States v. Baker.²⁹

In Baker, the crew of a private armed schooner named Savannah took an American vessel, the Joseph, by force on June 3, 1861.³⁰ Prior to taking the Joseph, the Savannah, its captain and its crew had received a commission from President Jefferson Davis of the Confederate States of America to carry out raids on U.S. shipping during the war between the states.³¹

The prosecutors brought multiple counts against the captain and crew. In addition to being charged with piracy under the language of § 1651, four of the crew were also charged with violating the language of § 1652.³² The defendants argued that they were operating under the “commission of a foreign state” and as such could not violate § 1652. The court disagreed. It first decided that four of the crew members – “Baker, Howard, Passalaigue, and Harleston” – were citizens of the United States.³³ The court then determined the issue of the Confederate States of America to be resolved as the executive and legislative branch of the U.S. government had not recognized the Confederate States as a foreign nation.³⁴ It determined the issue of the Confederate States to be a political question and that until the executive or legislative branch had recognized statehood for the rebellious states then the court could not treat them as such.³⁵

The jury was unable to come to a verdict and was discharged.³⁶ Based on the questions presented to the judge from the venire, it appears the major issues arose around whether or not the Confederate States had been recognized as a foreign power and the intent element of robbery.³⁷

Other acts that Congress defined as acts of piracy include: foreigners engaging in acts of war on the United States, or engaged in operations against U.S. citizens or property, if those acts are contrary to treaties in effect between the United States and the foreigner’s state of residence;³⁸ any U.S. citizen investing in a piratical enterprise;³⁹ violence against a vessel’s commander by a “seaman;”⁴⁰ a ship’s captain or her officers are determined to be pirates if they “piratically or feloniously” take their vessel;⁴¹ if a person attempts to get a captain or any other crew member to take the vessel, cargo, “or to turn pirate” that person may be punished by up to three years of imprisonment;⁴² or anyone who uses an amphibious landing from a vessel and thereafter attacks a town.⁴³

20th Century International Treaties Narrow the Definition of Pirate

Thanks to Congress’s vague definition of piracy, problems arise with defining the term pirate when new international treaties arise providing a new “law of nations.” In 1932, a group of scholars and students met at Harvard College and prepared a draft convention for the regulation of piracy.⁴⁴ The draft convention would eventually give birth to the language governing the prosecution of piracy found in both the Convention on the High Seas and the United Nations Convention on the Law.⁴⁵

The Convention on the High Seas requires treaty members to cooperate in combating piracy “on the high seas or in any other place outside the jurisdiction of any State.”⁴⁶ Under the convention, piracy has been defined by describing a series of acts listed under article 15. The United Nations Convention on Law of the Sea contains the exact same language in defining acts of piracy.⁴⁷ These acts are as follows:

(1) Any illegal acts of violence, detention or any act of depredation, committed for private ends by the crew or the passengers of a private ship or a private aircraft,
and directed:

(a) On the high seas, against another ship or aircraft, or against persons or property on board such ship or aircraft;

(b) Against a ship, aircraft, persons or property in a place outside the jurisdiction of any State;

(2) Any act of voluntary participation in the operation of a ship or of an aircraft with knowledge of facts making it a pirate ship or aircraft;

(3) Any act of inciting or of intentionally facilitating an
act described in subparagraph 1 or subparagraph 2 of this article.⁴⁸

The Convention also states that if a government-owned vessel or aircraft is taken by a mutinous crew it will be treated as a private vessel and subject to article 15.⁴⁹

Conclusion

At present, it appears that in order to fall within the international definition of “pirate” you must be a private individual using a vessel or aircraft to attack another vessel or aircraft with the intent to engage in violence, robbery, or detention of the vessel. Mutineers on vessels also achieve the rank of pirate. Anyone funding the pirate’s enterprise or facilitating the pirate is also a pirate. Of course, under the United States Code, those who attack U.S.-flagged shipping or towns falling under the jurisdiction of the United States also fall within the definition.

Now having a working definition, we can definitely say that Jack Sparrow and Capt. Blood are pirates. The mutinous crew of the HMS Bounty would fall under the definition of pirates. Those, however, who hijack a non-U.S.-flagged ship, but do not intend to attack another vessel, aircraft, or town, are not pirates under the current “law of nations.”⁵⁰

(Illustrations by Tony Rodriguez)

—————————————-

CITATIONS:

James J. Woodruff II is an Associate Professor of Lawyering Process at Florida Coastal School of Law. During his career as a practicing lawyer he handled cases arising under admiralty law. He holds a B.S. in Maritime Administration from Texas A&M University and a J.D. from South Texas College of Law. This article is a modified section taken from The Prosecution of Piracy Under the Offenses Clause, 2011 CARDOZO LAW REVIEW DE NOVO ___.

¹ Johnny Depp portrays the rascal Jack Sparrow in Disney’s The Pirates of the Caribbean. He is a cunning adversary who gives the outward appearance of a flamboyant drunk. He leads his companions on many adventures, frequently using highly improvised methods to escape from certain doom.

Captain Blood was a popular character portrayed most recently by Errol Flynn in a 1935 film. Capt. Blood is a physician who is wrongfully convicted and sentenced to a life of slavery in the Caribbean. He escapes the chains of slavery and begins a piracy career. Toward the end of the film Capt. Blood receives a pardon and commission in the Royal Navy from King William of Orange. This leads him to defend the colony under attack, and he is made governor after successfully defeating the colony’s French aggressor.

² Robert Louis Stevenson made famous Long John Silver, the sea cook with a missing leg. Silver had a constant companion in Captain Flint, his pet parrot. Robert Stevenson, Treasure Island, (the Macmillian Company 1922).

Captain Hook has been a villain to children ever since his introduction by J. M. Barrie in his children’s story, Peter and Wendy, more popularly known as Peter Pan, hit the stands. J. M Barrie, Peter and Wendy, (Charles Scribner’s Sons 1912). Reference is even made to Long John Silver in Peter and Wendy. Id. at 168, a testament to the power the image of Long John Silver has in defining the popular image of pirates in literature.

³ U.S. CONST. art. I, § 8, Cl. 10.

⁴18 U.S.C. § 1651 (2006).

⁵ See generally, United Nations Convention on the Law of the Sea, Dec. 10, 1982, 1833 U.N.T.S. 397 [hereinafter UNCLOS]; United Nations Convention on the High Seas, Apr. 29, 1958, 13 U.S.T. 2312 , 450 U.N.T.S. 82 [hereinafter High Seas Convention].

⁶ U.S. v. Smith, 18 U.S. 153 (1820).

⁷  Id. at 154.

⁸ Id.

⁹ Id. at 154-55.

¹⁰ Id. at 156-57.

¹¹ Id. at 157.

¹² Id.

¹³ Id.

¹⁴ Id.

¹⁵ U.S. CONST. art. III, § 3.

¹⁶ Smith, 18 U.S. at 157.

¹⁷ Id.

¹⁸ Id.

¹⁹ Id. at 158.

²⁰ Id. at 162.

²¹ Id. at 163 n.h. This footnote compiles a great number of sources in a number of languages. A reoccurring theme appears to be that piracy must occur at sea and lack the authority of “prince or state” Id. (citing Woodeson). Lord Coke is quoted as defining “pirate” meaning á rover and “robber upon the sea.” Id. (citing Coke (3 Inst. 113. Co. Litt. 391). So at its core, piracy is a robbery occurring on the sea lacking any state authority.

Murder falling within the definition of piracy is discussed using the case against Capt. Kidd. Id. William Kidd was tried for the murder of W. Moore on the Adventure Galley while on the high seas near Malabar. Id. His crew was tried for “seizing and running away with” the Quedash, a merchant ship. Id. Lord Chief Baron Ward instructed the jury as to the definition of piracy as “seizing and taking this ship and the goods in it piratically and feloniously.” Id. If the crew had engaged in such conduct and did not have a “French Pass, then it is piracy . . .” Id. Capt. Kidd and his crew were convicted and sentenced to death.

²² Id. at 161.

²³ Id. at 161-62. The opinion also describes that the crime of piracy was a civil law offence confined to the admiralty courts prior to the statute of 28th of Henry VIII. This illustrates English thought regarding piracy prior to Henry VIII. This treatment of piracy in a civil manner was possibly known by some members of the constitutional convention and taken into consideration when debating the offense clause.

²⁴ Id. at 162.

²⁵ Id.

²⁶ Id. at 182.

²⁷ Id.

²⁸ Id. at 183.

²⁹ United States v. Baker, 5 Blatchf. 6, 24 F.Cas. 962 (S.D.N.Y. 1861).

³⁰ Id. at 964.

³¹ Id. at 962. The full statement of the commission as given by the court is as follows:

Jefferson Davis, President of the Confederate States of America, to All Who Shall See These Presents-Greeting: Know ye, that by virtue of the power vested in me by law, I have commissioned, and do hereby commission, the schooner or vessel called the Savannah, (more particularly described in the schedule hereunto annexed,) whereof T. Harrison Baker is commander, to act as a private armed vessel in the service of the Confederate States, on the high seas, against the United States of America their ships, vessels, goods and effects, and those of their citizens, during the pendency of the war now existing between the said Confederate States and the said United States. This commission to continue in force until revoked by the president of the Confederate States for the time being. Given under my hand and the seal of the Confederate States, at Montgomery, this eighteenth day of May, A. D. 1861. (L. S.) Jefferson Davis. By the President. R. Toombs, Secretary of State. Schedule of description of the vessel: Name-schooner Savannah. Tonnage-fifty-three 41/95 tons. Armament-one large pivot gun and small arms. No. of crew-thirty.

³² Id. at 964. The language of both sections 1651 and 1652 is the same as the predecessor statutes. I have chosen to keep the current numbering in the discussion in order to avoid confusion.

³³ Id.

³⁴ Id. at 965-66.

³⁵ Id.

³⁶ Id. at 967.

³⁷ Id. at 966. The jury asked two questions. The first was “whether, if the jury believed that civil war existed, and had been so recognized by the act of our government, or if the jury believed that the intent to commit a robbery did not exist in the minds of the prisoners at the time, it may influence their verdict.” Id. The second was that it was “understood you honor to charge that there must be an intent to take the property of another for your own use.” Id.

These questions illustrate the problems with prosecution under § 1652 when the nation is fighting a state or territory that has seceded. To clear up any citizenship issues, the members of the Savannah’s crew should have individually revoked their U.S. citizenship prior to engaging in their actions as privateers. Such revocation may lead to other legal ramifications, but for the purposes of § 1652, it would clearly remove them from falling thereunder.

³⁸ 18 U.S.C. § 1653 (2006).

³⁹ 18 U.S.C. § 1654 (2004).

⁴⁰ 18 U.S.C. § 1655 (2006).

⁴¹ 18 U.S.C. § 1656 (2006).

⁴² 18 U.S.C. § 1657 (2006).

⁴³ 18 U.S.C. § 1661 (2006).

⁴³ Pirates have been known to engage in amphibious landings to assault and sack land-based towns. One of the most daring on record is Captain Morgan’s sacking of Panama. See generally, Peter Earl, The Sack of Panama: Captain Morgan and the Battle for the Caribbean, St. Martin’s Press (1981).

⁴⁴ See generally Harvard Research draft convention, 26 AM. J. INT’L L. SUP 739 (1932). The draft convention created a proposed code to govern piracy. Much of that code eventually became law under the United Nations Convention on the Law of the Seas.

Article 3 covers the definition of piracy in the convention. The extensive comments to that article provided shed light on the disagreements that arose in creating a definition of piracy and the appropriate legal methods for its punishment. The comments to article 3 state that creating a definition for piracy was the most difficult issue that faced the convention. Id. at 769. The comment reflects that the definition they had created did not touch upon “many practical and technical problems in the field of piracy …” Id. The comments to article 3 comprise 53 pages.

⁴⁵ I will not be discussing the Convention for the Suppression of Unlawful Acts Against the Safety of Maritime Navigation (SUA) as that convention does not use the term “pirate” to define a person who violates the convention.

⁴⁶ High Seas Convention, supra note 6, at art. 14.

⁴⁷ UNCLOS, supra note 6, art. 101.

⁴⁸ High Seas at art. 15.

⁴⁹ Id. at art. 16.

⁵⁰ Those individuals would not be pirates by definition, but can face prosecution under the SUA. See International Maritime Organization: International Maritime Organization: Convention and Protocol from the International Conference on the Suppression of Unlawful Acts Against the Safety of Maritime Navigation, IMO Do. SUA/CON/15 (1988), reprinted in 27 I.L.M. 668 (1988).

But the term is a bit of a misnomer because the reference is not just for those who are chronologically new in years on the planet. Each year there will be rookie players as young as 19 years old joining an NBA roster who may choose to translate their instant multi-million dollar income into a multi-million dollar consumption of goods and services with little or no capital contributions to charitable causes or the ownership of assets. What is new is the culture to use sophisticated private foundations in partnership with other for-profit entities to make major and sustainable improvements in communities from which they come.

One such example is a player who is now retired after nearly a decade in the NBA. A testimonial to his status as a new age athlete is codified in the State of the Union address in January 2007 by President George W. Bush:

“The greatest strength we have is a heroic kindness, courage and self sacrifice of the American people. You see this spirit often if you know where to look. And tonight we need only look above to the gallery. Dikembe Mutombo grew up in Africa amid great poverty and disease. He came to Georgetown on a scholarship to study medicine. Georgetown basketball coach John Thompson took a look at Dikembe and had a different idea. Dikembe became a star in the NBA and a citizen of the United States. But he never forgot the land of his birth or the duty to share his blessings with others. He built a brand new hospital in his own hometown. A friend has said of this good-hearted man, Mutombo [sic] believes that God has given him the opportunity to do great things. And we’re proud to call this son of the Congo a citizen of the United States.”5

A statistical review of current NBA players reveals that most have similar income but are not nearly as focused on such charitable projects. The NBA teams in the aggregate pay their players a total of just under $2 billion a year.6 Yet at various times during the 2009-2010 season, there were approximately 418 players, and only 130 appear to have a semblance of a foundation.7 A recent study of the 2008 season concluded that only 43 players were likely to have truly functional foundations.8 The median salary per player for the aggregate 30 teams is $3,425,665.9 If even half of 418 players funded a foundation with .05% of their salaries, without touching any endorsement money, more than $71 million of charitable funds would be generated each year. If that group chooses to pool their funds over five years for a portfolio of common projects, they could contribute $355 million for those initiatives.

A view of the highest paid NBA players also provides a glimpse of a significant opportunity to raise equity capital for charitable causes. The 25 highest paid NBA players have a combined salary of more than $462 million.10 That represents more than the entire gross domestic product (purchasing power) of the country of Zimbabwe.11 That purchasing power would make those players the 211th richest nation in the world.12 If they allocated 10% of just their salaries for charitable causes, without touching endorsement income, and pooled their funds for five years they would have amassed more than $231 million. Many of those top players have cultural connectivity with the crisis-burdened urban areas, and as such, high octane potential to be investors, as some already are, in urban projects. In fact, 20 of the top 25 salaried NBA players are African Americans.13

Income from endorsements also can be funneled into foundations, which in total can result in significant amounts of pooled assets. LeBron James’ high school graduation gift endorsement from Nike was $90 million, and since 2007 he leads the NBA in endorsements with an estimated $25 million in that year alone.14 His total endorsement package was $170 million.15 His mission is beyond the bounce of the basketball – to view his profession “differently than anyone has ever done … before.”16 That statement was made in 2007. Within three years, those words proved prophetic.

James was savvy enough in 2008 to re-negotiate his contract to establish free agency while he was still at a prime time to maximize his value and options. And then on July 9, 2010, he did what no other player had done before. He and premier sports network ESPN orchestrated the largest media feeding frenzy in NBA history over his announcement as to where he would take his professional services.17 Of particular relevance to this article, no other player devised such an announcement and negotiated with the multi-billion dollar media empire to mandate that all proceeds be donated to a charity.18 The beneficiary was the Boys and Girls Clubs of America in the amount of $2.5 million dollars.19 As testimony that the charitable purpose was genuinely part of his view of professionalism as an athlete, James secured ESPN’s agreement to commit 10 minutes of the one-hour program to give credit to charity sponsors.20 James, his marketing team and his foundation presented this idea to the network and the commitment to make the announcement, not from ESPN studios, but from the Boys and Girls Club.21 This is the different view of the player James referenced. It is an entrepreneurial and philanthropic perspective well beyond just playing the game on the floor. For these reasons, LeBron James is the poster child for the new age athlete.

Beyond the charity activities of James, there are 400-plus NBA players who can participate in myriad projects designed specifically for low-income communities. They can be laced with tax incentives that not only assist people in great need, but provide numerous tax benefits to reduce the player’s considerable tax liability and that of other partners in those projects. Those benefits include tax-exempt financing, non-recognition and exclusion of gross income, bond credits, tax credits, expense deductions and favorable depreciation rates.22 The aggregation of those benefits has often been the missing piece that allows the venture to make economic sense – essentially gap financing.23 As will be discussed below, therein lies the opportunity to collectively provide a transformative impact on entire communities of historic proportions.

The Jacksonville, Florida, Illustration

In many urban cores where the poor and historically disenfranchised reside, a common litany of maladies is faced daily that areuncommon to the general US population and major cities globally.24 Jacksonville, Florida, is just one of several major cities that faces some of those issues and therefore presents a philanthropic opportunity. The city is 15th largest in the nation, nearly 30% of which are African American.25 While the city of Jacksonville comprises the entirety of Duval County and is the largest city in square miles in the contiguous 48 states of this country,26 it has an overconcentration of African Americans in economically depressed areas, particularly north and northwest Jacksonville.27 Approximately 90% of the tenants of low-income public housing provided by the city are African American.28 Just over 41% of the African-American residents live on city blocks that are greater than 80% black.29

Infant Mortality

The infant mortality rate for African Americans in Jacksonville is 16.2 deaths per 1,000 births.30 That rate is 122% higher than that for the white population generally and 20% higher than the rate among African Americans in Florida as a whole.31 From a global perspective, the Jacksonville rate among African Americans is slightly better than that in Malaysia, but worse than in the countries of Bahrain, Jordan, Panama, Jamaica and Argentina.32 As stated by the most recent authoritative study regarding Jacksonville infant mortality, African-American infants in Jacksonville are more than twice as likely to die within the first year of life as white babies.33

The Asthma Epidemic

One may initially think asthma is not a serious health issue, since heart disease and cancer and AIDS take far more lives per year.34 But a recent Jacksonville area health department study revealed startling statistics about asthma-related issues, starting with the fact that asthma is now the most common chronic illness of Jacksonville children.35 The study then notes “remarkable disparities” in asthma-induced deaths between blacks and whites in Jacksonville.36 The death rates among African Americans were 117% higher than that of whites.37

Beyond the tragedy of death is the drain on the individuals who survive and the millions of dollars in health care costs after emergency room visits and overall hospitalization to treat the asthma attack. The disproportionate effect on African Americans is again apparent. In 2005, the hospitalization rate in Jacksonville for asthma was 91.5% higher for blacks than whites, and blacks were over 2 1/2 times more likely to be treated in the emergency room for an attack than

whites.38 Some suggest that emergency room care is an inadequate remedy because it “only [treats] the asthma attack, not the long-term problem” often addressed early by primary physicians in preventive care to avoid the attack.”39 These facts, coupled with the fact that the “numbers of minorities with asthma is increasing exponentially” led the author of the study to conclude that asthma is a “local epidemic.”40

The same study suggests means of ameliorating the epidemic. The primary asthma prevention targets are identified as the following:

1. Decreasing the occurrence of asthma through eliminating the environmental triggers (e.g., mold, dust, allergens, bug feces, industrial pollution).41
2. Increase access to quality health care.42
3. Increase education and community awareness and prevention activism.43
4. Reduce obesity and low birth rates, both of which are linked as an associated adverse factor.44

Dare we have the audacity to hope that some of those professional NBA players with multi-million dollar salaries use their respective foundations to bring those curative solutions to reality? To reduce the above environmental triggers for asthma, foundations could, for example, be part of a team that partially subsidizes the cost of mold elimination. As to access to quality health care, those without health insurance already have some assistance through the Duval County Health Department.45 But that department has found that “grants are difficult to get because every community in the country wants them.”46 The player foundations can be an alternate source for grants, or a collaborative link to governmental sources. In light of the needs described above for Jacksonville, foundations may infuse capital or be contributors to health care plans to increase access by those who are unable to afford commercial insurance.47 And since these athletes are already high-profile images for physical exercise, they are uniquely positioned to inspire others to minimize obesity, and thereby assist in reducing the adverse effects of that factor on the incidence of asthma. The player can make appearances at obesity awareness workshops as easily as he can appear for car dealership-sponsored golf tournaments. And his foundation can just as easily co-sponsor or fund those workshops.

Reduction of the Government Burden

These remedial efforts from the player foundations can also reduce the public burden of paying for the inadequacies in asthma-related health care. African-American asthma patients in Jacksonville’s emergency rooms are almost twice as likely to be covered under public sources, i.e., Medicare, Medicaid and KidCare.48 If player foundations infuse sufficient funds into existing support structures to help those patients receive preventive care, or assist in the purchase of commercial insurance, there may be fewer asthma attacks, and the incidence of emergency room visits would decrease. And that could also reduce the public costs associated with emergency room and general hospital care. The potential savings may be significant. In 2005, Jacksonville’s cost for asthma-related emergency room visits was almost $8 million, equating to 7.5% of the state total.49 Nearly one in five of all ER asthma-related visits in Jacksonville were of African-American children between the ages of five and 14, a rate 260% higher than the asthma-related ER visits of whites in Jacksonville.50 These disparities are revealed to show how players who self-identify with those in need have the wherewithal to make a difference. Reducing that disparity can have the dual benefit of saving lives and saving dwindling and scarce public funds.

As noted above, Jacksonville is just one example. In Harlem, a programmatic success is found in a project that focuses on transforming the quality of life for a 100-block low-income community, particularly tracking children from birth to 21 years old.51 The fundamental principles are stated as “help[ing] kids in a sustained way, starting as early in their lives as possible, and to create a critical mass of adults around them who understand what it takes to help children succeed…”52 Initiatives include heath care (“Baby Care”), nutritional programs like a subsidized farmers’ market, and charter schools.53 The model has been replicated in other cities, and typifies projects into which new age athletes can invest through their respective foundations.54

Joint Venture Opportunities with Profit Entities

There are three primary types of charitable organizations a socially conscious professional athlete would consider to house and distribute charitable funds. Sophisticated donors may funnel contributions through public charities, private foundations, or donor-advised funds.55 Professional athletes have most often elected to use private foundations in light of the propensity to actively direct their own funds rather than primarily raise funds from the general public.56

If a new age athlete establishes a private foundation for pursuing projects with long-term beneficial effects in historically disadvantaged communities, the foundation is not likely to achieve those large-scale benefits as a stand-alone entity. It is more likely that joint venturing with other entities, even profit entities, is required. Section 4944 of the Internal Revenue code is an obscurely helpful authority for reaching the limits of the joint venture opportunities with private profit entities. Particularly relevant to this article is the use of joint ventures and investments made by tax-exempt entities into for-profit entities.

Program-related Investments versus Jeopardizing Investments

Section 4944 of the Internal Revenue code (“IRC or Code”) imposes excise taxes when a private foundation “invests any amount in such a manner as to jeopardize the carrying out of any of its exempt purposes Ö”57

Those taxes can be substantial and a very clear deterrent to any questionable investment. The tax can be imposed on both the foundation and separately on any and all managers of the foundation.58 Also noteworthy is the fact that private foundations are subject to other excise taxes beyond the jeopardizing investments. Code sections 4940 through 4945 and a complex array of companion regulations are even greater cause for very careful analysis before a foundation invests in and jointly with for-profit ventures.59 The investment decision therefore is a high-risk game.

An exception to the jeopardy excise tax exists for what are called program-related investments (“PRIs”).60 An investment will not be considered a jeopardizing investment if it meets two criteria: (1) the “primary” purpose is to accomplish its exempt purposes and (2) no “significant” purpose of the investment is for production of income or appreciation of property.61

So investments significantly related to the exempt purposes are program-related and thus not in jeopardy of losing exempt status or having the excise taxes applied. Conversely, investments made primarily for the production of income or property appreciation are subject to those excise taxes and potential loss of exemption. Obviously then the question is what factors determine whether the primary purpose of the investment is for exempt purposes rather than income production or property appreciation. As described below, there is ample authority for the conclusion that a private foundation composed of professional athletes can be a member in a limited liability company with for-profit members and still have a primarily exempt purpose without losing exempt status, and without being subject to excise taxes due to jeopardizing investments.

Properly Purposed Investments as PRIs for the New Age Athlete and the Creative Use of LLCs

To have major impact on communities, athletes and their venture partners may need to pool their funds just to amass the amount of capital required to make a difference. With the rare exceptions noted above, most NBA player foundations examined to date have yet to pool their funds or develop a portfolio of investments. And as stated earlier, most NBA players have not created their own foundations. Yet the IRS has provided guidance to private foundations on portfolio development, albeit from obscure sources. The vehicle is a creative joint venture with for-profit entities and non-exempt individuals through a limited liability company.

In Private Letter Ruling 200610020, the IRS was asked to rule on whether a private foundation could make investments as part of an LLC with other non-exempt members without being subject to the excise tax under Section 4944.62 Stated in the affirmative, the entity sought IRS endorsement of the investments as program-related investments.

In the request for the PLR, the private foundation proposed an organizational structure whereby the members of the LLC invest (via capital contributions) into a common fund. The members would include the foundation, composed of individual professional athletes, and for-profit entities and individuals.63 The fund is designed to invest in businesses operating in low-income communities owned by minorities or other disadvantaged groups who have lacked access to conventional financing on reasonable terms.64 The overall intent is to enhance the economic well-being of those communities. An additional mission of the LLC is to educate individual LLC members on entrepreneurship and finance training. The fund will make qualified investments into “Portfolio Companies” (i.e., the target businesses in low-income communities).65

In order to qualify as a PRI, rather than a jeopardizing investment and excise taxes or exemption loss, the LLC investment must comply with the two-pronged requirements noted above (primary charitable purpose and no significant purpose for income production or property appreciation). The IRS concluded both requirements were met. There was a primary charitable and educational purpose because there was a sufficient nexus between the recipients of the investment (the Portfolio Companies) and the charitable purpose (improving the economic well-being of low-income communities). The nexus was evidenced from having the Portfolio Companies (1) actually operate in the target communities, (2) owned by those denied conventional financing, and (3) selected based on the ability to fill community needs.66 The educational program was further evidence of the charitable purpose since individual LLC members must participate in that activity, including training on how to evaluate business opportunities, and the principles of angel in

vesting, which gave them practical business experience.67

The IRS also found that the LLC investment was not made for income production or property appreciation.68 Deriving factors from its regulations, the IRS stated the non-income purposes were evidenced from the following considerations: (1) private investors investing solely for profit would not likely make the same LLC investment on the same terms as the LLC,69 (2) the LLC members expected a lower return on their investment than private sector investors (angel investors) due to the risky nature of the fund’s investment criteria in low-income communities without conventional financing, and (3) the foundation is authorized through the LLC’s Operating Agreement to assure that the fund’s activities remain charitable. The third factor includes the foundation’s ability to veto any non-charitable investment objectives, liquidate any non-charitable investment, redeem any fund investment that jeopardizes the status as a PRI, or alternatively cap its investment return.70

There are several other private letter rulings consistent with the above ruling, including allowing the profit corporation’s own investment to qualify as a PRI because it furthered the foundation’s exempt purpose.71 The IRS also endorsed as a PRI the foundation’s ownership of stock in for-profit businesses.72 The regulations also authorize PRI treatment of a foundation’s capital contribution if conventional financing is available, but dependent on the foundation’s funds to fill in the gap on the amount of equity capital necessary to make the loan.73 This is acceptable even when the private foundation purchases the common stock of a for-profit corporation, and even if that stock appreciates in value and the foundation profits thereby.74

In each circumstance, the IRS approved the private foundation’s joint venturing with for-profit entities, both LLCs and corporations, and with private individuals. In each instance, the foundations were allowed to invest their own funds jointly with funds of for-profit entities even if the LLC or corporation in which they both contributed funds was a for-profit business. And the IRS allowed PRI status for the LLC’s investments in target businesses as long as their funds were used in furtherance of the foundation’s exempt purposes and that governing documents for the LLC authorized the foundation to assure that the funds shall be used for those exempt purposes.

Application to the New Age Athlete

If a professional athlete or a group of athletes wanted to have transformative effects on the health care issues facing those in acute need in the city of Jacksonville, the IRS has endorsed sophisticated joint ventures through the players’ respective foundations. Certainly individualized efforts can occur without these joint ventures. A single player could make a simple contribution from his foundation to targeted individuals. Or a player could infuse funds into targeted nonprofit organizations that in turn allocate resources to those targeted individuals. But if the mission is to provide real and sustainable solutions, such big issues likely require big resource allocations. As noted above, the Jacksonville issues in infant mortality and asthma are pervasive among a community of nearly a quarter million people.75 These maladies have causes that are complex and long-developing in genetics, environment, class and race. Dissolving the heath care disparity, in this author’s view, is therefore not likely solved by governmental subsidies alone, or nonprofit organizations alone, which are often already under-resourced.76 The private sector has a role to play, and these athletes have a propitious opportunity to make a larger contribution as part of and in connection with that sector.

There are also existing major corporations available as joint venture partners from the private sector. The Goldman Sachs Group, Inc., funded its own foundation in 1999 with a $200 million donation.77 Grants have been awarded in excess of $114 million since its inception.78 January 2010 initiatives were created specifically to “deploy the firm’s capital to help transform distressed US communities into sustainable and vibrant neighborhoods of choice and opportunity.”79 The most recent projects may well be part of its larger effort to reestablish itself as a good corporate citizen after the recent economic crisis.80 The value of that intangible asset of goodwill, like many assets, is more appreciated when it is lost. If Goldman Sachs is dedicating its own capital for urban projects to improve its goodwill, who better to partner with than foundations of professional athletes that carry considerable cache in those same urban communities?

PRL 200610020 is a model for Jacksonville joint ventures in an LLC between the exempt player foundations and the non-exempt private sector corporate entities. The foundation would be composed of several professional athletes. Those athletes could be current or former players for the Jacksonville Jaguars, or those who were raised in Jacksonville, or those with any other basis of affinity with the city or their self-identification with the low-income target community. The foundation would be just one member of a for-profit LLC.81 Other members could be individuals and for-profit entities that could include corporations with local business activity, historically or as part of its growth model.82 All the members would then make capital contributions into a fund. The fund would be the principal asset of the LLC. The vast majority of that fund would then be invested in a chosen Jacksonville health care initiative.

This LLC model accommodates a dual philanthropic bottom line. The mission can be both charitable for the low-income community and educational for entrepreneurial training. In PRI 200610020, 15% of the funds were to be used to train entrepreneurs and athlete LLC members. For the Jacksonville initiative, methods to improve health care for the target community have already been identified. But the service providers are under-resourced. The foundation could help fund the training of those who need access to quality care, preventive education, and obesity prevention. The athlete members could receive training in how to evaluate the health care services and preferred investment methods in meeting the charitable goals.

One significant benefit to the new age athlete is that effective use of foundations during current seasons can help them transition into careers after their on-field career has ended. In the Jacksonville example, the player foundation members may envision owning and/or operating stand-alone health clinics within the target community or subsidiary out-patient clinics of existing hospital facilities. If athletes establish foundations during their playing days while they are highly visible, they can maximize their goodwill with their team, and presumably increase bargaining power for upcoming contracts. The use of a foundation during playing days also increases bargaining power to negotiate favorable terms with a corporate joint venture partner while his intangible asset of brand name is most valuable. Once his playing career is over or in the fourth quarter, his bargaining power may have decreased and the transition to other industries is more difficult.

The LLC is particularly well suited for these joint ventures because of statutory flexibility in management and profit distribution. Unlike the typical C corporation, the LLC members determine whether to manage the entity through a single manager or any agreed configuration of a group of members regardless of respective ownership interests.83 These managers need not own any particular amount of ownership interests.84 Under the PLRs and regulations, the foundation must have primary authority to assure the invested amounts by members into the fund shall be distributed consistent with the charitable and educational purposes.85 Under the Delaware LLC statutes, the foundation can be the manager by whatever terms are established in the operating agreement.86 Regarding distributions, the LLC operating agreement may govern the allocation of profits among members even if that allocation is different from a corporate dollar-per-share distribution based on respective ownership interests.87 That flexibility would allow the foundation and the for-profit members to adjust their respective profits to meet the complex requirements of the excise tax statutes and regulations in order to retain PRL status for the foundation’s investment and the LLC distributions.

Another advantage of the LLC model in the Jacksonville context involves the use of pooled investments and portfolio companies. When funds are pooled to amass significant capital, investments still may need to be placed in more than one area. To resolve that city’s multi-faceted health care issues, investments may need to occur in stages and be strategically placed in various service providers. One investment may involve a capital outlay into a new community clinic specializing in the infant mortality and asthma issues they face most acutely, and a separate investment in existing nonprofit organizations that are also part of the solution. Another investment may be loans or educational training grants to service providers (nurses and technicians). Still another investment may be the creation of an equity capital fund for small businesses designed to assist that same community (e.g., providers of durable medical equipment for infants and asthmatics). Through greater use of portfolio investments, the new age athlete can therefore enhance the effectiveness of his private foundation by working simultaneously on several fronts of the same war. The net effect may be accelerated achievement of major long-term benefits to the target community.

Conclusion

The NBA players have a propitious opportunity to do something unprecedented – pool funds through their respective private foundations to have transformative effects on entire communities. Jacksonville, is just one of many large urban communities that could be the beneficiary of such targeted efforts. Through regulations and private letter rulings, the IRS has now provided reliable guidance for carefully constructed joint ventures through LLCs that are well designed to pursue those goals.

The foundations can joint venture with profit entities as long as the capital contributions remain devoted to the charitable projects, and the LLC’s operating agreement requires the foundation to monitor the investment distributions. The LLC can identify and invest in portfolio companies and still allow profits to both the foundation and its for-profit members. And the operating agreement can provide the flexible allocations of profit to avoid loss of exempt status or excise taxes. The benefits of the increased profitable philanthropy by these new age athletes are not just to the target community and their tax return and career transition. More capital contributions to revitalize communities can translate to fewer governmental subsidies and tax loss for the country. So while players may often answer oft-repeated media questions with a cliche, another worn cliche is a comment to these talented potentially new age athletes — “the ball is in your court.”

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To read Professor Groves’ annotated works, please click here and here.