Practising Law Institute ADVISING NONPROFIT ORGANIZATIONS 2010 Presented By: Seth Perlman Perlman...

Practising Law Institute

ADVISING NONPROFITORGANIZATIONS 2010

Presented By: Seth Perlman

Perlman & Perlman, LLP

41 Madison Avenue, Suite 4000

New York, NY 10010

Ph: 212-889-0575

Fx: 212-748-8120

Seth@perlmanandperlman.com

www.PerlmanandPerlman.com

February 03, 2010

TOPICS TO BE COVERED…

History of Fundraising What Activities are Regulated Role of Government Regulatory Landscape Changing Landscape, including the “new” 990 Internet Fundraising Oversight Cause Marketing and the Regulatory Environment

THRESHOLD QUESTIONS

Why is fundraising regulated?

How extensive is the wrongdoing in the charitable sector?

How much is attributable to fraudulent fundraising?

HISTORY OF FUNDRAISING REGULATION

In 1955, New York established the Office of Charitable Registration to administer new fund raising regulations.

Eventually over 40 other states established charity offices modeled after New York, in response to: Growth of mass marketing technology Proliferation of charities Increased competition

PROLIFERATION OF CHARITIES

501(c)(3) Entities Registered with IRS __________________________________

1940: 12,500 1980: 320,000 1996: 654,186 2007: 1,128,367 _________________________________

2007: IRS approved 68,278 new 501(c)(3) entities (32 per hour/40 day week)

WHAT ACTIVITY IS REGULATED?

SOLICITATIONIn short, solicitation is the affirmative act of asking for a gift or selling goods or services that will benefit a charitable organization.

GOVERNANCE

The new Form 990 puts the IRS in the position of regulating the governance of nonprofits.

GOVERNMENT VS. CHARITY

Conflicting interests of charities and the government results in increasing tension.

Government Interests Ensuring assets are used for charitable purposes Protecting citizens from fraud Protecting donors’ privacy

Charity Interests Disseminating information Seeking funding unburdened by government restrictions

STATE REGULATION

Approximately 45 states (soon to be 47) have a statutory scheme to deal with nonprofit solicitations and use of nonprofit assets within their borders.

Registration and reporting requirements are imposed on charities, professional fundraising counsel, professional solicitors, and commercial co-venturers.

Each group is required to file annual registrations and financial reports and/or the IRS Form 990.

NONPROFIT ORGANIZATIONS

Include Section 501(c)(3) and (c)(4) organizations

35-37 states require charities and other nonprofits to register prior to commencement of solicitations.

Also may include other nonprofit organizations as defined by state law – tax exemption and deductibility is a function of federal tax law while the nonprofit status is a creature of state law.

PROFESSIONAL SOLICITORS

Directly solicit the general public on behalf of a charitable organization for a fee

Often have custody/control of the contributions received

Required to register in approximately 41 states, post a surety bond and file contracts with their nonprofit clients

Many states also require a pre-solicitation disclosure of professional status prior to making the request for a gift

PROFESSIONAL FUNDRAISING COUNSEL/CONSULTANTS

Help plan, manage, advise on or produce and design solicitations to the general public for a fee

Do not make the solicitations or have custody or control of contributions

Required to register in 26 states and post bonds in a few

COMMERCIAL CO-VENTURERS

As part of a sales promotion, a commercial co-venturer uses the charity’s name to sell its products or services and makes a charitable donation based on the sales.

Registration required in: Maine, Massachusetts and Alabama (Hawaii?)

20 other states regulate the activity but do not require registration

EXEMPTIONS

Churches and in most states - Religious Organizations Educational Institutions Hospitals Investment advisors, lawyers and accountants Organizations raising less than $25,000 Organizations for which solicitations limited to

membership Volunteers soliciting for the benefit of a named individual Bona fide employees or volunteers

SAMPLE CONTRACT PROVISIONSWITH OUTSIDE FUNDRAISERS

Record retention for 3 years Right to rescind by charity in NY and CA Gross collections delivered to charity Donor list owned by charity required (in some states) Description of purposes of the campaign, services to

be provided, and calculation and basis for the fee Signature by two officials, including one director or

trustee, of the charity

STATE LEGISLATIVE TRENDS Primary Focus Areas

Financial Reporting Registration and Reporting Anti-Terrorism Gaming Disclosure Annuity Property Tax Vehicle Donation Do Not Call/Do Not Fax Miscellaneous

OTHER GOVERNMENT REGULATORY AGENGIES

Internal Revenue Service

Postal Service

Federal Trade Commission

State Trade Commissions

County and Municipal Registration Offices

IRS: CHANGE IN PRIORITIES

“After years in which our energies have been directed to customer outreach and education, with minimal effort on enforcement, we are re-balancing by elevating enforcement to the top of our agenda…”

-Steve Miller, Tax Exempt Division

THE REVISED 990: KEY OVERALL CHANGES

New format: Core Form with Schedules A – R

Disclosure of more detailed information Compensation Governance Financial Information

New first page includes summary of activities/governance,

revenue, expenses, and net assets

THE REVISED 990: GOVERNANCE POLICIES

Conflict of Interest Policy Gift Acceptance Policy Whistleblower Policy Executive Compensation Policy (for key employees,

board members and officers) Joint Venture Policy Record Retention Policy Form 990 Review Policy Policy Governing Local Branches, Chapters and

Affiliates

THE REVISED 990: SCHEDULE G - INFORMATION ON FUNDRAISING OR

GAMING ACTIVITIES

Threshold Triggers: $15,000 or more in professional fundraising services, fundraising events income, or gaming events

Must list 10 highest paid fundraisers compensated $5,000 or more pursuant to written or oral agreements during the fiscal year

Includes disclosure of the “gross receipts from activity” performed by each fundraiser and the “amount paid to fundraiser”

Requires filing organization to list expenses (e.g. printing costs) separately in Schedule O, if possible

THE REVISED 990: SCHEDULE G - INFORMATION ON FUNDRAISING OR

GAMING ACTIVITIES

Must “list all states in which the organization is registered or licensed to solicit funds or has been notified it is exempt from registration or licensing”

Must include a revenue and expense breakdown for the two largest fundraising events with gross receipts greater than $5,000 and a summary for all other events with gross receipts greater than $5,000

Must include a revenue and expense breakdown for gaming events if gross income from gaming activities exceeds $15,000

Requires disclosure of other information related to gaming including the states where the organization performed the activity and whether the organization was licensed in each state

FUNDRAISING IN CYBERSPACE

Jurisdictional questions affecting nonprofit online activities:

Whether a state court has the power to adjudicate claims against an organization for its conduct on the internet

The extent of statutory authority of state or federal regulatory agencies

STATE JURISDICTION: ONLINE SOLICITATION

State must have “minimum contacts” with organization.

The organization must purposefully avail itself of the privilege of doing business in the state.

The cause of action/regulation must relate to defendant’s activities within the state.

The exercise of jurisdiction must be reasonable in light of the various interests at stake.

Long-arm statutes determine whether the state has jurisdiction over internet conduct of out-of-state organizations.

THE CHARLESTON PRINCIPLES

Advisory principles adopted by NAAG/NASCO to clarify the applicability of state charitable solicitation regulations to internet fundraising. These apply to:

Entities domiciled within the state. Out-of-state entities whose non-internet activities would require

registration in the state. Out-of-state entities that solicit through an interactive or non-

interactive web site and specifically target persons physically located in the state or receive contributions from the state on a repeated and ongoing, or substantial basis through or in response to the web site solicitation.

FEDERAL TAX ISSUES: NONPROFIT USE OF INTERNET

To maintain its 501(c) (3) status, a nonprofit must meet an organizational test and an operational test. Organizational Test: Organizing documents must limit the

purposes of the organization to one or more exempt purposes, and must not authorize the organization to engage more than insubstantially in any activities which are not in furtherance of their exempt purposes.

Operational Test: Organization must be deemed to operate “exclusively” for its specified exempt purposes.

Danger of Substantial Internet Activities Nonprofits should ensure that internet revenue-generating

activities do not become substantial in relation to their activities taken as a whole, unless those activities are primarily related to the nonprofit’s exempt purposes.

FEDERAL TAX ISSUES: UBIT

Tax Liability: A nonprofit might be liable for tax on its unrelated business taxable income. Includes income from a trade or business, regularly carried on that

is not substantially related to the organization’s exempt purpose or function except to the extent that the organization benefits from the profits derived from the activity.

Activities that could trigger UBIT Hyperlinks and Banner Exchanges Advertising v. Corporate Sponsorship Merchandising

CAUSE RELATED MARKETING REGULATION

Definition: A commercial marketing partnership between a business and a nonprofit entity to market an image, product or service linked to a social cause or issue, for mutual benefit.

Many state regulations protect against potential consumer fraud or deception and to ensure that the funds raised are used for the charitable purposes as advertised.

CAUSE RELATED MARKETING REGULATION

Advance registration for both the for-profit is required in Maine, Massachusetts and Alabama. Hawaii as of July 2008 requires the for-profit to file the contract.

About 20 other states regulate campaigns in some manner. Registration typically includes filing a registration statement,

paying a filing fee and posting a bond. States may also require:

a written contract, a final accounting or closing statement, certain disclosures in any marketing campaign, and maintaining books and records related to the co-venturer for a specified number of years.

CAUSE RELATED MARKETING REGULATION State Specific Requirements

Connecticut requires a written contract from the commercial co-venturer. A copy of the contract must be filed at least 10 days prior to the start of the charitable sales promotion in the state.

California requires that the designated funds be transferred to the charity at certain intervals throughout the campaign.

New York requires that the commercial co-venturer provide the charity with an interim report, at least annually, for any sales promotions lasting longer than one year.

New Jersey recently passed legislation requiring every co-venture to be pursuant to a written contract, which must contain a provision clearly and conspicuously stating that the parties are subject to the Charitable Registration and Investigation Act.

OTHER STATE ISSUES

Federal and State Cooperation FTC pipeline used by regulators to track problems in other

states.

AICPA SOP 98-2 – Joint Cost Allocation reviews

State review of 98-2 allocations BBB Wise Giving Alliance review of 98-2 allocations

Recording value of in-kind gifts Media in-kind as tangible property