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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
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