Transcript Document

Practising Law Institute
February 03, 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
[email protected]
www.PerlmanandPerlman.com
ADVISING NONPROFIT
ORGANIZATIONS 2010
TOPICS TO BE COVERED…
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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
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Why is fundraising regulated?
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How extensive is the wrongdoing in the
charitable sector?
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How much is attributable to fraudulent
fundraising?
HISTORY OF FUNDRAISING REGULATION
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In 1955, New York established the Office of Charitable
Registration to administer new fund raising regulations.
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Eventually over 40 other states established charity
offices modeled after New York, in response to:
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Growth of mass marketing technology
Proliferation of charities
Increased competition
PROLIFERATION OF CHARITIES
501(c)(3) Entities Registered with IRS
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1940:
12,500
1980:
320,000
1996:
654,186
2007:
1,128,367
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2007: IRS approved 68,278 new 501(c)(3) entities
(32 per hour/40 day week)
WHAT ACTIVITY IS REGULATED?
SOLICITATION
In 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
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Conflicting interests of charities and the government
results in increasing tension.
Government Interests
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Ensuring assets are used for charitable purposes
Protecting citizens from fraud
Protecting donors’ privacy
Charity Interests
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Disseminating information
Seeking funding unburdened by government restrictions
STATE REGULATION
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Approximately 45 states (soon to be 47) have a
statutory scheme to deal with nonprofit solicitations
and use of nonprofit assets within their borders.
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Registration and reporting requirements are imposed
on charities, professional fundraising counsel,
professional solicitors, and commercial co-venturers.
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Each group is required to file annual registrations and
financial reports and/or the IRS Form 990.
NONPROFIT ORGANIZATIONS
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Include Section 501(c)(3) and (c)(4) organizations
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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
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Directly solicit the general public on behalf of a charitable
organization for a fee
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Often have custody/control of the contributions received
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Required to register in approximately 41 states, post a surety
bond and file contracts with their nonprofit clients
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Many states also require a pre-solicitation disclosure of
professional status prior to making the request for a gift
PROFESSIONAL FUNDRAISING
COUNSEL/CONSULTANTS
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Help plan, manage, advise on or produce and design
solicitations to the general public for a fee
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Do not make the solicitations or have custody or
control of contributions
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Required to register in 26 states and post bonds in a
few
COMMERCIAL CO-VENTURERS
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As part of a sales promotion, a commercial coventurer uses the charity’s name to sell its products
or services and makes a charitable donation based
on the sales.
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Registration required in:
Maine, Massachusetts and Alabama (Hawaii?)
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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 PROVISIONS
WITH OUTSIDE FUNDRAISERS
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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
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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
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Internal Revenue Service
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Postal Service
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Federal Trade Commission
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State Trade Commissions
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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
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New format: Core Form with Schedules A – R
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Disclosure of more detailed information
 Compensation
 Governance
 Financial Information
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New first page includes summary of activities/governance,
revenue, expenses, and net assets
THE REVISED 990:
GOVERNANCE POLICIES
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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
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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”
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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
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Must include a revenue and expense breakdown for gaming events if
gross income from gaming activities exceeds $15,000
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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:
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Whether a state court has the power to adjudicate claims
against an organization for its conduct on the internet
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The extent of statutory authority of state or federal
regulatory agencies
STATE JURISDICTION: ONLINE SOLICITATION
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State must have “minimum contacts” with organization.
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The organization must purposefully avail itself of the privilege of
doing business in the state.
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The cause of action/regulation must relate to defendant’s
activities within the state.
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The exercise of jurisdiction must be reasonable in light of the
various interests at stake.
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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:
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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 noninteractive 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
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To maintain its 501(c) (3) status, a nonprofit must
meet an organizational test and an operational test.
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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
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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
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Liability: A nonprofit might be liable
for tax on its unrelated business taxable
income.
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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
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Hyperlinks and Banner Exchanges
 Advertising v. Corporate Sponsorship
 Merchandising
CAUSE RELATED MARKETING REGULATION
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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.
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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
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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
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Connecticut requires a written contract from the commercial coventurer. 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 coventure 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
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Federal and State Cooperation
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AICPA SOP 98-2 – Joint Cost Allocation reviews
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FTC pipeline used by regulators to track problems in other
states.
State review of 98-2 allocations
BBB Wise Giving Alliance review of 98-2 allocations
Recording value of in-kind gifts
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Media in-kind as tangible property