State Regulation of Charitable Solicitations:

Managing the Morass

Presented by

Leslie Stophel Maclellan Maclellan Law, PLLC [email protected]

© 2011 Chambliss, Bahner & Stophel, P.C.

All Rights Reserved

Charitable Giving

• More than 1.6 million nonprofit organizations are registered with the IRS • Individuals give over $211 billion as charitable contributions • Foundations and corporations give an additional $79 billion (Source: National Center for Charitable Statistics)

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Why Register?

• IT’S THE LAW: 41 states (and the District of Columbia) require nonprofits to register before raising funds • Form 990 inquiry • Oversight by industry organizations • Use of professional fundraiser and/or solicitor

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State Charitable Solicitation Acts

• Consequences – Civil fines (up to $25,000 – GA) – Criminal fines and jail, depending on the state and egregiousness of the acts • Up to a 3rd degree felony in some states – Media coverage / damage to reputation – Audit – Court ordered return of donations – Donor lawsuits

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Increased Regulatory Oversight

• NASCO: Priority • Recent attempts were made in several states to mimic the Sarbanes-Oxley Act to impose tighter restrictions on use of contributions • Federally, some members of Congress make regulating charities and charitable gifts a priority – Most notably, Senator Chuck Grassley (R-Iowa).

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Increased State Enforcement

• Each year – Approximately 100 enforcement cases per year – 2 to 3 organizations are shut down per year – Tennessee Deputy Attorney General: "definite increased focus"

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What is Soliciting Contributions?

• State specific definitions • Oral - TV, radio, commercials • Written - mail, public posting, or communicated by any media, including news articles • Email • Offer or sale of goods at fair market – Books, tapes, membership – Conference invites if fee paid – Benefit concerts – “Commercial co-venturer”

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Internet Solicitations

• In many states, officials view the "Donate Now" link on your website as a solicitation

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Internet Solicitations

• Charleston Principles – Applies state registration statutes to internet solicitations – Adopted by some states including Tennessee – States enforce the law against nonprofits that mislead or defraud persons in the state

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Trends – Internet Solicitations

• Registration required if: – The entity solicits contributions through an interactive website and either • Targets a person in the state, or • Receives contributions on a “repeated and ongoing basis”; or • Specifically invites further offline activity; or • Or establishes other contacts with the state (such as sending an email promoting the website)

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Trends – Responding to Social Media

• Social media permits nonprofits to raise money in different ways than charity-run websites and poses significant problems that charity regulators are trying to resolve • Questions that arise – How to monitor "daily-deal" websites that encourage online donations – How websites that charge fees for collecting donations should disclose those fees – How to respond to "friends" soliciting via Facebook – How to prevent bogus charities from social network abuse

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The Registration Process

1. Register in the State in which you are located – Tennessee uses the Uniform Registration Statement 2. Identify additional states in which you will be soliciting 3. Identify available exemptions

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Exemptions

• • • • • State specific Fire departments, community fairs, etc.

Churches and “bona fide” religious organizations Educational institutions – – – De minimis exemptions gross contributions less than $_____ loose interpretation of “contributions” TN has $30,000 exemption

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Trends – Uniform Disclosure Statements

• Many states also regulate solicitations by requiring nonprofits to disclose certain information in conjunction with the solicitation • Uniform Disclosure Statements are created to address these requirements • Many organizations include them with all public communications

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Forming a Nonprofit Social Enterprise: Organization and Tax-exempt Status

Presented by

Leslie Stophel Maclellan

© 2011 Chambliss, Bahner & Stophel, P.C.

All Rights Reserved

Two Layers of Government Regulation: State and Federal

• State Regulation – – – – Oversight of nonprofit corporations Annual reporting Charitable solicitations Exemption from state taxation – Contract Laws governing contracts/employees • Federal Regulation – – Federal tax exemption Form 1023

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State Regulation

• Tennessee Nonprofit Corporation Act • Board Governance • Charter must include specific statutory language • Annual reporting required • $100 filing fee • File with the Secretary of State

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Federal Tax-exemption

• File Form 1023 with the IRS • Operate almost exclusively for one or more exempt purposes • File within 15 months of incorporation • Most private foundations require • Annual Form 990 reporting (990N) • $800 fee

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Form 1023

• 10 page form with schedules • Independent Board members • Insider compensation – Conflict of interest policy • Mission statement/statement of tax exempt purpose • 3-6 month process

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Social Enterprises: Alternative Legal Forms

• Social Enterprise: business with a purpose • Trends: both for-profit and not-for-profit models • New hybrid legal forms – Corporate Flexibility Act of 2011 (CA) – Benefit Corporation (CA, MD, VT, NJ, VA, HA) – L3C (VT, NY)

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Questions?

• What is the social enterprise activity?

– Will enterprises’ activity be difficult to obtain tax exemption?

– Will exemption limit activities?

• Where will the funding come from and how much is needed?

– Private foundation grants?

– Private investors seeking ROI?

– On-going revenues?

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WHAT YOU NEED TO KNOW ABOUT FORM 990

By: James L. Catanzaro Chambliss, Bahner & Stophel, PC (423) 757-0274 [email protected]

What is It?

Unless exempt, startup non-profit organizations must file Form 990 (an informational return) within five months, 15 days from end of tax year

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Selecting the Right Form 990

Depending upon the financial resources of the organization, it may be possible to file Form 990N (an e-postcard) or Form 990EZ

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Organizations with gross receipts of less than $50,000 may file a Form 990N. This form requires: • EIN • Tax year • Legal name and mailing address • Any assumed names • Name and address of principal officer • Website address, if applicable; and • Confirmation of gross annual receipts

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If the organization can’t file a 990N, but gross receipts do not exceed $500,000 annually and its assets are not valued in excess of $1.25 million, it may file Form 990EZ. The EZ is a four page form with Schedules A through O, as applicable.

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Why Report?

If an organization fails for three consecutive years to file the applicable Form 990 due, its tax exempt status will be automatically revoked.

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What 990 Demonstrates

The assets of a non-profit are to be used for a charitable mission with its governing board and officers as the trustees of such assets. The return shows what is being done with the assets entrusted.

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What is the IRS looking at when reviewing information disclosed on Form 990?* In effect, the IRS wants to see if operations match the Bylaws adopted and 1023 Application submitted.

*other than Form 990N

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Good Governance and Form 990 A significant part of Form 990 concerns measures that, although not required, are deemed as good governance practices. Good governance enhances tax compliance.

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Thus, all non-profits should review and be aware of the Form 990 governance disclosures.

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Should every non-profit, no matter the size, adopt all policies and practices inquired about in Form 990? No, each organization must, depending upon its size, type and culture, determine whether and to what extent it should adopt such policies and practices.

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For each organization, there are a few key issues and concerns to be aware of when assessing the adequacy of organization’s governance processes.

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Issue: Is there an independent governance and management structure? Concern: Organizations controlled by family or other related parties may be subject to abuse.

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Issue: Has the organization adopted an effective conflict of interest policy? Concern: Organizations that have not, are more likely to engage in “self-interested” transactions.

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Issue: Is the organization properly managing its public assets? Concern: Organizations that do not have controls over compensation may be wasting public assets or providing private increment.

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Issue: Does the organization create contemporaneous documentation of its governance process? Concern: Organizations that do not keep good minutes cannot document that they have engaged in responsible management of assets.

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Disclaimer

This presentation is provided with the understanding that the presenters are not rendering legal advice or services. Laws are constantly changing, and each federal law, state law, and regulation should be checked by legal counsel for the most current version. We make no claims, promises, or guarantees about the accuracy, completeness, or adequacy of the information contained in this presentation. Do not act upon this information without seeking the advice of an attorney. This outline is intended to be informational. It does not provide legal advice. Neither your attendance nor the presenters answering a specific audience member question creates an attorney-client relationship.

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