AFP INTERNATIONAL CONFERENCENEW ORLEANS, LOUISIANA 2009
WHO IS WATCHING YOU NOW -------------
REGULATION OF CHARITABLE
FUNDRAISING AND THE NEW FORM 990
PRESENTED BY:
SETH PERLMAN
PERLMAN & PERLMAN, LLP
41 MADISON AVENUE
SUITE 4000
NEW YORK, NEW YORK 10010
212-889-0575
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
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
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 PROVISIONS
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
OTHER GOVERNMENT REGULATORY AGENGIES
Internal Revenue Service
Postal Service
Federal Trade Commission
State Trade Commissions
County and Municipal Registration Offices
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
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.
CAUSE MARKETING EXAMPLES
• THE GOOD
• THE BAD(AND NOT SO BAD) AND
• THE UGLY