April 2012

In this issue:

  • Identity Finder, LLC recently published an analysis of sensitive information contained within the public IRS Form 990. Using software, they determined that between 2001 and 2006, more than 18% of all nonprofit organizations, or their tax preparers, published at least one social security number on their public tax return. [Read more.]
  • The threshold at which tax-exempt organizations are required to file a state income tax return has been raised from $25,000 in gross income to $50,000 in gross receipts. Comment: This is certainly a step in the right direction. Nevertheless, the threshold needs to be raised even higher.
  • The Nonprofit Times named Wounded Warrior Project as the best nonprofit to work for in 2012. (WWP is a client of the firm and we send our congratulations).

Federal

INTERNAL REVENUE SERVICE (IRS).
March saw the release of Publication 598, which outlines the rules pertaining to unrelated business income of exempt organizations in TUBIEO, including the types of organizations that are subject to the tax and how to calculate it.
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Believe it or not, the number of tax-exempt charities and foundations actually declined by 16% in 2011 as compared to 2010.  There is, however, an explanation.  When the law went into effect in 2006 requiring filing of the 990-N notecard, a number of charities lost their tax-exempt status as a result of their failure to file after the grace period ended in 2011.  Even so, the IRS has indicated that the flow of new applications for tax-exempt status has also slowed.

IRS FORM 990s AND SOCIAL SECURITY NUMBERS.
Identity Finder, LLC recently published an analysis of sensitive information contained within the public IRS Form 990.  Using software, they determined that between 2001 and 2006, more than 18% of all nonprofit organizations, or their tax preparers, published at least one social security number on their public tax return.  The article goes on to provide that those who have had their social security number published are more likely to be a target of identity fraud.  Organizations should avoid placing personal information (especially social security numbers on public documents, such as the Form 990).  In part, the article concluded by requesting the IRS publish explicit guidance explaining that social security numbers are not to be published on the Form 990. 

State

ARIZONA.
In something of a surprise move, House Bill 2610 has been introduced which, in effect, would repeal the necessity of registration in the state.
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The threshold at which tax-exempt organizations are required to file a state income tax return has been raised from $25,000 in gross income to $50,000 in gross receipts.

Comment: This is certainly a step in the right direction.  Nevertheless, the threshold needs to be raised even higher.


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S.B. 1121 is now law.  It amends a tax deduction for crops donated to charitable organizations to the greater of wholesale market price or most recent sale price.

COLORADO.
The Office of the Attorney General has filed a lawsuit against a Ft. Collins charity, its founder and several board members on suspicion that the group misused at least $31,000 in charitable assets, as well as accusing them of making misrepresentations while soliciting donations.  The founder of the charity has denied the allegations and interprets the lawsuit as an attack on his church.

FLORIDA.
The Nonprofit Times named Wounded Warrior Project as the best nonprofit to work for in 2012.  (WWP is a client of the firm and we send our congratulations).

IDAHO.
S.B. 1286 would relax the requirements of the net percentage that must go to the charitable purpose from charity raffles from 90% to 80%.

ILLINOIS.
HB 5516 has been introduced in the House that would actually reduce late fees and fines for late renewals and late annual reports.  Currently, the fine for late renewal is $200.  The bill would reduce the fine to $25.

Comment: It is unusual to see filing fees and penalties being reduced in legislation.  This bill is still pending and is yet to be passed.

MASSACHUSETTS.
Representatives of the Massachusetts Attorney General’s Office appeared at a recent conference on nonprofit issues.  A portion of the presentation was to announce to those present that they would increase the rate of enforcement in the area of commercial co-venture activity.  They indicated they would be sending penalty notices to commercial entities that are registered, but are not following up with filing required reports.

Comment: The laws in Massachusetts and Maine are two of the broadest in the country.  They define a commercial co-venturer as including anyone who promotes any form of the business enterprise that contains an indication that a charitable organization is going to benefit.  If you would like more information about compliance with commercial co-venture laws, please contact our firm.

MINNESOTA.
The legislature is wrestling over how to finance the new stadium in Minneapolis.  In play is revenue that could be generated from new charitable gambling, such as electronic pull tabs and bingo games.
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The state legislature has passed a new law, which may be the first of its kind.  The law is intended to protect charities and churches from having to make refunds from “clawback” lawsuits, a frequent tool for recovering funds stolen from Ponzi-Scheme victims.

Comment: We have seen a rash of lawsuits brought by trustees in bankruptcy proceedings to recover funds accumulated through a fraudulent Ponzi scheme for investors.  The frequent defense of the charity is that they receive the funds in good faith, and in many cases have already spent the funds in pursuit of its mission, and any potential refund constitutes a financial burden.  There are few defenses to these trustee actions.  The most viable defense is an exchange of consideration.  The ability of the donor to take a charitable deduction is not determined to be consideration.

MISSISSIPPI.
Look for the legislature to change the rules pertaining to filing renewals to be more in line with the IRS. (See House Bill 1242.)
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House Bill 1434 would impose more restrictions on telemarketing and prohibit solicitations on Sundays or legal holidays with a few exceptions.  The primary exception pertains to callers who are not being compensated.

Comment: It would seem to us that there is an equal protection and First Amendment problem when one class of callers is favored over another.  If calling is to be prohibited on Sundays or legal holidays, then it should apply to everyone.

MISSOURI.
In an unusual case, the Heartland Animal Clinic, a commercial veterinary clinic located in the metropolitan Kansas City area, brought a lawsuit against Heartland SPCA (a nonprofit) also located in the metropolitan Kansas City area.  The dispute is over the use of the name “Heartland” in conjunction with the animal services, and a trial court has preliminary agreed, enjoining the nonprofit from using the word “Heartland” in conjunction with the delivery of its services.  The nonprofit indicated it will seek to appeal the court’s restraining order.

Comment: While this is unusual insofar as it involves a commercial entity suing a nonprofit, it is not unusual for nonprofits to protect their brand.  In this case it appears some sort of compromise is the most likely outcome.

MONTANA.
The Office of the Attorney General has completed their inquiry into the conduct of Greg Mortenson, author of the bestseller, “Three Cups of Tea,” and the Central Asia Institute.  While Mortenson had independent counsel, the Central Asia Institute was represented by Greg Lam of this firm, who was asked to assist the organization to address the concerns of the Attorney General.  The Office of the Attorney General issued a lengthy report, noting the problems and the steps that are being taken as a result of the cooperation of the charity and the agreement that Mortenson entered into with the Office of the Attorney General.

NEW JERSEY.
The Attorney General’s Office announced it has filed a lawsuit against a New Jersey telemarketing company for conducting activities in the state on behalf of charities that are not registered.  The lawsuit also accuses the company of not maintaining financial records that are required by law.  The lawsuit is a civil matter brought in seven separate counts and involves a company which the press release identified as “PJG Enterprises, LLC.”

NEW YORK.
After five years of fighting, there is a settlement in the $100,000,000 Astor estate.  In a settlement negotiated with Office of the Attorney General a significant portion of the estate will go to a city education fund, with the bulk of the estate being distributed to parks in New York City.  At the heart of the struggle was Brooke Astor’s 87-year old son, who was criminally charged with having stolen money from the estate.  The settlement saw his share of the estate slashed by more than 50%.

OHIO.
The charitable gambling laws in Ohio are already fairly extensive, and House Bill 386 would increase their complexity.  Among the changes in the new bill would be to legitimize charity card rooms.  This bill has passed the first reading.

OKLAHOMA.
Feed the Children (whose difficulties have been chronicled in these reports over the last several years) has gone outside the organization to hire professional leadership.  Kevin Hagan will assume the role of president in June.

OREGON.
The Oregonian reported that the Oregon Department of Justice recently opened an investigation involving the Oregon-based organization, Autism Awareness United.  The organization was founded by a controversial real estate man who lost his real estate license and raised money for other autism organizations.  According to the newspaper, the investigation was triggered by a tip that the organization was promoting a raffle involving more than $10,000, which is allowed only for federally tax-exempt organizations.  A complaint against the organization has also been filed with the state of Washington by a competitive group.

PENNSYLVANIA.
Former Penn State football coach, Jerry Sandusky, founded the Second Mile charity.  As most readers know, he is now facing a series of criminal charges for child abuse.  According to an article published in USA Today and in local newspapers, Sandusky has made a claim against the charity’s insurance company demanding it provide a defense.  The insurance company has gone to federal court to contend that it is not obligated to pay defense costs, citing the former coach’s alleged “reprehensible acts.”

UTAH.
Long-time auditor, Steve Cooley, is no longer with the Utah Division of Consumer Affairs.  Cameron Dibbs has taken his place.

WEST VIRGINIA.
Legislation has been introduced (Senate Bill 660) that would raise the threshold amount by which a charitable organization is required to submit an audit report from an independently certified public account, from $200,000 to $500,000.

Comment: Here again, is a subject whereby the state should seek some traction in gaining uniformity.  The threshold requirements for audits should be increased across the board.

Other

COMBINED FEDERAL CAMPAIGN.
According to the Federal Times, OPM (Office of Personnel Management) recently concluded an audit and is seeking reimbursement from the operator of the federal “in-the-work place” campaign in the Washington DC area.  The audit alleges that there were significant expenditures for inappropriate activities.  The operator is appealing most of the reimbursement order that was issued by the agency.

COURT RULING ON PBS/POLITICAL ADS.
The U.S. Court of Appeals for the Ninth Circuit in San Francisco ruled that the 1981 law prohibiting radio and public television from carrying advertisements that support political candidates, or taking positions on public issues, violates the First Amendment.  The court did uphold another part of the law which bars the running of ads for commercial products.  The ruling by the court was 2-1, and is based upon the fact that the court found the regulation was “content-based,” which requires an analysis under strict scrutiny.

THE NONPROFIT TIMES HONOR.
Errol Copilevitz, senior partner of the firm, was named as one of the twenty-five individuals who helped to shape the nonprofit community during the past twenty-five years in The Nonprofit Times‘s twenty-fifth anniversary issue.

PRESIDENTIAL GENEROSITY.
According to a published report, the President and the First Lady gave 22% of their income to charity.  The largest beneficiary was the Fisher House, which received $117,130.