July 2011

In this issue:

  • The IRS has dropped its attempt to have major donors to § 501(c)(4) organizations pay gift taxes.
  • In New Jersey, the Division of Consumer Affairs has issued a "pre-proposal" for a new point-of-solicitation disclosure for charities that raise more than $250,000 in which their appeals enumerate more than one program sought to be funded. UPDATE 8/3/2011: Errol Copilevitz submitted comments to Thomas Calcagi, Director of the Division of Consumer Affairs. You can read the letter, including a list of the companies and organizations who reviewed and are deemed to have co-signed the letter. Download letter.

Attorneys' Comments
Read additional comments related to this newsletter.


FEDERAL

INTERNAL REVENUE SERVICE (IRS).
A top official of the Tax Exempt Unit was recently quoted as saying that the seventy year old practice of approving group applications for tax-exempt organizations may no longer make sense. The issue is the unavailability of information about entities covered by a group exemption. The IRS is looking at making more disclosure mandated.

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The IRS has dropped its attempt to have major donors to § 501(c)(4) organizations pay gift taxes. The announcement was made by Steven Miller, Deputy Commissioner.

GIRL SCOUTS DECISION.
The United States Court of Appeals for the Seventh Circuit ruled on a dispute between a Wisconsin Girl Scouts Council and the national organization. In a nineteen-page decision, Judge Posner reversed the lower court decision, in part, directing it to grant a summary judgment to the Wisconsin Council involving its claim under the Wisconsin Fair Dealership Law that the national organization violated the Council’s rights by attempting to modify its licensed operation unilaterally and without a proper basis.

Comment: What is fascinating about this case is that it treats the relationship between the national and the local council as a type of franchisor/franchisee relationship. (Girl Scouts of Manitou Council, Inc. v. Girl Scouts of the United States of America, Inc., 7th Circuit Court of Appeals, No. 10-1986, Decided May 31, 2011.

 

THE CHARITABLE DEDUCTION.
The deficit is creating pressure to find new sources of income without raising taxes.  One target is clearly the ability to deduct donations to qualified charities. Independent Sector has begun a campaign to educate Congress on the value of maintaining the current law.

UNITED STATES POSTAL SERVICE (USPS).
Under a recent legislative proposal, the cost for nonprofit mail would become comparable to commercial mail, with a phase-in period.

NASCO.
The National Association of State Charity Officials has filed comments with the IRS, taking issue with proposed regulations that would affect IRC § 6104(c). The regulations allow the IRS to provide information to state officials when certain adverse actions regarding the status of tax-exempt organizations has been taken. NASCO’S comments take issue with the purported excessive administrative burden in order to access and share the information.

STATE

ARIZONA.
The Fiesta Bowl, a § 501(c)(3) organization which has been under attack for providing improper benefits to politicians and authorities in Arizona, has written letters to a number of the politicians asking them to repay the costs that were incurred by the Fiesta Bowl, if the expenditures cannot be justified to be consistent with the tax-exempt purpose of the organization. The president of the state senate received the most gratuities with more than $39,000 in tickets, trips and other “freebies.”

Comment:  This is still just another chapter in the saga of football bowl games being set up as 501(c)(3) charitable organizations. There is a state law in Arizona which prohibits politicians from taking these gratuities, and there is also the issue of a private benefit transaction that could jeopardize the tax-exempt status of the Bowl.

 

COLORADO.
Bucking a trend, the state has passed a bill which eliminates the requirement that non-exempt usage of property owned by fraternal or veteran organizations be on an occasional basis in order to qualify for the incidental exemption, and raised the threshold for the reporting requirement exception to $25,000 annually.

Comment: Compare this to the state of Louisiana where the existence of any unrelated activity will cause an organization to lose its real estate tax exemption in the state.

 

DISTRICT OF COLUMBIA.
A postal service mail processor was indicted on charges that she stole mail addressed to charities which contained over $9,000 in checks.If convicted, the postal worker faces up to five years incarceration.

GEORGIA.
A Georgia nonprofit started, in part, by a recognized political figure is coming under increased media scrutiny. According to ABC News and CNN, the nonprofit has paid a for-profit corporation, involving the same individuals, substantial fees. In addition, CNN reported that the charity had also provided its donor file free of cost to a political campaign.

Comment: There are a number of potential issues. First, a charity cannot be involved in a political campaign. Second, it should not be transferring its donor file for no consideration. Because of the potential relation of the parties, it could trigger concerns under § 4958 of the Internal Revenue Code.

 

HAWAII.
The Hawaii Supreme Court has adopted a rule that will allow money left over from class action lawsuits to be distributed to nonprofit groups that provide legal services to the poor.  The state joins seven or eight other states with similar provisions in their laws.

Comment: The money left over comes from awards to plaintiffs who cannot be found or individuals who would have been part of the class action but did not file a claim.

 

MASSACHUSETTS.
Brandeis University has agreed to keep the Rose Art Museum collection intact to settle a lawsuit brought by supporters.

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A priest in Southbridge has come under criticism for distributing goods collected for tornado victims to unrelated charities.

MICHIGAN.
Long-time Assistant Attorney General Tracy Sonneborn has left the Office of the Attorney General. The new head of the Charitable Trust Section is Denise Richards.

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A racketeering lawsuit was filed against Lady Gaga claiming charitable fraud. The suit alleges Lady Gaga sold wrist bands with the words, “We pray for Japan” to help the victims of the tsunami, saying that all proceeds went for the relief of the victims.  The suit claims that the singer and her affiliated companies retained a portion of each donation.  The lawsuit was filed by a private law firm - not by the Office of the Attorney General.

MISSOURI.
The St. Louis Science Center was the focus of the Post Dispatch, which printed a story on the payment of bonuses of nearly $264,000 to eleven well paid executives.  The Center receives $10 million in tax money annually, and defended the practice by calling the bonuses “incentives” for better performance.

NEW JERSEY.
The Division of Consumer Affairs has issued a “pre-proposal” for a new point-of-solicitation disclosure for charities that raise more than $250,000 in which their appeals enumerate more than one program sought to be funded.  The new rule, if approved, would require the charity to disclose to a prospective contributor that they can, in effect, take their gift and proportion it among any or all of the programs discussed. Fortunately, this proposed rule has been offered for public comment with a deadline of August 5, 2011.  Errol Copilevitz of this law firm is drafting comments on behalf of a number of charitable organizations, and direct marketing agencies. If you would like more information, or would like to be listed among those who oppose the promulgation of this new rule on both a practical and legal basis, please contact him at: ec@cckc-law.com.

UPDATE: Errol Copilevitz submitted a letter, dated August 3, 2011, to Thomas Calcagi, Director of the Division of Consumer Affairs. You can read the letter, including a list of the companies and organizations who reviewed and are deemed to have co-signed the letter. Download letter.

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The state sent out a reminder that the use of decals, etc. in conjunction with public safety fundraising is prohibited.

Comment: This restriction has never been challenged. It would seem to violate the right of free association under the First Amendment.



NEW YORK.
If there was any previous doubt, there should not be any now. According to the Long Island Association, the nonprofit sector is growing faster than the private sector, even though the economic challenges continue.  The study found that the nonprofit employment rate increased by 32% over the past decade.

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The former head of a pro-abortion rights charity admitted that she embezzled money from the organization to pay for summer house rental, child care, clothes and other personal items by passing them off as business expenses.  She has agreed to make restitution.

Comment: Charities have a duty to be transparent, and activities such as these, which are too common, should be discovered very early on by a simple system of “checks” and “balances” structured inside the organization and conducted in connection with the outside auditing firm.



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The Wall Street Journal reported that the state’s attorney general has asked leading figures in the nonprofit movement to devise recommendations for overhauling regulatory requirements concerning New York nonprofits.  The committee is expected to be composed of twenty-nine members who will make recommendations to the Office of the Attorney General.

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The Attorney General has filed a lawsuit against a New York-based breast cancer organization, its officers, several directors and its telemarketing service bureau. The lawsuit alleges misuse of funds, and that the telemarketing included misrepresentations.

 

OHIO.
The former treasurer of the U.S. Navy Veterans Association (USNVA) pled guilty to engaging in a pattern of corrupt activity, aggravated theft, money laundering, and tampering with records.  She could face up to 25 years in prison. The charity was run by a man known as “Bobby Thompson,” which turned out to be a stolen identity, who has still not been found. Investigations involving the charity are being conducted in several other jurisdictions.

OREGON.
Controversial Senate Bill 40 has died in a House Committee. The bill, as previously reported, would have required a disclosure that a donation was not deductible for state tax purposes if the charity did not meet a set financial standard. The bill was sponsored by the Attorney General and could be reintroduced in the next session.

Comment: The legislation is not only anti-charity, it is also most likely unconstitutional as a form of prohibited compelled speech.

 

PENNSYLVANIA.
The former general counsel for a major Philadelphia hospital has pled guilty to stealing $1.7 million over a period of years.

OTHER

DMA NONPROFIT FEDERATION.
This important trade association has announced its new leadership, which includes Chair Brian Cowart of ALSAC/St. Jude and Vice Chair Tom Harrison of Russ Reid. The Council members include: Angel Alomo of Food for the Poor, Valerie Beatty of American Cancer Society, Joanne Bowers of CARE, Steve Froehlich of American Society for the Prevention of Cruelty to Animals, Kim Haywood of March of Dimes, Gretchen Littlefield of Infogroup/Nonprofit, and Shannon McCracken of Special Olympics, Inc.

GIVING USA.
The annual report disclosed that giving was up last year by 2.1%. Americans gave more than $290 billion to charity. The same report goes on to forecast that more difficult times are ahead.

INDUSTRY NEWS.
Steve Gunderson, President and CEO of the Council on Foundations, has announced he will be leaving his position on September 1, 2011.

CANADA.
CRA has issued a ruling pertaining to unrelated business income tax and how it can disqualify a charity from exempt status.  CRA #2011-039425117 held that an association that engaged in a retail operation not related to the nonprofit objective was, in fact, operating for a profit purpose and therefore did not qualify as a nonprofit organization under §149(1)(1) of the Income Tax Act.

Comment: This is another example of Canadian law tracking with IRS concepts and rulings.



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According to a report by the Canadian Press, there are now approximately 85,00 charities registered with Revenue Canada.  Revenue Canada’s database shows that more than 6,000 employees of charities in Canada earn more than $120,000 annually and a few hundred make over $350,000 annually. The intent of the article was to raise questions regarding the use of donors’ money.

Commentary

The Fiesta Bowl and Tax-Exempt Status