July 2012

In this issue:

  • Legislation is expected to be adopted by Russia's parliament that will label foreign-funded non-governmental organizations operating within the country as “foreign agents.”
  • The Senate bill on postal reform has passed. The House version (less the controversial portion phasing out the preferred nonprofit mailing rate) has still not gone to the floor for a vote. It now appears that vote may not take place before the August recess and/or before the November election.
  • The Pittsburgh city council has approved legislation, whereby a number of local nonprofit organizations will collectively contribute approximately $5.3 million over the next two years to what is called “The Pittsburgh Public Service Fund.” Once again, these are payments in lieu of taxes.

Attorneys' Comments
Read additional comments related to this newsletter.


Federal

INTERESTING TAX COURT DECISION.
A Virginia couple purchased some property, which had a house on it they wished to have demolished, presumably for the purpose of rebuilding.  They decided to give the house to the local fire department to allow them to burn the house down as a training exercise for its crew.  When they filed their income tax they took a full deduction for the donation of the house to the local fire department.  The Tax Court held they were not entitled to a charitable deduction for allowing the fire department to use the house for a training exercise because they did not transfer any of the ownership interest in the house.  (Patel v. Tax Commissioner, 138 T.C. No. 23; No. 11694-09).

Comment: This is a decision that is consistent with the concept that donated services are not deductible as a charitable contribution.

INTERNAL REVENUE SERVICE (IRS).
How important is record keeping and being responsive to the IRS?  A tax-exempt organization found out when the IRS revoked the status of an after-school writing program for underprivileged children because the organization failed to provide documents showing it operated exclusively for exempt purposes.  (See Ltr Rul. 201225015).

Comment: An organization is required under the income tax regulations to submit information as may be requested by the IRS for the purpose of inquiring into its proper exempt status.  In this case the organization, through inadvertence, error or arrogance simply refused to respond.

NONPROFIT POSTAL RATE.
The Alliance of Nonprofit Mailers issued a press release in late June, announcing that Congressman Darrell Issa (R-CA), the leading sponsor of the Postal Reform Bill, informed the Alliance that Section 403 of the bill will be deleted when it goes to the House floor for a vote later this summer.  The controversial section would have eliminated the nonprofit postal rate over a twelve-year period.  Most in the industry had opposed its inclusion.  It is now believed the industry will support the efforts of Congress to reform the Postal Service.  (See next news item).

POSTAL REFORM.
The Senate bill on postal reform has passed.  The House version (less the controversial portion phasing out the preferred nonprofit mailing rate) has still not gone to the floor for a vote.  It now appears that vote may not take place before the August recess and/or before the November election.  Tony Conway of the Alliance of Nonprofit Mailers, in his most recent report, is optimistic that the House would find a way to advance the bill.

State

ALABAMA.
We recently reviewed a very interesting opinion letter issued by the Alabama Attorney General, interpreting the real estate property tax exemption for charitable organizations in the state.  Like most states the law provides that in order to qualify for an exemption, the use of the property must be “exclusively” for its charitable purpose.  In this case, a substance abuse treatment center applied for the exemption listing certain rental income.  The attorney general’s opinion concluded that receipt of the rental income did not preclude granting the exemption so long as the income was used to further the tax-exempt purpose of the center.

Comment: View the attorney’s comments on this posting.

* * * * *
When is an unsigned pledge enforceable?  That was the question before the Alabama Supreme Court.  In this case the pledge was to a synagogue.  The decedent made an oral pledge, paid a small portion thereof, and upon his death, his family claimed the pledge was void because it was not in writing.  The court ruled in favor of the synagogue, which had used the pledge as a basis to gain support from other members.  The court found the “detrimental reliance” of the synagogue made the pledge enforceable.

CALIFORNIA.
Legislation attempting to broadly increase the authority of the Attorney General over charitable organizations and their solicitation activities has been amended and reintroduced.  California Assembly Bill 2327 would also require any fiscal sponsor organization to carry directors and officers insurance, and provide proof of the insurance to the Office of the Attorney General.  It also prohibits misrepresentations in filings, and also broadens the authority of that office to issue cease and desist orders.
* * * * *
As the result of a CNN report, the Office of the Attorney General issued an investigative subpoena to an organization, questioning the employment status of an individual who had previously signed a settlement agreement with the state.  Under the terms of the settlement agreement, the individual was not to hold specific positions in another charitable organization for a period of time.

CONNECTICUT.
House Bill 5298 has been passed into law.  This unusual legislation charges the Department of Veterans’ Affairs in Connecticut with creating a listing on its website of “qualified” veterans’ organizations.  The new law also contains a criminal sanction for those who would raise money in the name of veterans with the intent to defraud.

Comment:  While the intent of this law may be admirable, the long-range view of it is somewhat disturbing. Government should never be in the position of making judgments on the worth of the program of tax-exempt organizations.  It is proper to regulate, but otherwise not to interfere with constitutionally protected rights.

FLORIDA.
A wish-granting organization was sued by the mother of a child who was injured during a trip.  She argued that a release she signed did not prevent her claim.  A Florida appellate court found for the organization, saying that while exculpatory releases are disfavored, they are enforceable when they are clear and understandable.  (Give the Kids the World v. Sanislo, Court of Appeal of Florida, Fifth District).

ILLINOIS.
The Chicago Sun Times reported the closing of Y-Me, a Chicago-based breast cancer support organization.  According to financial records, the organization’s support and resources had dropped dramatically over the past two years.  Was the sudden closing economics or something else?  The Office of the Attorney General has announced it would “open a review” of the organization.

INDIANA.
In June the Trustees of Indiana University voted to create a School of Philanthropy, which will be the first in the nation.  This action is an affirmation of the growing amount of interest in the nonprofit world, and the demand to offer more rigorous training to persons who want to make a career with charitable institutions.  This would take the Center of Philanthropy at the Indiana University in Indianapolis to the next level.  The School of Philanthropy would have to be approved by the Commission on Higher Education and be funded.  The Center on Philanthropy has a $65 million endowment.  The school could commence its program as early as next summer.

MASSACHUSETTS.
The Appeals Court of Massachusetts affirmed a lower court decision granting a restraining order against the defendants for failure to comply with the requirements of the state’s commercial co-venture law.  (Attorney General v. Susan L. Bach & others, 964 N.E.2d 370).  In this case a show house promotion was run using the name of The Susan G. Komen Breast Cancer Foundation.  The fact was the defendants did not have a signed contract with the charity, nor had the defendants registered with the state.  A summary judgment was granted by the lower court and affirmed by Appeals Court.

Comment:  Seeing enforcement actions involving commercial co-ventures is still somewhat unusual.  The trend, however, is much more focus on the activity and you can expect more such cases in the future.

NEW YORK.
The New York Attorney General announced a settlement with a hedge-fund manager who acted as a feeder in the Bernard Madoff scandal.  The fund manager will pay more than $400 million to compensate his investors for their losses.  Many New York-based charities and some outside the state could receive as much as 40% of their losses up to a maximum of $5 million.  The settlement did not involve the trustee of the Madoff estate.
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The New York Post recently ran a story criticizing some New York-based athletes who are “. . . fumbling the ball when it comes to their charities.”  The article appeared in the July 1, 2012 edition, and named several major athletes who seemingly have used charitable entities to create jobs for relatives, and/or failing to dedicate themselves to their charitable missions in an efficient manner.

OHIO.
We are all familiar with the struggles of local institutions such as the symphony, opera and ballet.  In Dayton, they have devised a new approach to the financial challenges by uniting the opera, ballet and symphony into a new nonprofit arts organization.

Comment: This is simply another form of consolidation in the nonprofit world as a way to deal with the economic situation.

* * * * *
A prominent Cleveland attorney is withdrawing as the attorney for the individual known as “Bobby Thompson.”  (No one knows for sure what his real name is).  The former fugitive committed identity theft and collected over $100 million in 40 states as a bogus Florida-based charity.  He has refused to disclose his real name, and has pled not guilty.

PENNSYLVANIA.
The city of Philadelphia passed an ordinance banning the feeding of homeless people on a park land in a high-tourist concentrated area.  Now church groups and shelters have filed a lawsuit challenging the ordinance on numerous grounds, including freedom of association.  The church groups and shelters argue that the location has been used for more than decade as a central distribution point to provide clothing and medical help to those who are homeless in the city.

* * * * *
The Pittsburgh city council has approved legislation, whereby a number of local nonprofit organizations will collectively contribute approximately $5.3 million over the next two years to what is called “The Pittsburgh Public Service Fund.”  Once again, these are payments in lieu of taxes.

TENNESSEE.
You can expect the city of Memphis to join the long list of major cities asking nonprofit tax-exempt organizations in the community to make voluntary payments to the city in lieu of taxes.

VIRGINIA.
The Office of Charitable Gambling has charged a charity executive with 14 counts of conversion of charitable proceeds for personal use.  According to the Commonwealth’s attorney, the defendant ran a bingo game, but the proceeds did not go to the charity as dictated by law.

Other

CORPORATE GIVING.
Patrick Rooney, Executive Director of the Center on Philanthropy at Indiana University, recently reported that corporate donations are trending at their lowest level since the 1970s.  Experts in the industry may have a partial explanation.  Some believe corporations, rather than making contributions, are concentrating more on the marketing side; hence, the proliferation of cause-related marketing promotions.

SOCIAL MEDIA USE.
According to Sage Software, 84% of organizations surveyed are using social media, and of those using it the goal of at least 85% is to increase revenue.  Facebook is the top multi-media sharing site.

RUSSIAN CHARITY.
Legislation is expected to be adopted by the country’s parliament that will label foreign-funded non-governmental organizations operating within the country as “foreign agents.”  The obvious effect will be to make it difficult, if not impossible, for foreign-funded non-government organizations to function within the country.

UNITED KINGDOM.
An investigation is being conducted on aggressive charity solicitors on the streets of London.  They being called “charity muggers,” who are being trained to be insistent when stopping the public in the street to seek a donation for their charity.

Commentary

Real Estate Property Tax Exemption and Adherence to Tax-Exempt Activities