June 2014

In this issue:

  • Postmaster General Patrick Donahoe was quoted in a Washington paper as saying the Service only needs a five-day delivery. House Republicans have proposed same, using the savings to finance road projects. It would also prevent a future bailout of USPS. The savings would amount to approximately two billion dollars per year.
  • The Alliance of Nonprofit Mailers Workshop has issued an invitation to the nonprofit community to attend a free in-person workshop on July 8, 2014, to be held at Easter Seals, Willis Tower, 24th Floor, Suite 2400, 233 South Wacker Drive, Chicago, IL 60606. To attend you must be registered no later than Thursday, July 3, 2014, and may do so by calling the Alliance at (202) 462-5132 or by e-mail at: steve@nonprofitmailers.org.

Federal

GIFTS-IN-KIND LIMITATION

In a Chief Counsel Advisory Memorandum, the IRS has ruled that corporate charitable contributions of non-essential items are not qualified contributions, and not eligible for enhanced deductions under IRC § 170(e)(3).  These products include wrinkle creams, hair gels, perfumes, hair spray, curling irons, dyes, and other such vanity items.  In the Memorandum, the IRS focused on the definition of a “needy individual” who lacks necessities.  The IRS did not challenge the eligibility of soaps, shampoos and conditioners.

INTERNAL REVENUE CHALLENGE

A federal district judge in Kentucky threw out a challenge by an atheist organization which claimed the IRS violated the First Amendment’s Establishment Clause by not requiring religious organizations to file Form 990s and other financial reporting requirements.  The court granted a motion to dismiss ruling that the atheist organization had no standing to bring the lawsuit, in part because the organization could have applied to the IRS for designation as a religious organization, but never had.  The court further stated it was only speculation that the IRS would reject the application, noting in fact the IRS had granted non-theistic groups status as religious nonprofits in the past.  Representatives of the organization said that applying to the IRS as a religious organization would go against their principles.  The plaintiffs have vowed to appeal.

Comment: This is a most interesting First Amendment case.  The fact that the atheist organization could apply and receive tax exemption as a religious organization is an enormous barrier that it would have to overcome if they are to prevail.

UNITED STATES POSTAL SERVICE (USPS)

Postmaster General Patrick Donahoe was quoted in a Washington paper as saying the Service only needs a five-day delivery.  House Republicans have proposed same, using the savings to finance road projects.  It would also prevent a future bailout of USPS.  The savings would amount to approximately two billion dollars per year.

State

CALIFORNIA

A bill that would allow regulators to use registration fees paid by nonprofits and professional fundraisers to crack down on questionable charities is zooming through the state legislature.  Currently the account, which contains $7 million, cannot be used by investigators in the California Department of Justice.  When passed (there appears to be no opposition), the funds will be used to create as many as thirteen new positions and to finance regulatory activity.  
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A federal district judge in California ruled that a business or organization recording calls for quality control does not violate the state’s wiretapping law.  Numerous claims have been made by class action lawyers asserting violation of the law with a $5,000 claim for each occurrence for failing to disclose the recording of customer service lines.

Comment: These same class action lawyers also sued several charities that were on the Tampa Bay Times’ list of the fifty worst charities in America.  Fortunately those cases were also dismissed.

FLORIDA

Last year the Securities and Exchange Commission charged two Florida residents with defrauding seniors through the sale of charitable gift annuities to more than 450 investors.  The sales took place in approximately thirty states.  The case has now been settled with the couple paying more than $2 million.  The two defendants are also permanently barred from dealing in securities again.  
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Earlier this month the governor signed into law a comprehensive revision of the state’s charitable solicitation law.  There are a number of new and unique provisions that apply to both charities and fundraisers.  Without any attempt to be all inclusive, among the unusual provisions are: (1) charities have a conflict of interest policy that is certified each year as part of the registration process; (2) if a charity has more than $1 million in income, but spends less than 25% on program service, it must file supplemental financial reports that require details of certain expenditures; and (3) professional fundraisers that take credit cards must also be individually registered and be subject to a background check.  Professional fundraisers must file a new more comprehensive form of solicitation notice.  The solicitation notice includes copies of the solicitation material.  There are also new requirements that apply to those who solicit through the use of unattended clothing bins.  For more details, please feel free to contact this firm.

DELAWARE.
In late May, the town council of Bethany Beach passed a resolution that requires organizations setting up charitable events within the town and using public facilities, to guarantee 60% of the events’ gross proceeds go directly to the charity.  The resolution also directs the town manager to review the organizations’ financial records.

Comment: This unusual approach was not inspired by any bad experiences.  In lieu thereof, the city council has described themselves as being pro-active.

MICHIGAN

Before the new rules limiting charitable gambling activities in the state could go into effect, a legal challenge was filed.  The plaintiffs in the case include eleven charities, one charity poker room, and two businesses that are allowed to supply equipment and advice to charities for their gambling activities.  The thrust of the litigation is that the rules are outside the state’s authority, and more interestingly, an assertion that it unduly interferes with the fundraising rights of charitable organizations.

Comment: We have not yet seen a copy of the Complaint. It is interesting to speculate whether the assertion made concerning the interference with the gambling activities impugns on the First Amendment rights of the charities to engage in fundraising.

MINNESOTA

According to published reports, the College of St. Benedict agreed to return $600,000 of a $3 million gift received from a convicted Ponzi schemer in 2003.  The Wall Street Journal reported the settlement of the “claw back” claim of the trustee.

Comment: “Claw backs” are designed to bring relief to those who have been defrauded by individuals convicted of running a Ponzi scheme.  In many cases the schemers have made donations to charities to bolster their image.  The only defense a charity has to a “claw back” claim is to impose a defense that consideration passed between the parties.  Being able to take a tax deduction is not deemed to be consideration.  In this case the donation was made contingent upon naming a building which was done.  The name was subsequently taken off the building, but the college, through its lawyers, was able to negotiate something less than 100% return, no doubt based upon the prior consideration received.

NEW HAMPSHIRE

Legislation has passed that will tighten the rules for table games operated in the name of charities in the state.  The new legislation requires financial record keeping and reporting requirements, and a deeper background investigation by the attorney general.

NEW JERSEY

Monies that were donated to an organization that improperly raised funds for the victims of Hurricane Sandy is now being put to good use.  The Office of the Attorney General and Division of Consumer Affairs announced that the $100,000 will be distributed to Habitat for Humanity of Monmouth County, and the food bank in the same area to help individuals and families affected by the storm.  The unregistered charity was closed by the state for its improper activities.

NEW YORK

According to the New York Post, some of the cities’ top nonprofit hospitals spend less than 2% on the poor in the form of free care.

Comment: Statistics like these open the door to make the claim that these nonprofit institutions should not be enjoying exemption from local taxes.

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In what has to be one of the most unusual stories published, the New York Postreported that twenty-six of the fifty-one members of the New York City Council wrote a letter to Walmart and the Walton Family Foundation.  The letter asked them to cease supporting local charities saying, in part, “We know how desperate you are to find a foothold in New York City to buy influence and support here. . .stop spending your dangerous dollars in our city. . ”.  According to the Post, just last week Walmart announced it had distributed over $3 million to New York City-based charities.

NORTH CAROLINA

The former accounting director of North Carolina A&T Foundation has been charged with stealing approximately $400,000 from the Foundation over the past three years.

OHIO

Two men set up fake charities offering help.  When people seek their help they take their name, personal information, and social security number and then prepare false income tax returns with significant claims for refunds.  TheColumbus Dispatch reported that they got away with $1.5 million before getting caught.  They will now spend 13 years in prison.

Comment: This is a new wrinkle on filing fraudulent tax returns.  It is a reminder of the importance of protecting individuals’ privacy.

Other

ALLIANCE OF NONPROFIT MAILERS WORKSHOP

This important organization has issued an invitation to the nonprofit community to attend a free in-person workshop on July 8, 2014, to be held at Easter Seals, Willis Tower, 24th Floor, Suite 2400, 233 South Wacker Drive, Chicago, IL 60606.  To attend you must be registered no later than Thursday, July 3, 2014, and may do so by calling the Alliance at (202) 462-5132 or by e-mail at:steve@nonprofitmailers.org.

HOW MANY “WATCHDOGS” DOES IT TAKE?

Just this year, the following “watchdog” groups have come into existence, to-wit: Philamplify (started by the National Committee for Responsive Philanthropy to look at foundations), Transparify, GreatNonprofits and Philanthropedia.

NASCO

In a press release dated June 6, 2014, the National Association of State Charity Officials published “Internet and Social Media Solutions: Wise Giving Tips.”  This is an initial step in addressing the quickly expanding and developing Internet and social media charitable giving platforms.  The publication recognizes the potential abuse and the amount of fraud which seems to be inevitable in social media.  The publications asks that there be significant vetting by both the charity and the platform, and more disclosure.  Most importantly, the publication notes that the fundraising laws vary from state to state, and depending upon how the arrangement is structured, the platform itself may be subject to state charitable solicitation laws and registration. 

NCAA LAWSUIT

Some are asking what the implications might be for the continued tax-exempt status of the NCAA from the fallout of the current litigation in which the institution is involved.

Comment: Just as the bowl games face the challenge so does the NCAA to justify its tax-exempt status.  It will be interesting to watch these continuing developments as more and more scrutiny is placed on these institutions and their preferred status.

INDIA

According to the Boston Globe, the country’s Home Ministry has told the reserve Bank of India to hold all foreign contributions to domestic charities.  The problem - the charities are campaigning against widespread pollution which, if successful, will allegedly hurt the economy.