March 2014

In this issue:

  • The House Ways and Means Committee has drafted major tax reform legislation that would increase the definition of those activities that constitute taxable unrelated business income (UBIT).
  • California is one of the states which recently started to require, as part of the registration process, that the IRS Form 990s filed by charitable organizations include Schedule B. This important schedule lists the major donors of the organization, which is proprietary to the organization. Schedule B is deleted as part of the public inspection requirement placed upon charities that receive requests for copies of their Form 990. On March 7, 2014, the Center for Competitive Politics filed a complaint for declaratory and injunctive relief in the United States District for the Eastern District of California challenging the requirement.

Federal

CONGRESSIONAL PROPOSAL.
There is a move in the House to penalize nonprofits that pay more than $1 million in salaries.  Interestingly, there is also consideration of requiring donor-advised funds to pay out donations to charities within five years of receipt.

Comment: Donor-advised funds give an instant tax deduction to the donor and allow the money to stay out of circulation for an indefinite period.  This particular piece of legislation should be favored as a way to expedite the distribution of funds intended for charitable purposes, but not yet distributed.

TAX REFORM ALARM.
The House Ways and Means Committee has drafted major tax reform legislation.  There are number of provisions of concern to tax-exempt organizations.  Most alarmingly, the bill would increase the definition of those activities that constitute taxable unrelated business income (UBIT).  Part of the proposal is to eliminate the exemption of royalty payments from UBIT which would be a critical blow to numerous charitable organizations.  The proposed legislation would also tax some kinds of “sponsorship” arrangements.

Comment: If the reader is connected to a charitable organization, then you have a stake in all of this.  Please keep yourself informed and, most importantly, let your congress persons and senators know about your feelings.  At a time when government and the media are “hounding” charities to be more efficient, legislation like this makes it more difficult for charities to provide the social services that serve our society so well.

State

ARKANSAS.
The latest city to start considering regulation of unattended clothing bins is Texarkana.

CALIFORNIA.
A challenge has been made to the state’s requirement of filing Schedule B with registration applications.  (See caption “Schedule B Challenge” further on in this news letter for details).
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The Assembly has given approval to a bill that targets anonymous campaign money by giving the state’s ethics and tax agencies more authority to conduct investigations.  If it becomes effective, the legislation will give the agencies the right to seek an injunction in state court to force disclosures of donors to tax-exempt organizations that become involved in the political process.

CONNECTICUT.
More than $20 million in contributions were received in Connecticut for the Sandy Hook tragedy.  A report has been issued by the attorney general and state officials indicating that while there was no structure in place to handle or document a large part of the contributions, it appears that little, if any, misuse or fraud took place.  In response an entity was created to provide oversight.

Comment: The generosity of American citizens continues to be amazing.

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The House Speaker has submitted a bill to the legislature that would eliminate exemptions for colleges and hospitals, making them fully taxable.  In part, the sponsor of the bill cites this necessity as a result of the blurring of the lines between for-profit and nonprofit institutions.

Comment: This is a continuing trend of government looking at narrowing tax-exemptions for nonprofits as a way of increasing revenue without raising taxes on voters.  In most instances it is counter productive because the nonprofits are providing social services that the government does not otherwise make available to those in need.

DELAWARE.
A bitter dispute over the management and operation of the foundation of the late artist, Cy Trombley, who died in 2011 has been settled.  Settlement was entered in the Chancery Court in Delaware with the terms under seal.  The claims that went in all directions involved padding commissions and the potential taking of unauthorized fees.

FLORIDA.
The Tampa Bay Times has commenced buy-out offers to employees, and has acknowledged financial distress.  The irony here is that the newspaper was the leading force of investigative reports slamming small charities for financial responsibility.

INDIANA.
Gene Tempel announced his retirement, effective at the end of this year, as Dean of the Lilly Family School of Philanthropy, which is located on the IUPY campus in Indianapolis.  A search for his replacement has begun.

KANSAS.
Like many states, the Kansas Constitution absolutely prohibits all forms of lotteries.  States do this to protect themselves from state-sponsored money-raising lottery programs.  Some states have legalized raffles, which is a form of a lottery, under certain conditions for charities.  The state senate by a vote of 35-0 has proposed an amendment to the Kansas Constitution to permit nonprofit, religious, charitable, fraternal, educational and veteran groups to operate raffles.  The measure is before the House.

MAINE.
A bill has been introduced in the Maine legislature that would eliminate the requirement for both charities and fundraising consultants to register.  If the bill passes, only professional fundraisers will be required to continue to register in the state.  The bill was introduced in the House on March 4, 2014, and therefore it is too early to ascertain if it has a chance for consideration and passage.
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The Red Barn Restaurant in Augusta, Maine held annual fundraisers to help local charities until a state official directed the restaurant to “cease engaging in solicitations as a charitable organization until you become licensed as a charitable organization.”  Now the legislature has approved the draft of a new bill to allow businesses to hold fundraisers without having to register as charitable organizations.

MINNESOTA.
The Office of the Attorney General has filed a lawsuit against A Brighter Day Foundation, accusing it of financial mismanagement and the executive director of spending hundreds of thousands of dollars on personal expenses.  The lawsuit alleges eight violations of the state’s nonprofit laws. 

NEW JERSEY.
Two men were sentenced earlier this month for operating a 9/11 charity, through which they collected approximately $120,000 on the representation that it would go to families affected by the 9/11 tragedy.  However, the funds were not used as represented.

NEW YORK.
The annual report from the New York Attorney General tracking the cost of professional telemarketing was issued at the end of February.  This year the report showed that 38% of the net proceeds were distributed to the charities.

Comment: The media, of course, portrays this, as does the attorney general, to the opposite, to-wit: that 62% went to the fundraisers.

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Once again proving that politicians and charities do not mix, according to the New York Post the Brooklyn Borough president allegedly raised money to fund local activities through a nonprofit which did not exist. 
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The New York Daily News reported that federal authorities in the New York Department of Investigation, in looking at the head of the Queens Library, who ordered over $140,000 in improvements to his personal office as well as the unilateral referral of projects to what may be deemed a “related party.”  The matter is in the early stages of investigation and no charges have been filed.
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The Office of the Attorney General is now trying to replace Henry Collins, who acted as the enforcement lawyer in the Charities Bureau in Albany.  An online posting for the position was made.

NORTH CAROLINA.
Two individuals have been charged with conspiracy to commit mail and wire fraud.  One individual owned a marketing company, and the other works for the Southern Region of Mercedes Benz USA, which sells and distributes car dealerships.  Together they set up a false system of invoicing the car company for fictitious charitable donations, which they then converted to their own use.

OHIO.
The Office of the Attorney General has announced an agreement with a charity based in Warren and its founders to resolve allegations that charitable contributions were used to pay personal expenses.  The defendants agreed to cease charitable solicitations and pay $5,000 to the State of Ohio.  The charity was organized to pay for scholarships for underprivileged children.

PENNSYLVANIA.
A former employee of the Bon-Ton Stores Foundation was sentenced to five years in federal prison for the theft of $1.3 million from the charitable group.  In addition to the sentence, the defendant was ordered to repay the entire amount.

WASHINGTON.
A major religious-based organization announced that it was the victim of fraud for as much as $500,000 as the result of embezzlement over a ten-year period by key employees.  The scheme was operated using a system of duplicate checks.

Comment: Theft from charitable organizations appears to be reaching epidemic proportions.  When major organizations with resources are the victims it is even sadder.  Charities must be cognizant of the necessity of monitoring their affairs in such a way as to prevent misuse of funds.  Internal controls and oversight are key to avoiding these kinds of problems.

WEST VIRGINIA.
The state is returning and rejecting registrations to solicit charitable contributions, as well as professional fundraiser and consultant registrations if the corporation does not have a Certificate of Authority or an Exemption from a Certificate of Authority to do business in West Virginia.  The problem is that many of these corporations are not required under West Virginia law to obtain a Certificate of Authority or an Exemption from a Certificate of Authority to conduct business in the state.  More specifically, the vast majority of these corporations do not have an office or affiliates located in West Virginia, and do not have any physical nexus with the state.  The only connection these corporations have with West Virginia is that they may place telephone calls or use the mail to disseminate charitable appeals to persons in the state.  The applicable West Virginia statute, like the majority of state laws, clearly states that “transacting business” in interstate commerce does not constitute transacting business for purposes of requiring a Certificate of authority.  Nonetheless, the state is demanding corporations to pay a $25 fee and demonstrate that they are not required to a get a Certificate of Authority as a precondition to engaging in protected speech.

WISCONSIN.
The former vice president of Shepherd’s Ministries, a Christian-based organization that helps those with mental disabilities, has pled guilty to mail fraud relating to him reportedly stealing funds that belonged to the charity.  The defendant was sentenced to 2-1/2 years incarceration.

WYOMING.
House Bill 21 has been signed into law.  The Bill grants property tax exemptions for fraternal organizations officially recognized by the University of Wyoming by community colleges, senior citizen centers as well as charitable organizations that directly use the exempt property consistent with their exempt purpose.

Other

SCHEDULE B CHALLENGE.
California is one of the states which recently started to require, as part of the registration process, that the IRS Form 990s filed by charitable organizations include Schedule B.  This important schedule lists the major donors of the organization, which is proprietary to the organization.  Schedule B is deleted as part of the public inspection requirement placed upon charities that receive requests for copies of their Form 990.  On March 7, 2014, the Center for Competitive Politics filed a complaint for declaratory and injunctive relief in the United States District for the Eastern District of California challenging the requirement.

Comment: We will follow this challenge with great interest.

URBAN INSTITUTE REPORT.
According to a recently released report, while the economy was stalled between 2001 to 2011, nonprofits in the United States increased by 25%, while for-profit business rose less than 1% during the same period.