In this issue:
Federal
FEDERAL TRADE COMMISSION (FTC )
The FTC announced that it entered into a settlement with a trade association in the music industry. The allegations were that the association “encouraged exchange of competitively-sensitive pricing information among its members.” The lesson here is that trade associations are not immune from scrutiny and liability under the anti-trust laws.
INTERNAL REVENUE SERVICES (IRS).
Just a reminder for charities whose five-year advanced ruling expired after June 9, 2008, it will not be necessary to file a Form 8734 with the IRS to obtain reaffirmation of their status. Beginning with an organization’s sixth year it will be required to meet the publicly supported test as shown on the revised Schedule A of the new IRS From 990.
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The IRS’ report on nonprofit hospitals may have an application beyond that industry. One of the elements most relevant to the nonprofit community as a whole are the findings on compensation. The median and average compensation amounts paid to top hospital officials was $377,000 and $490,000 respectively. At the major hospitals that underwent the review, compensation was $1.3 million and $1.4 million respectively.
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According to the Chronicle of Philanthropy, the IRS reported that the number of groups classified under § 501(c)(3) IRC rose by 5.2% putting the total to nearly 1.2 million charities and private foundations. The article said that in 2008 over 79,000 new organizations applied to the IRS for classification as a tax-exempt organization under § 501(c)(3)!
PRESIDENTIAL PROPOSAL.
The President’s most recent budget plans are creating “heartburn” for many in the nonprofit community. President Obama proposes limiting the ability of families to receive full credit for charitable contributions if the family income is $250,000 or more. The proposal would limit the deductibility to 28% rather than the actual tax bracket of donor. (Editorial Note: This comes at a particularly difficult time when government is looking for ways to save money and, at the same time, relying more on the nonprofit community for many services. Hopefully, organizations such as Independent Sectors and others will step forward to be the voice of the nonprofit community.)
State
ALABAMA.
The Elks and other civic and fraternal groups are up in arms over a legislative proposal that would limit electronic bingo to ten multi million dollar bingo halls in seven Alabama counties. Supporters of the legislation compare the electronic bingo games to slot machines.
CALIFORNIA.
A nonprofit is finding out that filing an inaccurate Form 990 can be costly. In this instance, a national tax preparation firm prepared the IRS Form 990 and indicated that all of the support the organization received originated from “donor advised funds.” The reality is the nonprofit receives no money from donor advised funds, but rather, is publicly supported. As a result of that statement and others in the 990, the California Attorney General’s office is conducting an audit of all the organization’s books and records.
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The Children’s Museum may lose out on a $10 million contribution as the result of concerns as to the source of the income. Federal investigators are pursuing charges of security fraud against the donor and in typical cases of investment fraud, courts will attempt to recoup stolen funds and return the money to investors. Such a result could be devastating to the Museum.
NEW MEXICO.
The state has begun to enforce an unusual provision in its statutes that requires fundraisers to provide a detailed report every six months to each of its nonprofit clients.
NEW YORK.
According to an article published in the New York Times, at least eighty-one New York-based charities have given contributions to political candidates since 2005. (Editorial Note: Charitable organizations are prohibited from intervening in political campaigns. Such conduct can threaten the tax-exempt status of the organization).
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A bill has been introduced in the state legislature that would prohibit a museum from selling part of its collection to cover operating costs. According to the New York Times, the bill was introduced as a result of several major museums selling pieces because of the economic situation they are currently experiencing.
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The New York Times also reported that an attorney hired by the New York Yankees to oversee the distribution of funds given by the team to community groups in the Bronx sued the nonprofit organization, alleging that the money had been mismanaged. Among the allegations made are that the chairman essentially short-changed the charity by depositing $800,000 in a non-interest bearing account at a bank which he co-founded and where he still works. (Editorial Note: This all goes to the prudent investor rule and a little bit to the Madoff scandal).
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The City of New York, through Mayor Bloomberg, has announced a series of measures to help coordinate efficiency among the city’s many nonprofit organizations. Mayor Bloomberg was quoted as saying, “Whether by training people for jobs, providing access to arts and culture, or building affordable housing, the nonprofit sector is a vital part of the city and our economy.” He went on to note that there are almost five hundred thousand people employed by nonprofit groups in New York City.
NORTH DAKOTA.
The state’s EMS Association, which represents about 1800 ambulance and emergency workers has received over $800,000 in federal funds over the last several years. Instead of using the funds for their intended purposes, the Associated Press reported that a significant portion of the funds ($200,000) were spent on lobbying, cell phones, meals, salaries and bonuses. The Association said it will be repay the money.
PENNSYLVANIA.
A well known Allentown criminal defense lawyer has been charged with tax evasion and attempting a $500,000 charity scam. Money that was placed in a community foundation was allegedly routed to a church and then back to the individual.
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What can the authorities do when a charity’s assets are misused in part of a fundraising scheme? The Pennsylvania Attorney General has filed a lawsuit seeking to revoke the corporate status of a nonprofit organization and for a full accounting. The organization was tied to a convicted state senator and CEO, who allegedly engaged in conduct to misuse the funds of the organization. According to the Philadelphia Enquirer, this is the first step towards dissolution.
SOUTH CAROLINA.
The Washington Post profiled South Carolina as being one of the hardest hit by the unemployment rate and the recession. It is a perfect storm. It combines economics, reality and politics. The unemployment rate is more than 13%, but yet Governor Mark Sanford refuses access to federal funds that would otherwise might be available to help the state.
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Senate Bill 6512, introduce on March 31, 2009, would amend the state’s charitable solicitation law to require professional fundraising counsel, professional solicitors and commercial co-venturers to maintain lists of donors and provide those lists to the charitable organizations as their sole and exclusive property. (Editorial Note: Once again the zeal to legislate is apparent. What is interesting about this bill is the total lack of understanding of the industry. In some cases telemarketers bring their own lists, and with direct mail the charity does own its list. With commercial co-ventures there is no way to know who the purchasers are going to be. It is just a sad commentary on the would-be regulators).
TENNESSEE.
Todd Kelley, Director of Division of Charitable Solicitations and Gaming has provided us with notice that new forms now being offered by the state will not require signatures to be notarized. The sole exception will be the summary of financial activities for a solicitation campaign.
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The state has announced that is now accepting registrations online at: http://www.tennessee.gov/sos/charity. The Secretary of State’s office will also continue to receive registrations by mail, but reminds everyone that they must be on current forms.
TEXAS.
Once again, law enforcement fundraising is a legislative target. House Bill 3325 would require point-of-solicitation disclosures to the effect that supporting such organizations will not result in preferential by law enforcement treatment, and mandating the recording of calls. It would also make the activity subject to the state’s do-not-call law. (Editorial Note: There are a number of issues with this proposal).
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There are two more legislative proposals in the state of Texas. House Bill No. 3476, if passed, will have a peculiar effect. It pertains to the provision of a telephone list to a third party in connection with a telephone appeal. It is not limited to either commercial or nonproft, but apparently would apply to all if passed. It simply states that any list provided to a third party remains the proprietary list of the party who provided it. The other legislative proposal pertains to the growing industry of clothing bins and the solicitation of used clothing and household goods. Senate Bill No. 776 would require a series of disclosures at the point of solicitation. This is particularly so if the donated goods are subsequently resold.
VERMONT.
The state has been notifying telefunders that it will become more aggressive with those who are late filing financial reports. In a letter the state noted the fine can be $10,000, and that the state will pursue bonds on file.
Other
A SAD NOTE.
Raymond Grace, the founder of CDR Fundraising Group, passed away on April 14, 2009. He was an acknowledged industry leader and a friend to many of us.
DMA
The Non Profit Federation of the Direct Marketing Association announced that Christopher M. Quinn will be the new Executive Director. He replaces Senny Boone who has been promoted to Senior Vice President of the DMA.
TELEFUNDING ACTION.
A number of states and the FTC are working together on a potential enforcement action that will be targeting telefunders and perhaps some nonprofits.
“THE LIFE YOU CAN SAVE.”
This is a new book which was recently profiled in Newsweek magazine. Among the findings from a survey of 30,000 Americans found that those who gave to charity were 43% more likely to say they are “very happy” about their lives than those who did not give.
WALL STREET JOURNAL.
On March 27, 2009, the Wall Street Journal published an article noting that the furor over big bonuses to AIG executives is and will continue to filter down to the nonprofit world. The IRS has already indicated some concern over executive salaries in the industry and the new Form 990 will help to elicit further information about highly paid executives. The article went on to say that Senator Charles Grassley (R-IA) who, in the past has asked for stricter regulation of nonprofits, is now considering legislation that would put more pressure on charities to prove their compensation is reasonable. (Editorial Note: If charities establish a procedure of consideration that results in an analysis of a proposed salary, then it is entitled under the IRS intermediate sanctions provisions to a presumption of reasonableness. This puts the burden on the IRS to overcome it. In recent years our firm has conducted a number of compensation studies for organizations to assist them in the process).