Understanding fund-raising law.
Given the increased scrutiny now being directed at nonprofit fund-raising campaigns, strict compliance with all applicable federal, state, and local laws is more important than ever to prevent even the most well-intentioned effort from turning into a public relations nightmare.
Abiding by the law in the fund-raising arena is no simple task. Books have been written on the topic of compliance with Internal Revenue Service regulations. A brief overview of the complicated legal dimensions of fund-raising practices, however, provides a framework for preparing for a fund-raising endeavor and for determining specific questions that should be directed to legal counsel.
Federal tax rules
Record-keeping and reporting. To comply with federal tax rules and maintain tax-exempt status, organizations need to establish some basic record-keeping and reporting procedures and make informative disclosures to their members and donors. To comply with IRS reporting requirements, records should be kept on
* the total amount of contributions, gifts, and grants received;
* the names and amounts given by large contributors (individuals whose total contributions during the most recent four years are greater than or equal to 2 percent of the organization's total contributions over that same period); and
* how the funds raised are spent, including separating program, administration, and fund-raising expenditures.
A good way to ensure that proper records are being kept is for fund-raising staff to review the IRS Form 990 Annual Information Return with accounting staff or your outside tax professional.
IRS disclosure and deductibility rules were enacted in the 1960s but not vigorously enforced until recently. To increase compliance, IRS is threatening to examine donor records of organizations that it discovers during audits are failing to make proper disclosures and to subsequently audit the individual tax returns of the organization's donors for disallowable charitable deductions.
Disclosure statements. IRS has also suggested it will consider assessing penalties against organizations for aiding donors in taking improper deductions--that is, by suggesting a donation is tax-deductible when it is not.
IRS disclosure rules require organizations to inform prospective donors about the extent to which their contributions are legally tax deductible. Disclosures should be made on membership applications, direct-mail appeals for donations, tickets to and flyers promoting fund-raising events, and so forth.
Once-common statements, such as "contributions are deductible to the extent permissible by law," are no longer sufficient. Instead, disclosure statements should indicate the specific fair market value--the cost to purchase the item or service on the open market, not the cost to the nonprofit of providing the item or service to the donor--of benefits received and the exact amount of the contribution that is deductible.
For example, if an association's foundation holds a dinner-dance with a fair market value of $45 but charges $100 per ticket, the foundation should disclose that only $55 is deductible as a charitable contribution.
Additional information on IRS disclosure and deductibility rules can be found in IRS Publication 1391. Another helpful resource is Bruce Hopkins's book The Law of Tax Exempt Organizations, published by John Wiley & Sons.
Tracking changes. It's also a good idea for at least one staff member to stay abreast of major fund-raising issues. In recent years, for example, IRS has begun taking a closer look at travel programs and corporate sponsorship agreements.
ASAE and other groups frequently conduct seminars on the hot topics in nonprofit fund-raising. Several newsletters devoted solely to nonprofit tax issues also provide insightful information.
The U.S. Postal Service is enforcing nonprofit postal regulations more vigorously than in the past, perhaps because of the increasing difficulty in getting nonprofit postal subsidies funded by Congress. The Postal Service--authorized to spot-check bulk mail and to impose fines if abuses are uncovered--is concerned primarily with two areas: 1) fraudulent or misleading direct-mail pieces and 2) misuse of nonprofit postal permits by allowing the permit to be used in cooperative mailings with for-profit firms.
Restrictions on direct mail. For example, in one recent case the Postal Service took action against a firm raising money for a nonprofit using a sweepstakes mailing. The mailing appeared to be a legal prize notification; however, the prize won by most recipients was only 10 cents. In that case, the Postal Service required that any future sweepstakes appeals include the value of any prizes and the odds of winning.
Some legislators would like to see further restrictions on direct-mail appeals, including requiring the real name and address of the organization or professional fund-raiser to be included on the reply envelope and prohibiting fund-raising appeals that resemble invoices.
The bulk mail coordinator at your local or regional post office is generally very helpful in answering questions about the proper use of your nonprofit postal permit. Another source of information is the Alliance of Non-Profit Mailers, 2001 S St., N.W., Suite 301, Washington, DC 20009; (202) 462-5132.
At the state level
Registering. Perhaps most difficult and time-consuming--particularly with respect to a fund-raising campaign that appeals to residents in a number of states--is complying with the plethora of state and local fund-raising laws. At last count, 42 states and untold local jurisdictions have enacted special rules for fund-raisers. Most of these regulations require organizations to register with each state in which they plan to solicit donations before they begin soliciting funds.
For example, in Washington, D.C., organizations are required to register and receive a certificate of registration at least 15 days prior to soliciting contributions. In Maryland, organizations are required to register unless they do not receive contributions in excess of $25,000 in a year and all fund-raising activities are performed by volunteers, not paid staff. However, most states do not require organizations to register if they are only soliciting donations from their members.
Information frequently required for registration includes
* names and addresses of officers, directors, and trustees;
* a recent financial report;
* a description of the organization's purpose(s); and
* information on how the funds are intended to be raised, including whether any outside fund-raising professionals or consultants will be used.
Disclosures. Following registration, organizations often are required to file an annual report with the state. At the time of a solicitation, specific disclosures, such as the fact that information about the charity is on file with the state or that professional fund-raisers are being used, is often required. States may not require an organization to disclose the amount or percentage of funds raised that will be targeted for fund-raising expenses.
To make compliance easier, it's a good idea to pull together the most frequently requested registration information. In addition, confirm the registration and disclosure requirements of each state in which you plan to raise funds with the appropriate office in each state, generally the secretary of state's office of attorney general's office. Or you may want to consult yet another book by Bruce Hopkins, The Law of Fundraising, which includes a comprehensive summary of state solicitation laws.
Fund-raisers may also be subject to a variety of other state laws, including prohibitions on fraudulent advertising. In some states, a fund-raising appeal needs only to be capable of deceiving to violate these laws. More information about these statutes may usually be obtained by contacting the state attorney general's offices.
Many cities and counties also have registration and disclosure statutes. While it is difficult, if not impossible, for an organization to contact every city and county in which it will solicit funds, it is particularly important to do so if you are conducting a door-to-door solicitation, a raffle, or a bingo fund-raiser, because these types of activities are frequently subject to special local regulations.
Offices regulating fund-raising vary depending on the locality; however, local police, finance, tax, licensing, and commerce departments are often responsible for issuing required permits.
Private fund-raising standards
Two private organizations have developed governance and fund-raising standards for nonprofit organizations. The National Charities Information Bureau, New York City, for example, suggests that organizations should expend at least 60 percent of funds raised on program activities.
The Council of Better Business Bureaus Philanthropic Advisory Service (PAS) guidelines say to expend a minimum of 50 percent of funds raised on activities described in the solicitation.
For more information, contact
* National Charities Information Bureau, 19 Union Square West, New York, NY 10003-3395; (212) 929-6300;
* Council of Better Business Bureaus PAS, 4200 Wilson Blvd., Arlington, VA 22203; (703) 276-0100.
A wealth of information on fund-raising practices is also available from The Foundation Center, New York City, and its 180 affiliated libraries. Contact one of The Foundation Center's regional offices in Washington, D.C., Cleveland, or San Francisco to determine the closest affiliated library.
Finding your way through the maze of federal, state, and local fund-raising rules can be difficult and confusing but not impossible if you learn some of the basics first.
Following is a list of some of the newsletters and other publications that deal with fund-raising and nonprofit tax issues, including some of those published by law and accounting firms. You may wish to contact your legal counsel or accountant to find out if they publish newsletters of their own.
* Association Law and Policy, ASAE, 1575 Eye St., N.W., Washington, DC 20005; (202) 626-2703; biweekly; available as benefit of membership in ASAE's Legal Section or for $195 per year.
* The Complete Guide to Planned Giving, JLA Associates, Inc., ASAE Publications, 1575 Eye St., N.W., Washington, DC 20005; (202) 626-2748 or fax your order to (202) 408-9634; $50 (ASAE members), $60 (nonmembers); order number 210075.
* EXEMPTS, Grant Thornton, 1850 M St., N.W., Suite 300, Washington, DC 20036; (202) 296-7800; quarterly; free.
* Journal of Tax Exempt Organizations, Faulkner & Gray, 1110 Penn Plaza, New York, NY 10001; (212) 967-7000; quarterly; $129 per year (plus $4.95 for shipping and handling).
* The Nonprofit Counsel, John Wiley & Sons, Inc., 605 Third Ave., New York, NY 10158, Attn: M. Dobday; (212) 850-6327; monthly; $96 per year.
* The Nonprofit Journal, Aronson, Fetridge, Weigle & Stern, 6116 Executive Blvd., Fifth Floor, Rockville, MD 20852; (301) 231-6200; bimonthly; free.
* Nonprofits Today, Frank & Company, p.c., c/o Cathy Anheier, 1360 Beverly Rd., Suite 300, McLean, VA 22101; (703) 821-0702; quarterly; free.
* Tax Monthly for Exempt Organizations and Tax Monthly for Associations, Harmon, Curran, Gallagher & Spielberg; 2001 S St., N.W., Suite 430, Washington, DC 20009; (202) 328-3500; monthly; $115 per year for each resource.
Sandra K. Pfau is a lawyer and assistant to the executive director of the IEEE Computer Society, Washington, D.C.
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|Title Annotation:||includes related article|
|Author:||Pfau, Sandra K.|
|Date:||Feb 1, 1993|
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