Non-Profit Legal Matters

The Blog of the Law Firm for Non-Profits®

A New Charity Reporting Option

There are many resources for finding out information about a nonprofit. The best option is to review an organization’s documents yourself. But if you don’t have time for that, where should you go for reliable reporting on nonprofits?

The Direct Marketing Association Nonprofit Federation (DMA) is hoping you will turn to their new Nonprofit Dashboard. The Dashboard’s content will come directly from nonprofits and will include 3 years of reporting across 8 metrics, including constituents served, program expenditures, and expenditures to acquire and cultivate donors.

DMA is an association of nonprofits and charitable fundraisers that focuses on providing education about fundraising. DMA has long been at odds with third party reporting sites like Charity Navigator and CharityWatch.

So what do the charity watchdogs think of nonprofit self-reporting? You guessed right, they are not impressed. Vice President of Marketing at Charity Navigator, Sandra Miniutti, argued against use of the site, explaining, “[t]here’s no independent scrutiny or analysis which would provide a benefit to a donor.”

But is this an instance of the pot calling the kettle black? There has been mistrust of some of DMA’s members, who are sometimes thought of as merciless direct marketers. But there has also been mistrust of the rating systems used by watchdogs like Charity Navigator.

DMA believes that the watchdogs don’t always portray a fair view of fundraising efforts and focus too much on the short term. Instead, the Dashboard will look to longer term data about fundraising efforts and programmatic achievements. DMA has an ethics committee that will investigate if a member is accused of misrepresenting financial information on the Dashboard.

Where do you look for information about an organization before you donate?

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Should Your Nonprofit Accept a Donation to Build?

constIs your nonprofit considering constructing a new wing or building based on receiving one substantial donation? Before it does, the board should consider all possible outcomes, including ending up in court.

Helga Wall-Apelt, a former board member of Florida State University’s Ringling Museum of Art, contributed $6 million to the museum in 2006 for a new center for Asian Art. She also contributed the use of her collection of jades, bronzes, sculptures, and photographs worth $30 million. In return, the new center was to be named for Wall-Apelt.

Almost 9 years later, construction has just begun on the new center. It has been delayed several times as the museum sought matching funds from the government and other sources. The vast majority of Wall-Apelt’s collection has been in storage at the museum since 2008.

Wall-Apelt has now filed suit against the museum, the university, and the affiliated Florida State University Foundation, claiming they have breached the terms of the gift agreement. Her attorney summed up her feelings, asking: “Here we are, almost nine years [after the donation], and she is out $6 million and the use of the collection, and what does she have to show for it?”

The museum’s executive director Steven High maintains that the museum has “met every element of this gift agreement.” Regardless, the museum has nearly 4,000 Asian art objects in addition to those promised by Wall-Apelt so it plans to open in January, 2016 with or without her collection.

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Can Donors Trust 1023-EZ?

1023-EZDonors rely on 501(c)(3) to indicate that an organization is carrying out charitable activities. But since the IRS released the streamlined exemption application (Form 1023-EZ), should they still do so?

The National Taxpayer Advocate (TAS) is an independent organization within the IRS that helps taxpayers who are having trouble resolving problems with the IRS. On July 16, TAS released its mid-year report to Congress. Among other topics discussed, the report includes TAS’s concerns about IRS treatment of taxpayers applying for exempt status.

Although TAS previously recommended that the IRS develop a Form 1023-EZ for use by small organizations, TAS is not happy with the Form that has been released for public use. The report explains that TAS is “deeply concerned about the IRS’s abdication of its responsibility to determine whether an organization is organized and operated for an exempt purpose and not merely accept an organization’s statement to that effect.” The report also argues that “[b]y adopting this approach, the IRS will undo, in the space of less than six months, decades of practice in this area.”

Our firm’s managing attorney, Arthur Rieman, has also criticized the Form. During an interview with Tax Analysts, he explained that streamlining the application “in this manner has the potential to open the floodgates to people who will use the relaxed requirements for exemption to game and abuse the system to reap profit and private gain at the expense of the trusting public.”

The IRS has told TAS that it intends to conduct audits of a representative sample of exempt organizations that have used the streamlined application in about 6 months and a year from now. At that time, the IRS intends to adjust its procedures to address any noncompliance it identifies. TAS believes this will have only a limited effect on compliance.

Our colleagues have argued that private foundations should not rely on a determination letter for an organization that has filed 1023-EZ. Should you?

Is it time for Congress to intervene and roll back 1023-EZ?

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Another Win for NY AG Schneiderman

imagesNew York Attorney General Eric T. Schneiderman is following his big win earlier this month with a $522,000 pay out from a Brooklyn rabbi who collected hundreds of thousands of dollars for fake charities.

Rabbi Yaakov Weingarten pled guilty in NY State Supreme Court to felony tax fraud for soliciting donations from thousands of donors for phony charities. He solicited donations for 19 totally made up Israeli charities, which he claimed helped needy Israelis, including the sick, the poor, cancer victims, and victims of terrorism. He admitted, “none of the money I collected . . . went to these entities, because they did not exist.”

Weingarten instead used the donations to pay his mortgage, home improvement payments, and cable and electric bills.

Under the terms of the settlement, approximately $360,000 will be donated to the UJA-Federation of New York. The Federation will in turn make grants to two Israeli charities: Schneider Children’s Medical Center of Israel, a pediatric hospital, and United Hatzalah of Israel, a fully volunteer Emergency Medical Services organization. The remaining settlement money will be paid to the State of New York and will cover civil fines and penalties.

Weingarten is also permanently barred from charitable fundraising in the State of New York.

Continuing the string of charity scandals hitting New York, former CEO of Metropolitan Council on Jewish Poverty, William Rapfogel, was recently sentenced to 3 1/3 to 10 years in prison and ordered to pay $3 million in restitution for stealing from the organization. Investigators from Schneiderman’s office found that Rapfogel took more than $3 million “to fund a lavish lifestyle.”

A recent Chronicle of Philanthropy opinion piece urges “nonprofit leaders and boards of directors to step up and take the risk of confessing to abuses of funds and other serious misdeeds.” Already a difficult task, nonprofits must support independent oversight. How are the leaders of your nonprofit encouraged to speak up when they see bad deeds?

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To Take Or Not to Take … (A Scandalous Donation)

DonationsAmerica’s historically black colleges and universities are facing a hard choice: continue struggling for much needed funds or accept a donation from David and Charles Koch.

From one perspective, this is a win-win scenario. The colleges get funding in the face of decreases in government funding and aid and the Koch brothers will perhaps attract more black voters. But some insist that the Kochs are pursuing a racist political agenda that stands in the face of everything historically black colleges and universities stand for. A spokesperson for the Kochs counters that the Kochs “have devoted their lives to advancing tolerance and a free society – where every individual is judged on his or her individual merits and they are free to make decisions about their lives.”

Regardless, a $25 million gift to the United Negro College Fund (UNCF) was too good to pass up. Lee Saunders, president of the American Federation for State, County and Municipal Employees Union has criticized UNCF for accepting the gift and for speaking at a Koch conference. But other black colleges have also accepted gifts from the Kochs. President of Dillard University, Walter Kimbrough, reasons “I can take their money and use it for good.” Dillard has already accepted about $50,000 from the Kochs.

Eric Walters, past president of the faculty senate at Howard University, proposed that the UNCF and historically black colleges and universities use some of the funds received from the Kochs to research the influence of money on politics and to generate dialogue about the impact of the Koch agenda on black Americans. But in some cases money received may be restricted for specific programs or activities.

It was only a few months ago that many charities in Los Angeles faced a similar dilemma about accepting money from Donald Sterling. Since then, has your organization done anything to put a gift acceptance policy in place to deal with these types of situations? Better to think it through now than when faced with a $25 million grant.

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IRS Crippled by Tea Party Scandal

Tea PartyIn the wake of the tea party scandal, you might think that Congress would want to bolster up the IRS’s exempt organizations division to ensure proper staffing and oversight. But you would be wrong. The House recently cut the IRS tax enforcement division budget by $1.2 billion (a 25% cut). The cut is a reflection of GOP outrage over the scrutiny of tea party groups and the IRS’s failure to produce the emails of Lois Lerner, former head of the exempt organization division.

Rep. Bill Huizenga (R-MI) reasoned, “It is up to Congress to use the power of the purse to rein in the IRS and force them to conduct their analysis in an unbiased manner.”

The White House has promised to veto the House bill, but in the meantime, the exempt organizations division is still dealing with a decimated staff and limited resources. A six-month investigation by Center for Public Integrity (the “Center”), a nonpartisan, nonprofit investigative news organization, shows that the division has all but stopped regulating politically active nonprofits in any consistent way, fearing more scandal.

The investigation included review of thousands of pages of IRS documents and interviews with dozens of current and former IRS employees and administrators. The Center found that less than .25% of exemption applications by social welfare organizations are denied, compared to nearly 4% thirty years ago. And the exempt organizations division has lost 14% of its staff positions over the last twenty years while the number of groups it regulates has grown more than 40%.

The Center has offered three solutions from its interviews with former IRS employees and administrators on how to fix the exempt organizations division. Namely, (1) finding a better funding source for regulation of exempt organizations, such as using the existing tax on private foundations; (2) increasing regulatory limitations on the political activity exempt organizations may undertake; or (3) creating an exempt organization regulatory agency separate from the IRS, similar to the independent commissions in the UK and in Australia.

What do you think needs to be done to fix the exempt organization division?

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Failure to Preserve Lerner’s Emails Violative of Federal Law?

Lerner's EmailsThe IRS’s failure to preserve former IRS official Lois Lerner’s emails is continuing to be problematic for the IRS and now appears to be causing trouble for the White House too. Cause of Action, a 501(c)(3) nonpartisan government watchdog, recently released a memo alleging that the IRS’s failure to preserve Lerner’s emails may constitute a violation of the Federal Records Act (FRA) and various criminal statutes.

The FRA requires that when agency records are accidentally removed (as the IRS alleges is what happened to Lerner’s emails when her computer crashed), the agency must promptly notify the National Archives and Records Administration (NARA). The agency must also work with the U.S. Archivist to initiate action through the Attorney General to start work on recovering the removed records. The Archivist testified that the IRS never notified his office of the computer crash, which, if true, was a direct violation of the FRA.

Cause of Action also alleges that the IRS may have criminally obstructed Congress by failing to preserve Lerner’s emails, seemingly based on the perhaps too good to be true coincidence of Lerner’s computer crashing only ten days after a request for emails. Cause of Action asserts that even if the IRS recovers all of Lerner’s emails, the agency still had the “evil purpose” of trying to obstruct Congress.

As a cherry on top, Cause of Action notes that if the President disposed of any email exchanges with Lerner without the consent of the Archivist and in consultation with Congress, this would have also been in violation of the federal records laws.

Although Cause of Action has recommended that Congress take action based on its findings, it’s unclear at this time whether that will happen. In the meantime, there is sure to be more drama on the Lerner scandal and we will keep you up to date.

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Where Do Clothing Bin Donations Go?

Clothing binWhen people put old clothes in the used-clothing bins around New York City, they believe those clothes are going to charity. But The New York Times explains that is not always the case. Although most of the bins around the city have signs indicating that donated goods will go to the needy or to charities, city officials say that the needy do not benefit from much of what is collected. Instead, the clothing is sold in thrift stores or overseas with the profits going to untraceable for-profit entities.

The bins are banned by city law from being put on public sidewalks and streets and are removed once spotted by the Sanitation Department enforcement officers or reported by residents. But the number of bins has still seen a huge increase in recent years. In 2010, the city found 91 bins and in 2014, the city found more than 2,000. And the Times reports that this pattern is being seen nationwide.

Organizations such as Goodwill had moved away from bin collections in favor of having donors bring their items into collection points to ensure proper management of the items. But with the increase in fraudulent bin collections, the organization is now rethinking bin collections. Goodwill leadership hopes people will choose Goodwill bins over others because they will see the reliable branding of the organization.

When you make a donation, even if it’s just old clothes, make sure it’s making it to the intended recipients. To be sure your donations are used effectively, consider bringing them to respected thrift stores such as those operated by the Society of St. Vincent de Paul, Council of Los Angeles, the National Council of Jewish Women, or The Salvation Army. David Fields, Executive Director of Society of St. Vincent de Paul, Council of Los Angeles, explains: “Donations of clothing allow the [organization] to provide this clothing for free to the impoverished, through our free distribution program or sell the clothing at our thrift stores, which funds our programs such as homeless shelters, housing for homeless families, soup kitchens, food pantries, and a summer camp for disadvantaged children.”

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Google, Google’s nonprofit arm, has chosen five nonprofits to test out new ways to use Google Glass, the Web-connected eyewear. The search attracted 1,300 submissions for how nonprofit organizations could uniquely use the new technology. A spokesperson explained that each applicant was assessed based on the passion, impact, and shear feasibility of their proposed project.

The grant recipients and their proposed projects are:

  • Classroom Champions, which connects top performing athletes with students in high-need schools, will ask Paralympians to record their routines with Glass. It then will create a sharable library of videos to help kids build empathy and learn to see ability where others only see disability.
  • 3000 Miles to Cure raises funds for, and increases awareness of, brain cancer research. It will use Glass to record portions of the 3,000-mile bicycle competition Race Across America from racers’ points of view and communicate messages of encouragement and donations to racers.
  • Women’s Audio Mission is an organization dedicated to the advancement of women in music production and the recording arts. WAM will use Glass to enhance its instructional programs by creating a more immersive lab experience for students.
  • The Hearing and Speech Agency supports and facilitates effective communication. The organization will develop and pilot new ways to improve the lives of individuals with communication difficulties, hearing loss, and autism using Glass.

Each winner will receive $25,000 and a free Glass (expected to soon retail for $1,500). The organizations will also meet with Glass engineers on the Google campus to determine how the technology can be tailored to meet the particular needs of each organization’s project.

How would your organization use Glass?

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IRS Releases Short Form Exemption Application – Form 1023-EZ

The IRS has forged ahead in the face of opposition from charity regulators and several nonprofit associations and introduced a short form exemption “application.” To be eligible to use the form, an organization must be able to answer “No” to each of 26 yes or no questions, including the following 3:

  1. Do you project that your annual gross receipts will exceed $50,000 in any of the next 3 years?
  2. Have your annual gross receipts exceeded $50,000 in any of the past 3 years?
  3. Do you have total assets in excess of $250,000?

The new form, known as Form 1023-EZ, is 3 pages long compared to the 12 pages plus schedules of the standard Form 1023. The IRS estimates that about 70% of new applicants will be eligible to file the short form. Exemptions will be all-but automatic for organizations that use the short form and answer no to all 26 questions.

By reducing the time it spends reviewing exemption applications, the IRS plans to dedicate more resources to rooting out fraud and abuse among existing nonprofits. However, the lack of scrutiny of organizations filing Form 1023-EZ may incentivize applicants to underestimate their projected revenue in order to use it instead of the full form. In addition, without the scrutiny of the full Form 1023, the IRS has opened the door to abusive and fraudulent use of Form 1023-EZ by organizations that have no charitable intent. This will inevitably lead to an unprecedented number of exemption applications, which the Service will likely have extreme difficulty effectively monitoring and auditing.

What do you think of the new short form?

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