Non-Profit Legal Matters

The Blog of the Law Firm for Non-Profits®

For-Profit College Converts to 501(c)(3)

In recent years we’ve converted a university and other 501(c)(3)s into for-profit corporations. But is the trend now reversing? Last year, the Law Firm for Non-Profits helped a for-profit private school become a nonprofit. And at the beginning of 2015, Herzing University, one of Wisconsin’s oldest and largest for-profit career colleges, was converted to 501(c)(3) status.

Why is this occurring? In the case of Herzing, it appears to be a combination of economics and changes in the law. For example, the federal rules now require for-profit colleges to demonstrate that they are preparing students for “gainful employment.” This includes setting a cap on annual student loan payments to the colleges at 20% of the student’s discretionary income or 8% of their total earnings. Failing to keep to these caps may result in a college being ineligible for federally funded student aid. Such aid is crucial to the financial success of most for-profit colleges.

It could have also helped that students of 501(c)(3) colleges in Wisconsin are able to tap into state financial aid that is not available to for-profit schools in that state.

Does Herzing’s conversion herald a new trend? For-profit colleges currently enroll 13% of all U.S. college students and take in more than a quarter of federal aid – over $30 billion a year. Unless the new law is reversed (it’s been challenged by the Association of Private Sector Colleges), we believe it will.

In the meantime, if your nonprofit school or college is considering converting to or from nonprofit status, call on the Law Firm for Non-Profits to successfully guide you through this process.

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Telephone Townhall for Nonprofit Organizations

TownhallDo you have questions about the sales and use taxes that affect nonprofits organizations? Here is your chance to ask your questions directly to the California Board of Equalization.

On February 19, 2015 at 10AM, California Board of Equalization member George Runner and the California Association of Nonprofits are hosting a live telephone townhall titled “How Tax Laws Affect You.” The purpose of the townhall is to provide nonprofits with information about common tax concerns, including the sales and use tax issues that affect them. During the event, callers will have an opportunity to ask questions.

Get more information here and register online here. If you attend the townhall, let us know what you learn in the comments section below!

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Biggest Donations of 2014 Announced

DonationsWhile the two biggest charitable donations in 2014 came from men over 80, the top 10 biggest donors reinforced young technology wealth as an important player in philanthropy. The list includes large donations from Nicholas Woodman, the founders of GoPro camera company, and his wife, and Larry Page, a co-founder of Google.

The top donation was a $1 billion bequest from Ralph Wilson, Jr., owner of the Buffalo Bills. The money went to a foundation in Wilson’s name with his heirs now in charge of fulfilling his charitable goals.

Although the combined top 10 biggest gifts of 2014 total $3.3 billion, about the same as that of 2013 ($3.4 billion), charitable giving by the ultra-rich has not yet recovered from the financial downturn. In 2007, the top 10 biggest gifts totaled $4.1 billion. But we have seen an upward trend from the years directly following the financial crises, when totals didn’t reach above $2.5 billion.

Most of the big donations went to colleges, research institutes, and foundations, with enormous capital campaigns leading the way. Harvard is aiming for a new capital campaign record with a $6.5 billion drive and received two of the donations on the top 10 list.

Check out the rest of the top 10 donors here and let us know which organizations topped your giving in 2014!

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2014 Year in Review of the Non-Profit Legal Matters Blog

download (1)As you make your nonprofit’s resolutions for 2015, take a moment to look back on the year that was for nonprofits. To help you get started, here are some of our top blog posts on 5 of the most interesting issues facing nonprofits and the nonprofit sector in 2014.

  1. This was a tough year for Lois Lerner. In the wake of the tea party scandal, we watched her downfall.

House Releases Scathing Report on Lerner

Congress Votes to Hold Lerner in Contempt

Lerner Plays Victim in Exclusive Politico Interview

  1. In 2014, the IRS introduced its Short Form Exemption Application — Form 1023-EZ, which faced opposition from charity regulators and several nonprofit associations but helped the IRS get through hundreds of exemption applications in a very short period.

IRS Releases Short Form Exemption Application — Form 1023-EZ

Can Donors Trust 1023-EZ?

REJECTED! IRS Derails Hundreds of Forms 1023-EZ

  1. At the end of 2013, we blogged about the more than 1,000 nonprofit organization that reported a “significant diversion” of assets since 2008. In 2014, we saw embezzlement hit all types and sizes of nonprofits.

May is for Embezzlement Convictions

Nonprofit Embezzlement Finally Stopped After 40 Months

Ex-Charity Head Faces Allegations of $3.8M Embezzlement

  1. Many celebrity charities faced scandal in 2014. Did your favorite celebrity end up under the negative spotlight?

Lady Gaga Boosts New Tax Plan

Bernie Mac Foundation Joins List of Troubled Celebrity Charities

  1. Whether or not to take donations or grants from unsavory sources became a big topic in 2014 as the Koch brothers made sizable donations to schools around the country.

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

UnKoch My Campus

It was a great year for all of us at The Law Firm for Non-Profits! Arthur celebrated his 18th anniversary of starting the firm and Jessica got married. We wish you a happy new year and a prosperous start to 2015!

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Will the Real Directors Please Stand Up

ex officio directorsThere is a lot of confusion among nonprofits with regard to ex officio directors. Who are they and how are they different from other directors?

The term ex officio comes from Latin and means “from the office.” Thus, an ex officio director is a member of the board because he or she holds a specific office or position. For example, if an organization’s bylaws state that the Executive Director is an ex officio member of the board of directors, then the person who holds that office is automatically a director. But does an ex officio director have all the rights of any other director, including the right to vote?

In 2009, the California legislature attempted to clarify the law. That year, an amendment to the law held that ex officio directors were required to be treated as all other directors, including having the right to vote. This was true regardless of whether the articles or bylaws of an organization specifically stated that ex officio directors were non-voting. But rather than providing clarification, the amendment left many nonprofits even more confused.

In 2014, the legislature took another stab at clarifying the law. A new amendment (effective January 1, 2015) provides that a person who is a member of the board by reason of occupying a specific position has all the rights and duties of every other member of the board, including the right to vote, so long as the articles or bylaws do not limit that person’s voting rights. Stated another way, if a person is a member of the board based on his or her position and the articles or bylaws limit that person’s right to vote, then that person is not a director regardless of his or her title.

This means that only persons who have voting rights on a board are statutory directors regardless of title. A nonvoting ex officio “director” could be invited to attend board meetings, but would not have the right to vote at such meetings and would not have any other rights or obligations of directors.

Still confused? We’re here to help. Please contact us with any questions your board has about ex officio directors or corporate governance in general.

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Congressional Watchdog Releases IRS Report Card

WatchdogHow are the recent congressional budget cuts affecting the IRS’s exempt organizations division? With growing concern about the effectiveness of IRS oversight of exempt organizations, the U.S. Government Accountability Office (GAO), an independent, non-partisan congressional watchdog, was asked to prepare a report to the Senate Committee on Homeland Security and Governmental Affairs about the division’s effectiveness. The GAO did just that – reviewing and analyzing IRS data and documents and interviewing IRS and Department of Justice officials, regulators, and specialists.

What did the GAO find? Sadly and not surprisingly, the agency determined that the decreased budget led to fewer employees in the exempt organizations division, which led to fewer exempt organizations being examined by the IRS (.81% in 2011 to .71% in 2013). The GAO also determined that due to the need to safeguard taxpayer data, the IRS has trouble sharing its information with state regulators to assist them with building cases against suspect charities. Finally, because many exempt organizations do not e-file, there is less digitized data available to ascertain analytics and it costs more in labor for the IRS to wade through the data received.

Based on its findings, the GAO made two recommendations to the IRS:

  1. Develop goals and performance measures to be used in assessing the impact of enforcement activities; and
  2. Clearly communicate to state regulators how they are able to use IRS information when examining charities.

Separately, the GAO is recommending that Congress consider expanding the requirement for exempt organizations to electronically file their returns so that more organizations are forced to do so.

The IRS agrees with the GAO’s recommendations. Do you? Read the whole report here.

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Former Executive Director Embezzles $900K from Charity

The former Executive Director of We Stay-Nos Quedamos, a South Bronx housing and social services nonprofit, recently pleaded guilty to diverting nearly $900,000 from the organization. How did she do it?

According to the New York Attorney General’s office, Yolanda Gonzalez paid her personal expenses, such as payments on her new car and trips to department stores, nail salons, and movie theaters, using the organization’s money. She brazenly wrote checks to herself or to cash, made ATM withdrawals, and used the organization’s credit cards.

It helped that Gonzalez didn’t work alone. She and the former CFO of the organization worked together to falsify financial reports, balance sheets, and financial statements to conceal her theft before submitting them to the board of directors and the Attorney General’s office.

Gonzalez was finally removed by Nos Quedamos’ board of directors after serving the organization for 6 years when they noticed the financial irregularities and became uncomfortable with her hiring her relatives. The board then alerted New York Attorney General Eric Schneiderman of the suspicious activity. Perhaps partially to blame was the trust the board placed in Gonzalez as the daughter of the founder of the organization, who passed away in 2005.

Gonzalez is set to be sentenced in January for grand larceny and criminal tax fraud. She faces up to 4.5 years in prison. The organization’s former CFO is set for sentencing in February and is expected to face 6 months of house arrest and 5 years of probation for falsifying business records.

Are you surprised that it took the board 6 years to notice Gonzalez’s theft? What steps does your organization have in place to catch financial irregularities quickly?

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Girl Scout Cookies Go Digital

CookiesAfter years of prohibiting digital sales of its cookies, Girl Scouts of the USA is moving the organization into the digital age with its “Digital Cookie” platform. Why did it take so long?

The national organization, which sets policy regarding sales of cookies by the individual councils, was concerned that online sales would not teach the girls the entrepreneurial skills that are the whole point of the cookie sales, such as interpersonal skills, handling money, and delivering a product.

But after three years of development and testing, the national office has figured out how to incorporate education into the online platform. The organization’s director of the digital cookie effort explained that girls will “learn vital entrepreneurial lessons in online marketing, application use and e-commerce.” The girls will also learn digital order tracking and have the option to hand deliver orders received online.

The national office is also concerned about the safety of its scouts. To gain access to a girl scout’s web page, users will have to receive an emailed invitation from the scout. In addition, no identifying information about scouts may be posted so that it is publicly visible.

The Digital Cookie is starting this month in limited areas and will go nationwide in January for the start of the cookie sales season.

What changes has your organization made to “compete” in the digital age?

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Proposed SUN Act Requires Increased Nonprofit Transparency

Senator Jon Tester (D-Mont.) recently introduced the Sunlight for Unaccountable Nonprofits Act (The SUN Act), which would require that already public information about nonprofits (specifically, that included on their annual information returns) be made available to the public at no charge in an open, searchable format. The Act specifically would require the information provided be “easy to find, access, reuse, and download in bulk.”

The SUN Act would also require disclosure of large donors (those who give $5,000 or more) to exempt organizations engaging in political activities. This would include an organization that indicates on its exemption application that it intends to spend money attempting to influence the selection, nomination, election or appointment of a person to a public office or that states on an information return that it has participated in, or intervened in, a political campaign on behalf of, or in opposition to, any candidate for public office.

Opponents of the SUN Act are concerned that such a disclosure requirement would chill free speech. But supporters of the Act point to the growing trend of “dark money” support of political campaigns, primarily meaning money from tax-exempt social welfare organizations that are not required to identify their donors.

The Act has been assigned to a congressional committee, which will consider it before possibly sending it on to the House or Senate as a whole.

Do you think the Act goes too far or not far enough with respect to nonprofit transparency?

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What’s in a Name?

Maybe a better question is, What is a name worth? If you’re the family of Avery Fisher and New York’s Lincoln Center, a name is worth at least $15 million … and perhaps $100 million or more.

For years, Lincoln Center has wanted to renovate Avery Fisher Hall, which is infamous for its subpar acoustics and poor sight lines. The project is expected to cost about a half billion dollars. Lincoln Center believes that an angel donor will be needed to kickstart the project, and that the Angel donor will want naming rights for the hall. As might be expected, Avery Fisher’s family has threatened to sue if Avery Fisher Hall is renamed.

Avery Fisher was an electronic pioneer whose $10.5 million donation allowed Lincoln Center to renovate the New York Symphony’s concert hall, which now bears his name. So why has Lincoln Center agreed to pay Fisher’s family $15 million? To give up its claim on the name of the hall. Indeed, Lincoln Center expects that the naming rights can fetch a donation of $100 million or more, the amount donated by David H. Koch to the New York State Theater, now known as the David H. Koch Theater.

Does it surprise you that Lincoln Center is willing to pay the Fisher family more than the amount Avery Fisher donated in the first place? It certainly has surprised the nonprofit legal community. The details of the deal have yet to be released. Perhaps the payment is a settlement to the Fisher family in order to avoid litigation. Indeed, threatened lawsuits in the last several years against universities that tore down or renamed buildings funded with donations from as far back as the Civil War era have resulted in major payouts by the universities.

Nowadays, donations with naming rights and other rights to donors come with detailed contracts that specify the period in which the donee may not change the name and the rights the donor or successors receive if the name is changed or the building is damaged.

If you’re concerned about a donation that includes naming rights or other perks for the donor, whether you are a donor or the recipient nonprofit, please contact us. The Law Firm for Non-Profits has deep experience in this area.

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