Non-Profit Legal Matters

The Blog of the Law Firm for Non-Profits®

Ex-Charity Head Faces Allegations of $3.8M Embezzlement

Embezzlement AllegationsRussell Brace, the former head of United Mid-Coast Charities Inc, a social services organization located in Maine, is facing allegations in a civil lawsuit of embezzling $3.8 million from the organization. The organization alleges that over 13 years Brace deposited millions of dollars in donations intended for the charity into bank accounts he controlled.

The allegations claim that Brace acknowledged the long-term embezzlement after being confronted by officials from the organization, who became suspicious after being unable to find records in the charity’s financial files of $75,000 in donations from a major donor.

Brace has now also become the target of a federal criminal investigation, which can take a year or more to complete. In the meantime, the civil suit will have to what as the judge agreed with Brace’s attorney that moving forward could put Brace at a disadvantage in the criminal case.

These allegations of embezzlement are unusual only in that they made the news. Embezzlement is, in fact, a huge problem in the nonprofit sector.

How many incidents of embezzlement will you have to read about before reviewing your organization’s checks and balances to ensure it doesn’t happen to your organization?

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Detroit Museum Defends Executive Salaries

During a year in which the Detroit Institute of Arts Museum (DIA) campaigned for a property-tax increase to help with its shaky finances, it also awarded double-digit pay hikes to its top two executive staff. This is not sitting well in the suburban counties where voters approved the tax increase, which will result in $23 million to support the DIA.

The Institute’s executive director saw a pay increase of 13% to $514,000 and its chief operating officer saw a pay increase of 36% to $369,000. The Institute’s board chair, Gene Gargaro, explained away the COO increase, saying that her increase included retroactive payments as she worked several months at an old salary after being promoted to COO. Gargaro also stated that both officers had been paid less than the average for peers at comparable institutions and these increases were just bringing them up to be closer to that average. He stated, “I would not deny that the compensation they receive is significant, but I would also say that they’ve earned it.”

Rep. Eileen Kowall (R-White Lake) responded that “[t]his is money that should have gone toward protecting the city’s art, not lining the pockets of top officials at the DIA.” Not helping is that the DIA started collecting the tax money in January 2013 and the city filed for bankruptcy just 6 months later.

Gargaro pledged to “keep the elected officials in Macomb, Oakland and Wayne Counties informed on a current basis as we make executive compensation decisions in the future.” But Oakland County Commissioner David Woodward said that he would continue to push for greater public accountability and oversight of the DIA’s executive compensation given the voter-approved tax to fund the museum.

Do you think the raises were insensitive given the efforts made by the state government and the voters to support the museum?

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Donations to Ebola Fight Trickling In

EbolaHave you donated to efforts working to halt the Ebola epidemic? If not, you’re not alone. The Washington Postreports that charitable giving to such efforts has been far less than that for other major disasters. For example, almost all of the funding received by the American Red Cross to date for its Ebola efforts has come from one donor and the International Federation of Red Cross and Red Crescent Societies has only raised 24% of its appeal target for fighting Ebola.

Jeremy Konyndyk, director of the U.S. Agency for International Development’s (USAID) Office of U.S. Foreign Disaster Assistance explains that “the kind of disasters that garner a lot of public support are the ones that are fast-moving and tend to look visually spectacular.” But Konyndyk points out that for this type of disaster, involving events such as typhoons, tsunamis, and earthquakes, all the damage is done before the media starts reporting, so there aren’t many lives left to be saved. But for the Ebola outbreak, there is still much to be done to save lives.

Margaret Aguirre, head of global initiatives for International Medical Corps, thinks that the problem may also be competition with other scary news, such as the Islamic State’s spread into Syria and Iraq and a bloody rebellion in the Ukraine.

A few big donations have been announced. The Bill and Melinda Gates Foundation has committed $50 million to the fight and Mark Zuckerberg and his wife announced a $25 million donation to the Centers for Disease Control Foundation.

If you want to donate but aren’t sure which organizations are involved with the fight, the USAID’s Center for International Disaster Information has provided lists of trusted and experienced organizations conducting relief operations in West Africa and tips on how to help.

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Ongoing Debate Over Political Pulpit Preaching

Political campaign intervention by 501(c)(3) organizations is absolutely prohibited. Yet earlier this month, nearly 1,500 preachers nationwide banned together for the election-season ritual of political pulpit preaching that has been taking place since 2008.

Alliance Defending Freedom is a 501(c)(3) conservative group that “advocates for the right of people to freely live out their faith” that organizes the event, which is aptly named “Pulpit Freedom Sunday.” The participating preachers and other backers of the event argue the ban on political campaign intervention violates churches’ freedom of speech. They also argue that the law is vague and that unequal enforcement has led to preachers pulling back on their social commentary in case it is construed as political. One preacher explained, “[Church leaders] have an obligation to influence the government.”

Churches, along with all exempt organizations, should remember the Supreme Court’s admonition that exemption is granted as a matter of legislative grace. Thus, as opponents argue, if pastors want to endorse candidates, they can simply give up their tax exemption. As put by a representative from the Freedom From Religion Foundation, a 501(c)(3) that “protects the constitutional principle of the separation of state and church,” said churches that also want to engage in politics want to “have their cake and eat it too.”

The Freedom from Religion Foundation brought a federal lawsuit earlier this year over the lack of IRS action on church politicking. The group dismissed the lawsuit after the IRS assured the group that it has a procedure in place to investigate such issues. The IRS has not yet taken action against churches participating in Pulpit Freedom Sunday.

Do you think pastors should be able to preach their political views from the pulpit without giving up the church’s exemption? (Try saying that five times fast.)

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Paid Sick Leave to be Required by Law

sick leaveDoes your organization provide paid sick leave to its employees? If it doesn’t now, it soon will have to. Effective July 1, 2015, California employers will be required to provide sick leave to most employees. Our friend Nicole Kamm from the law firm Lewitt, Hackman, Shapiro, Marshall & Harlan fills us in on what the new law means for California employers:

On Wednesday, Sept. 10th, Governor Jerry Brown signed the paid sick leave bill (Assembly Bill 1522) into law. This means that, effective July 1, 2015, California employers, regardless of size, must provide most employees paid sick leave. Eligible employees will be entitled to at least three paid sick leave days per year.

California is the second state to enact such a law (Connecticut was the first), but AB 1522 – the Healthy Workplaces, Healthy Families Act 2014 – is more expansive. According to the bill’s author, Lorena Gonzalez (D-San Diego):

We become the first state in the nation to guarantee paid sick days for every single private-sector worker in the state — no matter what industry they work in, no matter if they are part-time or seasonal, and regardless of the size of their employer…This means more than 6.5 million more workers in this state will be able to take up to three days off when they or their child is sick without fearing the loss of income, hours or their job.

Employers who already provide paid sick leave should review their policies in view of these new requirements to ensure compliance. And employers who currently do not provide paid sick leave will need to review the new law and implement a compliant sick leave policy.

For more details on the new law, read Nicole’s full blog. If you have questions about implementing the new law, contact Nicole or your organization’s employment attorney or HR professional for help.

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Katrina Money Wasted?

KatrinaFederal auditors claim that the University of New Orleans Research and Technology Foundation, a nonprofit created to support the University of New Orleans, failed to account for more than $19 million it received from the federal government to repair damage it sustained during Hurricane Katrina.

The Office of the Inspector General at the Department of Homeland Security (DHS), which conducts and supervises independent audits, investigations, and inspections of the programs and operations of DHS, recently issued an audit showing that, almost 9 years after Hurricane Katrina, the Foundation has still only accounted for $5.3 million of the money it received from FEMA. The audit alleges that the Foundation did not follow federal contracting guidelines on holding open and free competitions for repair project bids and allotting funds to small companies and those owned by women and minorities. The audit also notes that the Foundation failed to secure FEMA’s permission for $7 million of over budget spending.

The Foundation argues that noncompliance primarily occurred because it was emergency work and they needed to reopen the buildings as quickly as possible. But the auditors refute this claim, stating that exigent circumstances do not negate the necessity to follow federal contracting guidelines even if it is difficult to do so.

The audit also notes the lax oversight from FEMA and Louisiana emergency management officials, stating “[i]t is Louisiana’s responsibility to do whatever is necessary to get these projects closed.”

Unfortunately the Foundation failed to heed the lesson of The American Red Cross, which has periodically been accused of mishandling donations by diverting funds raised for one purpose to an altogether different purpose.

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First Ice-Bucket Challenge Money Allocated

ice-bucket challengeWho knew getting people to pour cold water over their heads could be so profitable? It may be hard to believe, but the ALS Association took in $115 million over the summer thanks to the ice-bucket challenge clogging your Facebook newsfeed. Deciding what to do with the windfall presented a challenge to the Association as last year the organization received $64 million, far less than the amount it took in just over this summer.

After the board met to consider different options and spoke with multiple advisers, including a panel of individuals living with ALS, the Association recently announced how at least some of the money will be allocated. $21.7 million will support six projects to advance understanding of ALS and to speed the developments of new treatments. Two of the grants will aim to promote understanding of ALS’s genetic basis and to sequence the genomes of about 15,000 patients with ALS.

The Association will release a full spending plan next month, but it is not anticipated that the organization will spend the rest of the funds by the end of its current fiscal year in January. As a sneak preview, spokeswoman Carrie Munk revealed that most of the remaining money will also be used for ALS research. Last year, research spending was 28% of the Association’s budget, second only to education and public policy (32%).

However, Barbara Newhouse, the Association’s president and chief executive, noted that even with this summer’s windfall the organization is still far short of the $1 billion it would need to bring a new drug to market.

What would your organization do with a funding windfall?

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Emailing Canadians? Read this First

CanadiansDoes your organization send fundraising emails to Canadians? Before you hit send, make sure that the correspondence is compliant with Canada’s new Anti-Spam Legislation (CASL), which went into effect on July 1, 2014.

CASL doesn’t apply to all emails. If your nonprofit is simply emailing to request a donation then the law doesn’t apply. But if that message also includes a promotion or offer of a product, good, service, business, or gaming opportunity, then the email is subject to CASL.

If CASL applies, it requires a nonprofit get consent from all message recipients. For now, that consent is implied if the recipient has recently made a donation, served as a volunteer, or is a member of the nonprofit. But implied consent will only last so long. For contacts made before July 1, 2014, implied consent will expire on July 1, 2017, and for contacts made after July 1, 2014, implied consent will expire two years after the initial contact.

If and when express consent is needed, it won’t be easy to get. Express consent cannot be requested by email. Instead, it must be requested by paper or orally or the recipient must provide consent on the nonprofit’s website. If this last method is used, the recipient must actively check a opt-in box on the nonprofit’s website, it must not be pre-checked.

Even after your nonprofit receives consent, the hoops aren’t finished. Each message to a Canadian recipient subject to CASL must identify the sender and its contact information and must include an unsubscribe option. If an unsubscribe request is received, the nonprofit must carry it out within 10 business days.

Noncompliance with CASL will incur steep repercussions. Each violation brings up to $10 million in penalties for an organization and up to $1 million for an individual. If directors or officers of a nonprofit are involved with the noncompliant messaging, they may be held individually liable.

How will the CASL affect your organization? If so, how will your organization change its conduct to comply with its requirements?

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Sales Tax Confusion! 4 Questions to Help You Steer Clear of Trouble

downloadWe often are asked how sales tax applies to 501(c)(3) organization’s fundraising events. CPA Mary Archibald, who specializes in nonprofits, was kind enough to address this question. Read on to glean Mary’s wisdom on this topic.

The sales tax requirements may be misunderstood because most 501(c)(3) organizations do not pay income tax. Therefore, they often take for granted that they are exempt from sales tax. Indeed, when a 501(c)(3) organization puts on a fundraiser, sales tax may be last thing on its mind. However, in many states, including California, there is no exemption from sales tax for 501(c)(3) organizations.

The state-by-state rules are complex, but below are a handful of questions – with answers pertinent to California 501(c)(3)s – to help get you thinking about the sales tax implications of your organization’s events.

  1. Does sales tax apply to the event ticket?
  2. If the charge for the ticket is purely for admission, sales tax does not apply.
  3. If the organization serves refreshments and the ticket does not otherwise state, then sales tax does not apply to the refreshments, such as coffee and tea.
  4. If the organization contracts with a caterer to serve a meal, the caterer is responsible for paying sales tax based on the amount the caterer charges the organization for the meal.
  5. If the organization itself serves food or a meal and it is included in the ticket price, than the rules are more complex and a competent tax accountant or attorney should be consulted.
  6. Does sales tax apply to the price of raffle tickets?
  7. Tax applies to a ticket charge where the purchaser is guaranteed to win something.
  8. If the purchaser is not guaranteed to win anything than sales tax does not apply.
  9. Does sales tax apply to items sold at auction?

Generally it does apply to items sold at auction on the same basis as if the items were sold by a retailer. There is an exemption from sales tax if the organization benefits homeless shelters and certain additional requirements are meet.

Complete rules pertaining to sales tax for fundraising event activities of 501(c)(3) organizations in California can be found in Board of Equalization (BOE) Publication 18. The Multistate Tax Commission and the Association of Fund Raising Distributors and Suppliers have a handy website that links to sales and use tax rules in all 50 states. Look up the rules of your state before your 501(c)(3) holds its next fundraising sales event.

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MacArthur Fellows Include 5 Nonprofit Geniuses

There are geniuses among us in the nonprofit sector. The John D. and Catherine T. MacArthur Foundation recently named five of them as it doled out its much-coveted fellowships, popularly known as “genius grants.”

And the nonprofit geniuses are:

Many of the other MacArthur fellows work in the nonprofit sector, including playwright Samuel D. Hunter (Partial Comfort Productions), historian Pamel O. Long (Princeton, Getty Research Institute, and Folger Shakespeare Library), scientist Mark Hersam (Northwestern University), and researcher Jennifer L. Eberhardt (Standard University), and physicist and brain researcher Danielle Bassett (University of Pennsylvania).

The Foundation selects the MacArthur fellows based on three criteria: “exceptional creativity, promise for important future advances based on a track record of significant accomplishment, and potential for the fellowship to facilitate subsequent creative work.” The winners are selected through a regimented nomination process, the Foundation doesn’t accept applications or unsolicited nominations.

Each winner receives a $625,000 “no-strings-attached” fellowship over five years. They can spend the money as they see fit with no proposals and no reporting.

Want more genius in your day? Check out the other 2014 MacArthur fellows.

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