Non-Profit Legal Matters

The Blog of the Law Firm for Non-Profits®

Court Dismisses Tea Party Suits Against IRS

tea partyHow do you solve a problem like a tea party group lawsuit? The IRS may have just found the answer: give the group tax-exempt status.

In the wake of the Treasury Inspector General report that called out the IRS for using discriminatory labels to sort through exemption applications, such as the term “tea party,” more than 40 conservative groups brought two lawsuits against the IRS for allegedly being singled out for perceived tea party affiliation. Last week U.S. District Court Judge Reggie Walton (who was appointed by President George W. Bush) dismissed almost all of the counts, finding them to be essentially moot as the IRS has now granted almost all of the groups exempt status.

Judge Walton also found that the individual IRS officials named in the suits could not be fined in their individual capacity because it could hurt future tax enforcement.

Finally, Judge Walton denied injunctive relief that would have prevented the IRS from targeting tea party groups in the future. He believed it to be unnecessary, explaining that “there is no reasonable expectation that the alleged conduct will recur, as the defendants have not only suspended the conduct, but have also taken remedial measures to ensure the conduct is not repeated.”

There were mixed reactions to the verdict. Rep. Jim Jordan (R-Ohio), who is heading an investigation into the tea party scandal asked, “You get targeted and harassed for three years but, oh, because you finally get [tax-exempt status], the three years of harassment doesn’t mean anything?”

Paul Ryan, senior counsel at The Campaign Legal Center, a nonpartisan, nonprofit organization that works in the areas of campaign finance and elections, political communication and government ethics, countered: “Judge Walton got it right — there is no ongoing injury to these groups . . . The IRS needs to enforce tax law with respect to nonprofit political groups more aggressively.”

Unsurprisingly, many of the tea party groups are planning to appeal the decision.

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IRS Catches Up on Exemption Application Processing

exemptionHas your organization been waiting a long time for its IRS exemption? If so, you may be hearing back soon. Last week Matthew Weir, director for the IRS Tax-Exempt and Government Entities Division, reported that this year the unit has closed 117,000 exemption applications, a 121% increase from last year. Weir pointed out that everyone should be especially impressed given that the IRS’s budget for 2014 was $1 billion less than it was in fiscal year 2012.

Weir also stated that the IRS believes that the new streamlined exemption application (Form 1023-EZ) has been a success. He reported that the IRS has closed most of the streamlined applications in about 11 days with 95% of the applications being approved.

It’s unclear though whether or not this should actually be considered a success. There are ongoing concerns in the exempt organizations sector that the streamlined application may be allowing undeserving organizations to obtain recognition of exemption. Acknowledging these concerns, Weir said that the IRS is planning to use a “pre- and post-determination process” involving correspondence exams to more closely review a sample of applications.

Did your organization file a Form 1023-EZ? What do you think of the new form?

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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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