Non-Profit Legal Matters

The Blog of the Law Firm for Non-Profits®

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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Florida Enacts Tighter Regulations on Charities and Fundraisers

RevisionsDo you remember when, in April, we told you that Florida’s lawmakers were concerned that 11 of the 50 worst charities were based in Florida. Now they are following through on their promise to do something about it.

Last month Florida Governor Rick Scott signed into law a comprehensive revision of the state’s charitable solicitation law. The aim of the law is to “prevent the misuse of Floridians’ charitable contributions by deterring fraudulent and deceptive organizations from soliciting contributions in [the] state.” Lawmakers also hope the new law will help Floridians make more informed decisions about the organizations to which they donate.

Among the new provisions are these more unique requirements:

  • Florida’s Department of Agriculture and Consumer Services (the Department is tasked with governing Florida charities) may deny or revoke the registration of a charity or a fundraiser, if it, or any of its officers, directors, or trustees, has had the right to solicit contributions revoked in any state or been ordered by a court or governmental agency to cease soliciting contributions in any state.
  • Any charity that solicits contributions in or from Florida residents must adopt a conflict of interest policy, which must require annual certification of compliance with the policy by all directors, officers, and trustees of the charity. A copy of the annual certification must be submitted to the Department with its annual registration statement.
  • A charity that has more than $1 million in total revenue and spends less than 25% of it on program service costs must complete an additional Department form, including the dollar amount and percentage of total revenue allocated to employees, fundraising, travel expenses, overhead, and charitable programs. The form must also detail any transactions with insiders (e.g., directors and officers).
  • Most charities that solicit contributions for specific disaster or crisis relief and receive at least $50,000 in contributions in response must file quarterly disaster relief financial statements detailing the contributions received based on the solicitations and how the contributions were spent.

Charity regulators across the country will be watching to see how effective these new provisions are. Would you like to see your state’s legislature adopt similar laws?

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NY Attorney General Announces $25 Million Settlement

SettlementEarlier this month, Attorney General Eric T. Schneiderman announced the $24.6 million settlement his office secured after an investigation into direct mail fundraising abuses at one of the country’s largest veterans’ charities, the Disabled Veterans National Foundation (DVNF). The AG’s Charities Bureau, which conducted the investigation, determined that the abuses were perpetrated by DVNF’s two outside for-profit direct mail vendors, Quadriga Art and Convergence Direct Marketing.

The investigation found that Quadriga produced and sent out misleading mailings and played the dominant role in running DVNF’s fraudulent fundraising efforts. Convergence provided fundraising advice to DVNF on the design and execution of its direct mail campaigns. Based on these roles, the AG found that the companies were fiduciaries to DVNF and owed duties and responsibilities as such, including making the interests of DVNF their primary concern.

The settlement requires Quadriga and Convergence to pay $9.7 million and $300,000 in damages, respectively. This $10 million will be distributed by the AG to support federally-managed research and development programs to improve the care, treatment, and rehabilitation services available to disabled veterans. Quadriga is also required to forgive $13.8 million in debt owed to it by DVNF and to pay $800,000 to defray the AG’s costs and fees.

And that’s not all. Quadriga and Convergence must also make significant changes to the way they fundraise including only entering into an agreement with a start-up charity if that charity has its own separate legal counsel; disclosing in writing any potential conflicts of interests to all clients; and providing clients with complete written descriptions of the elements of a proposed campaign, the cost and rate structure thereof, and the projected total costs and donation revenues associated therewith.

Under the settlement, DVNF is also required to make changes. It must reorganize its board of directors, including replacing all original directors, terminate Quadriga and Convergence as fundraising advisers for at least three years, and discontinue all fundraising tactics the AG found to be false and misleading, such as the use of fictional stories of wounded veterans supposedly helped by DVNF.

While many Attorneys General vigorously pursue claims against fraud and misrepresentation in charitable fundraising, this is the broadest and most sweeping settlement we have ever seen. AG Schneiderman seems to have expanded the Charity Bureau’s reach by an order of magnitude with this settlement.

Schneiderman was understandably pleased with the settlement, commenting: “Charities and their fundraisers that rely on direct mail campaigns can and must do better – and this settlement is an important milestone on the path forward.” Do you think the AG did enough? Did he do too much? Should Quadriga and Convergence be allowed to continue fundraising at all? Let us know what you think below.

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IRS Releases Progress Report on Exemption Application Backlog

BacklogIt may be hard to remember now why the scandal surrounding Lois Lerner started. Late last week the IRS reminded us. On Thursday it released an update on its progress reviewing the social welfare organization backlog. The backlog included organizations identified in May, 2013 as being selected by the IRS for additional scrutiny based on improper criteria.

The IRS reported that, as of June 18, 2014, it has closed 132 cases in the original backlog (91%), with 101 cases receiving favorable determination letters.

This news did not receive a positive reaction from David French of the American Center for Law and Justice, which represents 41 organizations in a suit against the IRS on the matter. He explained: “There is nothing satisfactory about the IRS process. It’s been conducted in a discriminatory and malicious manner since 2009, and that conduct continues.”

French noted that, of the 41 organizations participating in the lawsuit, 26 had their applications approved after long delays, 9 are still pending, 5 withdrew their applications, and 1 had its file closed after refusing to answer what French deems unconstitutional requests for additional information.

Too bad the IRS didn’t release a report on the tens of thousands of applications reportedly awaiting determination of 501(c)(3) status.

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Dog Ate My Tax Receipts Act

Dog Ate My Tax Receipts ActIn a surprising twist to the Lois Lerner saga, Rep. Steve Stockman (R-Texas) recently announced the Dog Ate My Tax Receipts Act. The proposed bill reflects Stockman’s belief that the IRS must allow taxpayers to offer “a variety of dubious excuses” for missing documentation as the IRS has done for the Lerner emails it has claimed are missing.

In Stockman’s own words: “Taxpayers should be allowed to offer the same flimsy, obviously made-up excuses the Obama administration uses.”

Under the proposed bill, taxpayers who fail to provide IRS requested documentation can offer any of the following excuses (which we hope you will enjoy regardless of their obvious political bent):

  • The dog at my tax receipts
  • Convenient, unexplained, miscellaneous computer malfunction
  • Traded documents for five terrorists
  • Burned for warmth while lost in the Yukon
  • Received water damage in the trunk of Ted Kennedy’s car
  • Forced to recycle by municipal Green Czar
  • Was short on toilet paper while camping
  • At this point, what different does it make?

Enjoy the full text of the proposed resolution here.

What other excuses would you like to use? Post your best below.

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