California’s Dangerous Nonprofit Warning Label Bill – AB 2855 – Will Not Advance

Jubilant people

5/28/16 Update: Costly bill that would have required charities in California to post a “warning label” on their websites and fundraising documents was held in committee and will not advance.

AB 2855 was a dangerous bill that threatened nonprofits raising funds in California and reflected the lack of understanding of its author/sponsor, California Assemblymember Jim Frazier (D –Oakley), of the nonprofit sector’s work, influence, and scope. Had this bill passed, it would have ranked among the worst laws in the country in its characterization and treatment of nonprofits. The bill was considered by the Assembly’s Appropriations Committee on May 11. Thanks to the strong advocacy efforts of over 700 nonprofits led by CalNonprofits and to members of the Appropriations Committee and its Chair Lorena Gonzalez (D-San Diego), AB 2855 was held in committee on May 27 and will not advance.

For more information about the dangers of bills like AB 2855, read our Senior Counsel Erin Bradrick‘s article The Ongoing Overhead Myth and the Dangers of Overly Zealous State Legislators in The Nonprofit Quarterly (4/14/16).

Our original analysis of AB 2855 (before it was shelved)

Background of the Bill – Mandated Overhead Disclosures

AB 2855 originally was drafted to require charities operating or engaging in charitable solicitations in California to post their administrative overhead expenses or a link to such information on each and every one of their web pages and on the first page of each and every fundraising document.

Requirements of the ‘Warning Label’ Bill

Likely because of Constitutional issues related to compelling such speech, AB 2855 was amended to delete the overhead disclosure requirement and replace it with a requirement for charities to include what CalNonprofits terms a warning label, more specifically:

  1. a required prominent link on charities’ websites to “the Attorney General’s Internet Web site which contains information about consumer rights and protections and charity research resources”; and
  2. the Web site address of such Attorney General’s Internet Web site on all charities’ fundraising documents (including old ones) used to solicit in California.

AB 2855 would require hundreds of thousands of charities operating or engaging in charitable solicitations in California (regardless of what state in which they are based) to put a link to a California Attorney General website with unknown content that would also be freely available to the public without such link. And it would require those charities to put the Attorney General website address on tens of millions of fundraising documents that are distributed within California.

First Amendment Issues

A general principle of the First Amendment requires a court to review any government regulation of the content of a person’s or organization’s speech with strict scrutiny. Generally, this involves asking two questions:

  1. Does the regulation further a compelling governmental interest?
  2. Are the means used narrowly tailored to accomplish that governmental interest?

The government’s interest, according to the Legislative Analysis, is “to give consumers more information about how to research a charity before making a gift ….” The additional substantive information would be required of, and provided by, the Office of the Attorney General. Such information would be accessible to the general public without requiring charities to add any information to their communications. But advocates of the bill appear to be making an argument that giving consumers an easier time to find such information on a government web address is the compelling government interest requiring the consumer protection ‘warning label’ on what would amount to tens of millions of documents.

Requiring hundreds of thousands of charities fundraising in California to include such website addresses and links on all of their websites and fundraising documents will require much work. It’s difficult to see how proponents of the bill will claim that the bill is narrowly tailored particularly in relation to the rather narrow goal of making information on the Attorney General’s website easier for the general public to find. It would be the first law of such nature governing charities in the country and a strong signal of the state government’s distrust of the charitable sector based on a minuscule fraction of charities involved in scandals picked up by the media. It essentially would put charities in the same category as tobacco companies that are required to put a warning label on their products. And it would undermine the incredibly valuable work of the charitable sector, the sector most trusted by the public.

The U.S. Supreme Court dealt with content-based regulation of speech in a charitable solicitation context in Riley v. National Federation of the Blind, 487 U.S. 781 (1988). In Riley, the Court held that the North Carolina Charitable Solicitations Act was unconstitutional content-based regulation of speech. Members of the Assembly Committee should be fully aware of this case and how the Supreme Court protects free speech before voting on compelling the speech of nonprofits in the manner described by AB 2855.

Imagine if all states had the same requirements. Every charity raising funds in all states would have 50 links to include on their website and on all of their national fundraising documents.


See CalNonprofits letter to Assemblymember Lorena Gonzalez, Chair, Appropriations Committee:

The impact of AB 2855 – and thus any effort to ensure compliance with its requirements – would be far-reaching. AB 2855 would require every charity to include what feels to nonprofits like a “warning label” on their website in a “prominent” location and also requires nearly every document they produce to direct donors and others to the state’s top law enforcement’s website. Mandating content in the ways proposed by AB 2855 would be expensive and burdensome, and would detrimentally interfere with nonprofits’ ability to communicate with their constituents and the public. AB 2855 arguably compels speech in an unconstitutional manner by dictating specific content to be included on nonprofit websites and documents and seems ripe for challenge on this basis.

See CalNonprofits revised letter to the Honorable Ed Chau, Chair, Assembly Privacy and Consumer Protection Committee:

The AG’s office is already communicating this information to the public – their web site is the first listing in a Google search for “California charities.” Burdening nonprofits in and beyond California with required speech on “any document” which seeks donor support to simply advertise what the public can easily find is unnecessarily punitive without serving any compelling public interest. Imagine all the “documents” that non-profit organizations create to solicit funds to support their mission-based work: signs on coin collection jars, private letters to individual donors, billboards and other large-scale outdoor advertisements, flyers posted in laundromats, neighborhood association newsletters, to name just a few. And AB 2855’s provisions would apply to any charity – regardless of where they are based – that solicits donations from Californians. So, every inbound piece of mail from any charity in the world would have to include this unnecessary disclosure. The additional cost of including this provision on “any document” would be extraordinary.

Also see the Opinion piece by Tim Delaney, chief executive of the National Council of Nonprofits, in The Chronicle of Philanthropy:

The bill, as amended late last week, would force every nonprofit in the country that seeks funds in California to put a link on its home page – plus a disclosure on all other solicitation materials directing potential supporters to  the California Attorney General’s Office.  That office is instructed to provide “information about charities, informational materials containing consumer rights and protections and charity research resources to allow donors to become informed about a charity before making a decision to give.” Such legislative  language puts nonprofits at the mercy of an elected partisan’s changing views on what’s “appropriate” on such things as overhead, compensation, and advocacy – as well as which charitable causes are worthy. It probably will prompt copycat legislation in other states, transforming nonprofit website homepages into huge advertisements for the offices of state charity regulators, rather than the mission of the actual nonprofit.

Burdens and Costs to the State Government

AB 2855 will create substantial burdens for the State’s Office of the Attorney General in developing a website with appropriate information on how to research a charity (a very complex matter approached in myriad ways by grantmakers), developing regulations related to the law (including determining the minimum contacts required to fall within AB 2855 – e.g., a “donate” button on a passive website clicked by 5 California residents?), educating the public about the law and its associated regulations, re-designing registration and registration renewal forms, enforcing the law in audits, defending litigation on the constitutionality of the law (which would be expected in light of the almost universal opposition by the nonprofit sector).

You can access the May 11, 2016 Bill Analysis for the Appropriations Committee (which includes the comment “unduly onerous”) here.


Multistate Registration and Filing Portal

Register text on keyboard button

Currently, 39 states and the District of Columbia each require some form of periodic charity registration, which creates a substantial administrative and filing burden for organizations fundraising in multiple jurisdictions. 36 states and DC will accept the Uniform Registration Statement (URS), but that still requires an organization to file the URS with each state’s charity official (typically the Attorney General) and, in 13 jurisdictions, specific supplemental forms.

The Multistate Registration and Filing Portal, Inc. (MRFP), the National Association of State Charities Officials, and the National Association of Attorneys General started development of a Multistate Registration and Filing Portal,  to make it easier for nonprofits to register in multiple jurisdictions using a one-stop online portal. According to the Portal’s website:

The portal will maximize efficiency, data transparency, and information sharing by enabling compliance with registration requirements for all participating states without duplication of data entry. It will make the collected data available to the public in a searchable and interactive format. Academics, policy makers and the public will be able to conduct their own inquiries or download data in machine-readable format. Multistate registrants will realize reduced administrative costs and inefficiencies in complying with 39 states’ different registration requirements, allowing more resources to be devoted to charitable mission. Single state filers will avoid the inconvenience and uncertainty of paper filings. Registration service providers will be able to electronically transmit data for multiple clients. State filing fees will be collected and disbursed to states through the Single Portal.


We intend that the system will enable population of data fields from electronically filed Forms 990, thus avoiding further reentry of data. The system will enable regulators to combine 990 data with state registration data. Analytics will enable regulators to better understand charitable resources and solicitations, to better focus law enforcement and fraud prevention resources, and enable better policy making for protection of charitable resources. Electronic filing will allow states to direct limited resources from processing paper to our core regulatory responsibilities of preventing fraud and abuse of charitable funds and solicitations.

On February 17, 2016, MRFP posted a Request for Information (RFI) to invite input and proposals for development of the Portal. The RFI will remain open until April 1, 2016. To allow for additional feedback, MRFP is hosting a conference call on March 15, 2016 open to the public.

5 Likely Implications

  1. Easier registration process for charities with online capacity.
  2. Greater enforcement of registration, including use of penalties and sanctions for noncompliant organizations, in all states in which an organization engages in more than minimal fundraising.
  3. More clarity about the thresholds triggering registration requirements in states other than the charity’s state of formation.
  4. Growth of charity ratings services and the sophistication of their methodologies.
  5. Improved use of data and analytics by charities.

Additional Resources

New developments in the Single Portal Multi-State Charitable Registration project (National Council of Nonprofits, 1/20/16)


Nonprofit Radio: Wounded Warrior Project and Overhead

Budget Concept

I’ll be on Nonprofit Radio this Friday at 10:30 am PT / 1:30 pm ET discussing the Wounded Warrior Project controversy and overhead with host Tony Martignetti. Catch us live on Talking Alternative or a few days later on iTunes.

I’ve previously expressed my views on the overhead myth here and talked with Tony about good overhead and bad overhead. But the criticism of Wounded Warrior Project goes beyond a single statistic. I look forward to my discussion with Tony to see if we can share some insights about this case and on reviewing a charity’s activities.


Wounded Warrior Project accused of wasting donation money (CBS News, 1/26)

[A]ccording to public records reported by “Charity Navigator,” the Wounded Warrior Project spends 60 percent on vets.


According to the charity’s tax forms, spending on conferences and meetings went from $1.7 million in 2010, to $26 million in 2014. That’s about the same amount the group spends on combat stress recovery — its top program.

Ex-employee: Wounded Warrior Project conduct “makes me sick” (CBS News, 1/27)

CBS News has interviewed more than three dozen former employees of the Wounded Warrior Project and nearly all of them told us they’re concerned that the organization has become more focused on raising money than on serving wounded veterans.

Charity watchdogs question Wounded Warrior’s spending on vets (CBS News, 1/27)

“I couldn’t tell the number of people that were assisted. I thought that was truly unusual. If the organization is asking for money and purportedly spending money to assist veterans, and talking about it, I would like to know,” said Owens.

Letter from Wounded Warrior Project to CBS (1/27)

Based on our most recent independently audited financial statements, 80.6% of total expenditures went to provide programs and services for wounded service members, their caregivers, and families.

Wounded Warrior Project on Charity Navigator’s watch list (CBS News, 1/30)

But CharityWatch president and founder Daniel Borochoff said his biggest concern is the group is sitting on a $248 million surplus — and that not enough of it is being spent on veterans.

Wounded Warrior Project Spends Lavishly on Itself, Insiders Say (New York Times, 1/27)

About 40 percent of the organization’s donations in 2014 were spent on its overhead, or about $124 million, according to the charity-rating group Charity Navigator.

Wounded Warrior Project Investigation: What CBS News Got Wrong (Nonprofit Pro, 1/28)

Then there’s the issue of the $26 million Wounded Warrior Project spent on conferences and meetings. That figure is almost indefensible if all of it went toward staff-only team-building events and office parties, but the charity lists $24.4 million of it as a program expense, $491,000 as a management expense and $1.2 million as a fundraising expense.


That could be a crafty way for Wounded Warrior Project to skirt the system in an attempt to inflate its program numbers, or it could be that some number of these events involved veterans. (Or, it could be both.)

Wounded Warrior Project: The Fundraising Factory Issue (Nonprofit Quarterly, 2/1)

This focus on expanding the fundraising base among individuals would, in fact, require capital well above what most organizations would spend, since acquiring new donors at a fast pace is an expensive endeavor, so there is a different “model” at play here—a donor acquisition and growth model or a “fundraising factory” -but the fact that it appears to be funded by current donors without an acknowledgement of that is a very big problem. We also have no sense of when and if there will be a “big enough” moment at which time we might expect a smaller fundraising cost.

What Forms 990 Can and Can’t Tell Us About Wounded Warrior Project (Guidestar, 2/3)

[T]he 990 has little to say about the allegations that have been made by CBS and by the New York Times.  But it does indicate an organization that has grown very quickly, and one that could be more transparent about its operations on its Form 990.

Wounded Warrior Project Response to False News Reports

Wounded Warrior Project provides more than 20 needs-specific, free programs and services to more than 83,000 wounded veterans, who we call Alumni, and more than 15,000 family support members. We are constantly expanding our services to better support warriors.

Wounded Warrior Project Form 990 (for fiscal year ending 9/30/14)

  • The mission of the Wounded Warrior Project is to honor and empower wounded warriors.
  • Number of voting members of the governing body: 10 (all independent)
  • Total revenues: $342,066,114
  • Total expenses: $248,005,439
  • Total expenses of the three largest program services (by expenses): $81,892,441 (33% of total expenses)
  • Total program services expenses: $189,558,100 (76% of total expenses), including $40,916,885 in joint costs from a combined educational campaign and fundraising solicitation
  • Total fundraising expenses: $43,441,173
  • Net assets: $248,285,483
  • Principal officer: Steven Nardizzi

Additional Resources

(updated 3/12/16)

Myths, Misconceptions, and Mistakes: The Wounded Warrior Project (GuideStar Blog)

Wounded Warrior Project execs fired (CBS News, 3/10)

After Complaints on Wounded Warrior Project, Pressure From Donors (New York Times, 3/11)


Nonprofit Radio: IRA Charitable Rollover

nonprofit radio


I’ll be on the first Nonprofit Radio program of 2016 on Friday, January 8, at 10:30 am PT / 1:30 pm ET discussing the IRA Charitable Rollover with host Tony Martignetti. Catch us live on Talking Alternative or a few days later on iTunes.


Until the PATH Act was signed into law at the end of 2015, the last day an individual could make a qualified charitable donation from an IRA was December 31, 2014. The PATH Act permanently extended this charitable giving incentive, which was first temporarily established under the Pension Protection Act of 2006 and renewed annually thereafter through the end of 2014. By making the incentive, among certain other temporary breaks (tax extenders), permanent, Congress must now factor it into the budget and stop using it as a point of political negotiation.

What is the IRA Charitable Rollover?

The IRA Charitable Rollover provision allows individuals aged 70½ and older to donate up to $100,000 from their traditional or Roth IRAs to eligible public charities without having to count such qualified charitable distributions as taxable income. Distributions from traditional IRAs, which are required starting at age 70½, are otherwise typically included in the individual’s adjusted gross income (AGI) and subject to income tax.

Because the qualified charitable distributions aren’t counted in an individual’s AGI, the individual cannot claim an itemized charitable deduction for them. But the IRA Charitable Rollover, unlike the charitable contribution deduction, is available to taxpayers, regardless of whether they itemize their deductions.

A Tax-Efficient Way of Giving

If a taxpayer wants to make a charitable contribution and can do it through a donation of cash or through the IRA Charitable Rollover, it will be advantageous to do it through the IRA Charitable Rollover.

  • A charitable contribution deduction is only available to taxpayers that itemizes their deductions; the IRA Charitable Rollover is available to taxpayers regardless of whether they itemize their deductions.
  • The charitable contribution deduction is subject to certain limitations based on the taxpayer’s AGI; the IRA Charitable Rollover is not.
  • The IRA Charitable Rollover counts as part of a taxpayer’s minimum required distributions and doesn’t increase the taxpayer’s taxable income or AGI (which has other benefits, including more favorable tax treatment of Social Security benefits and lower Medicare Part B & C premiums).
  • In certain states, it is not possible to take a charitable contribution deduction for state income tax purposes, but states generally adopt the federal definition of gross income.

Senate Finance Committee Working Group Report (July 7, 2015)

“The now-expired rules allowing taxpayers to exclude qualified charitable distributions from gross income have the salutary effects of encouraging and facilitating charitable giving. The rules accomplish this by allowing an IRA owner to arrange for a distribution to be made directly from his or her IRA to a qualified charity and generally to exclude the amount of the distribution from the IRA owner’s gross income. As a result, a taxpayer who has accumulated more assets in an IRA than she will need to fund her retirement expenses need not arrange both for a distribution from the IRA to the IRA owner and a subsequent donation to charity.

The intended benefits of the provision may be diminished by extending the provision only on a temporary basis, particularly where the provision is enacted late in the year to which it applies. When the provision was last extended in December 2014 for calendar year 2014, for example, many IRA owners who otherwise might have benefited from the provision were not able to use it. Some taxpayers were unable to arrange an IRA distribution, because their financial institutions’ deadlines for requesting distributions for the 2014 calendar year already had passed. Others took required minimum distributions from their IRAs before the extension was enacted and were no longer in a position to arrange for further distributions. While the Working Group does not make specific recommendations, the Committee may wish to consider proposals for qualified charitable distribution rules that would increase certainty for taxpayers and increase the amount of funds that flow to charity.

While the exclusion for qualified charitable distributions provides a critical incentive for charitable giving, the Working Group is mindful of the importance of ensuring income security for retirees. Some might argue that the exclusion for qualified charitable distributions encourages IRA owners to redirect retirement savings to a non-retirement income security use (charitable giving) before they know the full extent of their income needs during retirement. Others, however, believe that the IRA owners most likely to take advantage of the income exclusion are well-advised taxpayers who have excess accumulations in an IRA or who would make many of the same charitable contributions even in the absence of the special exclusion.” – Read more here.

Urban Institute

“In 2008, the National Committee on Planned Giving (NCPG) conducted an informal survey asking charitable organizations to report qualified IRA distributions. Approximately 900 charities (mostly institutions of higher education) reported nearly 8,700 such distributions. Donations of less than $5,000 accounted for nearly 60 percent of all distributions, although they represented only 6 percent of the total dollar value reported. Donations in excess of $25,000 accounted for less than 20 percent of donations, but nearly 75 percent of the total dollar amount.” – Read more here.

Additional Resources (updated 3/28/16)

Popular IRS Charitable Tax Break Can Be Valuable—for Those Who Know How to Use It (Wall Street Journal, 3/27/16)


10 Predictions for the Nonprofit Sector in 2016 and Beyond

fortune teller forecasting 2016 new year it's coming soon,

Below are some of my predictions of events and trends that will impact the nonprofit sector in 2016 and beyond. Last year, while noting that good prognosticators have to go beyond stating obvious trends, I made only one prediction: “Nonprofits will increasingly recognize the importance of understanding and responding to the for-profit social enterprise movement.” And over the year, nonprofits certainly took note of such events as the announcement of the Chan Zuckerberg Initiative LLC, the non-charity vehicle for Priscilla Chan’s and Mark Zuckerberg’s $45 billion social good pledge, and the continuing emergence of the benefit corporation, a taxable “hybrid” entity bearing characteristics of both a traditional and nonprofit corporation. This year, I’ve made a few more predictions, mostly reiterating or reworking those of others who study these things.

1. Country Divided Over Issues Exacerbated by Terrorism

I hesitated to lead off with a prediction of bad news, but terrorism is growing exponentially as a critically important issue many nonprofits will need to factor into their planning. Beyond the direct physical harm caused by such acts, there will be continuing conflicts between those who demand social justice and those who demand laws that they believe will create greater security even at the expense of equitable treatment and the Constitution. The far right will continue growing stronger as it advances a campaign based on public fears of extremist Islamic terrorists, despite the fact that most terrorist acts are associated with domestic far right extremists.

2. Black Lives Matter

This social movement will rapidly grow and exhibit its political strength. Racial justice, particularly involving Black Americans, is an all-too-obvious problem, and citizens, especially those who are younger and/or belong to minority groups that have traditionally neglected their voting responsibilities, will step up and influence elections based on this simple, yet terribly complex, issue.

3. Gun Control

President Obama will use his executive powers to create stronger gun-control regulations focused on licensing requirements and background checks. Nevertheless, gun violence will continue to be a critical public health crisis for the country with over 100,000 victims a year.

4. Extreme Weather

A very warm El Niño, a strong Arctic Oscillation, and the continuing consequences of human-caused climate change will continue to produce some extreme weather conditions. Climate-related disasters will become more frequent occurrences. And cities (and their residents) that have not previously experienced such disasters will be very ill-prepared.

5. Greater State Regulation of Nonprofits

State regulators will be more assertive in enforcing registration requirements for charities and professional fundraisers. This will be a consequence of increasing media coverage of scandals in the nonprofit sector, decreasing enforcement by a seriously weakened Internal Revenue Service, and diminishing public confidence in the sector (even though it will continue to be by far the most trusted of the three sectors). Some states will attempt to clear their rolls by revoking the right of charities to operate within their jurisdictions for failure to register and threatening board members with potential liability. Unfortunately, this will disproportionately impact smaller, volunteer-run charities that provide services to neglected segments of our population.

6. Increased Push for Federal Regulation of Nonprofit Activities

While the budget cutbacks have greatly harmed the Internal Revenue Service’s ability to enforce existing federal laws applicable to nonprofits, there will be a greater push for more laws and regulations to address problems in the sector. Dark money utilizing 501(c)(4) and 501(c)(6) organizations to support and/or oppose political candidates will continue to be exposed as a horrible problem for the country, and there will be a stronger push for reforms throughout the election season. The Bright Lines movement to make clearer guidance for nonprofit political activities will gain political and popular support. But reforms, which will eventually be made, will not be seen until after the election. Donor-advised fund regulations will again be deferred, but the push for a minimum distribution requirement will strengthen and may be inevitable. The move to tax colleges on their enormous endowments will also continue to gain popularity (but will ultimately fail).

7. Rise of Nonexempt (for-profit) Social Enterprises

The Chan Zuckerberg Initiative LLC received much of the attention last year as a nonexempt alternative to a private foundation or donor-advised fund for social good giving. While it isn’t the first example of this nontraditional form of giving, it may mark the moment where the definition of “philanthropy” started to expand to include giving through nonexempt vehicles not subject to the laws of 501(c)(3). Benefit corporation legislation will continue to be passed by some of the 19 remaining states that have yet to adopt such corporate form (eventually, it will be adopted in all states). Mission-related investments and program-related investments (PRIs) by private foundations in for-profit entities will rise markedly as recognition that such investments may, under certain circumstances, be more effective and efficient than grants to nonprofits in creating the desired social change.

8. Collaborative Management Practices

More examples of collaborative management practices, like holacracy, will continue to be tested and implemented, including in nonprofits, with varying degrees of success.

9. U.S. Presidential Election

Hillary Clinton will be elected as President over Paul Ryan, the Republican candidate emerging from a brokered Republican convention.

10. Academy Awards

Spotlight, a movie about the media’s exposure of the greatest nonprofit scandal in our country’s history, will win “Best Picture” at the 88th Academy Awards.


Best of the Nonprofit Law Blog 2015

Best of 2015 - The year in review

An eventful year for the world, the sector, and for us at NEO Law Group. Some of my firsts: participating at Burning Man (one of our favorite clients), rapping at Independent Sector’s Annual Conference, and attending SOCAP. Here is the best stuff from the NEO Law Group over the past year:

Blog Posts


Why Are Charities Tax-Exempt? – with special thanks to the late Rick Cohen, the conscience of the nonprofit sector

Nonprofit Law 101 for Journalists

Independent Sector Threads: Oakland Style


Public Charity: Public Support Tests Part I: 509(a)(1)

Nonprofits – International Charity Activities

Fiscal Sponsorship: The Risks of Being a Fiscal Sponsor


Where Nonprofit Boards Fall Short

Why Nonprofit Governance is Different from For-profit Governance

Nonprofit Board Meetings – Calendar of Agenda Items


Executive Compensation – The Legal Issues

Women Leaders Still Make Less Than Their Male Counterparts…Even in the Nonprofit Sector

Private Foundations

Private Foundation Rules

Private Foundations & Self-Dealing

Private Foundation: New Rules Recognizing Mission-Related Investments

Social Enterprises

Chan Zuckerberg Initiative – Taxable Social EnterprisePart 1 & Part 2

California Social Purpose Corporation: An Overview


2015 Western Conference on Tax-Exempt Organizations

Embark: 2015 Independent Sector Annual Conference



A Prediction for the Nonprofit Sector in 2015

A Lawyer’s Journey to Black Rock City: Burning Man 2015

Articles – Erin Bradrick

California’s New Regulations: The Start of a New Problematic Trend in State Charity Oversight? The Nonprofit Quarterly

Fiscal Sponsorship: What You Should Know and Why You Should Know It, ABA Business Law Today

Basic Legal Considerations Before Launching a Planned-Giving Program, The Chronicle of Philanthropy


Tips for Nonprofits: Private Foundation or Public Charity?

Tips for Nonprofits: Fiscal Sponsorship

Nonprofit Radio


Volunteer Legal Issues

Speaking Engagements


Current Developments – The Bakers’ Dozen, Western Conference on Tax-Exempt Organizations

Legal Session, National Network of Fiscal Sponsors Annual Gathering

10 Rules Your Nonprofit Needs to Know for 2016, Annual Policy Convention, CalNonprofits


Nonprofit Board Scandals and the Lessons Learned, BoardSource Leadership Forum

Nonprofit Law: Hot Topics, Continuing Education of the Bar, State Bar of California

Top Five Hot Legal Topics for 501(c)(3) Organizations (webinar), American Law Institute


Nonprofit Legal Structures and Compliance Issues, CalCPA Nonprofit Interest Group, South Bay


Top 10 Events in 2015

The past 12 months have featured a number of major events that have affected, and will continue to affect, the nonprofit sector. In 2015, nonprofits mobilized to help with major crises, including the almost 8.0 magnitude earthquake in Nepal, the influx of migrant and refugees seeking new homes, and the continued socio-economic and racial inequalities in the United States. On the administrative, legislative, and foreign policy front, Congress passed legislation that will enhance charitable giving by making three essential tax incentives permanent, the IRS issued guidance that will permit private foundations to make impact investments, and nearly 200 countries reached an agreement to address climate change. And in a historic decision, the US Supreme Court ruled that the Constitution provides same-sex couples the right to marry. Here is a list of our top 10 events of 2015 affecting the nonprofit sector in the United States and a few links regarding each:

  1. Nepal Earthquake

  2. Refugee and Migrant Crisis in the Central America, Middle East, Africa, and Europe

  3. Terror Attacks (Paris, Beirut, Nigeria, Kenya, Elsewhere)

  4. Volkswagon Scandal

  5. Black Lives Matter (unrest in Baltimore after Freddie Gray)

  6. The US Supreme Court ruling that the Constitution provides same-sex couples the right to marry

  7. Guidance on Mission Related Investments

  8. Paris Agreement on Climate Change

  9. Chan Zuckerberg Initiative

  10. Tax Incentives for Charitable Giving Made Permanent in PATH Act of 2015


Proposal for a New (and Risky) Way to Substantiate Charitable Contributions

3d illustration of yelow tape with text warning

UPDATE 1/7/16:  The proposed regulations have wisely been withdrawn.

The Treasury Department and IRS are soliciting comments through December 16 regarding the recently proposed rule that would provide donors with another way to substantiate their contributions of $250 or more but at the cost of imposing significant new risks on charities and donors. The new way to substantiate charitable contributions would require charities to, among other things: (1) collect a donor’s social security number, which would trigger a number of privacy laws designed to prevent identity theft, and (2) file a new form of information return with the IRS.

Why the Proposed Regulation?

The likely intent of the proposed rule is to help prevent the situation where donors of $250 or more fail to obtain or maintain an appropriate and timely gift receipt (technically termed a contemporaneous written acknowledgement) from a charity and subsequently have their charitable contribution deductions denied. The burden is currently on the donor to get the appropriate and timely gift receipt to allow for the deduction. Such rule was adopted to help prevent fraudulent claims of large charitable contributions but has resulted at times in denials of deductions for legitimate charitable contributions merely for the fact of poor recordkeeping.

In the past, some donors who failed to obtain a a contemporaneous written acknowledgement had the charity donee amend its Form 990 to reflect the donation. They argued that such amended Form 990 would be sufficient to serve as the substantiation required to support a charitable contribution deduction. However, according to Accounting Today:

“The IRS has consistently maintained that an alternative substantiation method is not available until regulations are in place prescribing the method for charities to do this,” said the IRS statement. “The Treasury Department and the IRS have concluded that the Form 990 is an unsuitable reporting method for this purpose.  The purpose of these regulations is to consider appropriate alternatives to amended Forms 990.”

The Likely Impact

While the new proposed rule allows, but does not require, a charity to file the new information return, its likely impact will be to shift the burden to many charities to substantiate donors’ contributions (and potentially be liable for failing to do so properly) in something like a 1099 reporting regime. It would be difficult for charities to deny their donors’ requests for accepting the transfer of such burden without jeopardizing their donor relations. But before accepting such responsibility, charities would be well advised to develop appropriate risk management, document management, and cyber security systems, with knowledge of the risks and pitfalls associated with collecting donor data, including social security numbers.

What Can You Do?

Rather than developing appropriate systems to manage donors’ personally identifiable information, charitable organizations can first choose to let the Treasury Department and IRS know that the rule, if promulgated, will harm them and the nonprofit sector. Note that taking such action is an acceptable activity for public charities and private foundations and is not considered lobbying. Consider signing the letter in opposition to the proposed rule provided by the National Council of Nonprofits and Independent Sector here. The following is an excerpt from the form letter:

We submit this joint letter to demonstrate our universal opposition based on the following common concerns:


  • Protecting the Public Should be the Highest Priority: Like other law enforcement agencies, the IRS has consistently warned individuals to give out their Social Security numbers only when “absolutely necessary.” A charitable nonprofit should never be asking a donor for her or his Social Security number when soliciting donations. If someone is asking in relation to a donation, that should be considered a sign of a scam or fraudulent solicitation and reported to appropriate law-enforcement authorities. The proposed donee gift form, if utilized, would require nonprofits to ask donors to give out their Social Security numbers when it is not absolutely necessary. This conflicting message from the IRS is certain to confuse the public and result in fraud.
  • Administrative Burdens and Fiduciary Duties: Collection, storage, and reporting of Social Security numbers to the IRS is a costly additional endeavor that can impose significant risks on entities that are hacked. To protect sensitive donor information, nonprofits would have to divert resources from mission to purchase expensive data security systems that have no guarantee of protecting the public. Nonprofits that collect Social Security numbers and improperly protect the data could be subjecting themselves and their board members to lawsuits asserting a breach of fiduciary duty.
  • Disincentive for Donor Support: In 2009, the Government Accountability Office reviewed a proposal similar to the current draft regulation and found that “[t]axpayers may reduce giving because they are reluctant to provide Social Security numbers to charities given concerns over identity theft.” This consequence of reduced support for charitable works in communities was considered unacceptable then and remains a risk that cannot be countenanced today.

More About the Proposed Rule

The National Council of Nonprofits provides an excellent and detailed summary of the proposed rule and its opposition to its promulgation here. The Council’s president and CEO Tim Delaney provides further commentary in this HuffPost Impact post. This is a bad and unnecessary rule, and those in Treasury and the IRS pushing for the regulation (I’ve overheard some key officials most familiar with the sector are opposed) seemed not to have adequately considered all of the adverse consequences that would likely result.

More on Social Security Numbers

The federal government’s Social Security website advises: “Organizations should avoid using Social Security numbers (SSNs) as identifiers for any type of transaction.” It further provides: “Organizations that maintain SSNs in their system of records should consider encryption of this data.” Here’s why:

Identity theft is one of the fastest growing crimes in American society. The routine and often indiscriminate use of SSNs as identifiers creates opportunities for individuals to inappropriately obtain personal information. Repetitive use and disclosure of SSNs in organizational record keeping systems, multiplies the susceptibility of persons to potential identity theft. Through misuse of SSNs, individuals are subject to the danger of identity theft and its repercussions. Access to an individual’s SSN can enable an identity thief to obtain information that can result in significant financial difficulties for the victim. While this can be disruptive for the individual, it can also lead to civil liability for the organization and its individual employees if someone is harmed by information that has been made available to others.

Further Resources:

What You Risk When Your Social Security Number Is Hacked (Wall Street Journal)

Data Privacy and Cyber Liability: What You Don’t Know Puts Your Mission at Risk (Nonprofit Risk Management Center)

Protecting Personal Information: A Guide for Business (Federal Trade Commission)


Chan Zuckerberg Initiative – Taxable Social Enterprise – Part 2

Young hipster man making a good-bad sign

Shortly after Mark Zuckerberg announced the social good goals of the Chan Zuckerberg Initiative and the joint pledge he made with his wife Priscilla Chan to contribute 99 percent of their Facebook shares (currently valued at about $45 billion) to the Initiative, which is structured as a limited liability company (LLC), I started getting calls from the media. They wanted to know what it meant to give money to an LLC instead of a 501(c)(3) nonprofit. I subsequently wrote a very brief article explaining the rationale for using an LLC and how the Chan-Zuckerberg Initiative was reminiscent of earlier social good efforts from some Silicon Valley titans. Since then, dozens of stories have come out criticizing and defending Zuckerberg and the couple’s use of the LLC as a vehicle in philanthropic giving.

Among the publications I spoke with about the Initiative: Fast CompanyThe Chronicle of PhilanthropyNational Public Radio (NPR), the Canadian Broadcasting Company (CBC), and Tax Analysts.

LLC Background Information

An LLC is Not a Nonprofit

  • An LLC owned by individuals is not a 501(c)(3) tax-exempt entity
    • But the LLC may very well be a pass-through entity (like a partnership or sole proprietorship) in which its profits, losses, and other tax attributes are passed through to its owners
  • A contribution to such an LLC does not allow for a charitable contribution deduction
    • But the owners may be able to take a charitable contribution deduction if and after the LLC makes a contribution to a qualified 501(c)(3) entity
    • The owners will not be able to take a charitable contribution deduction for direct contributions to, or investments in, a for-profit social enterprise (a form of impact investing); contributions earmarked for lobbying; or contributions to engage in political campaign intervention

An LLC Offers Great Flexibility and Benefits

  • An LLC can have a social good purpose and, just like any individual, can engage in charitable and philanthropic activities
    • It can make charitable contributions to public charities or to a private foundation
    • It can make charitable contributions to a donor-advised fund (allowing for an immediate tax deduction and deferred grantmaking)
    • It can make investments in for-profit social enterprises
    • It can make loans to nonprofit or for-profit social enterprises
    • It can guarantee loans made by financial institutions to nonprofit or for-profit social enterprises
    • It can enter into joint ventures with nonprofits
    • It can enter into joint ventures with for-profits without being subject to the same limitations and restrictions that would be applicable to a 501(c)(3) co-venturer
    • It can engage in lobbying without limitations that would be applicable to 501(c)(3) organizations
    • It can engage in political campaign intervention like supporting or opposing political candidates without  limitations that would be applicable to most tax-exempt organizations
  • The purposes of an LLC can be changed by its owners at any time, subject to any internal restrictions they may have created by contract
    • Accordingly, the LLC can simply turn into a regular investment vehicle at any time without public notice
  • The governance of an LLC is extremely flexible; it can be structured with just one manager or have a corporate-like board of directors
  • An LLC offers its owners limited liability protection and is a widely used vehicle for asset protection purposes
  • A privately-held LLC is not required to operate transparently to the public

A Pledge is Not the Same as a Contribution

  • An unenforceable pledge to an individual’s own LLC is not binding and is merely an expression of present intent

My Take

The LLC offers Chan and Zuckerberg a limited liability vehicle in which to organize their social good efforts. It offers the couple no additional tax benefits with respect to the deducibility of their contributions. The deduction will follow the change in control of the funds from Chan and Zuckerberg (regardless of whether held in a pass-through LLC or in their personal accounts) to a 501(c)(3) charitable entity. But a limited liability form is completely customary in any entity of that size owned by individuals.

No money has changed control yet. At this point, there is just an unenforceable pledge, albeit a very public one for an enormous amount of money. It’s fair to criticize the message (was it initially misleading or simply broadly misinterpreted as a pledge to charity?), but utilization of an LLC from which to engage in individual social good efforts is not in and of itself worthy of criticism. We’ll see a lot more of this from younger, sector-agnostic, wealthy do-gooders in the future. See A Prediction for the Nonprofit Sector.

Finally, as The Atlantic article referenced below states:

It’s too early to criticize the Chan Zuckerberg Initiative—just as it’s too early to praise it.

Recommended Reading

Mark Zuckerberg’s Philanthropy Uses L.L.C. for More Control (New York Times)

Assessing Mark Zuckerberg’s Non-Charity Charity (Atlantic)

How Mark Zuckerberg’s Altruism Helps Himself (Pro Publica)

Mark Zuckerberg wants to change the world, again. You got a problem with that? (Fusion)

5 criticisms of billionaire mega-philanthropy, debunked (Quartz)


Chan Zuckerberg Initiative – Taxable Social Enterprise

Mother holding her newborn baby's feet

Yesterday, Mark Zuckerberg published a touching letter written to his week-old daughter Max which announced the beginning of the Chan Zuckerberg Initiative. The Initiative’s mission focuses on two ideas: advancing human potential and promoting equality. And the statement that raised all the attention:

We will give 99% of our Facebook shares — currently about $45 billion — during our lives to advance this mission.

Many initially assumed the pledge from Zuckerberg and his wife Priscilla Chan was to one or more 501(c)(3) charitable organizations, but a Facebook press statement clarified that the Initiative was a limited liability company (LLC). A New York Times article explains the rationale for choosing a non-tax-exempt entity:

By using a limited liability company instead of a nonprofit corporation or foundation, the Zuckerberg family will be able to go beyond making philanthropic grants. They will invest in companies, lobby for legislation and seek to influence public policy debates, which nonprofits are restricted from doing under tax laws. A spokeswoman for the family said that any profits from the investments would be plowed back into the Chan Zuckerberg Initiative for future projects.

This is reminiscent of Google’s announcement in 2005 that it would commit one percent of its profits and equity to, a division of Google Inc. and not a 501(c)(3) organization, to advance its philanthropic efforts. A Washington Post article explains Google’s rationale for not making the pledge to a tax-exempt charity or its own Google Foundation:

By using for the bulk of its charitable giving, the company will have greater flexibility in how it deploys the funds since the affiliate will not be subject to the restrictions imposed on foundations by the Internal Revenue Service. For example, will be able to invest in projects promoting entrepreneurship in Africa that are off limits for foundations because the programs turn a profit. It will also support charitable initiatives that spread the use of technology and could be viewed as questionable for a foundation since they are closely related to Google’s business.

The Omidyar Network (started by eBay founder Pierre Omidyar) provides another example of the use of a non-exempt LLC to further philanthropic purposes. A Forbes interview of the Omidyar Network’s managing partner Matt Bannick explains the hybrid model:

At the heart of our strategy is a flexible approach to philanthropy. We embrace whatever tools necessary—including nonprofit grants and for-profit impact investments–to support high-impact social entrepreneurs and the broader environments in which they work.  Our hybrid investment approach is supported by a hybrid organizational structure:  we operate both a foundation and a for-profit investment fund under the same roof.

Deeper Dive

For-Profit Philanthropy – Dana Brakman Reiser, 77 Fordham Law Review 2437 (2009)