FUNDRAISING & CHARITABLE GIVING   STARTING A NONPROFIT

NEO Law Group’s Video on Tips for Starting a Nonprofit – Fundraising Before Exemption

 

Yesterday, NEO Law Group posted its third YouTube video on 2 minute tips for starting a nonprofit.  This video focuses on the issue of fundraising before receiving an exemption determination letter from the IRS. We hope that you enjoy it and please stay tuned for additional 2 minute videos with tips for starting a nonprofit.

EVENTS   FUNDRAISING & CHARITABLE GIVING

Chronicle Live Discussion: Clever Ways to Thank Donors

 

Thank you card
On Thursday, October 31, The Chronicle of Philanthropy is hosting a live video discussion, Clever Ways to Thank Donors, that will show attendees how to be creative in their thank you's and also mindful of legal considerations, including federal rules regarding written acknowledgments and disclosures. You can also view the recorded version on the same site.

Tony Martignetti of Tony Martignetti Nonprofit Radio and Cody Switzer, The Chronicle's Web editor, are hosting. And I'll be a guest along with Claire Axelrad, fundraiser and principal at Clairification.

Cody started us off by asking me about the legal requirements around acknowledging donors for their charitable contributions. I gave a quick rundown of some basic rules:

  • A donor needs a bank record or written communication from the charity that states the name of the donor, the amount of the contribution, and the date of the contribution in order to be able to take a charitable deduction. A charity should be especially diligent about helping the donor establish her deduction when receiving a cash donation.
  • A donor needs more information from a charity for a charitable contribution of $250 or more. Notably, the written acknowledgment from the charity must include a statement that provides either (1) that the charity did not give any goods or services to the donor in return or (2) that the charity did give goods or services to the donor in return (in which case, the acknowledgment should describe the goods or services, including a good faith estimate of their value). There are several cases in which donors could not deduct their legitimate contributions just because the charity didn't provide them with written acknowledgments without one of the two statements above in a timely manner. And the IRS always wins when taking these cases to court.
  • A charity must provide additional information to the donor if providing goods or services back to the donor in exchange for a payment of more than $75, which is part charitable contribution and part purchase price. Such transactions are called quid pro quo contributions. In such circumstances, the charity must provide the donor with a written disclosure including a good faith estimate of the value of goods or services provided to the donor and a statement that the amount of the contribution that is deductible for federal income tax purposes is limited to the excess of money (and the fair market value of property other than money) contributed by the donor over the value of goods or services provided by the organization.
  • There are exceptions, including for certain defined token items and membership benefits.

Download Some Donation Receipt Rules for Charities [PPTX]

Tony then asked Claire about creative ways to thank donors. She first emphasized that charities need to thank donors within 48 hours (great advice!). Then she shared with us some examples, including handwritten cards, video thank you's, and baked goods.

See Claire's Pinterest Board on Gratitude – Nonprofits Say Thanks

As the lawyer in the discussion, I natch had to raise some cautions even while noting the importance of expressing gratitude in a variety of clever ways:

  • Exercise reasonable care in selecting any volunteer or staff person to personally engage with your donors, especially if they will be creating food items to give as a thank you. Rule of thumb: consider whether you would trust that person to deliver those items to your kids.
  • Train your volunteers or staff persons on how to engage with your donors. Make sure they don't make any misrepresentations (including stating how the donor's money will be used if that's not really the case).
  • Be careful of the potential dangers of any thank you gift (e.g., nuts in cookies, toys that might be swallowed by small children).
  • Get simple but sufficient licenses and/or releases if filming and/or publicly displaying videos of donors, particularly if children are involved.

Technical difficulties resulted in the recorded discussion being cut off after 45 minutes, but we continued to talk among ourselves as this is a fascinating and important topic for charities. Hopefully, we'll get the chance to do it again!

ADVOCACY & LOBBYING   EVENTS   FUNDRAISING & CHARITABLE GIVING   PRIVATE FOUNDATIONS / PHILANTHROPY   UBIT / UNRELATED BUSINESS

Independent Sector Public Policy Action Institute 2013: Key Issues in Tax Reform

 

IS PPAI 2

Day Two of the Independent Sector Public Policy Action Institute kicked off with a session on tax reform moderated by Kyle Caldwell, Charles Stewart Mott Foundation, and divided into five hot topics.

Charitable Deduction. Richard Schmalbeck, Duke University School of Law, discussed the availability of a charitable contribution deduction only to itemized filers and the 28 percent cap for high-income taxpayers proposed by President Obama, which he supported as a possible solution.  Sue Nelson, America Heart Association, began by stating that she did not expect major tax reform in the next five years and noted that the sector has diverse levels of interest on the issue of the charitable deduction. 

Non-cash Contributions. Victoria Bjorklund, Simpson Thacher & Bartlett LLP, discussed policy issues surrounding the general 30 percent deduction rule but startled the audience by noting that the IRS has a 100 percent win rate on the denial of deduction cases involving noncash contributions and defective substantiating paperwork (Forms 8283 and 8282). Seth Turner, Goodwill Industries International, Inc., discussed the potential adverse impact on Goodwill of policies that would diminish the incentive of noncash contributions.

UBIT/Commercial Activity. Jill Manny, National Center on Philanthropy & the Law, NYU School of Law, discussed basics of UBIT and the commerciality doctrine and noted the unlikelihood of reform hitting these areas. Exactly how much unrelated business activities are permissible to a charity remains vague, but a bright line test doesn't seem practicable. Angela Williams, YMCA of the USA, emphasized the need for nonprofits to be part of the conversations on tax reform because they are the starting point of conversations for years to come. She mentioned the Business Coalition for Fair Competition's advocacy against earned income activities of nonprofits, reminding the audience of the need for a counterpoint. 

Community and Private Foundation Issues. David Shevlin, Simpson Thacher & Bartlett LLP, discussed the equivalency determination repository; differing conflicts of interest rules for public charities, private foundations, and donor-advised funds (can they be harmonized?); the wide spectrum of investments that don't all fit into legally defined categories; and donor-advised funds (will the still-forthcoming IRS regulations treat them like private foundations?).  Sue Santa, Council on Foundations, echoed the need for strong advocacy by the sector, the importance of drawing a line in the sand to protect against a chipping away of the charitable deduction, and the work of Charitable Giving Coalition. She also noted the proposed tiering of the charitable sector, dividing charities into different classes subject to different tax treatments.

Nonprofit Advocacy and Political Activity. Nina Ozlu Tunceli, Americans for the Arts Action Fund, discussed proposals limiting 501(c)(4) political activity following the recent IRS controversy that range from 0 to 49 percent. Greg Colvin, Adler & Colvin, started by calling on foundations to remove the prohibition against lobbying from their grant agreements. He then noted the problems with the lack of guidance on political intervention (what it is and how much is permitted) and the solution proposed by the Bright Lines Project

BOARDS / GOVERNANCE   FUNDRAISING & CHARITABLE GIVING

Overhead: The Good and Bad

 

IStock_000009770380XSmall

 

Last Friday, Gene was on Nonprofit Radio discussing examples of good and bad overhead following host Tony Martignetti’s interview with the three signatories to The Overhead Myth letter.  The growing rejection of the myth that overhead is a good way to measure a charitable organization’s value is a promising trend.  The overhead myth has long contributed to nonprofits under-investing in critical aspects of their organization and operation solely to appease donors and board members who bought into the popular longstanding myth.

This is not to say that overhead ratios are unimportant.  But, the numbers should be interpreted within the larger context of how the organization is functioning.

As Gene noted on the program, some types of overhead may be better than others. Good overhead expenses advance an organization’s ability to further its mission.  Higher overhead ratios, relative to comparable organizations or historic figures, may be justifiable where the organization is building structures and systems to increase its effectiveness and/or efficiency, or to resolve problems that have arisen or previously been unaddressed.  Bad overhead expenses do not advance an organization’s ability to further its mission or do so only in an inefficient, non-strategic manner.  With recognition that there may be exceptions based on an organization’s unique facts and circumstances, here are some examples:

Good Overhead: 

  • Education.  A strong organization ensures that its board and executive are empowered with the information required to do their jobs well.  It is far too common for organizational leaders to lack experience in critical areas of governance and management and to allocate insufficient resources for their development.  Generally, an organization can only go as far as its leaders take it, so it’s imperative to properly equip such leaders.
  • Policy Creation.  A strong organization is guided by sound policies that help improve its operations, prevent costly mistakes, and keep it legally compliant. Examples of important policies for a nonprofit include those covering: conflicts of interest, document retention and destruction, whistleblowers, gift acceptance, expense reimbursements, contract approval, check-signing, internal controls, investments, employment, social media, and intellectual property.
  • Risk Management.  A strong organization recognizes that “an ounce of prevention is worth a pound of cure” and places value on protecting its leaders, employees, and volunteers.  Assessing risks with the help of experts through legal, accounting, and program audits may be invaluable in mitigating risks, preventing waste, and finding new areas of efficiency.
  • Technology (including information technology).  A strong organization invests in tools that help advance its ability to further its mission.  Dated technology may be more expensive to maintain, create inefficiencies in productivity, and hinder or prevent expansion.  New technology may allow for more effective and/or efficient ways of delivering services, receiving feedback, mobilizing advocacy efforts, measuring and analyzing impact, communicating with donors and other supporters, and finding new donors.
  • Building engagement and collaboration.  A strong organization engages its staff, board, volunteers, allies, and communities.  If an organization’s most valuable asset is its people, sufficient investments to recruit and retain the best people for the job are critically important.  This relates to compensation, training, communications, workspace, job flexibility, and appreciation among other things.  External communications should reflect the values and professionalism of the organization.  In budgeting for such efforts, an organization’s leaders must consider the value it places on its public reputation, goodwill and transparency.  Such communications may be tremendously important as building blocks for future collaborative efforts, something every organization should be exploring.

Bad Overhead: 

  • Certain insider transactions.  Insider transactions that benefit insiders (board members, officers) more than the organization’s intended beneficiaries may be unlawful.  But even when they’re not, and even if such transactions merely give the appearance of benefiting insiders more than beneficiaries, an organization should think carefully and consider alternatives before proceeding.
  • Extravagant expenses resulting in trivial benefits.  What is extravagant?  What is trivial?  Smart organizations will consider these questions from the perspective of their donors and other stakeholders before spending.  For some organizations, a $500 daily hotel bill may be acceptable in certain circumstances; for others, it might be considered outrageous and severely harm the organization’s goodwill.
  • Expenses that further some cause other than your mission.  There are many worthy causes, but a charitable organization is legally bound to advance its own stated mission.

 

Co-authored with Gene Takagi.

BOARDS / GOVERNANCE   CURRENT AFFAIRS & OPINION   FUNDRAISING & CHARITABLE GIVING

Overhead Myth: Thoughts from a Nonprofit Attorney

 



Myth

On June 17, 2013, the CEOs of GuideStar, Charity Navigator, and BBB Wise Giving Alliance signed a letter to the Donors of America denouncing the “overhead ratio” as a valid indicator of nonprofit performance. Leading commentators applauded the move even while some noted that charity ratings organizations, like some of the signatories to the letter, were in no small part responsible for perpetuating the "overhead myth." Meanwhile, nonprofit executives and Dan Pallotta collectively said, "It's about time."

What is overhead?

Overhead generally refers to an organization's administrative and fundraising expenses. Overhead Ratio is the ratio of overhead expenses to total expenses. A 30% overhead ratio indicates that 30% of an organization's total expenses went to overhead; the corollary is that 70% went to program expenses.

Why do donors want to fund programs instead of overhead?

Understandably, donors have equated funding programs with impact. But investments in infrastructure and public education/support may have as much to do with impact as investments in the direct provision of goods and services. Donors want to see their dollars produce the most charitable impact possible. It is overly simplistic, and in most cases, flat out wrong, that the more dollars that go to programmatic expenses, the bigger the charitable impact. This is best explained with a simple example:

Charity A spends 10% on overhead and 90% on programmatic expenses to provide charitable services to children with cancer and their families. With a $1 million budget, Charity A helps 90 families with 8 hours/month of direct services. Charity A's programs, and donor base have remained relatively static for the past ten years, but it has suffered from frequent turnover of managers, low employee morale, outdated technology, and weak systems.

Charity B pursues the same mission as Charity A but last year spent 40% on overhead and 60% on programmatic expenses. With its $1 million budget, Charity B helps 200 families with 20 hours/month of direct services. Charity B has strong leadership, makes smart use of outside experts, and invests in infrastructure and technology to leverage continued growth. As a result, Charity B is rapidly expanding its operations with a much broader and engaged group of donors and funders, and sharing and collaborating with other organizations to create greater impact beyond the communities it directly serves.

Charity A may have a much lower overhead ratio than Charity B, but a donor's investment in Charity B will result in a much greater impact on the lives of children with cancer, their families, and the braoder community.

Does the law have anything to say about overhead?

Not explicitly. But 501(c)(3) organizations are required to be operated primarily to further one or more 501(c)(3) exempt ("charitable") purposes. Additionally, they must not be operated to benefit private interests, except incidentally in furthering the public's interest. If a 501(c)(3) organization is using a high percentage of its resources on activities that are not charitable, the IRS may charge that the organization is not using charitable assets in a manner that is commensurate with its charitable purposes and revoke its 501(c)(3) status. The underlying rationale is that such use of charitable assets is evidence that the organization is not operated primarily for charitable purposes and likely operated with the primary intent to benefit private interests (like those of a commercial fundraiser or highly paid insiders).

What are our thoughts on overhead?

The amount of overhead and the ratio of overhead to programmatic expenses are by themselves poor measures of a charity with few exceptions. As we noted above, the overhead ratio may have little to do with impact. This is not to say, however, that the overhead ratio should not be considered at all. Particularly when looked at over a period of years in relation to several other impact-related factors, the overhead ratio may indicate whether or not an organization is making good use of its funds, is well managed, and is serving primarily public rather than private interests. Consider the following example:

Charity C has spent 70% on overhead for each of the last 5 years but its overall revenues, net assets, persons served, infrastructure, programs, and public outreach have remained static and uninspired the entire time. Charity C pays its founder/CEO top dollar (to the extent permissible), engages in costly fundraising efforts that produce relatively small amounts of net revenue, and has a board that is composed solely of the founder's close friends and business associates.

Charity C may not be the ideal organization for a donor wanting his or her contribution to have the greatest impact possible. Its high overhead ratio doesn't appear to be justified by progress in its performance or impact, and its leadership doesn't inspire confidence that these factors will improve.

Other Resources

It's Time for Real Talk About Real Nonprofit Overhead Costs – HuffPost Impact

Getting Clear About Overhead – The Center for Effective Philanthropy

FUNDRAISING & CHARITABLE GIVING

6 More Fundraising Legal Tips

 

Tips

Fundraising and development professional should tighten up their knowledge of laws affecting their work. Earlier we posted Top 5 Fundraising Legal Tips. Here are 6 more:

  1. When soliciting pledges, understand whether your organization and the donor intend the pledge to be legally enforceable. If there is a contract and either consideration given by the charity for the pledged amount (e.g., promise to do something or not do something) or reliance by the charity on the promised pledge to charity's detriment, the pledge is likely to be legally enforceable. But that doesn't necessarily mean that a charity should always sue a donor that reneges on a pledge. Here's a good resource on the subject from Pearlman & Pearlman: Legal Issues Related to Unfilled Charitable Pledges.
  2. Understand the varying deductions a donor can take for a charitable contribution, depending on the type of contribution (e.g., money, stock, land, art) and recipient organization. See IRS Publication 526: Charitable Contributions. But don't give legal or tax advice to your donors. And note that these laws are changing.
  3. Have policies to help ensure your organization and its employees, volunteers, and agents (while acting as representatives of the organization) do not make any misrepresentations, infringe on anyone's copyrights, breach any contract provisions, or otherwise violate applicable laws when creating and publishing your fundraising materials. See, e.g., 10 Issues to Address in Your Nonprofit's Social Media Policy.
  4. Be aware of the difference between a qualified sponsorship payment and advertising income. Your organization may be responsible for paying unrelated business income tax on the latter. Here's a good resource on the subject by Ellis Carter on the Charity Lawyer Blog: Corporate Sponsorship or Taxable Advertising?
  5. Include risk management as part of the planning process for events. Check out the Nonprofit Risk Management Center for resources (e.g., Managing Special Event Risks).
  6. If you're contracting with a professional fundraiser, check whether your state has registration requirements for such professionals and additional requirements for charities that enter into such contracts. In California, make sure you visit the Attorney General's website (FAQs – Commmercial Fundraisers).
FUNDRAISING & CHARITABLE GIVING

‘Tis the Season to Be Compliant: Tips for Organizations on IRS Requirements for Deducting Charitable Contributions

Thank you cardThe holiday season is a time of giving. Along with the presents exchanged at gatherings with friends and families, many gifts are made to nonprofits in the closing month of the year at holiday charity galas and auctions, through end-of-the year email and direct mail appeals, and through other fundraising events. For charities, the deductibility of charitable contributions can be an important incentive for some donors. However, the requirements for a donor to actually itemize that deduction on his or her personal tax return can be tricky and complicated for both the donor and organization. Failures can lead to disqualified deductions for the donor, damaged donor relations, and in some cases, penalties imposed on the organization. The IRS has historically taken a stance of strict compliance with these requirements and this year is no exception.

Below we’ve offered some quick tips for charitable organizations to help with federal tax law compliance and maintaining happy donors this holiday season.  

Check that You Are Listed As a Qualified Organization Eligible to Receive Deductible Contributions

General rule: A taxpayer more only deduct those contributions that are made to a qualifying
organization. 

      Only 501(c)(3) tax-exempt organizations – i.e., public charities and private foundation – formed in the United States are eligible to receive tax-deductible charitable contributions. The organization must be exempt at the time of the contribution in order for the contribution to be deductible for the donor. Public charities and private foundations often publicize their 501(c)(3) status on their websites and in their solicitations for donations. However, this may not be an accurate representation to donors if, for example, the organization has had its status revoked.  Common problems include:

  • Automatic revocation for failure to file an IRS information return. As announced in June 2011, approximately 275,000 tax-exempt organizations automatically lost their exempt status for a failure to file annual information returns with the IRS. The IRS articulated a reinstatement process to help such organizations regain exempt status, but it will generally only recognize reinstatement from the date of the application unless the organization can show reasonable cause for retroactive reinstatement. Thus, contributions made during the interim between the organization’s revocation and subsequent reinstatement may not be deductible. The IRS will however allow a donor unaware of the organization’s status change to rely on public information on the IRS website and deduct contributions made on or before the date of an appropriate public announcement of the organization’s revocation of exempt status (e.g., an IRS bulletin). Both organizations and donors can check the status of an organization by searching the Exempt Organizations Select Check, a publicly available online database of qualifying organizations published by the IRS, but many donors and organizations alike fail to do so. Organizations are in the better position for keeping up to date on IRS notifications and disqualifications and should immediately address any matters jeopardizing their exempt status and/or update their solicitation materials accordingly regarding their exempt status. (See also Revenue Procedure 2011-33, 2011-25 I.R.B. 887).
  • Some organizations may be qualified but not listed on the IRS Exempt Organizations Select Check. An organization should communicate this information clearly to its donors. For example, churches and government agencies are eligible to receive deductible contributions even though they are generally not listed in the online database. Additionally, organizations granted reinstatement may experience a delay before the organization will show up in the Exempt Organizations Select Check database. During this period, a donor may rely on the organization’s IRS determination letter and may also confirm the organization’s status by calling the IRS (toll-free) at 1-877-829-5500.
  • A public charity  that has failed its public support test and tipped into private foundation status and not communicated the change in status to its donors. Although a public charity and private foundation are both qualifying organizations, they are subject to different deduction limits. If a public charity tips into private foundation status, the change in status should be communicated to donors as it may affect the deductibility of such contribution (see IRC section 170(b) for the differences in deduction limits for contributions to public charity versus a private foundation).

Takeaway: An organization should check whether it is listed as eligible to receive tax-deductible contributions as a public charity or private foundation using the IRS Exemption Organizations Select Check tool, a database that is similarly available for taxpayers to search.

 

Help Your Donors Meet Their Substantiation Obligations for Cash Contributions* of $250 or More

General rule: For a deduction of $250 or more, a taxpayer must have a contemporaneous written acknowledgment of the contribution that is issued by the organization before the taxpayer files his or her tax return.

      Taxpayers are required to have a written record of any charitable contribution, regardless of amount, that shows the name of the qualified organization, the date of the contribution, and the amount of the contribution. The substantiation requirements for deductions of cash contributions under $250 are fairly easy for a donor to satisfy. Generally, it can be satisfied by a donor-produced bank record (e.g., canceled check, bank statement, credit card statement). The requirements for deducting any donation of $250 or more, however, are higher; the donor must also have a contemporaneous written acknowledgement from the qualified organization for each contribution of $250 or more even though an organizationis generally not required to issue such a receipt for cash donations. (See IRC section 170(f)(8)(A)).

  • The written acknowledgment from the organization must be both:

            1. In writing and include**:

a. The amount of the cash contributed by the donor;

b. A statements indicating whether the qualified organization gave the donor any goods or services as a result of his or her contribution;

c. A description and good faith estimate of the value of any goods or services received by the donor; and

            2. Contemporaneous, meaning that it must be obtained by the donor on or before the earlier of:

a. The date you file your return for the year you make the contributions, or

b. The due date, including extensions, for filing the return.

  • For better donor-relations, an organization should develop a reasonable process for issuing written substantiations in a timely manner that meet all written substantiation requirements for cash contributions, especially for cash donations of $250 or more. As a best practice, the written acknowledgment from the organization should also meet the written record requirements for donations under $250 (i.e., include the date of the contribution) so that the donor will not be required to provide an additional written record. A donor’s failure to obtain a written acknowledgment can have serious consequences for that donor. For example, in the recent case, Durden v. Commissioner, T.C. Memo 2012-140, the United States tax court upheld the IRS’s denial of a taxpayer’s claim for a charitable deduction totaling $22,517. The taxpayer had made multiple charitable contributions over $250 by check to a church. However, the receipts issued by the church failed to meet the requirements of a contemporaneous written substantiation – one notice failed to state whether the any goods or services were provided in return for the contribution and the second notice was not issued contemporaneously.

Takeaway: Although an organization is generally not required to provide written acknowledgments for cash donations, it is generally recommended that organizations provide a timely written acknowledgment that meets all substantiation requirements for the donor as a good donor-relations practice.

*This article does not address contributions by payroll deductions.

**Please note there are additional statements required related to noncash contributions and intangible religious benefits.

 

Meet Your Reporting Obligations Whenever the Donor Receives a Benefit in Return for the Cash Contribution

General Rule: For payments of $75 or more in which the donor receives some benefit in return, an organization must issue a written disclosure statement to the donor and the donor may only deduct the amount of their payment that exceeds the fair market value of that benefit.

      One exception to the general rule discussed above for cash contributions is that an organization is required to issue a written disclosure statement if a donor makes a payment of $75 or more to a qualified organization that is part payment for goods or services and part contribution. This is referred to as a quid pro quo contribution. These transactions commonly occur when an organization sells a ticket to a fundraising dinner where donors will receive a meal or when an organization holds a fundraising auction where donors bid on items for purchase. Generally, the donor may only deduct the amount paid that exceeds the fair market value of the merchandise, goods, or services received in return. To help donors itemize the proper amount, organizations should be aware that:

  • The written disclosure statement must:
    1. Tell the donor that he or she can only deduct the amount of the payment that is more than the value of the goods or services received;
    2. Provide a good faith estimate of the value of the goods or services received; and
    3. Be furnished in connection with the solicitation or the receipt of the quid pro quo contribution.
  • Failures may result in monetary penalties on the organization. An organization that fails to issue the required written disclosure statement is subject to a penalty of $10 per contribution (capped at $5,000 per fundraising event or mailing), unless the failure was due to reasonable cause.
  • It is not uncommon for organizations to provide incorrect fair market value estimates but these mistakes can have costly implications for their donors. Fair market value is generally understood as the price at which property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the relevant facts. Generally a donor can rely on the organization’s good faith estimate of the value unless the donor knows the estimate is unreasonable. Common issues occur for example when:

1. An organization fails to publish the fair market value of items to donors prior to the purchase of an item at a charity auction.

Generally, if there is no prior notice or estimate of fair market value provided by the organization to the purchaser before the purchase (e.g., a catalog of items distributed to potential donor-bidders), the purchaser’s payment is not considered a gift (i.e., no donative intent for the payment to be part contribution). The IRS will treat the amount that was paid by the purchaser as the fair market value of the item (i.e., no part of the payment is considered as exceeding the fair market value of the item).

2. An organization incorrectly values a celebrity presence as “invaluable” or “priceless.” 

Generally, unless the celebrity is providing a service or performance for which the celebrity is famous for, the fair market value of the celebrity’s presence is $0.00. For example, the fair market value of a ticket to a tour of the SF MoMA led by George Clooney is equal to the fair market value of a SF MoMA tour generally. If the SF MoMA generally provides these tours at no cost to the public, the fair market value of the George Clooney-led tour is also $0.00.

  • There are exceptions when the written disclosure statement is not required and the donor may be able to deduct the payment in full despite receiving certain benefits in return. For example:

1. A donor may deduct the entire payment as a charitable contribution if (i) the benefit received is of token value and (ii) the organization correctly determines that the benefit is of insubstantial value and informs the donor that he or she can deduct the payment in full. Insubstantial value can be established in one of two ways (see Rev. Proc. 90-12, 1990-1 C.B. 471):

a. The fair market value of all benefits received is not more than the lesser of 2% of the payment or $97 (2011 figure, adjusted annually); or

b. The payment is $48.50 or more (2011 figure, adjusted annually) and the only benefits are token items bearing the organization’s name or logo that collectively cost less than $9.70 (2011 figure, adjusted annually).

2. Certain membership benefits can be disregarded so long as the annual payment by the donor is $75 or less and the benefit(s) consist of:

a. Any rights or privileges (except for the right to purchase tickets for college athletic events) that can be used often during the membership period (e.g., free or discounted admissions or parking); or

b. Admission to events that are open to members and the cost per person does not exceed $9.70 (2011 figure, adjusted annually).

Takeaway: Organizations have an obligation to issue a contemporaneous written disclosure statement for a payment by a donor of $75 or more that is a quid pro quo contribution. With quid pro quo contributions, organizations generally have an obligation to make a good faith estimate of the value of the benefit and should confer with an appropriate professional when unsure about how to value special or unique items.

 

The above-described rules only scratch the surface of federal tax laws as they relate to charitable contributions. The rules are increasingly complicated for certain types of gifts such as real property, vehicles, and stock.  While organizations should not offer tax advice to their donors and the reliability of certain records is ultimately the burden of the taxpayer, organizations can show their gratitude to their donors by employing best practices which help their donors to have adequate records when April 15 rolls around.

For more information, please listen to our interview with Tony Martignetti for the Chronicle of Philanthropy. “How to Thank Donors” ) and Nonprofit Radio, “Dutiful Documentation.”

More information is available in:

IRS Publication 526 Charitable Contributions

IRS Eight Tips for Deducting Charitable Contributions

- IRS Publication 1771 Charitable Contributions: Substantiation and Disclosure Requirements

- IRS Publication 561 Determining the Value of Donated Property

 

FUNDRAISING & CHARITABLE GIVING

There is no “I” in Team: Common Private Benefit Problems for Booster Clubs

Goal
Booster clubs are commonly used by parents and students to help offset the costs of school or extracurricular activities such as participation in an athletic team, marching band, or academic decathlon team. Booster clubs are often parent controlled and formed; may conduct fundraising through a variety of efforts such as car washes, general solicitations, and corporate sponsorships; and may involve any number of students and parents. A booster club may also have the added benefit of qualifying as a public charity because it furthers an exempt purpose under section 501(c)(3) of the Internal Revenue Code. For example, the IRS has traditionally recognized 501(c)(3) tax-exemption for boosters clubs that promote amateur athletics. There have, however, been many issues raised by the IRS in the athletic booster club context that highlight problems that may be common to all types of booster clubs, particularly when it comes to private benefit and private inurement which can be prevalent in these environments. Below are some key issues that any booster club should consider.

No Cooperative Fundraising

Students and parents understandably may want a payout from the booster club’s funds that is equal or proportional to the amount they individually raised as compared to the other participants. That system, however, is a private inurement issue under federal tax law. (See Treas. Reg. Reg. 1.501(c)(3)-1(c)(2)). The private inurement rule applies to individuals who are in a position to exercise control or influence over the organization (also called an “insider”), such as a board member, and prohibits the organization from allowing its net earning to inure to the benefit of an insider, no matter the amount. Parents participating in certain booster clubs may be considered insiders and thus, allowing a direct correlation between those parents’ fundraising efforts and the benefit received would be a private inurement violation because the organization’s earnings are being used to directly and specifically pay for benefits to a specific insider rather than to the class of individuals as a whole such as an athletic team.

Furthermore, such a credit system still raises private benefit concerns regardless of whether a parent is considered an insider or even involved in the booster club. Lois Lerner, the Director of Exempt Organizations at the Internal Revenue Service, recently affirmed that crediting amounts raised by a participant against that participant’s costs (e.g., dues, travel expenses) is a private benefit violation that may jeopardize the organization’s exempt status.

This is not to say that individuals may never benefit from a booster club’s activities. The IRS has acknowledged, for example, that in all athletic booster clubs, there is always a class of individual athletes who receive benefits. The critical inquiry for compliance with federal tax laws is whether the benefit to the individuals (e.g., subsidized competition costs) as a whole, is insubstantial and incidental when compared to the public benefit being conferred by the same activity.

No Earmarked Funds for Individuals

It is similarly problematic if donations are being made to and accepted by the booster club for the direct benefit of a particular individual. Individuals should not be soliciting contributions from donors with any suggestion or intention that the contribution will be directly used for that individual who solicited the gift. Additionally, the booster club should not accept any contributions that have been earmarked by the donor for a particular individual. Not only would such contributions not be tax-deductible for the donor, the booster club would likely be acting as a conduit in violation of the federal tax laws regulating private inurement and private benefit by allowing such money to pass through the organization to the individual without having exercised any control, oversight, or discretion over those funds.

Be Cautious of Interpersonal Relationships

A booster club is commonly composed of and run by individuals who know each other on a personal level such as neighboring families or parents of childhood friends. Board tensions and organizational issues can become all the more complicated and difficult when personal feelings or relationships are involved. Therefore, adopting and regularly reviewing policies that help to address and resolve foreseeable conflicts and establish sound management practices can be a worthwhile investment. For example, “interested persons” with respect to a conflict of interest policy may reach beyond family members to also include domestic partners and some definition of “a close friend.” Additionally, implementing bylaws provisions that encourage board turnover and drafting policies related to check and contract signing authority could be helpful in ensuring objective eyes are always present to spot problematic practices or inappropriate uses of organizational funds.

Ultimately, those individuals forming and operating booster clubs must remember that 501(c)(3) status comes with both advantages and specific rules and responsibilities under federal tax law, some of which have been highlighted above. A booster club’s governance and activities can trigger any number of other federal tax laws such as those related to unrelated business income and excess benefit transactions, all of which help to ensure the booster club is focused on the bigger picture of its exempt purposes rather than private or other interests.

For more information, please read the IRS Exempt Organizations CPE Text (1993), “A. ATHLETIC BOOSTER CLUBS: ARE THEY EXEMPT?

CURRENT AFFAIRS & OPINION   FUNDRAISING & CHARITABLE GIVING

Contributions to Charity-owned LLCs

News
The IRS has finally confirmed that a contribution to a disregarded single member LLC ("SMLLC") wholly owned by a U.S. charity that otherwise qualifies under Section 170 of the Internal Revenue Code will be treated as a charitable contribution to a branch or division of the charity. Notice 2012-52 (below) makes clear that a donor to such an LLC may potentially take a deduction for the gift. This guidance is effective for contributions made on or after July 31, 2012 but may be relied on by donors for taxable years for which the statute of limitations for refunds or credits under IRC Section 6511 has not expired.

There are several reasons why a charity might want to form a disregarded SMLLC including to house a set of exempt activities with different management needs and/or a different risk profile from the charity without having to file an application for exempt status (Form 1023) or separate annual information returns (Forms 990). Keeping possible liabilities resulting from the activities of the SMLLC separate from the charity may be an important risk management strategy behind the creation of such structure.

Charitable Contributions to Domestic Disregarded Entities

Notice 2012-52

PURPOSE

This notice provides guidance on the deductibility of contributions to domestic single-member limited liability companies that are wholly owned and controlled by organizations described in § 170(c)(2) of the Internal Revenue Code (U.S. charities) and for federal tax purposes are disregarded as entities separate from their owners under § 301.7701-2(c)(2)(i) of the Procedure and Administration Regulations (SMLLCs).

BACKGROUND

Section 170(a) allows as a deduction any charitable contribution, as defined in § 170(c). Section 170(c)(2) in part defines the term "charitable contribution" as a contribution or gift to or for the use of a corporation, trust, or community chest, fund, or foundation–

(A) Created or organized in the United States or in any possession thereof, or under the law of the United States, any State, the District of Columbia, or any possession of the United States;

(B) Organized and operated exclusively for specified purposes, including religious, charitable, scientific, literary or educational purposes;

(C) No part of the net earnings of which inures to the benefit of any private shareholder or individual; and

(D) Which is not disqualified for tax exemption under § 501(c)(3) by reason of attempting to influence legislation or participating in a political campaign.

Section 170(b) prescribes limitations on the maximum amount deductible as a charitable contribution.

Generally, a business entity that has a single owner and is not a corporation under § 301.7701-2(b) is disregarded for federal tax purposes as an entity separate from its owner (disregarded entity). See § 301.7701-2(c)(2)(i). Section 301.7701-2(a) provides that “if the entity is disregarded, its activities are treated in the same manner as a sole proprietorship, branch, or division of the owner.” A business entity (including a disregarded entity) is domestic if it is created or organized within the United States, or under the law of the United States or of any state. See § 301.7701-5(a). A U.S. charity that wholly owns a disregarded entity must treat the operations and finances of the disregarded entity as its own for tax and information reporting purposes. See Ann. 99- 102, 1999-2 C.B. 545. However, for employment and certain excise tax purposes, an entity that is disregarded as separate from its owner for any purpose under § 301.7701- 2 is treated as an entity separate from its owner. See § 301.7701-2(c)(2)(iv) and (v).

CONTRIBUTIONS TO DOMESTIC SMLLCs

If all other requirements of § 170 are met, the Internal Revenue Service will treat a contribution to a disregarded SMLLC that was created or organized in or under the law of the United States, a United States possession, a state, or the District of Columbia, and is wholly owned and controlled by a U.S. charity, as a charitable contribution to a branch or division of the U.S. charity. The U.S. charity is the donee organization for purposes of the substantiation and disclosure required by §§ 170(f) and 6115. To avoid unnecessary inquiries by the Service, the charity is encouraged to disclose, in the acknowledgment or another statement, that the SMLLC is wholly owned by the U.S. charity and treated by the U.S. charity as a disregarded entity. The limitations of § 170(b) apply as though the gift were made to the U.S. charity.

EFFECTIVE DATE

This notice is effective for charitable contributions made on or after July 31, 2012. However, taxpayers may rely on this notice prior to its effective date for taxable years for which the period of limitation on refund or credit under § 6511 has not expired.

DRAFTING INFORMATION

The principal author of this notice is Susan J. Kassell of the Office of the Associate Chief Counsel (Income Tax & Accounting). For further information concerning this notice, contact Ms. Kassell at (202) 622-5020 (not a toll-free call).

Additional IRS Resources

Limited Liability Companies as Exempt Organizations Update, 2001 EO CPE Text

Limited Liability Companies as Exempt Organizations, 2000 EO CPE Text

Limited Liability Company Reference Guide Sheet

Instructions for Limited Liability Company Reference Guide Sheet

Internal Revenue Manual Exhibit 7.20.4-12

BOARDS / GOVERNANCE   FUNDRAISING & CHARITABLE GIVING   RISK MANAGEMENT

Gift Acceptance Policies – NCPGC Program Presented by Barbara Rhomberg

             Gift Tax Lemon

On January 12, 2012, I attended the progam "Gift Acceptance Policies: Why, When, What, How, and Who" presented to the Northern California Planned Giving Council by exempt organizations attorney Barbara Rhomberg.  Using the example of the Trojan Horse, Barbara quickly convinced us that not all gifts are good ones and the time for a gift acceptance policy is before a charity accepts a problematic gift.  Here are some highlights of her talk [and some of my thoughts in bracketed text].

There are 5 factors a charity must consider before accepting a noncash gift:

  1. Costs of ownership.
  2. Costs associated with the sale.
  3. Staff/volunteer time required.
  4. Exposure to liability [and other harm].
  5. Marketability of the gifted asset and any cash flow associated with it.

In addition, a charity must assess the impact of any restrictions on the use or disposition of the asset (e.g., prohibitions against a sale, endowment-related issues); any strings and conditions (e.g., naming opportunities, payment of associated legal or appraisal costs); embarassing gifts (e.g., due to nature of donor's business); and tax shelters.

Gifts of real estate may be of great value to a charity.  But there may also be significant costs of ownership (e.g., maintenance, insurance, property taxes) and sale.  Additionally, there may be risks of environmental liability (particularly with undeveloped land or land with prior commercial use), title problems, prior mortgages/liens, and marketability.  [For fiscal sponsors, there must be consideration of what the sponsoring organization will do with real estate secured for a project if the project committee fails to raise sufficient funds and/or disbands.]

Planned gifts (e.g., charitable remainder trusts, charitable lead trusts, charitable gift annuities) will require special consideration.

A gift acceptance policy will help protect a charity from accepting a bad gift, expedite the acceptance of a good gift, facilitate the tactful decline of a gift, and evidence an appropriate level of governance [which will be reflected on its Form 990]. A good policy will answer the following questions among others:

  • What assets can be accepted?
  • Who will review the assets and how will they be reviewed?
  • How will restrictions, strings, and conditions be evaluated?
  • Who can accept the asset?

While charities will not want to be bound by rigid rules that fail to consider special circumstances that might make an exception in order, a good policy will identify who is authorized to make such exceptions (e.g., executive director, board committee, or board).  A good policy will also take into account the charity's unique set of facts and circumstances.  And a charity will benefit from the experience of working through development of its own gift acceptance policy that considers its own unique set of facts and circumstances.  Simply copying a template document may be do more harm than good though review of a few strong templates may be a great place to start.

Resources suggested by Ms. Rhomberg include:

Gift Acceptance Policies – Why, When, What, How, and Who – Barbara Rhomberg

Effective Gift Acceptance Policies and Procedures – David Wheeler Newman

Model Gift Acceptance Policy and Procedures - David Wheeler Newman

Understanding and Drafting Nonprofit Gift Acceptance Policies – Kathryn W. Miree

Great presentation, Barbara!