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eUpdate: Archives

2005 Issue 1 | Download as a PDF


Payroll Deduction Plan Violates 501(c)(3) Ban on Political Activities
Top Ten Accountability Traps
IRS Issues 2005 Inflation-Adjusted Rates
FEC Issues Inflation-Adjusted Campaign Contribution Limits
CAN-SPAM Act Could Affect Charities
Electronic Filing Required for Nonprofits Starting in 2006
IRS Adopts Final Rules On Public Disclosure Copy Fees


Payroll Deduction Plan Violates 501(c)(3) Ban on Political Activities

In a recent Technical Advice Memorandum (TAM), the IRS ruled that a public charity that administered and promoted a payroll deduction plan through which employees could donate to a PAC violated the Internal Revenue Code's prohibition on political activities by 501(c)(3) organizations.

The charity, which is the parent company of a collection of healthcare providers, organized and administered the voluntary program to benefit the PAC of a hospital industry trade association. The charity's president, who had been elected chairman of the association, announced his intention to increase participation in the PAC by informing employees of the charity and its subsidiaries of their right to give to the PAC through payroll deduction. In order to make employees aware of the plan, the president taped a video encouraging them to contribute. The video was then shown at regularly scheduled staff meetings. Additionally, the PAC was promoted in the organization's newsletter.

Organizations exempt under Section 501(c)(3) of the Code are prohibited from participating or intervening in any political campaign for or against a candidate for public office. Direct as well as indirect intervention in a political campaign is considered a violation of this prohibition. This means that charities may not support political organizations, such as PACs, in any way.

The charity argued that because the PAC had paid the incremental costs of administering and promoting the payroll deduction plan, such as the production and duplication costs of the video, no violation had occurred. The IRS, however, identified other costs to the organization that were not repaid, such as the cost associated with the President's time spent making the video. Furthermore, because the charity's president appeared on the video and presumably urged support for the PAC through the payroll deduction plan, the video amounted to an endorsement of the PAC by the charity. Supporting and endorsing a PAC violates the prohibition on political campaign activities, and the IRS ruled that the charity would need to pay a 10% excise tax on the expenditures involved in promoting and administering the payroll deduction plan.

Rulings from the IRS on what constitutes prohibited political activities are somewhat rare, making this memorandum instructive. The TAM shows that the IRS will generally consider statements made by a top employee on company time to be attributable to the organization. It also demonstrates how reimbursement of incidental expenses incurred by a charity for political activities may not be sufficient to avoid a violation. Allowing a PAC to use a charity's facilities, even if it does not cost the charity anything, can violate the law.

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Top Ten Accountability Traps

Managers and boards of all nonprofits, especially those with limited resources, must understand how to preserve the programs and the reputation of their organization by following proper accountability procedures. Here are ten questions that managers and nonprofit attorneys should be able to answer: Does your nonprofit organization…

  1. Operate programs that are not within the authorized "purposes" of your organization?
  2. Make board decisions in a manner inconsistent with the organization's by-laws?
  3. Fail to comply with all Better Business Bureau standards for fundraising and nonprofit governance?
  4. Fail to file annual financial reports with the IRS or applicable state regulators?
  5. Communicate with elected officials or government agencies about legislation without registering and reporting in ways that comply with federal, state, or local lobbying laws?
  6. Cover expenses under one government contract with funds from another contract?
  7. Fail to remit payroll withholding taxes to federal and state authorities?
  8. Set salaries and give raises to senior employees without salary information from similar nonprofits?
  9. Treat regular staff workers as consultants rather than employees, or award comp time but not overtime pay to non-management staff who work beyond regular hours?
  10. Have personnel policies that do not advise staff members and their supervisors about current personnel practices?

If your answer to any of these questions is "Yes," you could be ignoring problems that could affect your nonprofit's security and even survival. Get the right legal help to address any accountability issue.

Originally published in the newsletter of the Lawyers Alliance for New York
(www.lanu.org), a nonprofit organization that provides legal services to nonprofits in New York City.

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IRS Issues 2005 Inflation-Adjusted Rates

The IRS has released inflation-adjusted figures for the 2005 tax year, which will be of interest to both individuals and nonprofit organizations.

Low Cost Article

The unrelated business taxable income of certain exempt organizations does not include proceeds from the distribution of "low cost articles" in connection with charitable solicitations. For the tax year beginning in 2005, a "low cost article" is any article which costs $8.30 or less.

2004: $8.20
2005: $8.30

Other Insubstantial Benefits

The IRS established guidelines in Revenue Procedure 90-12 to provide charitable organizations with help in advising their patrons of the deductible amount of contributions when the contributors are receiving something in return for their contributions. The original guidelines state that the value of benefits received by a donor in return for a fully-deductible charitable contribution may be disregarded if either: 1) for a contribution of $25 or more, the contributor did not receive something in return that costs more than $5 (or the rate for a "low cost article" listed above); or 2) the fair market value of all of the benefits received in connection with the payment is not more than 2 percent of the payment or $50, whichever is less. The $5/$25/$50 schedule is annually adjusted for inflation and this year has been increased to $8.30, $41.50, and $83, respectively.

2004: $8.20 / $41 / $82
2005: $8.30 / $41.50 / $83


The standard mileage deduction rate for business use of an automobile has increased to 40.5 cents/mile. This is a 3 cent increase over last year's rate, making it the largest rise ever. The figure for volunteer or charity work remains at the 14 cents/mile rate in effect the last two years.

2004: 37.5¢/mile
2005: 40.5¢/mile

Reporting Exemption for Lobbying Expenditures

Revenue Procedure 98-19 set at $75 or less - annually adjusted for inflation - the amount of annual dues that social welfare organizations may receive without becoming subject to Internal Revenue Code Section 6033(e). Section 6033(e) requires a tax-exempt organization that incurs nondeductible lobbying expenditures to notify its members, at the time the dues are assessed or paid, of its reasonable estimate of the portion of the dues that is allocable to those expenditures. In 2005, the annual dues limitation to qualify for the reporting exception regarding certain exempt organizations with nondeductible lobbying expenses is $88 or less.

2004: $86
2005: $88

Non-Member Dues

In 2004, membership dues of 501(c)(5) agricultural and horticultural organizations and 501(c)(6) organizations will not be subject to Unrelated Business Income Tax provided that annual dues do not exceed $127.

2004: $124
2005: $127

Annual Exclusion for Gifts

The first $11,000 of gifts to any person (other than gifts of future interests in property) is not included in the total amount of taxable gifts made during that year. This rate remains the same as the previous year.

2004: $11K
2005: $11K

Itemized Deductions

The income threshold for the overall limitation on itemized deductions, which rises slightly each year, has risen to $145,950 for single individuals or married individuals filing jointly, or $72,975 for married individuals filing separately. The allowable amount of deductions is reduced for taxpayers with adjusted gross income above that amount.

2004: $142.7K
2005: $145.95K

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FEC Issues Inflation-Adjusted Campaign Contribution Limits

Certain campaign contribution limits set by the Bipartisan Campaign Finance Reform Act of 2002 (BCRA) are indexed for inflation. The FEC has issued inflation-adjusted limits for the 2005-2006 election cycle.

Individual Contributions to Federal Candidates

Original Amount: $2,000
2005-2006 Cycle: $2,100

Individual Contributions to National Party Committees

Original Amount: $25,000
2005-2006 Cycle: $26,700

Overall Cycle Limit for Individuals

Original Amount: $95,000 (per two-year cycle)
2005-2006 Cycle: $101,400

Cycle Limit to Candidates

Original Amount: $37,500
2005-2006 Cycle: $40,000

Cycle Limit to all PACs and Parties

Original Amount: $57,500 per six-year cycle
2005-2006 Cycle: $61,400 (no more than $40,000 to state and local parties and PACs).

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CAN-SPAM Act Could Affect Charities

Although intended to fight unsolicited commercial email, the "Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003" (the "CAN-SPAM Act") may catch nonprofits unaware, since their email messages may also be subject to the Act's requirements. Any organization that uses email to sell goods or services - including conferences, publications, and even certain large gifts in return for charitable contributions - will either want to be certain that the message is not subject to CAN-SPAM's provision, or comply with the Acts requirements for "commercial" email communications.

Communications Subject to the Act

Generally, CAN-SPAM applies only to emails primarily designed to sell products or services to recipients. For the purpose of enforcement, the Act divides emails into three

  • Commercial: Emails that sell goods or services or provide links to webpages that do. Examples include advertising for merchandise or publications, promoting events at which admission will be charged, and services such as insurance or credit cards.
  • Transactional/Relationship: Emails that continue already-established relationships or deliver information, goods, or services that recipients have already agreed to receive. Many membership communications may fall under this category, unless they are clearly sent for the sole purpose of selling things.
  • Other: Anything that is neither commercial nor transactional/relationship, including legislative alerts and solicitations for funds.
An email that contains content that falls into more than one of these groups (a "dual purpose" email) is categorized based on its "primary purpose," as viewed by the average reasonable person reading the subject line and body of the message. In particular, the purpose that appears first in the message will be key in evaluating mixed commercial and transactional/relationship emails. For example, an email would be more likely to be considered commercial if it included:
  • Commercial content at the beginning of the message;
  • A large proportion of commercial content; or
  • Highlighting of commercial content using color, graphics, and font size or style.

Requirements for CAN-SPAM Compliance

If an email is commercial, then it must contain an accurate and non-misleading header and subject line, so that recipients will be able to determine the source and purpose of the incoming message. In addition, a commercial email must contain three basic elements:

  • A clear and conspicuous notice that the message contains an advertisement or other commercial content;
  • The sender's postal mail address; and
  • An "opt-out" mechanism that allows recipients to stop receiving commercial emails from the sender as well as a notification that recipients can opt-out. A menu can be used so that the recipient only opts out of commercial emails, but continues to receive other types of messages. Once recipients opt out, the sender is prohibited from sharing those email addresses with another organization.
What This Means for Nonprofits

In general, nonprofits that do not want to run afoul of the Act should refrain from sending emails primarily intended to sell products or services, even if such products or services are directly related to their exempt purposes. If emails are used to sell products or services, the nonprofit should try to make these commercial aspects an incidental part of messages sent for other substantive purposes. In particular, organizations should exercise caution when creating emails that:

  • Advertise events or conferences where fees will be charged;
  • Sell publications;
  • Advertise dues-paying membership; or
  • Contain links to Web sites or Web pages that sell merchandise.
One thing that may be a source of relief to many nonprofits is that charitable solicitations are not considered commercial content. However, charities should exercise some caution when offering products or services in return for contributions. While it is unlikely that emails offering small gifts in return for clearly charitable donations would be deemed commercial in nature, larger incentives with values that approach the amount of the "donation" may raise questions. Generally speaking, organizations that use email to solicit contributions should make sure to emphasize the charitable nature of requests for support rather than items that recipients may receive in return for donations.

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Electronic Filing Required for Nonprofits Starting in 2006

In a set of new Temporary Regulations, the IRS recently announced that over the next few years, it will begin requiring certain entities including private foundations, charitable trusts, and other large nonprofits to file annual returns electronically.

Tax exempt organizations with assets totaling $100 million or more will be required to file Form 990 electronically beginning with the first fiscal year ending on or after December 31, 2005. Exempt organizations with assets totaling $10 million or more will be required to file Form 990 electronically beginning the first fiscal year ending on or after December 31, 2006. Additionally, all private foundations and charitable trusts, regardless of assets, will be required to file Form 990-PF electronically beginning with the first fiscal year ending on or after December 31, 2006.

All of these requirements apply only to entities that file 250 or more returns with the IRS in a given year. Organizations that file fewer than 250 returns are not obligated to meet these filing requirements regardless of assets. Returns of all types, including 990s, returns required under section 6033, excise tax returns, and employment tax returns, count towards the 250-return threshold. The only exception in this area applies to amended or corrected returns, which do not count for the purpose of tabulation.

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IRS Adopts Final Rules On Public Disclosure Copy Fees

In January, the IRS adopted final regulations regarding the per-page copy fee that nonprofits may charge when responding to requests for copies of documents that must be made available to the public. An organization is required to make available to the public its exemption application, determination letter, and three most recent Forms 990. The organization must also provide photocopies of these documents upon request. In July of 2003, the IRS adopted temporary regulations allowing exempt organizations to charge no more than $0.20 per page for providing copies of publicly available documents. Last month, the IRS finalized these regulations without change; the maximum copy fee remains at $0.20 per page.

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This publication is designed to provide accurate and authoritative information about the subject matter covered. It is not distributed with the intent to render legal, accounting, or other professional advice. The services of a competent professional should be sought if legal advice or other expert assistance is required.


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