 |
 |
 |
 |
 |
 |
 |
Archives
February 2002
 |
|
| Cover Story |
Watchdog Organization Releases Proposed New Charitable Accountability Standards |
| IRS Update |
IRS Releases Final Intermediate Sanctions Regulations |
| Fundraising Focus |
FTC Proposed Telemarketing Rules Would Affect Professional Fundraisers |
| Employment Matters |
ADA Compliance in Light of Toyota v. Williams |
| Election Connection |
FEC Internet Proposal Draws IRS Concern
|
|
|
|
Watchdog Organization Releases Proposed New Charitable Accountability Standards The Better Business Bureaus's Wise Giving Alliance--the country's primary charity watchdog organization--has released a proposed set of new accountability standards for the operation and governance of public charities. The proposed standards outlined in its "Exposure Draft" will undergo a 120-day public comment period before the Alliance finalizes them in mid-2002. The Alliance was created last year by the merger of two long-established charity watchdog organizations, the National Charities Information Bureau (NCIB) and the Philanthropic Advisory Service of the Council of Better Business Bureaus' Foundation (PAS/CBBB). [See NN 7-8/01]. Each of these organizations published its own set of accountability standards to encourage fair and honest solicitation practices and promote ethical conduct by charities. The Alliance currently continues to use the old CBBB standards, but the final standards will supercede both sets of guidelines. Because many private foundations and individual donors consider compliance with the Alliance's standards an important factor in their funding decisions, it can be to a charity's advantage to adopt the Alliance's standards. In addition, compliance with the standards is the basis of evaluations the Alliance conducts on specific charities. This article highlights the most interesting and noteworthy standards of the Exposure Draft. While many of the Alliance's proposed standards are similar or identical to previous guidelines, several are revised or brand-new. The rules also take into account comments received from charities and others on the Alliance's "Discussion Document," released last summer to spur public suggestions on what the Alliance should consider in revising the CBBB standards. Overall, the new standards are stricter or require charities to provide more information to the public than the previous standards. Revised Standards Both the NCIB and CBBB's old standards promulgated rigid requirements regarding the composition of a charity's Board of Directors and the frequency of its in-person meetings. The proposed Alliance standards on this topic (Standards 1 to 5) are stricter. They require the Board to consist of a minimum of five voting members who hold at least three in-person meetings during the year, with a majority of the directors present. One of these meetings can be replaced by a conference call of the entire Board or a meeting of the organization's Executive Committee. To prevent situations involving private benefit or conflicts of interest, the NCIB's old standards allowed only one paid staff member to serve on the Board of Directors. The proposed standards further tighten this requirement by allowing either one directly compensated staff member or one "indirectly" compensated individual (such as a spouse or relative of a paid staff member) to serve on the Board. The Alliance has also substantially expanded the CBBB's standards concerning donor privacy. The CBBB's old standard required a charity to honor donor requests for confidentiality, including requests that one's name and contact information not be exchanged, rented, or sold. The new standards have replaced this general language with specific steps a charity must follow to ensure donor privacy. The first is to provide a "clear, prominent and easily accessible privacy policy" on web sites that solicit contributions. (A charity that does not solicit web-based contributions will probably still want to draft a privacy policy and display it on its web site, if it has one). The proposed standards also require a charity to provide in written appeals to first-time donors and then, not less than annually, a checkbox or other opt-out method that donors can use to prevent the charity from sharing their names and addresses with others. Probably the most anticipated of the revised standards are Standards 8 through 15, which discuss financial management. Among other things, these standards direct charities to spend certain amounts on programs and fundraising; address the issue of whether it is appropriate to retain assets for later use; and discuss how to report joint-cost expense allocation. In the past, charities found the comparable NCIB and especially the CBBB spending guidelines restrictive. The new standards remain tough. Regarding program spending, proposed Standard 9 requires a charity to spend at least 65% of its total expenses on program activities, a significant increase from the former NCIB requirement of 60%. The Alliance has slightly relaxed the rules that discourage asset accumulation, however. The old CBBB program expenditure/asset accumulation standard, which required charities to spend at least 50% of total income on programs, effectively prevented charities from transferring substantial current income to endowment funds. In contrast, the Alliance will only limit the accumulation of assets available for current use and will use a test based on expenses rather than receipts. Proposed Standard 11 dictates that a charity's net assets available for use should not exceed twice the total expenses budgeted for the current year, which will allow a charity to create a modest reserve fund. Like the old watchdog groups, the Alliance believes that charities should avoid accumulating funds that could instead be used on current programs. With regard to fundraising expenditures, charities have over the years consistently criticized the CBBB fundraising limitation as being too difficult to uphold. They will be dismayed to learn that proposed Standard 10 maintains the CBBB requirement that they spend no more than 35% of related contributions (contributions received as a direct result of fundraising efforts) on additional fundraising. The retention of the "35% rule" indicates that, like the IRS, the Alliance is increasingly determined to limit charity fundraising expenses to what it considers reasonable amounts. It is also concerned with getting charities to properly disclose those expenditures. Proposed Standard 13 requires that a charity's financial statement include a breakdown of expenses (such as salaries, travel, and postage) that indicates what portion of these expenses was allocated to program, fundraising, and administrative activities. Standard 14 reinforces the preceding standard by warning that the Alliance will check the accuracy of such joint-cost allocations and will not accept financial statements that underestimate fundraising expenses in order to inflate program expenses. As before, if an organization does not meet the spending requirements of Standards 9, 10 and 11, it must provide evidence that affirmatively demonstrates that its use of funds is reasonable. New Standards Neither the NCIB or the CBBB formally required a charity to measure the effectiveness of its programs. The Alliance's proposed Standards 6 and 7 would require a charity's Board to adopt a policy of assessing, no less than every two years, the organization's performance and determining future actions necessary to achieve its mission. The results of the effectiveness assessment and recommended actions must be submitted to the Board for review and approval. While it is to be hoped that charities would voluntarily evaluate their performance, these guidelines indicate that the Alliance now considers a charity's willingness to identify and learn from its strengths and shortcomings as critical to its ability to accomplish its mission. The Alliance has also addressed the question of charities' use of the Internet with regard to fundraising and site content. In addition to the privacy policy requirement mentioned above, any charity website that solicits contributions must contain the mailing address of the charity, electronic access to its most recent Form 990, and the following information from its annual report: 1) the organization's mission statement; 2) a summary of the past year's program service accomplishments; 3) a roster of the officers and directors; and 4) financial information, including (i) total income in the past fiscal year; (ii) expenses in the same program, fundraising and administrative categories as on the charity's annual financial statement; and (iii) ending net assets. Applicability to Small and Large Organizations Surprisingly, last summer's Discussion Document indicated that the Alliance was toying with the idea of releasing separate standards or requiring varying levels of compliance for charities of different sizes. Unfortunately, the new standards largely fail to address this issue. This is especially a disappointment for smaller charities, which may find it difficult or impossible to comply with many of the standards due to their limited scope and resources. One of the few proposed standards that does apply differently to charities of varying sizes is Standard 12, which advises charities to make publicly available complete annual financial statements prepared in accordance with generally accepted accounting principles. The standard clarifies that organizations whose total annual gross income exceeds $250,000 should have their financial statements audited in accordance with generally accepted auditing standards. Charities whose total annual gross income is between $100,000 and $250,000 need only have a certified public accountant review their financial statements, and charities whose total annual gross income is below $100,000 can internally produce their financial statements. The Next Step: Comment Period The Alliance's 120-day comment period is an excellent opportunity for charities to provide their input on the proposed guidelines before the Alliance finalizes them. Keep in mind that this is an extremely rare opportunity--the CBBB standards were last revised in 1981. The Alliance will accept public comments on the proposed charity standards until May 22, 2002. A copy of the Exposure Draft is available on the Alliance's web site at www.give.org, as is an electronic commentary form. If you prefer to submit your comments in writing, the Alliance will accept written comments at: Exposure Draft, Standards for Charitable Accountability, BBB Wise Giving Alliance, 4200 Wilson Boulevard, Suite 800, Arlington, VA 22203. By Mark Sawchuk  IRS Releases Final Intermediate Sanctions Regulations More than five years after the 1996 Taxpayer Bill of Rights added Section 4958 to the Internal Revenue Code and just under one year since its release of temporary regulations, the IRS has at long last finalized most of the intermediate sanctions regulations. The regulations impose excise taxes on excess benefit transactions involving section 501(c)(3) public charities and section 501(c)(4) social welfare organizations. In a nutshell, intermediate sanctions are excise taxes imposed on an individual or organization (called a "disqualified person") who receives excess economic benefits from the nonprofit organization. Excess benefits are any economic benefits provided directly or indirectly from the organization to the disqualified person that exceed the value of the consideration received by the organization for providing the benefit. To be deemed a disqualified person, the person receiving the benefit must be in a position to exercise substantial influence over the affairs of the nonprofit. Prior to the enactment of Section 4958, the IRS did not have a way to punish such persons, short of revoking the organization's tax-exempt status. Hence the term "intermediate" for these regulations, which penalize the transaction without endangering the charity's exemption. [see NN 2/01 for the basics on intermediate sanctions]. The final regulations differ only slightly from last year's temporary regulations, but do feature some noteworthy provisions. The most important of these is the IRS's affirmation that a nonprofit organization can be a disqualified person. While a (c)(4) cannot be a disqualified person with respect to another (c)(4), a (c)(4) can exercise substantial influence over a (c)(3) and receive excess benefits from it. The IRS reasoned that because (c)(4)s can engage in political activities prohibited to (c)(3)s, an excess benefit transaction could be a way for a (c)(3) to support such activities indirectly. In comments released with the regulations, the IRS specifically signaled that it may use intermediate sanctions to enforce the (c)(3) ban on political campaign intervention. The final regulations treat all other types of nonprofit organizations as potentially disqualified with respect to a (c)(3), with the exception of another (c)(3). Many of the comments the IRS received on the temporary regulations asked for clarification on financial transactions. One frequent question revolved around a situation where economic benefits are provided to a donor solely on account of the donor's deductible contribution (i.e., a quid pro quo contribution). The IRS responded by saying that as a practical matter, any contribution to a tax-exempt organization will not be an excess benefit transaction as long as the value of the contribution exceeds the value of any benefit the donor receives in return. However, the IRS has still not issued guidance on applying the regulations to more complicated situations, including donor-advised funds and revenue-sharing arrangements. The result is that the specific facts and circumstances of a particular case will determine whether these transactions are subject to intermediate sanctions. One of the more intriguing aspects of the regulations concerns individuals who steal from exempt organizations. The regulations clearly state that economic benefits received by a disqualified person through theft or fraud will never be considered compensation for services rendered. Thus, embezzlement always becomes an excess benefit transaction subject to intermediate sanctions. As adopted, the final intermediate sanctions regulations should satisfy the purpose of discouraging excessive salaries, "sweetheart" deals, and other similar arrangements. It seems, however, that the IRS may use the regulations to expand its reach on other issues, such as criminal activities and political campaign intervention by (c)(3)s. By Mark Sawchuk FTC Proposed Telemarketing Rules Would Affect Professional Fundraisers Telemarketing fundraising regulation continues to increase as the Federal Trade Commission (FTC) proposes to administer changes mandated by the recently passed U.S. Patriot Act [NN 1/02]. The changes center around a revised definition of telemarketing to include charitable solicitations by for-profit corporations. The FTC, which was already in the process of revising its telemarketing regulations, will include the new definition in its amendments. The FTC has proposed modifications to its Telemarketing Sales Rule (TSR), created to implement the Telemarketing Consumer Fraud and Protection Act. The TSR, adopted in 1995, protects consumers from unwanted telemarketing and deceptive sales calls. It places limitations on the times when telemarketers may call, requires certain disclosures during a call, and prohibits misrepresentations. The TSR does not currently apply to calls made by charitable organizations or political campaigns because the statute's definition of telemarketing applied only to the purchase of goods and services. The Patriot Act changed this definition to include charitable solicitations by for-profit companies made on behalf of charitable organizations. The proposed changes would apply the revised TSR to telemarketers who solicit for charitable contributions as well as those selling goods and services. Individual charities who do their own telephone solicitation would continue to be exempt from the FTC's jurisdiction. The new FTC proposal also includes plans for a national "do-not-call" registry that would allow consumers to have their name placed on a list to stop receiving telemarketing calls. Telemarketers could face fines up to $11,000 for contacting homes listed in the registry. However, calls would still be permitted to listed numbers if the consumer has given "express verifiable authorization" to receive telemarketing calls from an individual company or organization. The FTC is accepting comments on the proposed regulations until March 29, 2002. To mail in comments, write to: Office of the Secretary, Room 159, Federal Trade Commission, 600 Pennsylvania Ave. NW, Washington, DC 20580. Comments may also be submitted via e-mail at tsr@ftc.gov. E-mail comments must be organized in sequentially numbered paragraphs. All comments should include "Telemarketing Rulemaking - Comment. FTC File No. R411001" in the subject line. More information, including a link to the full text of the proposed rules, can be found on the FTC web site at www.ftc.gov. By Anne Cornelison ADA Compliance in Light of Toyota v. Williams No one is entirely sure where the figure of 43 million disabled Americans came from in the preamble to the Americans with Disabilities Act (ADA). Several commentators have suggested that the seemingly large number was put forward by various disability rights activists to demonstrate the extent of the problems disabled individuals face in the workplace and elsewhere. They should have set the bar a bit higher. In the Supreme Court's most recent case defining the parameters of the ADA, Justice O'Connor, writing for a unanimous court, used that number and a handy Webster's Third New International to sharply limit the ADA's reach in workplace accommodation actions. In Toyota Motor Manufacturing v. Williams, the Supreme Court held that in order for a plaintiff to show substantial impairment of the major life activity of performing manual tasks, as the ADA requires, she must demonstrate that her impairment limits her performance of activities that are of "central importance to daily life," such as household chores, bathing and, famously, brushing her teeth. Had Congress intended for the ADA's reach to be longer, the Court reasoned, it would not have started off with a disabled population figure amounting to a mere fifth of the citzenry. The broad upshot of the Toyota decision is that it is not enough, as the plaintiff tried with her carpal tunnel syndrome, to show impairment at a manual task unique to any one job. As a result, job-specific impairments, like for typing or other specialized manual tasks, are probably off the table when it comes to ADA qualification. In the narrower sense, but one with more real-world impact, only the most severe forms of carpal tunnel syndrome could be considered to constitute an impairment to a major life activity. Finally, Toyota reaffirmed that in procedural matters, plaintiffs will have to offer evidence in addition to a medical diagnosis demonstrating their impairment. Plaintiffs will need to submit evidence specifically showing the extent to which their impairment causes a substantial limitation to their own life experiences. As could be expected, the Toyota ruling was met with both joy and rage. The less optimistic lawyers representing employees have opined that, under the new standard, no one will meet the ADA requirements for workplace-related claims, as a plaintiff's disability will have to be so severe that it would be likely that the plaintiff would not be qualified for any job in the first place (and thus out of ADA reach). This is probably an exaggeration. The Court implied that widely recognized disabilities, such as blindness, deafness, or being confined to a wheelchair, still qualify for virtually automatic ADA protection. Instead, the Toyota decision makes it more difficult to show a disability such as carpal tunnel syndrome, where the impairments are less obvious. Employer's groups are, to say the least, pleased. The "individualized assessment" required by the court will, however, undoubtedly lead to lengthier proceedings than may have been previously envisioned. On balance nonetheless, chalk Toyota up as a win for employers, at least until Congress gets back into the act. By Doug Smith FEC Internet Proposal Draws IRS Concern Recent proposed Federal Election Commission (FEC) regulations involving Internet advocacy have led to concern from the IRS regarding their application to exempt organizations. Specifically, the IRS does not share the FEC's definition of what constitutes political campaign intervention by an exempt organization. The FEC's proposed rules attempt to clarify regulations on Internet advocacy. For example, under certain circumstances, the FEC would permit corporations and labor organizations to maintain hyperlinks on their web sites to a candidate's web site or to post a news release endorsing a candidate. The FEC decided unanimously in September to publish the Internet proposals for public comment. Mary E. Oppenheimer, the IRS assistant chief counsel for Tax Exempt/Government Entities, conceded that the FEC proposal did not directly conflict with the Internal Revenue Code. However, she noted that some of the activities might constitute political campaign interventions as defined by the IRS, depending on particular facts and circumstances. Posting hyperlinks to candidate web sites may constitute political campaign intervention for tax-exempt organizations, even if permitted by the election laws. The IRS reiterated that it would evaluate the level of campaign intervention on a case by case, "fact and circumstances" basis. Although the IRS has often commented favorably on FEC Internet rulings, the IRS's position on these proposed regulations demonstrates the difference between tax code and election law definitions of political activities by exempt organizations. Nonprofits should keep in mind that they must maneuver carefully between the election and tax laws. The IRS response to the FEC, coupled with the mention of the 501(c)(3) ban on political activities in the Intermediate Sanctions regulations (see above article), indicate that the IRS is particularly determined to prevent nonprofits from engaging in prohibited political activities. By Anne Cornelison FEC Public Hearing on Internet Proposed Rulemaking The Federal Election Commission has scheduled a public hearing on March 20, 2002, to discuss issues pertaining to the Notice of Proposed Rulemaking (NPRM) on the use of Internet for campaign-related activity. The FEC proposed rules are discussed in this month's article, "FEC Internet Proposal Draws IRS Concern." The hearing will be in the Commission's 9th floor meeting room at 10am on Wednesday, March 20. Requests to testify must be received on or before March 1, 2002. Individuals requesting to testify must also submit written comments by March 1st unless they have already filed written comments on the proposed rules. For more information on the proposed rules and the public hearing, go to www.fec.gov/press/20020215internet.html. By Anne Cornelison 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. Newsletter Home | HarmonCurran Home |