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Archives
July - August 2001
Watchdog Organizations' Merger allows Charities to Comment on Charitable Giving Standards
For well over fifty years, two "watchdog" organizations-the National Charities Information Bureau and the Philanthropic Advisory Service of the Council of Better Business Bureaus's Foundation (CBBB)-have established guidelines for the operation and governance of charities. Many private foundations, as well as individual donors, rely on NCIB and CBBB evaluations as an important factor in their grant-making decisions. The recent merger of the two organizations into the Better Business Bureaus's Wise Giving Alliance has given charities a rare opportunity to provide input on the revision of the CBBB charitable giving standards, last revised in 1981.
The new Wise Giving Alliance has announced that NCIB standards will no longer be applied and that it is in the process of revising the CBBB standards. As part of the process, the Alliance has posted a "Discussion Document" on its web site inviting charities and others to submit suggestions that the Alliance will consider in drafting the new standards. Submitting organizations may particularly want to consider commenting on some of the CBBB's more difficult and awkward standards. For example, CBBB Standard B4 requires any organization whose fundraising costs exceed even a fairly small portion (35%) of related contributions to affirmatively demonstrate that their fundraising costs are reasonable; and many charities find that their direct-mail fundraising rarely meets the 35% standard. Furthermore, Standard C5 requires that solicitations in conjunction with the sale of goods, services or admissions identify the portion of the sales or admission price which goes to benefit the charitable organization. The purpose of this standard is fairly straightforward, but it can be deceptively difficult for a charity to make a meaningful and accurate disclosure when its license agreement with a commercial vendor has complex fee provisions.
The Discussion Document also raises a few issues that the current CBBB standards do not address. The document invites suggestions as to whether and in what manner the new standards should address issues related to donor privacy protection, charities' use of the Internet, and charities' effectiveness in delivering their programs. Interestingly, the Discussion Document also indicates that the Alliance is considering establishing different levels of standards applicable to large and small organizations.
This is a rare chance for members of the nonprofit community to influence the way in which they are assessed by the new "watchdog" organization. To obtain a copy of the Discussion Document, go to the BBB Wise Giving Alliance web page at www.give.org/srp/index.asp. You may submit your comments through the on-line hyperlink or mail them to: Bennet M. Weiner, Vice President and Director, Philanthropic Advisory Service, Council of Better Business Bureaus, 4200 Wilson Boulevard, Suite 800, Arlington, VA 22203. You may also fax them to (703) 525-8277 or e-mail them to bweiner@cbbb.bbb.org.
By Paul J. Tanis
Recent Court Decisions Deepen the Campaign Finance Debate
Two recent court decisions-the Supreme Court's ruling in FEC v. Colorado Republican Federal Campaign Committee ("Colorado II") and a U.S. District Court decision in Alaska-have added to the debate on campaign finance reform. While the first case deals with federal election law and the second with state election law, both rulings examine the complicated, triangular donor-party-candidate relationship in light of the First Amendment's guarantees of freedom of speech and political association.
Colorado II: Hard Money Expenditure Limits Upheld
In June, the Supreme Court upheld the constitutionality of the law limiting expenditures by political parties that are coordinated with congressional campaigns. Under the Federal Election Campaign Act (FECA), all expenditures by political parties made in connection with the general election of a congressional candidate ("hard money" expenditures) are capped by a statutory limit, commonly known as the party expenditure limit. This limit is much higher than the contribution limit imposed on individuals and PACs.
In a line of cases stretching back to Buckley v. Valeo, the Supreme Court has consistently ruled that limits on contributions and expenditures-free speech activities-are justified only by the need to prevent corruption in the political system. In 1996 the Colorado Republican Federal Campaign Committee won a Supreme Court victory ("Colorado I") when the court ruled that limiting a party's independent expenditures violates the First Amendment because the potential for corruption arising from such expenditures is slight. This result is consistent with the rules that PACs may spend unlimited amounts on independent expenditures. The Colorado I decision, however, did not address the Committee's broader claim that the FECA's party expenditure limit as a whole is unconstitutional, including its application to coordinated expenditures. [See NN 1/01 and 6/01 for new FEC standard of coordination.]
When the case reached the Supreme Court for a second time, the Committee argued that the party expenditure limit subjected it to a unique First Amendment burden because of the distinct role parties play in the political system. As a result, this limit should be subject to even greater constitutional scrutiny than usually applied to limits on coordinated expenditures by other entities. Moreover, the Committee claimed that because most contributions it receives are small, any corrupting influence they might have on candidates via coordinated expenditures would be negligible if the expenditure limit were to be struck down.
Ruling against the Committee, the Court held that although parties and their candidates are "joined at the hip," parties are not entitled to a stricter standard of constitutional review than that afforded PACs and individuals, for which the Court has previously upheld coordinated spending limits. The Court also dismissed the Committee's argument that the potential for corruption between a party's donors and its candidates is small. The majority opinion notes that the party expenditure limit helps reduce the impact of "corruption by conduit" scenarios whereby individuals, who are allowed to donate only $1,000 to a general-election candidate, contribute higher amounts (up to $20,000 per year) to a party committee with the knowledge that the party will spend more on behalf of the donor's preferred candidate than it otherwise would have. Without the expenditure limit, the party could end up a simple intermediary between large donors seeking to circumvent the individual contribution limits and candidates eager to accept increased coordinated spending. The result would be that such donors could exercise greater influence over candidates once elected. Because the FECA was enacted for the legitimate purpose of preventing such undue influence and the party expenditure limit is closely drawn to achieve this purpose, it was found to be constitutional.
Speculation abounds as to whether Colorado II provides any clues into how the Supreme Court might rule on challenges to the McCain-Feingold ban on "soft money" should it ever be enacted [see NN 4/01]. The importance of the party expenditure limit as a curb on special interests has diminished over the past decade. Instead, parties have increasingly relied on large contributions of "soft money"-money not currently regulated under the FECA-which they have largely used to run "issue ads" in congressional districts where they seek to assist candidates. Because McCain-Feingold bans soft money contributions to the national political parties, the party expenditure limit's significance would greatly increase were the bill passed into law and the ban upheld by the Supreme Court. While the reasoning of Colorado II provides some support for the constitutionality of the soft money ban, a recent lower court decision concerning Alaska election law casts doubt on its constitutionality.
State of Alaska: Soft Money Contribution Limits Struck Down
A recent U.S. District Court ruling overturned an Alaska statute that prohibits donations to political parties in excess of $5,000 (Jacobus v. State of Alaska). The court ruled that individual, corporate, and union donations to political parties could only be limited to the extent that they are used for the purposes of nominating or electing candidates.
The judge found that contributions to a party for "soft money" activities, such as get-out-the vote efforts, voter registration, and issue advocacy, could not be constitutionally limited. The ruling allows donors to contribute unlimited amounts of money to state political parties, as long as no more than $5,000 goes towards activities designed to nominate or elect an individual candidate for Alaska public office. In essence, this legalizes large soft money contributions to the state's political parties.
While the judge upheld the state's statutory restrictions on direct donations to candidates and campaigns as constitutional, he ruled that any broader limit on contributions to political parties would violate the First Amendment. He noted that "corporations still have First Amendment rights to engage in activities in which the threat of corruption is absent," including soft money, "party-building" activities.
Both of these cases highlight the difficulties of reconciling the First Amendment's guarantees of freedom of speech and political association with attempts to keep the corrupting effect of wealthy special interests out of the electoral system. Should the McCain-Feingold bill be enacted, the Supreme Court will be asked to evaluate whether the First Amendment allows a ban on soft money donations to political parties.
By Mark Sawchuk and Paul J. Murphy
Vermont Supreme Court Hands Victory to Lobbyists (and Nonprofits)
The First Amendment protects freedom of speech, including "the right of the people . . . to petition the Government for a redress of grievances." In a recent case, the Vermont Supreme Court struck down a 1998 state statute imposing a 5% tax on lobbying expenditures in excess of $2,500 on the grounds that it unconstitutionally burdened protected First Amendment rights (Vermont Society of Association Executives v. Milne). The ruling is significant because it may dissuade other states from enacting similar legislative burdens on lobbying.
Although several states impose fees on lobbyists' expenditures to support regulatory systems for lobbying registration and disclosure, the Vermont tax was unique in that its proceeds went to an unrelated purpose-a fund to provide public grants to candidates running for state office. The state argued that the tax was merely a generally applicable sales tax on the expenditures of a commercial service. The court disagreed, finding that a tax restricted exclusively to expenditures connected with communications and activities aimed at influencing legislation and administrative action singled out and burdened "core political speech." The court remarked that "it would be difficult to conceive of a more distinct, independent tax singling out a discrete group of First Amendment speakers" and noted that the very trigger for the tax was reporting lobbying activities that fall under the definition of "petitioning" the government.
While the court stressed that it is perfectly appropriate for lobbying to be regulated and for lobbyists to pay regulatory fees to defray the costs of regulating First Amendment activity, the lobbying tax could not be considered such a fee since it was used to fund unrelated activities. Moreover, even if it had been used for a related purpose, the lobbying tax was found to be so burdensome on a distinct form of First Amendment activity that it probably would still have not passed constitutional muster.
The case was originally brought before a lower court by a group of nonprofit organizations employing lobbyists who felt that it was important to challenge the relatively new Vermont tax before other states implemented similar laws. Nonprofits that engage in lobbying and similar advocacy activities should cross their fingers that the ruling will encourage lawmakers in other states to look for other means to raise additional revenue.
By Mark Sawchuk
IRS Asks For Comments (Again) on Form 990
The IRS is once again considering tinkering with the various versions of Form 990, the exempt organization tax return [see NN 3/01, p. 3]. Announcement 2001-33 requests comments on a 1999 modification to the form that requests the disclosure of information about certain compensation arrangements involving third-party contractors.
Part IV of Form 990-EZ, Part V of Form 990, and Part VIII of Form 990-PF require reporting organizations to list the names and contact addresses of officers, directors, trustees, key employees, and foundation managers, as well as the compensation packages approved for these individuals. In 1999 the IRS changed the instructions so that nonprofits that paid other persons, such as management services companies, for these services were required to report the compensation as though they were paying the individuals directly instead of through the third-party contractor. It reasoned that requiring nonprofits to disclose this information would protect against situations in which an officer or director could incorporate to avoid the reporting requirement.
In addition, the 1999 instructions appear to address the question of how to report salary payments for officers and key employees reimbursed by sister organizations. If Organization X pays its employees to perform services for its sister Organization Y and is reimbursed for these costs under a reimbursement agreement, Organization Y should still list the reimbursement amount on its 990 as compensation paid to its own employees.
After the new rules went into effect, numerous groups expressed concern that the new reporting requirement was too burdensome on small nonprofit organizations because it required them to obtain detailed information from the management services group. Other nonprofits worried that listing individuals who were not their own employees constituted an invasion of privacy. The IRS has responded by asking for further public comments on the instructions to the three versions of Form 990. If possible, the comments should include suggestions on how to simplify the reporting requirements while preventing abusive arrangements.
You may send your comments on the 990 instructions to the IRS at 1111 Constitution Avenue, NW, Washington, D.C. 20224, Attn: David W. Jones, T:EO:RA:T, Room 313; or, you may send them via e-mail to *TE/GE-EO1@irs.gov. Comments will be accepted until July 23.
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By Mark Sawchuk
The Pitfalls of Tip Jars: How Extensive Involvement in Donations Can Lead to Trouble
A recent U.S. district court decision suggests that non-profits considering raising funds with gambling tip jars not exert too much control. Otherwise, they risk the funds being designated unrelated business income and subject to tax.
Unrelated business income tax (UBIT) is levied on exempt organizations that receive income from activities not related to their exempt purpose. In the recent U.S. District Court case, the Vigilant Hose Co. of Emmitsburg, Maryland, a 501(c)(4) designated volunteer fire department, and three local taverns jointly applied for permits to operate gambling devices under the Frederick County Gaming Ordinance. The tip jars are operated solely by each tavern with at least 70% of the proceeds going to Vigilant after winnings have been distributed. The IRS maintained that the application for permits and the purchase of the jars were joint business ventures between the taverns and Vigilant, and therefore assessed Vigilant for nearly $30,000 in taxes over a two-year period.
The court disagreed, reasoning that because of Vigilant's minimal involvement in the income producing activity, the relationship with the taverns did not amount to a joint venture. Vigilant's participation with the tip jars was not significant enough to be considered a "trade or business," even if the devices produced a substantial income for Vigilant. The Court cited a previous decision that defines unrelated business as "'extensive activity over a substantial period of time during which the taxpayer holds himself out as a provider of goods and services.'" In this case, the taverns maintained control over the operation of the jars and the bookkeeping related to their income. Vigilant lacked a contractual relationship with the taverns, and its involvement with the tip jars' operation was not extensive. It was simply the beneficiary of the taverns' actions.
The implications of the Vigilant case center around exempt organization fundraising efforts. While Vigilant assisted the taverns in securing the necessary permits to establish the tip jar activity, it lacked the operational control that would cause the activity to be deemed a joint venture between the parties involved. Exempt organizations should consult with their state and local laws when participating in similar activities that the IRS could consider unrelated business income.
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.
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