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Archives
June 2002
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Exchanging Donor Lists with a Federal Political Committee: You May Get More Than You Bargained For A nonprofit's donor list is usually considered one of its most valuable assets–both by the organization itself and by other groups with similar ideological or political goals. It is not surprising that nonprofits often seek to capitalize on the value of their lists by renting them out or exchanging them with those of other organizations. But the recent Federal Election Commission audit of the "Bauer for President 2000" campaign committee demonstrates that nonprofits must be careful when engaging in list transactions with political campaigns. The Audit Findings The Bauer audit focused on a list exchange between Gary Bauer's 2000 presidential primary campaign committee and a PAC that Bauer had established several years earlier. The campaign committee and the PAC–both federally registered political committees–entered into a contract in which the PAC agreed to make its list of approximately 137,000 names available to the committee for unlimited use during the campaign. In exchange, the committee agreed to provide the PAC with a complete copy of its donor and non-donor files once the campaign was over. The campaign committee argued that the terms of the exchange were commercially reasonable at the time the agreement was made, but the FEC looked at the actual uses of the lists. During the year Bauer campaigned for president, the committee used the PAC's mailing list to send out nearly 1,000,000 mail pieces. In the year after the campaign ended, however, the PAC had sent fewer than 200,000 mail pieces to the names provided by the committee. The FEC determined that because the campaign committee had made much greater use of the PAC's names, the list exchange was not of equal value and resulted in an excessive campaign contribution from the PAC to the committee. Even though the audit describes a list exchange between two political committees, the same analysis would apply to an exchange between a political committee and a nonprofit. The difference is that a nonprofit corporation is absolutely prohibited from making a federal campaign contribution. Avoiding Prohibited Campaign Contributions In general, two exchanged donor lists are considered to be equally valued if both lists would yield identical prices according to accepted industry practice. For example, assume that Nonprofit A has a donor list of 10,000 names, which it makes available for rental through a list broker. The broker is able to rent out the A list for $150 per 1,000 names for each use of the list. Political Committee B has a donor list of 15,000 names that it rents for $100 per 1,000 names through a list broker. Thus, each one-time use of all of the names on each list is worth $1,500. If the two entities were to exchange their lists to be used only one time by each, the exchange would be of equal value according to accepted industry practice. Nonprofit A would not be making a prohibited contribution to Political Committee B. In the above example, it is important to observe that Political Committee B must not use the names on A's list more than one time. If Nonprofit A allows B to use its list multiple times, it will be making a prohibited contribution to the committee. To prevent such a scenario, A should have an agreement with B specifying the one-time use restriction. Nonprofit A should also monitor Political Committee B's use of the list to ensure the committee is in compliance with the agreement. Avoiding Prohibited Campaign Activity For 501(c)(3) public charities, ensuring the exchange of equally valued lists is only the first step, albeit a vital one. 501(c)(3)s must take additional precautions to ensure they are not engaging in prohibited political campaign activity. Because of the risk to their tax-exempt status, charities usually refrain from entering into list exchanges directly with political committees. 501(c)(3)s can typically avoid trouble by making their donor lists available for rent or exchange at fair market value via a list broker, so long as the lists are broadly marketed without regard to political affiliation. If a (c)(3) intends to engage in a list transaction directly with a political committee or has any doubts about a proposed exchange, it should seek legal advice early on. The FEC audit described above should serve as a warning that list transactions with candidates and PACs require special attention. Providing a donor list to a political committee or candidate for less than the usual and normal charge may result in an illegal contribution. In addition, it could lead to a lengthy FEC investigation and a potentially large fine. A 501(c)(3) organization could even be required to pay federal excise taxes, and in the worst case, lose its tax exemption. By Paul J. Murphy   IRS Releases Revenue Ruling on Private Foundation Asset Transfers Private foundations face more restrictions on their activities and operations and are potentially subject to more taxes than their public charity counterparts. These disadvantages come into play in two of the more complex areas of the private foundation laws: the transfer of assets from one foundation to another and the termination of a foundation's status as a private foundation. Fortunately, the IRS has recently released a new Revenue Ruling that provides examples and guidance to foundations on how to distribute their assets and/or terminate without incurring expensive penalty taxes. Organizations that terminate their foundation status without having disposed of all their assets must pay the "termination tax," which is equal to the lesser of 1) the aggregate tax benefit resulting from the section 501(c)(3) status of the foundation, or 2) the value of the net assets of the foundation. Revenue Ruling 2002-28 sets out generally applicable rules that foundations may follow to avoid the termination tax and comply with other IRS requirements. The central holding of the Ruling recognizes that a foundation may avoid termination taxes by making a qualifying transfer of all of its assets prior to notifying the IRS of its intention to terminate. The Ruling also provides guidance on many related matters that affect both grantor and grantee foundations. These include what reporting forms a terminating or transferring foundation is required to file; how an asset transfer would affect the recipient foundation's distribution requirements; and the recipient foundation's responsibility to exercise expenditure responsibility over all outstanding grants made by the grantor foundation. The IRS's new revenue ruling is a boon to private foundations, which frequently go through transitions that require the transfer of assets or termination. In the past, many foundations felt that they had to request costly and time consuming private letter rulings from the IRS to assure that no penalties would be imposed on these transactions. Now all private foundations may rely on Revenue Ruling 2002-28 for guidance. Any foundation that anticipates such a transaction should familiarize itself with this ruling, available in the IRS's Internal Revenue Bulletin 2002-20. By Mark Sawchuk D.C. Master Business License Update Nonprofits with offices located in the District of Columbia should be aware that they are now required to obtain a business license from the D.C. Department of Consumer and Regulatory Affairs (DCRA) if they receive over $2,000 in contributions or from other sources annually. This new Master Business License (MBL) also, for the first time, allows a D.C. nonprofit corporation to register and conduct business under a trade name. This article is designed to bring you up to date on what the MBL is, as well as provide guidance on how your nonprofit organization can apply for the MBL. An Overview of the Master Business License Program The Master Business License law simplifies D.C.'s old business licensing system by consolidating all business license registrations and renewals onto one form. The MBL is designed to be useful to for-profit businesses that hold multiple business licenses (e.g., a grocery store that has a grocery store license, liquor license, cigarette sales license, etc.), since it eliminates the need for multiple registrations. Over time, the D.C. government will convert all current business licenses to the MBL program. Unfortunately, the MBL is a burden for nonprofit organizations, many of whom have never obtained a business license to operate in D.C. Every nonprofit organization that has an office or conducts business in D.C. will eventually need to obtain a Class B MBL. Nonprofit Currently Holding a Charitable Solicitation Registration Officials at the DCRA have indicated that the government's primary concern is licensing organizations that do not yet have any type of D.C. business license. This means that if a nonprofit already has some type of business license, the nonprofit does not need to apply for a MBL at this time. Most charities that solicit funds from the general public in the District should already hold a business license for charitable solicitation, so they do not need to obtain the MBL until that license is up for renewal. At that time, the government should provide them with information regarding the MBL. Nonprofits should not confuse their Articles of Incorporation (for a D.C. corporation) or Certificate of Authority to Conduct Business (for an out-of-state corporation) with a business license. These are organizational documents, not business licenses. Nonprofit Not Holding Charitable Solicitation or Other License A nonprofit that does not currently hold a business license must begin the application process for the Class B MBL under the category "Other Business Services." This includes charities that do not currently have the Charitable Solicitation Registration but should have applied for it, and those that plan on soliciting funds in the future. They cannot get the Charitable Solicitation Registration until they obtain the MBL, at which time they will have an endorsement for charitable solicitation annexed to their Class B licenses. In order to obtain the MBL under "Other Business Services," nonprofits must provide the following information:
Trade Name Registration Until adoption of the MBL program, nonprofit organizations were not able to register for and transact business under an assumed name, or trade name. One of the few positive aspects of the MBL program is that it finally allows nonprofits to register trade names with the DCRA. This can be done on line or in person at the DCRA. In order to register a trade name, organizations must have a business license. Organizations not currently holding a business license can apply for the MBL and the trade name at the same time. As above, a charity holding a Charitable Solicitation Registration already holds a business license and may register a trade name immediately. When the organization renews its Charitable Solicitation under MBL, the trade name will already be added to the renewal. The fee for registering a trade name is $50, and there is a $3.50 processing fee added for on line applications. More information about how to register trade names is available on line at the D.C. government web site. Nonprofits should be aware that because the MBL program is so new, answers to some procedural questions remain unclear. The government's MBL tutorial is extremely helpful. If you have specific questions about the program, phone the D.C. government at (202) 442-4434. By Mark Sawchuk and Anne Cornelison Nonprofits Continue to Discover Impact of ADA Public Accomodations Provisions Ten years since implementation of the Americans with Disabilities Act (ADA) began, nonprofit organizations are continuing to discover what its public accommodations provisions mean for them. Even small nonprofits must ensure that they comply with this portion of the ADA and any related state or local laws. Important Aspects of the Public Accommodations Provisions The ADA's public accommodations provisions mandate that no individual will be discriminated against on the basis of disability in the "full and equal enjoyment" of, among other things, the services, facilities and other accommodations of any "public accommodation." This applies to anyone who owns, leases or operates such a public accommodation. The ADA defines a "public accommodation" very broadly. Hotels, homeless shelters, food banks, retreat centers, and virtually any place of public gathering fall under the ADA's definition of a public accommodation, and thus they must meet the needs of disabled persons. Exceptions to the definition apply only to certain religious organizations and private membership clubs (and even this exception is negated where club facilities are made available to patrons of a public accommodation). The most visible instance of ADA implementation is the remodeling or revamping of public accommodations to facilitate ease of movement for persons with mobility impairments. For nonprofits that are housed in existing structures or making such facilities available for public use, ADA compliance may require the removal of architectural barriers when such removal is "readily achievable." Readily achievable means that barriers can be removed without much difficulty or expense. For example, renovators may be able to easily provide a ramp to enter a building; to assist in access to other portions of a building; or to create accessible parking spaces without much difficulty or expense. Where a nonprofit is housed in a facility that has been or is being altered, the extent and type of renovations may trigger additional ADA obligations. All alterations that could affect how the facility is used must be made in an accessible manner to the maximum extent feasible. For example, imagine that a house is being renovated to serve as a retreat center. If a door is being relocated as part of the renovations, the new doorway must be wide enough to meet any new construction standards for accessibility. In general, federal law does not require the installation of an elevator in altered buildings of fewer than three stories unless the facility houses a shopping center, mall, or professional office of a health care provider. ADA implementation may also mean that nonprofits will be responsible for making certain "auxiliary aids and services" available to persons with disabilities such as blindness and deafness. Appropriate auxiliary aids and services include qualified interpreters, note-takers, and written materials for individuals with hearing impairments; and qualified readers, taped texts, and Brailled or large print materials for individuals with vision impairments. Nonprofits must provide such auxiliary aids and services unless the provision of these items would result in undue burden, or in fundamental alteration in the nature of goods and services provided. An organization that runs a crisis hotline, for example, would probably have to provide a TDD (telecommunications device for the deaf) for incoming calls. A nonprofit may also need to make such aids and services available to individuals with disabilities at its annual conference. Who Is Responsible For Compliance? Both landlords and tenants must comply with the ADA's public accommodations provisions. Landlords and tenants may allocate responsibility for complying with the ADA when negotiating leases for office space. The same is true for hotels and clients negotiating contracts for conferences or other events. Before signing leases or contracts, nonprofits will want to make sure that such documents include a provision regarding ADA compliance. Ideally, the space provider will be solely responsible for ADA compliance. Often, however, a landlord may ask a nonprofit to share in compliance responsibilities because the nonprofit is making significant renovations to the office space before moving in. Similarly, hotels frequently do not want to pay for special auxiliary services requested by the nonprofit. Such clauses should be reviewed carefully to determine whether and how the organization can meet these obligations, as well as whether it is more appropriate for the landlord or hotel to take on full responsibility for ADA compliance. Nonprofits will serve themselves well if they examine any office lease, hotel contract or contractor agreement with a fresh eye to their obligations under the ADA and incorporate any provisions to ensure compliance with this landmark federal law. By Ann Peters and Mark Sawchuk How (Not) To Hire a Real Estate Broker If you are looking for new office space, or if it is time to renew your lease, be alert to your dealings with real estate brokers. Even if you don't sign a written contract, you can enter into a binding commitment with a real estate broker, possibly without even intending to do so. Real estate brokers often aggressively solicit business. Some brokers will provide a variety of "free" services, prior to obtaining a written commitment from you, including providing space planning consultations to help you decide your office needs and searching for and showing you available office spaces. When do these free services obligate you to that broker? Under the common law, a real estate agent is entitled to a commission on the sale or lease of property if two conditions are met: (1) the agent is the so-called "procuring cause" of a sale or lease of real property and (2) the agent was authorized by one of the parties to the lease or sale to represent the party. In most cases, a broker will be entitled to receive a commission once you allow the broker to contact a landlord about a space that you ultimately lease. You cannot avoid the broker's commission by excluding the broker from negotiations regarding a property once the negotiations have started. Since the landlord generally pays the broker commission, the fact that a broker is entitled to a commission will not result in any direct costs to you, the tenant. However, since the landlord will pay only one commission, if you try to switch brokers at some point during negotiation, the broker that does not get paid by the landlord may be entitled to seek payment of its commission from you. Most tenant's brokers want to bind their clients to exclusive broker agreements. Under an exclusive broker agreement, the broker will receive a commission no matter what space the client ultimately leases. If you have already authorized one broker to negotiate on your behalf regarding a particular office space, you may have a difficult time engaging another broker to assist you in finding other spaces because the second broker risks losing a commission if you choose to take the space the first broker is negotiating. To avoid inadvertently retaining a real estate broker and other misunderstandings, you should have a clear written agreement that spells out the scope of the broker's authority before you allow the broker to do anything on your behalf. By doing so, you will be more certain of the terms of your relationship with the broker. You can also take better advantage of the laws of many states that require broker agreements to contain certain terms. For example, in the District of Columbia, brokers must disclose the type of proposed broker relationship (i.e. exclusive or non-exclusive) and the broker's compensation prior to entering into a broker agreement. By Paul J. Tanis 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 |