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June 2005
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Cause-Related Marketing Campaigns May Contain Pitfalls for the Unwary Notice 2005-42 Allows Grace Period for Cafeteria Plans No 501(c)(3) Status For Dormant Corporations What Associations Need to Know About Immigration Law Cause-Related Marketing Campaigns May Contain Pitfalls for the Unwary The popularity of cause-related marketing relationships, in which nonprofit organizations license their names and/or logos to use on or in connection with a commercial product or service, continues to grow with both nonprofit organizations and commercial entities. However, nonprofits should understand the laws that apply to cause-related marketing partnerships and review the risks and benefits associated with cause-related marketing relationships prior to embarking on a path that will affect both the organization's pocketbook and its public image. The purpose of cause-related marketing is to raise funds for a charitable enterprise by allowing a commercial entity to use the nonprofit's name and logo for either a flat fee or a percentage of the proceeds from the sale of a commercial product (or a combination thereof), which enhances the company's corporate image. Typically, the nonprofit enters into a licensing agreement with the commercial entity and passively receives income from the use of its name and logo, while the company conducts a marketing campaign to inform consumers about the product and the company's new "partnership" with the nonprofit organization. However, a nonprofit may run afoul of state consumer protection laws and the Federal Trade Commission Act ("FTCA") if it takes too passive an approach. Conversely, the organization may incur unrelated business income tax ("UBIT") if to takes too active an approach with respect to its cause-related marketing relationships. Compliance with State Consumer Protection Laws and the FTCA Consumer protection laws are designed to protect the public from false advertising, consumer fraud, and deceptive trade practices. When a nonprofit organization enters into a cause-related marketing agreement, it also steps into the world of commercial advertising, and it must therefore comply with all laws applicable to that enterprise. Thus, when a nonprofit organization allows its name and logo to be used in connection with a commercial product, the nonprofit must be careful that any messaging and packaging is accurate and truthful and that the content or overall impression of the product is not deceptive or misleading to the general public. To comply with both state and federal consumer protection laws, nonprofit organizations should take the following steps:
Unrelated Business Income Tax (UBIT) If a nonprofit actively engages in the marketing or sale of a commercial product or service, any proceeds received as a result of the sale of that product will be subject to UBIT. A nonprofit entity can eliminate UBIT concerns if it takes a passive role in the promotion of the product or service and the fee it receives is structured as a royalty payment for the use of the organization's name and logo. A passive role with respect to marketing, however, does not mean a passive role with respect to the relationship, and a nonprofit organization should always reserve and exercise its right to review and edit all materials to ensure that they comply with the consumer protection laws described earlier. Policy Considerations Prior to entering into any cause-related marketing relationships, each nonprofit organization should examine its charitable purpose, reflect on its corporate culture, and engage in a thorough discussion about whether the benefits of cause-related marketing outweigh the potential risks associated with such agreements. Will the nonprofit's donor base support its venture into the corporate sector? What are the public relations risks associated with the agreement, and how will the nonprofit respond to negative publicity? If the relationship sours, will the nonprofit be able to pull any merchandise that contains its logo off the shelf? How will the nonprofit select its corporate relationships? Once a nonprofit organization has made the decision to pursue cause-related marketing as a fundraising option, it should adopt a policy defining the types of relationships it will pursue and setting any limitations that the organization wants to adopt. The following links contain additional information about cause-related marketing. The first link is to a 1999 report from sixteen state Attorneys General and the Corporation Counsel of the District of Columbia, and the second link is to the Better Business Bureau Wise Giving Alliance Standards for Charity Accountability. www.oag.state.ny.us/press/reports/nonprofit/full_text.html www.give.org/standards/newcbbbstds.asp By Jenny Gillon  Notice 2005-42 Allows Grace Period for Cafeteria Plans Employees that previously had to spend all the funds in their health savings account by the end of each year now have an extra two-and-a-half months to spend that money. The same goes for other benefits that are part of so-called Section 125 cafeteria plans. The IRS recently changed the rules for these plans, adding a two-and-a-half month grace period to the end of the plan year. Employees who participate in Section 125 cafeteria plans can choose to have a certain amount deducted from their salary to pay for particular benefits with pre-tax dollars. These benefits include health savings accounts, dependent care assistance programs, and premium only accounts, which cover the employee share of health insurance costs. Employees decide before the start of the plan year how much money they will have deducted from their salary for different benefits. Previously, all of these benefits had to be used up within the plan year. Also, cafeteria plans did not allow employees to carry over unused elective contributions or benefits from one plan year to another (the "use-it-or-lose-it" rule). The IRS recently changed the rules for Section 125 cafeteria plans to allow employers to add a grace period to the plan year, extending the amount of time in which employees may use benefits or contributions. Now an employer may choose whether to add a two-and-a-half month grace period onto the end of the cafeteria plan year. For example, an employee with a plan year operating on a calendar year basis would have until March 15, 2006 to spend 2005 funds. Adding the grace period effectively gives employees fourteen-and-a-half months, rather than twelve months, to use any benefits or contributions before they are forfeited. Employers may take this option starting with the current plan year. By Lizzie Hubbard No 501(c)(3) Status For Dormant Corporations A corporation that is dormant does not qualify for 501(c)(3) status, according to the IRS. This has implications not just for new organizations, but also for older organizations that may be alive but inactive. A determination letter was issued last year to an organization that was not operating and hoped not to begin operating in the future. The organization was established to administer employee benefit plans for church employees who might find themselves without benefits in the event of a religious schism. Because the religious schism in question had not yet happened and, the organization hoped, never would happen, the corporation was dormant. Nevertheless, the organizers hoped to secure 501(c)(3) status for the inactive corporation, so that it could begin doing business immediately in the event of a schism. The IRS decided that an organization that was not currently operating could not qualify for 501(c)(3) status, because it did not meet the legal requirement of "operating" for 501(c)(3) purposes. Clearly, a newly formed inactive corporation is not eligible for 501(c)(3) status. But this principle also applies to corporations that have long been in existence and may even have a determination letter from the IRS declaring their 501(c)(3) status. If a corporation has not been operating in the manner it claimed it would in its application for exempt status, because it has not been operating at all, it may no longer have that status, and its determination letter may not apply. It is often the practice of nonprofit organizations to keep dormant affiliated organizations alive, for the purpose of one day re-activating them when a particular campaign or cause requires a corporate home. Those in charge of reviving the corporation for a new purpose may assume that an old determination letter granting the corporation 501(c)(3) status still applies, but too long a period of inactivity may have rendered that determination letter meaningless. At the very least, the revived corporation will be required to notify the IRS of any changes to its methods of operating. If it has received little or no revenue, the organization may also have lost its status as a public charity, making it subject to burdensome rules governing private foundations. Also, some policy makers have proposed adopting a rule that would revoke the exempt status of organizations that fail to make required annual tax filings for three consecutive years. If this rule were adopted, organizations that have been dormant more than three years would almost certainly lose their exempt status. Although it may be tempting to preserve a dormant organization for future use, it often may be smarter to officially shut down the old organization and start a brand new one. By Lizzie Hubbard What Associations Need to Know About Immigration Law By Grace Shie Reprinted with permission from the June 2005 issue of ASSOCIATION MANAGEMENT magazine. Copyright 2005, American Society of Association Executives, Washington, D.C., www.asaenet.org It's the rare organization these days that does not need to know about immigration law. Be it hiring a foreign national, inviting an international member to a U.S. conference, or transferring an employee from an association's overseas office to the U.S. headquarters, associations have many reasons for understanding the complexities of visa applications and processes. New regulations and guidelines from the Department of Homeland Security further complicate the navigation of immigration law. Edited by Jerald A. Jacobs In this column, Grace Shie uses a hypothetical example to explore the basics of U.S. immigration law and provide guidance on how it might apply to certain situations related to association management. In an increasingly international workplace, association executives need to understand what visa options are available and how the application process works. Suppose an international nonprofit association headquartered in London decides to expand to the United States. Its management wishes to transfer a seasoned executive from the U.K. office to manage U.S. operations. And as the U.S. office grows in size and operations, it will likely need to augment the U.S. staff with foreign nationals from other offices around the world to lend their specialized knowledge of the organization's programs and policies. Each of these foreign nationals will require sponsorship for a work visa that authorizes employment with the association's U.S. office. In this scenario, a menu of visa options comes into play. The particular visa selected will be based on the fit between the eligibility requirements of each visa type, the work performed in the United States, and the candidate's personal qualifications. This example provides an overview of the types of visas that may be required by prospective association staff and some typical steps in obtaining such visas. Reviewing Visa Options The hypothetical international association in London has several visa options that will apply to its various foreign national workers who will be transferred to the United States.
Understanding the visa process For most of the employment-based visa categories mentioned, the association and its designated candidate must each take various steps for the employee to ultimately receive the appropriate visa, allowing the individual to legally enter the Untied States. File a petition of eligibility.For most categories, the association must file with the Department of Homeland Security's U.S. Citizenship and Immigration Services a preliminary petition to demonstrate the employee's eligibility for the desired visa. Be aware that USCIS has a historical case backlog, and field offices have developed a pattern of providing inconsistent adjudications and reflexively issuing requests for evidence (RFE). In addition, absent a $1,000 premium processing fee paid to USCIS, most visa petitions will probably take at least three months to process. This processing period shrinks to 15 days with premium processing unless an RFE is issued, in which case the time frame becomes unpredictable. These factors impose significant burdens on organizations that rely on seamless global travel for their executives, managers, and professional workforce. Thus, it is critical that the association's U.S. office identify visa cases at least six months in advance of the proposed start date for transferred employees or of the expiration date for candidates already in the United States. Apply for the required visa. Once the association obtains a USCIS petition approval, the candidate must apply at a U.S. consulate abroad for the required visa to enter the country. The candidate will likely be required by the State Department to attend an in-person visa interview, and biometric security requirements are currently being rolled out to worldwide consular posts. Because of growing queues for security checks, which are based on nationality, visa, and travel history, significant lead time for visa application and processing is essential. Seek admission to the United States.When entering the country, the foreign worker will be subject to the security checks that have become a normal part of the admission process at 119 U.S. air and sea ports and are currently being rolled out to land ports and borders. With a high volume of travelers and intense pressure on customs and border protection officers to avoid immigration mistakes post-September 11, more temporary foreign workers can expect to be singled out for secondary inspection and asked additional questions about the purpose of their trip. Visa holders are advised to travel with key back-up documents on all trips. Such documents include recent pay stubs; photo identification in addition to the passport; the original approval of the petition by USCIS; a full copy of the petition and exhibits (including relevant academic and employment records); and the birth and marriage certificates for the visa holder's accompanying spouse and children. Clearly, immigration law grows ever more complex. Knowledge, preparation, and lead time are key factors in securing appropriate work and travel documentation in a timely manner. Grace Shie, formerly with Pillsbury Winthrop Shaw Pittman, LLP, is an attorney with Baker and McKenzie, Washington, D.C. Jerald A. Jacobs is a partner in the Nonprofit Organizations Practice at Pillsbury Winthrop Shaw Pittman, LLP, Washington, DC. Jacobs edits this column and is general counsel to ASAE. E-mail: jerry.Jacobs@pillsburylaw.com. 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 | |