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Archives
March 2001
A Fistful of Federal Dollars: Nonprofits Can't Use Federal Money to Lobby
Nonprofits which lobby as part of their exempt purpose activities must keep in mind that all grant funds are not created equal. While organizations can often-subject to certain IRS restrictions-use foundation grants to pay for their lobbying activities, federal laws, Office of Management and Budget (OMB) circulars, and government regulations prohibit organizations from using federal funds to engage in most lobbying activities.
OMB Circular A-122, known as "Cost Principles for Non-Profit Organizations," contains a restrictive set of lobbying prohibitions. It provides that an organization cannot use federal funds in "any attempt to influence" federal or state legislation by communications with any member or employee of Congress or a state legislature, or with any government official or employee in connection with a decision to sign or veto legislation. This prohibition includes attempts to influence the introduction of legislation, modifications to pending legislation or enactment of pending legislation. Organizations are prohibited from using federal funds to influence or encourage state and local officials to engage in federal and state lobbying activities. The "communications" referred to in Circular A-122 could include, but are not limited to, telephone conversations, meetings and letters to the persons listed. Although the Circular does not specifically refer to a situation where an organization might discuss with a legislator, for example, an issue that it hopes will be the basis for legislation, such a situation would be best avoided if federal funds would be used to facilitate the discussion.
A-122 further prohibits the use of federal funds to prepare, distribute or use "publicity or propaganda" or to urge the public to participate in demonstrations, marches, rallies, fundraising drives, lobbying campaigns, or letter writing or telephone campaigns in an attempt to influence legislation. The terms "publicity or propaganda" are not specifically defined in Circular A-122 but could encompass any documents whose purpose is to attempt to influence the introduction of legislation, modifications to pending legislation or decisions to sign or veto legislation. Organizations also cannot use federal funds in connection with particular "legislative liaison activities" including attendance at legislative sessions or committee hearings, information gathering about legislation and analysis of legislation, specifically when these activities are carried on in "preparation for an effort to engage in unallowable lobbying," such as the lobbying activities described above.
The Byrd Amendment and accompanying government agency regulations prohibit the use of federal funds to obtain federal funds in certain instances. An organization cannot use federal funds to pay any person to influence or attempt to influence a federal agency or Congress in connection with the making of federal contracts, grants, loans or cooperative agreements as well as the extension, renewal or modifications of these documents. The prohibition applies to efforts to influence agency or congressional employees or officers, members of Congress or congressional staff. Organizations must provide a written declaration to the government agency from which they received the funds which names any registered lobbyists who have made lobbying contacts on its behalf in connection with such federal funding requests and certify that they have not and will not use prohibited payments. They must also file disclosure reports with the agency detailing any lobbying activities carried out using non-federal funds and assuring the agency that public funds were not involved.
There are some narrow exceptions to these lobbying prohibitions. Federal funds may be used to lobby on city or county legislation. They may also be used to give testimony to legislative bodies under certain conditions. An organization may use federal funds to cover the cost of this testimony if the information provided is in the form of a technical and factual presentation on topics directly related to the performance of a grant, contract or other agreement in response to a documented request and from a legislator, legislative body or staff. Organizations may also liaise with government agency representatives to carry out agreements between the two parties, and also to provide professional or technical services or other information.
501(c)(3) nonprofits should already be careful regarding their lobbying activities because of restrictions placed on them by the Internal Revenue Code and accompanying regulations. But all nonprofits that receive federal funds should take extra care that any communications they make using these funds are not state or federal lobbying communications.
By Mark Sawchuk and Ann Peters
IRS Adopts Charitable Trust Regulations
The IRS recently adopted two sets of final regulations limiting the permissible terms of charitable lead trusts and charitable remainder trusts, two common income and estate planning techniques which provide income for both charities and donors. The new regulations, already in effect, were issued in response to certain abusive transactions that prevent charities from collecting the amount specified in the trust agreement or which benefit primarily the donor rather than the charity.
Charitable lead trusts provide annual payments ("lead" payments) to a charity for either a specified term of years or for the remaining life expectancy of an identified individual (known as the "measuring life"). At the end of the term, the rest of the trust is transferred either to the grantor or to the grantor's beneficiaries. The charitable lead trust allows the donor to receive gift and estate tax benefits and to take a charitable income tax deduction based on the actuarily anticipated life expectancy of the measuring life.
The IRS regulations are designed to prevent the abusive arrangement of appointing a relatively young but terminally ill individual as the measuring life. Under this scenario, the charitable deduction could have been calculated based on actuarial life expectancy, while the charity would receive the income for a much shorter period of time. The final regulations limit who can serve as the measuring life to the donor, the donor's spouse or a lineal ancestor of all the individual beneficiaries. The trust may allow alternative remainder beneficiaries who are not lineal descendants of the measuring life if the trust passes an IRS "probability" test, i.e., if there is less than a 15% probability that individuals who are not lineal descendants of the individual who is the measuring life will receive any part of the trust.
Charitable remainder trusts are essentially the opposite of charitable lead trusts. They provide annual income to the trust's individual beneficiaries for a specified period of time or until the death of all beneficiaries. Upon termination of the trust term, the remaining trusts assets (hence, "remainder" trusts) are transferred to the trustee or donor's specified charity. As with charitable lead trusts, donors are permitted to take an income tax deduction based on the anticipated amount of trust funds that will pass to the charity, and receive other tax benefits as well. If there is more than a 5% chance that the trust's assets will be depleted before it passes to the charity, the donor is not entitled to an income tax deduction.
The new IRS regulations governing remainder trusts prevent arrangements that allowed beneficiaries to receive non-taxable income. Donors frequently contribute highly appreciated assets to charitable remainder trusts which are not taxable on the capital gains received when the assets are sold. Until the adoption of the new regulations, a donor could contribute highly appreciated assets to a short-term remainder trust with a high payout rate; and instead of selling trust assets to pay the trust's beneficiaries, the trust would take out a loan against the assets and use it to distribute money to the trusts' beneficiaries. The recipient would characterize the loan as a tax-free return of corpus and avoid income taxes, while the high payout rate would minimize the trust assets that would pass to the charity. The IRS regulations effectively eliminate this kind of arrangement.
Thus the new regulations attempt to ensure that the tax advantages that accrue to the donor are reasonably related to the amount eventually received by the charitable organization. Nonprofit organizations who regularly receive donations through charitable trusts of the "remainder" or "lead" variety may want to familiarize themselves with these regulations, which can be found in the Federal Register from Friday January 5th, Volume 66, Number 4, pp. 1034-1038 and 1040-1044. You can find a link to a searchable database of the Federal Register on the Government Printing Office's web site at www.access.gpo.gov/su_docs/index.html.
By Mark Sawchuk
Form 990 Fundraising Expense Disclosures
Organizations in the process of filing their 2000 990s should be aware that the IRS has signaled that it will no longer ignore the practice of claiming zero fundraising expenses.
Form 990 is the mainstay of the public disclosure system for the nonprofit sector's public oversight. Everyone from potential donors to political enemies uses a nonprofit's publicly available 990 to get more information about the organization. Accordingly, there is a great deal of temptation to muddle the picture with misleading data. At the least poor record-keeping, untrained accountants, or simple ignorance of the disclosure requirements can lead to a pattern of noncompliance. No matter the cause, making material misstatements on a 990 return can result in substantial penalties against the organization and its managers. Just recently, the Internal Revenue Service penalized a 501(c)(3) which had attempted to improve its public support figure by excluding several large donations on its 990s.
Such obvious distortions are relatively rare. Non-reporting of fundraising expenses, however, appears to be a major problem. A Chronicle of Philanthropy study estimated that more than a quarter of all organizations with gross receipts of more than $500,000 in 1996 reported zero fundraising costs. A recent study further indicated that at least 15 percent of Pennsylvania charities which had hired fundraising consultants reported zero fundraising costs for the years in question. In those cases fundraising costs were apparently rolled into the program expenses line item, particularly for grant-making charities, often with the explicit approval of their accountants. In addition good-faith mistakes, as these cases seem to indicate, charities have an incentive to minimize these figures because of the fundraising-expenses-as-a-percentage-of-revenue requirements imposed by the National Charities Information Bureau, the Combined Federal Campaign and others.
The former rule of thumb was that the Service paid little attention to the fundraising expenses line item in Form 990. A charity would only get caught if it was already the subject of an investigation, and even then the standard fines for failure to file a complete return ($50/day up to $5000/year) were rarely imposed. After all, the Service only asks the question to help potential donors and state charity regulators monitor the activities of organizations for consumer protection purposes.
That viewpoint is changing as the IRS gets more complaints from state officials. Several months ago, David Jones, chief of the Exempt Organizations Review Branch indicated that the Service would begin to look much more closely at fundraising disclosures. He noted that the common practice of bundling fundraising expenses into program costs was "dubious." It is not yet clear how extensively the Service plans to pursue this matter. The IRS has promised an announcement sometime later this year addressing the issue.
The attention being lavished on fundraising expense reporting is reminiscent of the cause celebre of a few years ago as charities neglected to report the full measure of their officers' salaries, consulting fees, and other high salaries. This has become less of an issue in the community imagination with the advent of intermediate sanctions regulations [see NN 2/01, page 1] but remains an area in which to tread carefully.
While working on the revised 990 for 2000, faithfully reporting fundraising and other expenses, no matter how it makes them cringe, is the best advice for 501(c)(3)s and (c)(4)s.
By Doug Smith
IRS Modifies Form 990
Just in time for the 2000 reporting period, the IRS has modified Form 990, the tax return filed by exempt organizations, as well as several related forms.
Form 990 itself has not undergone much change, except for the addition of Part X. This section will be used for reporting transfers in association with personal benefit contracts, often referred to as "split dollar insurance" arrangements. These include life insurance, annuity, or endowment contracts for which a charity will pay the premiums in exchange for a portion of the proceeds. Charities who have such arrangements must complete Part X of the 990 in addition to filing separately Form 8870, introduced this year for reporting split dollar insurance transactions. (See NN 5/00, 12/00).
The IRS has also developed a new Schedule B to Form 990, which must be filed along with the 990 or 990-EZ (the short version of Form 990). It provides a required format for reporting the names, addresses, and other information on substantial contributors required by Line 1(d) of Form 990 (Line 1 of Form 990-EZ). Additionally, it provides a section for detailing noncash property received, as well as a section that must be completed by 501(c)(7), (c)(8), and (c)(10) organizations. Schedule B is not open to public inspection unless it is filed by a Section 527 organization.
The IRS has also created a Form 8868, which must be used to request extensions of time to file the various versions of Form 990. The form allows organizations to request an automatic 3-month extension, as well as an additional (though not automatic) 3-month extension if the first was not sufficient. The instructions prohibit any extensions beyond 6 months.
All of these forms are available on the IRS' web site at http://www.irs.gov/plain/forms_pubs/forms.html.
By Doug Smith
D.C. Nonprofit Corporation Act Update
The District of Columbia Council recently approved a change in its Nonprofit Corporation Act to allow members of nonprofit corporations to vote by email or other electronic means, unless the organization's bylaws or articles of incorporation state otherwise [see NN 9/00, page 3]. This is likely to make board elections and bylaw amendment votes more efficient and increase membership participation.
The Act is still in the congressional review period, but adverse action by the U.S. Congress is unlikely. Organizations may begin operating under the new law once it is effective, tentatively scheduled for March 27, 2001.
While the law is not dependent on explicit bylaw authorization, organizations would be well-advised to establish procedures, enshrined in their bylaws, to allow electronic voting.
By Doug Smith
Info for Charitable Donors
The Internal Revenue Service recently released the revised version of Publication 526 explaining the rules and procedures of charitable donations and deductions. 501(c)(3)s should keep a copy on hand for the inevitable donor questions on just what is deductible. The publication provides tables and examples for most common charitable activities. You can download Publication 526 from the IRS's website at http://www.irs.gov/forms_pubs/pubs.html.
Someone at the Service has developed something approaching a wry sense of humor. By way of an example about the charity-sponsored travel-tour deductibility rules, the Service opined: "You work for several hours each morning on an archeological dig sponsored by a charitable organization. The rest of the day is free for recreation and sightseeing. You cannot take a charitable contribution deduction even though you work very hard during those few hours."
By Doug Smith
Updating FEC Filings
Recent changes to Federal Election Commission regulations require political action committees to amend their statements of organization (FEC Form 1) to include website and email address information. In its continuing efforts to maintain its status as the most e-savvy of agencies, the Commission has published a set of detailed and confusing guidelines on how to submit this amendment.
Those committees that submit FEC reports electronically must amend Form 1 electronically to add website and email address information, if any. For details on electronic submission, please visit
While all committees with their own website must file this amendment, the connected PACs of a 501(c)(4)s which share the (c)(4)'s website do not have to file this amendment. That is, unless the PAC has its own email address (something like pac@seefour.org) and files electronically, in which case it must file an electronic amendment to Form 1 with the email address PACs with neither an email address nor a website can mercifully ignore this notice.
By Doug Smith
Advanced Fundraising for Dummies: Planned Giving Simplified
When fundraising directors think of planned gifts, the most common thought is getting their organizations put in some rich donor's will. Planned Giving Simplified, by Robert Sharpe Sr. (Wiley 1999, $34.95), goes a long way to correct this misconception.
More broadly defined, planned giving is a gift, either current or deferred, that requires professional assistance to structure and execute. Planned Giving Simplified describes, without resort to undue legalese, the various types of gifts, the players involved and their roles.
Current planned gifts are gaining in popularity, especially when the donor wants to maintain some direction over the disposition of the funds. They can involve donations of securities, assignments of interest income, or interest free or deferred loans. These are a good deal more complicated than simple gifts of cash. Sharpe includes several forms and worksheets to help fundraisers and donors along the process.
Deferred gifts are essentially a pledge of assets effective at some future date. In other words, this category includes not only designating a charity as the beneficiary of a will, but also any other arrangement by which the donor will derive some benefit from the pledged asset until death or some other date. Here is where the book comes into its own, outlining the different types of deferred gifts, from charitable gift annuities to life estate agreements.
Novices may find the sections describing the gift planners' functions and their interaction with the donor and the charity helpful, if only to find their place in the scheme of things. While some may quibble with the sometimes melodramatic tone, the sections on the psychology of potential donors (particularly their fears of needing the money back) provide a useful touchstone.
This is not a book for a large charity's development director. Rather, it is a useful starting point for the small organization which is just realizing that there is an entire source of funds and fundraising techniques which the organization has yet to tap. To that end, the essays by actual fundraising executives on planned giving experiences and charity in general can serve as useful morale builders.
By Doug Smith
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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