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Archives
March 2003
FEC Issues Final Reporting Regulations
There were few surprises in final rules issued by the Federal Election Commission (FEC) on reporting requirements under last year's new campaign finance law (the "Bipartisan Campaign Reform Act," or BCRA). However, there is a potential trap for nonprofits that are "Qualified Nonprofit Corporations" (QNCs) under the Federal election law.Unlike other corporations, QNCs are permitted to make independent expenditures for or against federal candidates. Their unusual status derives from a Supreme Court case concerning Massachusetts Citizens for Life (hence QNCs are sometimes referred to as "MCFL" organizations). They must be political/ideological 501(c)(4) organizations, and may not accept contributions from unions or business corporations. [For more information on MCFL corporations, please see NN 03/02.] Qualifying organizations must notify the FEC of their status, and then are permitted to engage in independent expenditures.
BCRA defined electioneering communications, a new category of electoral speech. This was an attempt to regulate the "issue advocacy" that falls just short of express advocacy for or against a candidate. Broadly, communications that may be "electioneering communications" are those that are distributed via paid broadcast, refer to a clearly identified candidate (incumbent or challenger) for Federal office (even without mentioning her/his candidacy) or a political party, and appear within 30 days before a primary or 60 days before a general election in which the person, or candidates or the party, will be on the ballot. [see NN 11/02]
In its primary rulemaking on the subject, the FEC carved out an exception to the general prohibition on corporations paying for these communications out of their general funds. Since the Constitution requires that QNCs be permitted to engage in express advocacy, it would make little sense to try to prevent them from making electioneering communications. However, in the latest regulations, the FEC declined to adopt a similar exception for the reporting requirements associated with electioneering communications.
A QNC that makes independent expenditures must report the expenditures to the FEC, but is only required to report information about donors who make contributions specifically for the independent expenditure. Thus, most general contributors to these nonprofits may maintain their anonymity. If the QNC makes an electioneering communication, it must report the name and address of any donor who has given an aggregate of $1000 or more since the beginning of the previous calendar year.
Fortunately, there are two simple ways to avoid this intrusive reporting requirement. First, an organization may establish a separate fund to pay for the communications. Only donors to that fund would then be disclosed. In addition, independent expenditures are excluded from the definition of electioneering communications. Thus, by including words of express advocacy in potentially troublesome messages, a QNC may turn it into an independent expenditure and avoid the new donor disclosure rules.
The result is paradoxical: in the presence of express advocacy, when the constitutional support for mandatory reporting and disclosure is strongest, QNCs are subject to less intrusive reporting requirements. Nonetheless, this is the state of the law for now, and qualified nonprofits planning to run broadcast ads during election season would do well to institute procedures to avoid inadvertently triggering these new donor disclosure requirements.
By Elizabeth Kingsley
Patent Guidance on Deductibility of Patent Contributions In a recent ruling, the IRS analyzed when the contribution of interests in a patent to a qualified charity could be deducted for federal income tax purposes. The Internal Revenue Code denies a charitable deduction for most contributions of partial interests in property. Common examples of non-deductible partial interests are gifts to a charity auction of a week at a beach house, or a loan of a painting to an art museum. This ruling applies this principle to donations of various interests in a patent.
Situation #1: The donor grants a university a license to use a patent, but reserves the right to license the patent to others.
The IRS considers the donation of such a license as a donation of a "partial interest," meaning that the donor retains enough control over the patent so as not to qualify for a charitable deduction. The ruling notes that the result would be the same if the donor retained any other substantial right in the patent.
Situation #2: The donor donates a patent to a university on the condition that a certain member of the faculty will remain employed by the university for the remaining life of the patent.
In this situation, the donation is conditional on the employment of the faculty member. If the employee were to leave, the patent would revert to the donor. Because the possibility of this happening is not "so remote as to be negligible," no deduction is allowed.
Situation #3: The donor permanently donates his interest in the patent to the university, with restricted licensing terms.
In this situation, a charitable deduction is allowed. Even though the terms of the donation require that the university cannot sell or license the patent for a limited term, ownership of the patent itself cannot revert back to the donor. The restriction does, however, reduce the fair market value of the patent, thereby reducing the amount eligible for a charitable deduction. And, if the donor receives a benefit in exchange for the patent, the value of the benefit will reduce the amount of the contribution.
By Miguel de Baca
IRS Offers Tax Guidance for Charities in US Possessions
The Internal Revenue Service recently offered guidance on Form 990 reporting requirements for public charities located in U.S. possessions and territories. Revenue Procedure 2003-21 allows nonprofits formed and operated in U.S. possessions to exclude some receipts in calculating whether they meet the $25,000 threshold for filing Form 990, the annual information report.
The guidance specifies that amounts donated from "bona fide" residents of U.S. possessions do not count toward the $25,000 gross receipts cap. Only contributions received directly or indirectly from U.S. sources (i.e. citizens and corporations in the 50 states and District of Columbia) are included in the total. To qualify, nonprofits must have no significant activity in the United States proper and be organized under Section 501(a) of the Internal Revenue Code. The guidance is not applicable to private foundations.
United States possessions and territories include Puerto Rico, American Samoa, Guam, the Northern Mariana Islands, Canal Zone, the Marshall Islands and the U.S. Virgin Islands.
By Amy Licht
BBB Wise Giving Alliance Finalizes Standards for Charitable Accountability
The Better Business Bureau's Wise Giving Alliance recently released its revamped Standards for Charitable Accountability,
along with a new "Wise Giving Seal" program. The Standards, a final version of the Alliance's
"Exposure Draft," released in early 2002 [see NN 02/02], and the seal are designed to help donors evaluate charities.
For many years the Wise Giving Alliance (WGA) and its predecessors have published evaluations of national charities. The assessments, which have not always been welcome, are triggered by fame, notoriety or public inquiries. In contrast, local organizations and national charities that generate little public attention often escape the WGA's evaluation process.
The "Wise Giving Seal" program is new. It allows qualified public charities to display a seal on their publications and in other places to signal their compliance with the Alliance's strict standards for corporate governance, fundraising and operations. The program will be limited to national nonprofits, which will pay fees ranging from $1,000 to $15,000 for the seal. The WGA will begin implementing the seal program in June.
The Alliance's finalized Standards for Charitable Accountability are largely identical to 2002's proposed standards. Significantly, in the finalized version the Alliance has retained controversial provisions that charities spend 65% of total expenses on program activity and no more than 35 percent of related donations on fundraising. In addition, the Standards address donor privacy by requiring that, at least annually, organizations provide a means, such as a check-off box, for donors to inform the charity if they do not want their name and address shared outside the organization.
A significant change in the Standards' financial requirements allows nonprofits to accumulate a larger amount of available assets. Standard 10 states that a charity's unrestricted net assets should not be more than three times the past year's expenses, or three time the current year's budget, whichever is higher. This is a significant increase from the Exposure Draft, which dictated that available net assets not exceed twice the charity's total expenses budgeted for the current year.
Another small but welcome modification comes in Standard 3, which, for the first time, addresses accessability to Board meetings for people with disabilities, stipulating, "For all meetings, alternative modes of participation are acceptable for those with physical disabilities." Unfortunately, this Standard may conflict with state laws on the matter, which generally do not specifically allow for participation in Board meetings through assistive technology, such as TDD devices.
The new standards come into effect in phases as outlined in the Alliance's Implementation Guide. Most provisions became effective on March 4, 2003, the date the document was released to the public. Standards that may take time to implement, such as scheduling additional Board meetings or adopting a policy to assess an organization's performance and effectiveness, will become effective on March 4, 2004. Standard 7, which requires charities to submit a written report to its Board on performance, effectiveness and recommended future actions, will become effective on March 4, 2005
The new Accountability Standards, Implementation Guide and further information about the Wise Giving Seal program are available at the WGA's web site, www.give.org.
By Amy Licht
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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