California Enacts Non-Profit Integrity Act

FEC Restrictions on Fundraising Will Soon Go Into Effect

New Rules on Donations of Vehicles, Intellectual Property, and Other Noncash Contributions

The President recently signed the American Jobs Creation Act of 2004 (H.R. 4520), which includes three provisions regarding charitable contributions. Two of these provisions deal with the tax deductibility of specific types of charitable contributions, donations of vehicles and intellectual property. The third provision expands reporting rules for noncash charitable contributions.

Vehicle Donations

Prior to the passage of the American Jobs Creation Act, a taxpayer who donated an automobile (or any other type of vehicle, such as a boat) to charity could deduct the fair market value of the vehicle. Charities were required to provide donors with a written acknowledgement for all donations worth more than $250. Under the new law, taxpayers are no longer allowed to deduct the fair market value of the vehicle; in most cases, the amount of the deduction is based on the price at which the charity sells the vehicle. The law is effective for donations made after December 31, 2004.

If the value of the donation exceeds $500, the charity must provide the donor with a written acknowledgement in order for the donor to take the deduction. If the charity sells the vehicle without first making use of the vehicle or improving it, the charity must attest that the vehicle was sold to an unrelated party in an arm's-length transaction, state the gross proceeds from the sale, and state that the donor's deduction may not exceed this amount. Charities that use or make material improvements on donated vehicles must provide an acknowledgement explaining this use or material improvement. Charities may be penalized for failing to provide acknowledgements or providing fraudulent acknowledgements.

A number of charities that opposed the bill argue that the vehicle donation provisions could reduce their income from vehicle donation programs. Potential donors may be dissuaded by the possibility that a vehicle will sell for less than its actual value, which would limit the size of the donor's deduction. Charities will also bear the additional administrative costs of the increased paperwork.

Intellectual Property Donations

The Jobs Creation Act also contains new rules regarding deductions for donations of patents and other intellectual property. The law specifies that the donor's initial deduction is the lesser of the property's fair market value or the donor's basis in the property (usually either the amount that the donor paid to purchase the property or the cost of developing the property).

If the charity earns income from the intellectual property, the donor may receive additional deductions based on the amount of income generated by the property to the extent that the amount of income exceeds the amount of the initial deduction. For example, if an author donates the copyright on a book to charity, the charity may receive royalties for sales of the book. If the royalties amount to more than the initial deduction taken by the author (the cost of producing the manuscript), the author may be able to take deductions for the royalties earned by the charity in subsequent years. For the first two years, the donor may deduct one hundred percent of the amount of income generated by the property; this drops to ninety percent in the third year, eighty percent in the fourth year, and so on. Charities must report income from donated intellectual property to the IRS and provide donors with this information in writing. If the charity fails to provide this information, the donor is prohibited from taking additional deductions. No deductions are allowed after the 10th anniversary of the donation or after the intellectual property expires, whichever occurs first.

The new rules regarding intellectual property donations apply to any donations made after June 3, 2004.

Reporting of Noncash Contributions

The American Jobs Creation Act increases the reporting requirements for noncash charitable contributions. Under the old rules, individuals, closely-held corporations, personal service corporations, partnerships, and S corporations taking deductions greater than $5,000 for noncash charitable contributions were required to obtain a qualified appraisal of the donated property (although the donor was not required to attach the appraisal to his/her tax return). However, other types of corporations were not required to obtain such an appraisal.

The new provision of the American Jobs Creation Act adds C corporations to the list of donors who must obtain appraisals of donated property in order to claim a deduction greater than $5,000. The provision also requires all donors claiming deductions worth more than $500,000 to attach the qualified appraisal to their tax return. This provision applies to all individuals, partnerships, and corporations. Donors who fail to comply with these requirements will be denied a charitable deduction. The new requirements apply to any donations made after June 3, 2004.

By Lizzie Hubbard





California Enacts New Non-Profit Integrity Act

California has enacted a new Nonprofit Integrity Act that goes into effect on January 1, 2005.

The Act applies new regulations to charitable organizations, commercial fundraisers, and fundraising counsel and grants the Attorney General enforcement and supervisory powers. The provisions include corporate responsibility measures similar to those imposed on some for-profit corporations by the Sarbanes-Oxley law in the wake of recent corporate scandals. The primary focus of the new California law is on corporate governance, disclosure, accounting, and requirements for contracts between charitable organizations and commercial fundraisers or fundraising counsel.

Governance Issues

The Act requires boards of directors to review the compensation packages of their presidents/CEOs and treasurers/CFOs to assure that they are just and reasonable.

Any charity with gross revenues of $2,000,000 per fiscal year or more must now prepare an annual financial statement audited by an independent certified public accountant and make it available to the public. The Act also requires that a charity appoint an audit committee to handle the retention, compensation, and termination of auditors; review and monitor the auditing process; and approve any non-auditing services carried out by an auditing firm.

Fundraising Requirements

Elements of the new law require charities to establish and exercise control in their relationships with commercial fundraisers and introduce new requirements for solicitations.

Any commercial fundraiser with which a charity does business must be registered with the Attorney General. Furthermore, written contracts are now a requirement and must contain a variety of specific provisions. The most notable of these is a cancellation clause that allows the charity to cancel the contract within 10 days following the date of execution, upon 30 days notice after that time, or at anytime for cause. In addition, contracts should include sections requiring commercial fundraisers to abide by this and all other applicable laws.

There are also prohibitions on certain conduct with respect to solicitations, including the use of unfair and deceptive trade practices.

Full Scope Unclear

The Act brings unincorporated associations (unless noted below) and other legal entities holding property for charitable purposes under the provisions of the Supervision of Trustees and Fundraisers for Charitable Purposes Act (the pre-existing California law regulating charitable fundraising). Every charity subject to that law is now required to register with the Attorney General within 30 days of receiving any contribution.

There remains some question about the extent to which the Act might govern organizations that were previously exempt from registering with the Attorney General. We can say with a degree of certainty that the auditing requirements do not apply to hospitals, universities, and private educational and religious institutions. One the other hand, it is our interpretation that non-California corporations doing business in California (which were previously exempt from registration) are now subject to all portions of the Act. Because the legislation is vague on this point, any previously exempt organization should seek advice from the Attorney General's Office before soliciting for charitable contributions in California.

This article is just a brief summary of key features of the Act. Any entity that will be holding or soliciting property for charitable purposes in California should seek further advice before proceeding.

By Damon King





FEC Restrictions on Fundraising Will Soon Go Into Effect

The Federal Election Commission is close to finalizing regulations that will limit what nonprofits can say in fundraising messages. Nonprofit Navigator will cover these rules and their implications in greater depth in our next issue, but for now it is important to realize that solicitation pieces naming anyone who is a candidate for federal office may need legal review. While there are clearly no declared candidates for the Presidency in the 2008 election, most members of Congress are very nearly perpetual candidates for reelection. The rules will likely go into effect early in 2005, but letters or other solicitation materials used in 2004 could create problems if subsequently re-used.





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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