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Archives
September 2002
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| IRS Update |
Belated Summer Reading: IRS Releases Tax Guidance Booklet for Religious Organizations |
| Election Connection |
Second Circuit Decision Allows Limits on Candidate Spending |
| Court Cases |
Copyright Laws Unreliable for Protection of Membership Lists |
| Fundraising Focus |
Checklist for a Hitch-Free Car Donation Program |
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Belated Summer Reading: IRS Releases Tax Guidance Booklet for Religious Organizations
In early July, the IRS released Publication 1828, "Tax Guidance for Churches and Religious Organizations," a plain language guide explaining tax laws as they apply to churches, temples, mosques and other religious organizations. Much of the guidance pertains to all 501(c)(3)s, so other groups that are not religious organizations will find this publication useful as a quick-reference guide. In addition to special rules applicable to churches and religious organizations, the booklet covers a range of relevant topics, including information about UBIT, employment taxes, payment of employee business expenses and charitable contribution substantiation and disclosure rules.
Readers should exercise caution, however, in applying the IRS guidelines on political campaign activity in Publication 1828 to organizations other than churches. Because the IRS is sensitive to both the constitutional protection of free exercise of religion and the political power of some religious organizations, it appears to have softened some of its criteria for prohibited political activity. Consequently, the guidelines on political campaign activity for religious organizations may not be applicable to all 501(c)(3)s.
Publication 1828 is available for download on the IRS web site, at http://www.irs.gov/pub/irs-pdf/p1828.pdf and in print form by calling the IRS at (800) 829-3676.
By Amy Licht
Second Circuit Decision Allows Limits on Candidate Spending
A recent decision by a three-judge panel of the Second Circuit Court of Appeals approves a new approach to campaign finance reform. Landell v. Vermont Public Interest Research Group breaks new ground because it is the first time a federal appeals court has held limits on campaign spending to be constitutional.
In Landell the court mostly upheld Vermont's comprehensive campaign reform legislation, Act 64, which regulates the flow of campaign spending within the state through a variety of contribution and expenditure limitations. While the Act's contribution limits are quite low, the most notable element of Act 64 is the limitations it places on the amount candidates and their campaign committees can spend during a two-year election cycle. The Act determines expenditure limits based on the office a candidate is seeking. For example, candidates for governor are allowed to spend $300,000, whereas candidates for county offices are limited to only $4,000. Incumbent spending is further restricted to 85% of the expenditures allowed to challengers.
Before the Landell decision, conventional legal wisdom held that legislatures were prohibited from enacting laws that place mandatory restrictions on the amount candidates could spend in elections. This doctrine stems from the 1976 landmark decision, Buckley v. Valeo, which involved a challenge to the Federal Election Campaign Act (FECA). In Buckley, the Supreme Court upheld limits on contributions to candidates and related disclosure provisions, but struck down restrictions on candidate expenditures. The Court reasoned that laws burdening core political speech must be narrowly tailored to serve a compelling government interest. Under this exacting scrutiny, FECA's contribution limitations and disclosure provisions were deemed necessary to prevent corruption and the appearance of corruption in the electoral process–the compelling government interest offered by supporters of the law. In contrast, FECA's expenditure limitations were held to violate the First Amendment. The Court explained that the spending restrictions imposed "direct and substantial restraints on the quantity of political speech." Because the Court believed that contribution limits accomplished the government's interests in eliminating corruption by controlling excessive campaign spending and preventing distortion of the campaign process, expenditure limitations could not be justified.
While Landell may appear to fly in the face of Buckley, the appellate court goes to great lengths to show that it was applying the same exacting scrutiny to Act 64's expenditure limits. The difference between the two cases lies in Vermont's justification for the Act's spending limits- that they are necessary to preserve citizen access to candidates and officeholders, a central mechanism of democracy. A review of the legislative history of Act 64 and testimony in the case led the court to conclude that unlimited campaign spending in Vermont had produced an "arms race mentality," in which candidates were under constant pressure to raise more money than their opponents in order to be able to spend more. This drive for funding afforded special interest groups and other contributors privileged access to and influence over politicians and alienated ordinary citizens. The court found such influence to be abusive because it was purchased, and held that Vermont's compelling interest in ensuring its citizens fair access to their officeholders was reasonably achieved by restricting candidate expenditures. The court noted that ensuring citizen access to political officials could not be achieved by contribution limitations alone. As a result, the Act's expenditure limits survived Buckley's exacting scrutiny.
Landell promises to reignite the debate on whether expenditure limitations are an appropriate means of campaign finance reform. Recently, in Homans v. Albuquerque, the U.S. District Court for the District of New Mexico in the Tenth Circuit struck down candidate expenditure limits in Albuquerque's city charter, finding them "an unconstitutional infringement of the First Amendment." This apparent split between the Second and Tenth Circuits may eventually lead the Supreme Court to revisit its decision in Buckley. Reformers have been arguing for years that compelling government interests aside from those reviewed in Buckley could justify such limits. Soon we may all find out if they are right.
By Amy Licht
Copyright Laws Unreliable for Protection of Membership Lists
A recent court case highlights the difficulty of protecting an organization's membership list against unauthorized reproduction.
As it stands, U.S. copyright laws do not protect the actual information contained in membership lists such as names and addresses. Rather, copyright laws are designed to protect the expression of ideas and creativity – not necessarily hard facts. In the court case American Massage Therapy Association v. Maxwell Petersen Associates, Inc., a publisher copied a substantial number of names and addresses from a nonprofit's membership directory into its own membership directory. The publisher admitted that the nonprofit had properly registered the copyright for the membership directory as a whole, and had even added specific language in the directory to prohibit its unauthorized reproduction.
Nevertheless, the Court ruled that the basic information contained in the membership list did not meet the minimum requirement of "originality" to qualify for copyright protection under this ruling. The entire directory, which included additional information selected by the nonprofit, was eligible for copyright protection. The names and addresses alone, however, did not qualify as "original" because the information does not owe its origin to the independent thought of the publisher.
What can nonprofits do to protect membership lists?
While there is no single source of legal protection for information lists per se, here are three suggestions that may help avoid unauthorized reproductions.
- By contract. You should require any outside organization or individual that has access to membership information in the course of their service to your organization, to sign a binding contract promising not to use the information for any unauthorized purpose.
- Restrict access to the list to those who are bound to protect it. Consider restricting access to the list within the membership organization to those employees whose work requires it. By the nature of their employment, then, they have a fiduciary duty to hold the information contained in the membership directory in confidence. You may also want to have these employees sign a confidentiality contract to underscore the importance of this duty.
- License your directory. If you publish and distribute a membership directory, implement a license similar to those used with computer software. These licenses provide language to the recipient of the membership directory that merely opening the directory constitutes an explicit agreement to abide by the terms of its use. By opening the package, the user assents to the terms of the license, and to the obligations, restrictions, and rights of use fully stated in the directory. If the user does not agree, then he/she should not open the "package." This "shrink-wrap" license allows your organization to continue distributing membership directories, while providing some level of protection from their misuse.
Checklist for a Hitch-Free Car Donation Program
The IRS recently provided guidelines for charities implementing car donation programs operated by a for-profit contractor. The ruling evaluates the compensation of the for-profit contractor and compliance with various rules for charitable deductions.
Like many charities without the resources to operate a car donation program, the charity involved in the ruling had appointed a for-profit business as its authorized agent to solicit car donations, to retrieve or accept the donated vehicle into its facility, to arrange for appraisals of donated vehicles deemed to be worth more than $5,000, and to re-sell the car or dismantle it and sell its parts. The for-profit agent was paid contingent compensation (i.e., a percentage of each sale).
Charities may want to study the following three principles used by the IRS to evaluate contingent compensation:
The IRS considered whether the car donation program might constitute unrelated trade or business because the used autos are re-sold. The IRS ruled that it does not, because the sales of donated items do not generate UBTI.
Charities planning to implement car donation programs should also note IRS requirements regarding receipts, stating the name of the donor, the date, location, and description of the donation, and a statement of whether any goods or services were provided in consideration for the contribution. In addition, state donation laws govern the time frame in which these letters must be sent – so be sure to check. More information for non-profits and donors is available in the recent IRS Publication 1771 [See NN, 04/02, and online http://www.irs.gov/pub/irs-pdf/p1771.pdf].
If engaged in a non-profit/for-profit partnership in the car donation program, non-profits should clarify the role of the for-profit, such as whether the for-profit business will be responsible for sending receipts to donors. For example, the charity specified in the ruling authorized the for-profit business to send an immediate receipt letter from the for-profit on behalf of the charity, followed within forty days by a separate, "official" receipt on charity letterhead, acknowledging the receipt of the used car donation. In the event that the car is estimated to be worth more than $5,000, the car donation program should refer donors to professional appraisers, not affiliated with either non-profit or the for-profit used vehicle facility. Donors are responsible for paying the costs of the appraisal.
By Miguel de Baca
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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