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april 1998 Law and Policy News From
○ ○ ○ ○ ○ ○ ○ ○ ○ Harmon, Curran, Spielberg & Eisenberg, LLP
nonprofit
Navigator
Fundraising or Not?
New Nonprofit Accounting Rules
T
he American Institute of Certified serve a management function; 2) be addressed
Public Accountants [AICPA] has to an audience that is either clearly in need of
released Statement of Position 98-2, the organization’s message or programs, or who
which includes new rules that could profoundly can help the organization fulfill its purpose,
affect the financial statements of nonprofits that exclusive of the addressee’s ability or willing-
allocate certain “joint costs” between ness to contribute money; and 3) request action
fundraising and program or management costs. that will help fulfill the organization’s mission
SOP 98-2 has drawn criticism from both and explain the need and benefits of the action.
directions; watchdog organizations are
concerned that some fundraising costs may
continue to be underreported or allocated to The new rules will have a particu-
other functions, while many nonprofits fear that lar impact on groups that use
the new standards will unfairly alter the
telemarketing and direct mail.
public’s perception about the focus of their
activities. SOP 98-2 will become effective for
a charity’s fiscal year beginning on or after If the appeal does not meet these standards, the
Inside
December 15, 1998. total cost of the project must be counted as This Issue
○ ○ ○ ○ ○ ○ ○ ○
The new ruling makes it much more fundraising.
difficult to allocate the cost of a project If any individual’s compensation for the
Lobbying by
between fundraising and non-fundraising work on a particular project varies based on the 2 Non-501(c)(3)s
functions, and will particularly affect groups contributions raised by the project, the project
that rely heavily on direct mail and will not meet the “purpose” test. If a message
Charitable
telemarketing. All costs of a project that includes a slogan to encourage people to take 4 Registration
includes fundraising must be allocated to action without explaining the need or the
fundraising unless the project passes a three- benefits of doing so, it will not meet the
part test that focuses its purpose, audience, and “content” test.
content. Generally speaking, this means the Although AICPA may consider this a
7 UBIT Update
project must: 1) include a call for action that simple refinement of earlier guidelines, many
will help accomplish the organization’s goals or nonprofits are concerned that the burden of the
continued on page 6
nonprofit
Navigator
IRS Update
Law and Policy News from
Harmon, Curran,
Spielberg & Eisenberg, LLP Lobbying by Non-501(c)(3)s
○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○
The 1993 budget bill denied a business claiming a business deduction for the payment
Editors: deduction for lobbying expenses or for the is also exempted. If your organization meets
Gail M. Harmon
Elizabeth J. Kingsley
portion of exempt organization membership certain parameters, you are automatically
Nicole M. McLaughlin dues attributable to such expenses. To considered to meet this standard:
implement this provision, noncharitable • If you are a 501(c)(4) or 501(c)(5) and
Assistant Editors: membership organizations are required to either (1) more than 90% of annual dues,
Eileen B. Smith
Robert Truhn track their lobbying expenses and disclose to voluntary contribution and special assess-
their members the percentage of dues or ments comes from individuals, families, or
Business Manager: similar payments attributable to lobbying and entities paying $75 or less, or (2) over 90%
Charles S. Crumb
therefore not deductible as a section 162 of such income is from 501(c)(3)s,
Nonprofit Navigator is business expense. Organizations that do not government entities, or section 501 groups
published monthly by the
Washington, D.C. law firm of make this disclosure are subject to a proxy tax qualifying for the broad exclusion outlined
Harmon, Curran, Spielberg & on their lobbying costs. above;
Eisenberg, LLP. Subscription
rates are $115 for one year
and $198 for two years for
• If you are a 501(c)(6) and more than 90%
subscriptions sent within the It is worth the time to determine if of annual dues and similar amounts comes
United States. Special rates
from 501(c)(3)s, government entities, or
are available on request for your organization qualifies for an
multiple subscriptions sent to section 501 groups eligible for the broad
the same address and for exemption. exclusion.
outside the U.S. All rates
subject to change without
notice. Subscriptions may be Complying with these tracking and If you do not meet these safe harbors, a
made by phone at 202/328-
reporting requirements can be quite burden- simple procedure may come to the rescue. An
6874, ext. 35. Subscription
and address changes may be some, so it is worth taking some time to organization can keep records establishing that
addressed to:
determine whether your organization may at least 90% of annual dues income is from
Nonprofit Navigator qualify for an exemption from their coverage. sources that would not claim a tax deduction
2001 S Street, NW for the payment, and disclose to the IRS on its
Suite 430 First, is your organization exempt under a
Washington, DC 20009 code section other than 501(c)(4), 501(c)(5), Form 990 that it is doing this. Unfortunately,
(202) 328-3500
or 501(c)(6)? If so, you need read no further; there is little guidance available to explain
email:
navigator.hcse@zzapp.org the tracking and disclosure requirements do
This publication is designed not apply to you. In addition, only 501(c)(4)
to provide accurate and social welfare groups (other than veterans’ Many noncharitable membership
authoritative information
about the subject matter organizations) and 501(c)(5) agricultural and organizations must track and
covered. It is distributed with
horticultural organizations are covered; other
the understanding that the report lobbying expenses.
publisher is not engaged in organizations described in these sections are
rendering legal, accounting,
or other professional advice.
similarly exempt.
If legal advice or other expert If you do not qualify for this broad what documentation would be sufficient for
assistance is required, the this purpose. An organization desiring a
services of a competent exclusion, you may nonetheless escape the
professional person should be tracking and reporting requirements. An higher degree of certainly, or unsure whether it
sought.
organization that receives substantially all of meets the 90% threshold, may apply to the
its income from sources that would not be IRS for a private letter ruling.
nonprofit
Navigator continued on page 3
Law and Policy News from
Harmon, Curran,
Spielberg & Eisenberg, LLP
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2 April 1998
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IRS Update
Denial of Exemption for Kemp Fund Upheld
The IRS decision to deny tax exempt measure of whether the organization is
status to The Fund for the Study of Economic “operated exclusively for charitable purposes.”
Growth and Tax Reform [the Fund] was Judge Urbina states in his opinion that the
supported by a recent judgment in U.S. Fund was “partisan and politically motivated,”
District Court. and that its position “advocated a legislative
The Fund was established by Jack Kemp, agenda” and “supported a one-sided political
former Republican Vice Presidential candidate agenda.” Unfortunately, the decision does not
and Secretary of Housing and Urban Develop- provide a clear definition of the difference
ment, to raise money for the GOP-staffed between advocating a point of view, and
National Commission on Economic Growth promoting a particular agenda that might
and Tax Reform (the “Kemp Commission”). result in the impermissible bestowal of
In 1996, the Kemp Commission issued a “substantial private benefit.” It also does not
report advocating the abandonment of the distinguish “political” policy advocacy from
current tax code and the implementation of a prohibited partisan politicking.
single tax rate. Another Kemp-founded Since the judgment does not draw these
organization, Empower America [NN, 2/98, p. distinctions, it is difficult to predict how the
6], also encountered difficulty in winning concepts may be applied to other groups
exemption from the IRS. applying for exempt status in the future. If the
Judge Ricardo M. Urbina upheld the IRS ruling is applied broadly and with even wider
position, ruling that the Fund is not entitled to interpretation by other judges, it may have
(c)(3) status because it is a partisan organiza- serious implications for organizations that
tion concerned with advancing the Republican have a politically-affiliated leadership or
political agenda during the Presidential membership, or are asked to investigate an
election season, and confers a “substantial issue by government leaders.
private benefit” on its Republican-affiliated
supporters. The Fund intends to appeal the
decision.
In its argument to the court, the Fund Lobbying by 501(c)(3)s
charged that other organizations with politi- continued from page 2
cally-active leadership, such as the Congres- The bad news is that if you cannot
sional Hispanic Caucus and the Congressional establish that at least 90% of dues or similar
Black Caucus Foundation, were granted amounts you receive annually are not deduct-
exempt status without the same level of ible, your organization must track lobbying
concern about their partisan leadership. Judge expenses, and either disclose to members the
Urbina did not address this issue in his portion of their dues not deductible as a
decision because the argument had not been business expense or pay a proxy tax.
raised in the administrative proceedings before
the IRS. Next month: Living with the 162(e)
The judgment relies on the concept of tracking and disclosure requirements.
“nonpartisan, nonpolitical advocacy” as a
nonprofit
Navigator
Law and Policy News from
Harmon, Curran,
Spielberg & Eisenberg, LLP
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April 1998 3
Views Reviews
and
Charitable Registration:
Workplace Campaigns and Internet Activity
The Nonprofit Navigator is pleased to Web sites maintained by a charitable
present a guest column from Errol Copilevitz organization on the Internet are available to
of Copilevitz & Canter, P.C. Mr. Copilevitz is anyone who cares to find them. A number of
an expert on state regulation of charitable states have considered requiring any charitable
solicitation, and he addresses some unusual organization which maintains a Web site that
questions about state registration require- includes a request for public support to
ments. register in their jurisdictions. Many charities
Does your organization expose itself to which have no other contact with distant states
the burden of state charitable registrations if do not feel registration should be required. It
its only contact with residents of the various is expensive and burdensome. After all, the
states is on the Internet and/or through its “surfer” comes to them, not vice versa, which
participation in the Combined Federal means the appeal is only made in the state in
Campaign? These issues are still not resolved. where they operate.
Recently, a court in the state of New York
Most states do not require considered the jurisdictional issues of Internet
sales of commercial products. The analysis
solicitation registration based
used was one of nexus. This is a standard
solely on CFC participation. whereby the courts have determined whether
there are sufficient contacts with the jurisdic-
The appeals for public support by a tion to entitle it, for example, to impose a sales
charitable organization necessitates registra- tax. Upon reviewing the facts and circum-
tion and filings in approximately 45 of the 50 stances of the case, the court concluded that,
states. What constitutes a solicitation becomes absent some physical presence in New York,
most relevant in deciding whether these the state had no jurisdiction.
requirements are triggered. Certainly, an Those seeking to regulate Internet appeals
appeal at the dinner table to guests on behalf through registration believe that otherwise
of a beloved cause would not require registra- there is a point to the lack of accountability.
tion, but a campaign conducted by However, the presence of a Web page or an
telemarketing or direct mail on a wide-scale Internet site, absent any other contact with a
basis would. If the standard is whether the state, does not constitute a solicitation within
appeal is being made to the general public, that jurisdiction. A charity cannot control who
then participation in the CFC by a charitable comes to the Web site. Registration in the state
organization should not require registration in where a charity is domiciled should be
all states where government employees may sufficient for any other jurisdiction to monitor
reside. The CFC is an “in-the-workplace” the accountability of an organization to which
program which, by definition, is limited in their residents may consider making a
scope. Most states do not seek to enforce their contribution.
nonprofit
Navigator
solicitation registration requirements based Until the legal issues are resolved by the
Law and Policy News from
solely on CFC participation. courts, charities soliciting contributions
Harmon, Curran, continued on page 7
Spielberg & Eisenberg, LLP
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4 April 1998
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Capitol
Letters
Anti-Advocacy Measure Defeated
The nonprofit community should be and has been introduced in many state
aware of the restrictions that had been part of legislatures. The broader federal legislation
the “Campaign Reform and Integrity Act” would have applied it to most nonprofit
(H.R. 3485). organizations as well.
The provisions regarding nonprofits were This notice would ask the members for
so unpopular that they were dropped from the their consent for their dues, fees, and other
final proposal voted at the end of March in a contributions to the organization to be used for
vain attempt to gain wider support for the “political activity.” The percentage of
other measures. However, future federal or affirmative responses would in turn determine
state legislation may revive the proposal that how much of the proposed budget could be
nonprofits be required to ask their members used to pay for such activity.
annually for consent to spend dues money on Under the proposal, it would be illegal for
political activity. a nonprofit to exceed this budget. “Political
The proposal, which was initially dubbed activities” were defined broadly, encompass-
“paycheck protection” by its supporters and ing not only communications about political
aimed only at unions, would require that candidates but also any voter education efforts
organizations send an annual notice to their and lobbying or disseminating educational
members indicating the next year’s proposed materials on proposed Federal legislation or
“political activity” budget. The union version regulations.
of the proposal is on the ballot in California
IRS Update
IRS Guards Its Secrets
Nonprofit Navigator readers are already erly received expedited treatment of its
aware of the recent changes in disclosure exemption application. The IRS would only
requirements for Forms 990, and the ease with disclose those documents submitted by the
which people can obtain certain information organization itself, and not documents
from nonprofit organizations. But what about submitted by others in support of the applica-
information regarding organizations trying to tion, nor IRS documents relating to the
obtain their exemptions, or about documents application. When sued for failure to disclose,
indicative of the IRS’s process for determining the IRS said it considered the withheld
whether or not to grant exemption? documents to be taxpayer return information
In late 1996, an exempt organizations protected from disclosure. The US District
attorney sought additional information from Court found in favor of the IRS, and the D.C.
the IRS about an organization that he believed Circuit Court of Appeals recently upheld the
might be engaging in prohibited political decision. nonprofit
Navigator
activities, and that he suspected had improp- Law and Policy News from
Harmon, Curran,
Spielberg & Eisenberg, LLP
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April 1998 5
New Accounting Rules
continued from front page
new rules will cause problems. Their com- Others criticize that the rule may give
plexity will make it more difficult for even organizations that receive government
conscientious organizations to comply; as a funding, fees for services, or other non-
result, there is concern that accountability in contribution income an unfair advantage over
the nonprofit arena will erode. contribution-funded charities because the
former may appear more “efficient” than the
latter. Additionally, there is a fear that start-up
The new rules have no stan-
nonprofits, along with smaller organizations
dard or easy to follow alloca- that may not have a wide audience or pool of
tion formula. donors, will be marginalized by the focus on
the new fundraising allocations as a means of
This is exacerbated by the lack of a determining their organizations’ effectiveness
specific allocation method. SOP 98-2 requires and commitment.
a “reasonable” method and suggests three Although it is unclear whether the new
“commonly-held” systems that nonprofits rules help prevent abuses or unfairly advan-
could use — but it contains no standard or tage certain organizations, there is no doubt
easy-to-follow formula that nonprofits may that most nonprofits will need to examine their
adopt. Some nonprofits are looking to accounting practices and implement new
accounting firms to assist with ensuring allocating methods. Moreover, the new rules,
compliance; others are calling for a massive while probably designed to impart flexibility,
education program so that organizations are may inadvertently disadvantage many organi-
given enough information that they may be zations that cannot afford the sophisticated
able to comply with the new rules without accounting or legal help necessary to take
having to retain a CPA. advantage of such flexibility.
Examples Under SOP 98-2
• A charitable organization that sends out the required disclosure information for quid
pro quo contributions in excess of $75, and then includes in the documentation a
request for further contributions, may allocate the costs of the communication between
fundraising and management and general functions. The purpose and content criterion
are met, even with the lack of request for action, because the communication is
designed to meet the organization’s management and general responsibilities. The
audience criterion is met because the recipients are those who need to receive the
message.
• An organization that sends to individuals on the mailing lists of other sympatheic
groups information about animal rights, including a request for a contribution to the
organization, a request that the individuals contact their legislators, and a postcard for
the individuals to send to legislators, may jointly allocate the costs of the mailing
between fundraising and program if the organization also conducts the same grassroots
activities without the fundraising component. Thus, for instance, if the same group
also runs advertisements and distributes the grassroots materials at community events
nonprofit
Navigator
without a fundraising request, the cost of the mailing may be jointly allocated.
Law and Policy News from
Harmon, Curran,
Spielberg & Eisenberg, LLP
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6 April 1998
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UBIT Update
IRS Diagnosis: Health Club is Exempt
Health clubs have become a battleground expand its facilities to accommodate more
between nonprofit and commercial organiza- members. Despite these factors, the IRS did
tions. In a somewhat surprising private letter not find evidence sufficient to revoke the
ruling, the IRS recently found that a health health club’s exemption.
club which appeared to have both charitable UBIT
and commercial elements to its operation It is often said that the purpose of UBIT is
should neither have its tax-exemption revoked, to “level the playing field” between nonprofit
nor be assessed UBIT. The health club was and for-profit businesses that compete in the
associated with two tax-exempt hospitals and same arena, by taxing income a nonprofit
had standard facilities open to the general receives from business activities that are,
public. among other things, unrelated to the
In deciding not to revoke the health club’s organization’s exempt purpose. In this
exemption, the IRS cited factors that sug- instance, the IRS determined that the hospital
gested charitable, non-commercial purposes subsidies and the fees paid by the hospital for
for the health club’s operation: allocation of its patients to use the facility for rehabilitation
space; subsidized dues for low income users; purposes indicated charitable activity and
lack of profit; 20% of the club’s space was advanced the exempt purposes of both the
devoted to a rehabilitation facility used by the owners of the club and the club itself. In
hospitals and others; and the public space in addition, the IRS found that the public’s use of
the club was also used by individuals undergo- the health club was substantially related to the
ing physical therapy. accomplishment of the health club’s exempt
purpose. Therefore, the club was not assessed
UBIT.
Despite some evidence pointing to
commercial purposes, the IRS did
not revoke the exemption. Charitable Registration
continued from page 4
Additionally, the club did not serve only
the wealthy; many of the health club’s through on-line communications do run some
members were apparently middle-income, and risk that state regulators may attempt to
the club provided 10% of its memberships to require registration. Organizations concerned
low-income persons at no charge. Signifi- with avoiding involvement in test case
cantly, the hospitals were subsidizing the club litigation or multi-state registration would be
and it was not expanding, despite a waiting list wise to avoid some of the more creative,
for membership. technologically advanced mechanisms for
Other factors suggested more commercial actual on-line contributions. On the other
purposes: the fees charged by the health club hand, a simple mention on a Web site that the
were competitive with other health clubs in organization gratefully accepts donations, and
the area; some other health clubs in the area an address to which they can be sent, should
had folded (presumably due to market over- not cause concern among state regulators and
saturation); and the health club wished to is probably a safe approach. nonprofit
Navigator
Law and Policy News from
Harmon, Curran,
Spielberg & Eisenberg, LLP
...............................................................................................................................................................
April 1998 7
(202) 328-3500
Washington, DC 20009
Suite 430
2001 S Street, NW
Spielberg & Eisenberg, LLP
Harmon, Curran,
Law and Policy News from
Navigator
nonprofit
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About the Firm
Harmon, Curran, Spielberg & Eisenberg, L.L.P. specializes in providing legal advice to nonprofit
organizations and individuals in the areas of:
• Nonprofit Organization Tax law
• Election law
• Employment law
• Environmental law
For more than 25 years, we have successfully served the legal needs of a wide variety of nonprofit
organizations and citizen groups, political action committees, and individuals.
We pride ourselves on providing individualized attention and services tailored to the unique require-
ments of each client. We work closely with clients to identify and prioritize their legal needs and
develop effective strategies for working within the scope of their resources. The firm is dedicated to
helping clients use the legal system to enhance the effectiveness of citizen advocacy, vindicate civil
rights, and promote environmental protection.
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