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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

.......................................................................................................................................................
2                        April 1998
           ...............................................................................................................


                                                                               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


...............................................................................................................................................................
                                                                                                                             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

.......................................................................................................................................................
4                   April 1998
           ...............................................................................................................


                                                                               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


...............................................................................................................................................................
                                                                                                                             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

.......................................................................................................................................................
6                   April 1998
           ...............................................................................................................


                                                                       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
                           ..............................................................................................................



                                                   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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