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					     june 1999                                                                        Law and Policy News From
      ○ ○ ○ ○ ○ ○ ○ ○ ○                                     Harmon, Curran, Spielberg & Eisenberg, LLP




  nonprofit
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States Crack Down on Fundraising Practices

F
         rustrated by their inability to set legal   tions raised one million dollars that, according
         limits on benefits for-profit fundraisers   to the Attorney General, primarily benefitted
         receive from charities, some govern-        the organizations’ operators while less than 1%
ment officials are adopting innovative tactics to    was used for charitable purposes. In less than
battle “fraudulent” or “misleading” fundraising      two months the Attorney General convinced the
practices. The inadequacies of mere registra-        court to shut down the organizations. The
tion and reporting laws have led state Attorneys     resulting settlement requires the two organiza-
General to use consumer protection laws for          tions to dissolve and to pay $445,000 in fines,
reining in charitable appeals. Cause-related         attorneys’ fees and forfeited profits.
marketing arrangements between nonprofits
and commercial interests are also coming under         State officials are applying con-
increasing scrutiny.
                                                      sumer protection laws to charity
Combating Fraudulent Solicitations
                                                      telemarketers.
     Texas Attorney General John Cornyn
recently won a judgement against two organiza-
                                                           In related developments the Federal Trade        Inside
tions that held themselves out as charitable in
order to solicit contributions that ultimately
                                                     Commission has issued a report on                      This Issue
                                                     telemarketing fraud and the State of Minnesota         ○ ○ ○ ○ ○ ○ ○ ○
were used for non-charitable purposes. The
                                                     is targeting fundraising practices as well [NN,
organizations, American County Officers
                                                     1/99, p. 2, NN, 11/98, p. 2]. Minnesota                2   IRS Ruling on
Association, Inc. (ACOA) and Volunteer Fire                                                                     Political Activities
                                                     Attorney General Mike Hatch is currently
                                                     pursuing a suit arguing that an organization’s
  Regulators are increasingly                        telemarketers mislead the public about the             5   GAO Report on
                                                                                                                Lobbying
 frustrated with their lack of                       percentage of the donated funds, that actually             Definitions
                                                     goes to the charity. The charity, Wishing Well
 control over fundraising costs.
                                                     Foundation USA, receives only about 20% of
                                                     the donated funds, and barely 5% of the
                                                                                                            6   Psychological
                                                                                                                Testing of Job
Fighter Association, Inc. (VFFA), both solic-
                                                     donations are actually used for the stated                 Applicants
ited contributions ostensibly to support law
                                                     purpose of helping terminally ill children. A
enforcement and fire fighting. The organiza-
                                                                                      continued on page 3
nonprofit
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                                             IRS Update
Law and Policy News from
Harmon, Curran,
                                             IRS Ruling Finds Ballot Measure
Spielberg & Eisenberg, LLP

○   ○   ○   ○   ○   ○   ○    ○   ○   ○   ○   Activities “Political”
                                                  Can we do it and not lose our tax-exempt      its issue. The organization targets only a very
Editors:
Gail M. Harmon                               status? Many nonprofit advocacy organiza-          select number of elections in which one of the
Shawn M. Gaylord                             tions ask this question every day. A new           key differences between the candidates is their
Elizabeth J. Kingsley
Nicole M. McLaughlin                         ruling sheds some light on the factors the IRS     positions on the organization’s issue.
                                             may consider in deciding whether a 501(c)(3)             In addition to traditional political expen-
Assistant Editors:
Daniel W. Persky                             organization has engaged in prohibited             ditures such as contributions to candidates,
Robert Truhn
                                             political campaign activity.                       voter guides and targeted GOTV, the organiza-
Business Manager:                                                                               tion also engages in significant ballot measure
Rebecca D. Gaiser
                                               Some 501(c)(3) “advocacy” activi-                activities. It campaigns on specific ballot
Nonprofit Navigator is
published monthly by the                                                                        measures for the primary purpose of forcing
Washington, D.C. law firm of                   ties may cross the line into prohib-             candidates to take a position on those mea-
Harmon, Curran, Spielberg &
Eisenberg, LLP. Subscription                   ited campaign intervention.                      sures, and conducts ballot measure campaigns
rates are $115 for one year                                                                     where the outcome of the measure itself would
and $198 for two years for
subscriptions sent within the                     The private letter ruling, scheduled for      affect the future of the pro and con-issue
United States. Special rates
                                             publication later this month, addresses the        candidates (e.g. term limits). The organization
are available on request for
multiple subscriptions sent to               question of what activities may qualify as         also selects ballot measure campaigns for the
the same address and for
outside the U.S. All rates
                                             “exempt functions” for a section 527 political     primary purpose of increasing the turnout of
subject to change without                    organization. Because the IRS has said             voters who support candidates it favors.
notice. Subscription requests
and address changes may be                   elsewhere that political organization exempt             Every ballot measure project undertaken
addressed to:                                functions are by definition prohibited politick-   by the organization must be approved by a
 Nonprofit Navigator                         ing for a 501(c)(3), groups should be aware        resolution of its board of directors confirming
 1726 M Street, NW                           that many common advocacy activities (e.g.         its electoral goal. The electoral purpose of
 Suite 600
 Washington, DC 20036                        grassroots lobbying, voter registration, Get       each activity would be substantiated by one of
 (202) 328-3500
                                             Out The Vote [GOTV], seeking candidate             several methods (see box on page 4).
 email: Navigator
 @HarmonCurran.com                           endorsements for legislative issues) to support
                                             or oppose ballot measures can, in some cases,        Whether ballot measure work is
This publication is designed
                                             qualify as political campaign intervention.
to provide accurate and                                                                           “political” depends on the particu-
authoritative information                    The IRS acknowledged that ordinarily ballot
about the subject matter
                                             measure work is considered lobbying activity,        lar facts of the case.
covered. It is distributed with
the understanding that the                   permissible for a 501(c)(3), and not an
publisher is not engaged in
rendering legal, accounting,                 “exempt function” for a 527 political organi-          The IRS ruled that these are activities
or other professional advice.                zation. In this case, a detailed examination of    with a “primarily political purpose .... inextri-
If legal advice or other expert
assistance is required, the                  the organization’s intent to influence elections   cably linked” to specific issues and races
services of a competent                      supported the conclusion that its ballot           based on the “particular facts and circum-
professional person should be
sought.                                      measure advocacy would, indeed, be treated         stances” presented. It is understood that the
                                             as “political” activity.                           races and issues chosen for emphasis by the
                                                  The organization in question is a single-     organization are based on their relative
                                             issue advocacy group that attempts to influ-       importance to the organization’s agenda along
nonprofit
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                                             ence the election of candidates supportive of
                                                                                                                                  continued on page 4
Law and Policy News from
Harmon, Curran,
Spielberg & Eisenberg, LLP

.......................................................................................................................................................
2                       June 1999
           ...............................................................................................................

              Fundraising, cont.
              continued from page 1

              review of the charity’s federal tax returns                 The report’s authors want to better educate
              revealed that in 1997 it received over $2.7            the public about the financial relationships
              million and spent over $2.1 million on                 between the for-profit and nonprofit corpora-
              fundraising.                                           tions and the products being advertised. The
                   These actions are part of an increasing           Attorneys General proposed six guidelines for
              trend in which government officials target             cause-related marketing (see box).
              telemarketers who receive an unduly large
              portion of charitable contributions. While               Charities need to pay careful
              states may not constitutionally cap the
              percentage of revenues solicitors receive, they
                                                                       attention to their fundraising
              can allege fraud if solicitors deceive the public        contracts.
              about what happens to the donated funds.
              Although legitimate charities and their                    Cause-related marketing brings in almost
              fundraisers have not been the target of these          $500 million annually for the nonprofit
              investigations to date, nonprofits might do            organizations. Given the huge stakes, the
              well to look carefully at telemarketing scripts                                           continued on page 4
              and other fundraising materials used on their
              behalf. Representations that contributions will
              be used for specific purposes or activities may          Proposed Cause-Related Marketing
                                                                       Guidelines
              be deemed misleading if the fundraising
              campaign does not turn a substantial percent-            1. Cause-related advertising should not
              age of its receipts over to the charity.                    be false, unfair or deceptive.

              16 States and DC Target Cause-Related                    2. Ads should have clear statements that
              Marketing                                                   the products have not been endorsed
                      “Ready money is Aladdin’s lamp.”                    by the charity, if that is the case.
                                        —Lord Byron                    3. Products cannot be advertised as better
                   Cause-related marketing is an increas-                 than their competitors unless the
              ingly popular, and controversial, way for                   maker of the product AND the charity
              charities to raise money. The IRS often seeks               can prove that is true.
              to impose unrelated business income tax                  4. Ads must reveal that the company has
              (UBIT) on revenue nonprofits earn by                        paid for the right to use the name and/
                                                                          or logo of the nonprofit organization if
                 The Attorneys General are                                that is the case.
                 concerned that consumers are                          5. Ads must reveal how consumers’
                 misled by advertisements.                                purchase of the product(s) influence
                                                                          the amount of money the charity
                                                                          receives from the maker of the
              allowing their name and logo to be used by
                                                                          product.
              for-profit corporations. Moreover, sixteen
              state Attorneys General and the Corporation              6. Exclusive partnerships between for-
              Counsel of the District of Columbia recently                profit corporations and nonprofits are
              issued a joint report arguing that the public               to be avoided, and if they do exist
              may be misled by advertisements that feature                must be revealed to the public.                         nonprofit
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                                                                                                                                  Law and Policy News from
              the names and logos of prominent charities.                                                                         Harmon, Curran,
                                                                                                                                  Spielberg & Eisenberg, LLP


...............................................................................................................................................................
                                                                                                                              June 1999                        3
                                Fundraising, cont.
                                continued from page 3

                                Attorneys General are holding public hearings        revoked solely because of the low ratio of
                                and soliciting comments about their report and       charitable expenditures to gross receipts from
                                the proposed guidelines.                             their main fundraising activity, conducting
                                                                                     sports tournaments. The IRS ruled that the
                                Commercial Activities OK with IRS If                 ratio of donations to non-charitable expendi-
                                Purpose is Charitable                                tures was “commensurate in scope with its
                                    In related news, the IRS has released a          financial resources” because the lopsided ratio
                                Field Service Advice stating that the tax-           was due to an unavoidable substantial increase
                                exempt status of four charities cannot be            in expenses.


                                Ballot Measure, cont.
                                continued from page 2

                                with their expected “resonance with the              line into political activity. 501(c)(3)s in
                                public.”                                             particular should take care that their ballot
                                    In effect the IRS ruled that traditional         measure work and other election-related
                                501(c)(3) or 501(c)(4) ballot measure work           activities are not targeted to suggest electoral
                                may, under unusual circumstances, cross the          goals.


                                      Methods of Substantiating An Electoral Goal
                                      These factors may demonstrate that advocacy work was undertaken to influence
                                      candidate elections:

                                  •    Written opinions from experts in              •   Communication between the organiza-
                                       campaign strategy or public opinion               tion and candidates or a third party that
                                       research that the project is likely to            include a clear statement of the electoral
                                       have an impact on the outcome on an               goal of the project. Such a communica-
                                       election.                                         tion could include a request from a
                                                                                         candidate that the organization carry out
                                  •    Results of voter opinion polls or other           the project or a request for volunteer
                                       statistical analysis of voter trends              assistance for the campaign.
                                       indicating that the project is likely to
                                       have an impact on an election.                •   Partisan methods including publicizing
                                                                                         the names of candidates who agree with
                                  •    Project planning conducted with                   the organization’s issue agenda, “bird-
                                       candidates and/or their aides where a             dogging” candidates to ask pointed
                                       clear electoral goal is stated and                questions or hiring campaign consultants
                                       methods for achieving that goal are               who use traditional political campaign
                                       discussed.                                        techniques.




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Law and Policy News from
Harmon, Curran,
Spielberg & Eisenberg, LLP

.......................................................................................................................................................
4                   June 1999
           ...............................................................................................................


                                                                              Capitol
                                                                                   Letters
              GAO Report: Common Definition
              of ‘Lobbying’ Not Feasible
                   Often, nonprofit officials ask, “Does this        decisions about the best way to regulate
              count as lobbying?” The answer is not easy             lobbying under the tax code. Conversely, the
              because tax rules for 501(c)(3) and non-(c)(3)         report notes that using IRC definition of
              organizations use different definitions. The           lobbying in the LDA context includes costs of
              1998 passage of the Lobbying Disclosure Act            lobbying at the state, local and grassroots
              [LDA] made matters worse by adding yet                 levels, thereby detracting from its usefulness
              another set of definitions. Therefore, Con-            to federal watchdogs. Additionally, the IRC
              gress asked the General Accounting Office              definition of lobbying does not include
              [GAO] to consider common or ‘harmonized’               contacts to influence federal executive branch
              definitions. Since applying the LDA defini-            decisions, one focus of LDA reformers.
              tion to 501(c)(3) organizations’ activities
              could have led to severe restrictions on their
                                                                       Harmonizing the definitions could
              ability to lobby, the nonprofit profit commu-
              nity should be relieved by GAO’s recently-               have led to severe restrictions on
              released report that recommends that these               (c)(3) lobbying.
              definitions not be ‘harmonized.’
                   Semiannual LDA reports publicize the                   After rejecting a ‘harmonization’ of the
              amount of federal legislative and executive            definitions, the report presents two options for
              branch lobbying. They also provide the public          Congressional consideration. One would
              with information regarding who is doing the            eliminate organizations’ options to use the
              lobbying and who is paying for it [NN, 5/98,           IRC definition for LDA reporting. This would
              p.4]. However, LDA defined ‘lobbying’ so               substantially increase the record-keeping and
              differently from the tax law that nonprofits           reporting burdens of the surprisingly small
              might have been required to keep two separate          number of organizations that chose to use the
              sets of records to satisfy both requirements.          IRC definition last year. GAO recommends
                   To ease this burden, LDA provides that            against this option.
              organizations that report their lobbying to the             The second alternative would allow the
              IRS may use either the LDA or the Internal             continued use of IRC definitions, but require
              Revenue Code [IRC] definition. Meanwhile,              that only federal-level lobbying be reported
              Congress instructed GAO to evaluate the                under LDA. While this would produce more
              differences between the definitions, and the           accurate LDA reports, GAO may have
              degree to which those differences could                underestimated the administrative burden of
              influence the level of disclosure by an                separating out federal from non-federal
              organization and to recommend a solution.              lobbying. Moreover, because the IRC
                   Although the report notes that the specific       definition covers fewer communications than
              disclosure goals of LDA would be best served           LDA, GAO cautions that this option could
              if the LDA definitions were used for all               permit some organizations to use the IRC
              purposes, it concludes that such a change              definition and thereby avoid registration and
              would significantly alter prior Congressional          reporting.                                                   nonprofit
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                                                                                                                                  Law and Policy News from
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...............................................................................................................................................................
                                                                                                                             June 1999                         5
                                Employment
                                       Matters
                                Psychological Testing of Job Applicants May
                                Violate ADA
                                     The following was adapted from an               ing of 567 statements such as “I have a good
                                article by Ruth Eisenberg and Debra S. Katz          appetite” or “I have never indulged in any
                                that appeared in the February 8, 1999 issue of       unusual sexual practices”, with which the test-
                                Legal Times. Ruth Eisenberg is a partner at          taker is asked to agree to disagree. Although
                                Harmon, Curran, Spielberg & Eisenberg, LLP.          such tests may well reveal personality traits,
                                Debra S. Katz is a partner at Washington,            including whether a person is outgoing or
                                D.C.’s Bernabei & Katz, where she specializes        trustworthy, some are meant to aid in the
                                in employment discrimination matters.                clinical diagnosis of mental disorders. The
                                     Increasingly, nonprofit and for-profit          ADA prohibits discrimination in employment
                                employers are using psychological tests to           based on mental and physical impairments.
                                screen potential employees. Employers say
                                they are simply trying to ensure that the              Employers say they are simply
                                personality of a new employee “fits” with a
                                                                                       trying to ensure that a new em-
                                particular position and with the company as a
                                whole. However, use of such tests could                ployee ‘fits’ with a particular
                                easily run afoul of the legal protections              position and company as a whole.
                                provided by the Americans With Disabilities
                                Act [ADA]. Therefore, organizations should           Pre-Offer Inquiries Limited
                                carefully evaluate the wisdom of using them,              The ADA prohibits medical examinations
                                especially before an offer of employment is          and disability-related inquiries of job appli-
                                extended. Even after a conditional offer of          cants until after a conditional offer of employ-
                                employment is made, organizations must be            ment has been extended. A major purpose of
                                prepared to demonstrate that any adverse             this provision is to prevent employers from
                                hiring decision was based on job-related             using pre-offer inquiries to exclude persons
                                factors. In most employment contexts, it is          with “hidden” disabilities, such as certain
                                quite difficult to show that ‘personality traits’    psychological problems.
                                qualify.                                                  Equal Employment Opportunity Commis-
                                                                                     sion [EEOC] regulations clarify that at the pre-
                                 Nonprofits should carefully con-                    offer stage, an employer may undertake a limited
                                                                                     inquiry into an applicant’s ability to perform the
                                 sider the wisdom of using psycho-
                                                                                     job, but specific inquiries into the details of an
                                 logical tests before making an                      applicant’s disability are prohibited.
                                 offer of employment.                                     Only a few court decisions have ad-
                                                                                     dressed the question of pre-offer psychologi-
                                     For example, the Minnesota Multi-phasic         cal testing, and have reached contradictory
                                Personality Inventory [MMPI] is a test that is       conclusions. A federal trial court in Florida
                                increasingly used to evaluate applicants,            has concluded that pre-offer psychological
                                particularly those for executive-level posi-         testing administered to an applicant for a
nonprofit
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                                tions. MMPI is a standardized exam consist-          corrections job violated the ADA because the
Law and Policy News from                                                                                              continued on next page
Harmon, Curran,
Spielberg & Eisenberg, LLP

.......................................................................................................................................................
6                   June 1999
           ...............................................................................................................

              Psychological Testing, cont.
              continued from previous page

              tests “provided evidence that would lead to                 This result seems misguided in light of
              identifying a mental disorder or impairment.”          the clear provision in the ADA protecting
              Other courts have reached other conclusions,           those who are perceived to be disabled. One
              depending upon the particular test and the             federal court of appeals recently ruled that the
              position for which testing was being adminis-          ADA’s policy of eliminating disability
              tered.                                                 discrimination is best served by allowing
                                                                     victims of illegal medical questioning to sue.
              Post-Offer Inquires
                                                                     Another court of appeals has dodged the
                   Medical examinations and disability-
                                                                     question twice, both times finding that the
              related inquiries are permitted after the
                                                                     plaintiff had failed sufficiently to allege injury
              employer has extended a conditional job offer.
                                                                     in fact. Cases to be decided by the Supreme
              However, the offer can be conditioned on the
                                                                     Court this term may shed light on whether
              results of the examination only if all entering
                                                                     individuals who are perceived to be disabled,
              employees, regardless of disability, are
                                                                     but are not in fact disabled, are covered by the
              subjected to the examination and the informa-
                                                                     ADA.
              tion is kept confidential. After an offer of
              employment has been made, employers can
              require medical examinations and ask disabil-            Court cases on the issue of pre-
              ity-related questions, including questions
                                                                       offer testing have reached contra-
              about sick leave usage, illnesses, and diseases.
              Questions do not have to be job-related. But             dictory conclusions.
              if an employer withdraws an offer after such
                                                                          Another area of potential litigation of
              testing or inquiries, the criteria used to screen
                                                                     which nonprofit employers should be aware
              out the potential employee must be job-related
                                                                     involves employers who base adverse employ-
              and consistent with business necessity, and
                                                                     ment actions on an individual’s false answer to
              must not tend to screen out individuals with
                                                                     impermissible questions about disability. In
              disabilities.
                                                                     this situation, during the hiring process, the
                                                                     employer has asked questions that are imper-
                                                                     missible under the ADA. In order to get the
                 An employer violated the ADA
                                                                     job, the potential employee has answered one
                 when it terminated an employee                      or more questions incorrectly. Subsequently,
                 based on answers to impermissible                   the employer determines that the answer was
                 questions.                                          false and discharges the employee based on
                                                                     misconduct - answering a question falsely in
                                                                     the hiring process. The question is whether it
              Can Applicants Sue?
                                                                     violates the ADA to discharge an employee
                   Recently, employers have raised a legal
                                                                     based on a false answer to a question that
              bar that could frustrate efforts to get relief for
                                                                     should not have been asked in the first place.
              those denied jobs as a result of illegal psycho-
                                                                          In the one federal decision to address this
              logical testing. An increasing number of
                                                                     issue, the district court rejected the employer’s
              courts have agreed that applicants who are
                                                                     argument that the employee was fired because
              screened out of jobs as a result of psychologi-
                                                                     he engaged in misconduct. The court held that
              cal testing have standing to challenge this
              action only if they are qualified individuals
                                                                     the employer violated the ADA when it
                                                                     terminated the employee based on false
                                                                                                                                  nonprofit
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              with a disability as defined by the ADA.                                                                            Law and Policy News from
                                                                     answers to impermissible questions.                          Harmon, Curran,
                                                                                                                                  Spielberg & Eisenberg, LLP


...............................................................................................................................................................
                                                                                                                             June 1999                         7
                                                                                                      (202) 328-3500
                                                                                                      Washington, DC 20036
                                                                                                      Suite 600
                                                                                                      1726 M Street, NW
                                                                                                      Spielberg & Eisenberg, LLP
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        Getting to Know Harmon, Curran,
        Spielberg & Eisenberg, LLP
        Ruth E. Eisenberg, Partner
        • Washington University, A.B., 1976
        • St. Louis University School of Law, J.D., cum laude, 1980
        • Law Clerk, U.S. Court of Appeals for the Eighth Circuit, 1980-81
        • Co-author, The Rights of People Who are HIV Positive: The Basic ACLU Guide to the Rights of People
          Living with HIV Disease and AIDS (1996)
             Ruth specializes in employment, disability rights and civil rights law. She advises the firm’s nonprofit
        clients, particularly on employment issues and helps clients with serious health problems to resolve disputes
        with health, life and disability insurance companies. Before joining Harmon, Curran, Spielberg & Eisenberg,
        LLP in 1996, Ruth litigated disability cases as the Deputy Litigation Director at National Veterans Legal
        Services Program (1991-1996) and represented people with HIV as Director of Legal Services at the Whitman-
        Walker Clinic (1988-1991). She is a recognized expert in the legal issues involved in HIV disease. Ruth is a
        member of the Whitman-Walker Clinic’ Legal Services Operating Committee.




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