Vol. IV, No. 5 September - October 1996

New Hampshire Compels Speech; Micromanages Nonprofits
Under recent statutory amendments (RSA 7:19, II), the State of New Hampshire requires nonprofits - which engage in transactions with its directors, officers or trustees involving more than $5,000 - to first publish notice of the transaction in a "newspaper of general circulation." This compelled speech requirement is the first of its kind imposed by a state and more onerous than the burden placed on for-profit businesses. The Free Speech Coalition believes such compelled speech violates the First Amendment.

Additionally, New Hampshire's revised statute also contains the following new requirements on nonprofits:
• Prohibits loans by a charity to directors, officers, or trustees.
• Prohibits lending money or property to a board member.
• Prohibits the sell or lease of land to or from a board member without court approval.
• Prohibits board members from doing "unfair" business with the nonprofit.
• Requires board adoption of a government-approved "conflict of interest" statement.
• Mandates that transactions of more than $500 per year with a director, officer or trustee be approved by a two-thirds vote of the board of directors. These rules apply not only to board members, but also to immediate family members of board members.

Moreover, the state is attempting to impose these requirements on all nonprofits that mail into New Hampshire - not just nonprofits incorporated in New Hampshire - even if their only contact with the state is by mailing to New Hampshire residents. FSC is sending a letter to New Hampshire's Attorney General outlining its constitutional objections to the statute.

Hawaii Ends Nonprofit Registration
Hawaii has moved to the forefront in regulatory reform by repealing all code sections governing the registration of nonprofits. Sections 467B-2, 467B-11 and 467B-14 of the Hawaii Code were repealed effective July 1, 1996. These sections had required every nonprofit operating in Hawaii to file extensive information with the state. Under the statute as revised, nonprofits still are prohibited from using unscrupulous methods to raise funds, but the burden of filing time-consuming and redundant paperwork is no longer imposed. FSC recently wrote Hawaii Governor Benjamin J. Cayetano, noting that, "Hawaii now leads the way in removing restrictions on the free exercise of First Amendment rights by nonprofit organizations."

FSC has reported widely on Hawaii's Charitable Solicitation Act. The February 1995 edition of FREE SPEECH detailed Hawaii's requirement that nonprofit organizations must have the donor's permission, in advance, to be solicited. To continue the reform in Hawaii, this "positive-option" statute should be the next Hawaiian law to be scrapped.

Delaware’s Harsh New Rules
While some states see the value of repealing costly, ambiguous and unnecessary regulation, Delaware is going in the opposite direction. The Delaware Charitable Solicitation Act of 1996 (S.368) mandates, among other things, that persons soliciting donations for charities must give their name before asking for a donation. Additionally, solicitors must also provide the name of the charity, the purpose of the donation, and the amount/percentage of the contribution that will be used for programs and fundraising (or a "good faith" effort to make such a calculation).

Violating any of these rules is considered "deception, fraud, false pretense, false promise, misrepresentation, or the concealment, suppression, or omission in connection with a charitable solicitation, whether or not any person has in fact been misled, deceived or damaged thereby" (emphasis added).

The governor signed the bill on July 25, 1996, and the law became effective September 24, 1996. Paradoxically, pushing for this new burden on nonprofits was the Delaware Association of Nonprofit Organizations.

Double Sanctions Threaten Nonprofits Under TBOR2
The Taxpayer Bill of Rights 2 (TBOR2), enacted last summer, permits the IRS to impose "excess benefits taxes" on nonprofits in lieu of or in addition to revoking their tax-exempt status. Such taxes, placed on "disqualified persons," can be subject to a tax of up to a 225 per cent of the amount by which the benefit exceeds fair market value. The exact definition and calculation of "fair market value" is not defined. Nonprofits should consult their attorneys and tax advisers to assure that they are in compliance with the new act. CCH Legal Publishers reported that "TBOR2 will clearly increase the need for adequate, contemporaneous documentation of fair market value from independent sources."

In January 1996, FSC wrote to Senator William Roth (chairman of the Senate Finance Committee) and Congressman Bill Archer (chairman of the House Ways and Means Committee) advising them of the danger, and excessive burden, that double sanctions could have on nonprofits.

Unfortunately, only FSC vigorously alerted Congress to this danger. One nonprofit recently wrote that "the IRS is expected to act swiftly and with force with this new weapon that it has been seeking for years." Now, with the TBOR2 becoming law, double sanctions are a new weapon in the IRS's arsenal.

Additional burdens in TBOR2 for nonprofits include:
• Requirement to provide copies of Form 990 to any individual who asks (previously nonprofits only had to allow for inspection).
• Expanded reporting requirements on Form 990 of taxes paid related to excess expenditures to influence legislation, disqualified lobbying expenditures, political expenditures and excess benefit transactions and other transactions related to disqualified persons.

There is one piece of good news from TBOR2. Volunteer board members now are exempt from tax-related penalties. This section, known as the congressional exemption, frees board members who receive no financial remuneration from the prospect of liability for tax penalties incurred by the nonprofit.

Due to the complexity of the new law, various organizations have conducted information sessions on compliance. Nonprofits unsure as to how to comply with the new law can contact FSC at (703) 356-6912 for references to technical information. FSC will be draft and file comments with the IRS in November regarding the anticipated regulations.

IRS Charged With Political Harassment
An October 23, 1996 op-ed piece in the Wall Street Journal, written by the Western Journalism Center's founder and executive director, Joseph Farah, charges the IRS with harassment, saying that IRS officials questioned the organization on its choice of investigative journalism projects, selection of individual reporters, selection criteria for articles, as well as individuals selected for review committees. The Center says that it has been singled out because of its critical expose of government scandals.

FSC obtained copies of IRS Information Document Request forms to the WJC requiring the nonprofit to provide "copies of all correspondence files for 1995, copies of all documents related to the selection of an investigative reporter and how the topic was selected." As with most nonprofits, WJC believes it is improper for the government to require it to provide copies of every letter it sent or received during the year.

WJC also says a government official contacted at least one contributor to the nonprofit and told him his company's government business would be in jeopardy if he continued to support the nonprofit. More information on the Center and its fight with the IRS can be viewed on WJC's site, http://www.e-truth.com.

North Carolina: Nonprofits Responsible for Contractors’ Actions
Changes to North Carolina's Charitable Trusts Statutes apparently seem to allow that state to deregister a nonprofit if their fundraising counsel is unregistered with the state government. Article 3, Section 131F-15(a) of that code states that "a person shall not act as a fundraising consultant in this State unless that person has obtained a license from the Department." According to Article 2, Section 131F-6(a)(13), nonprofits are required to provide "[t]he names, street address, and telephone numbers of any solicitor, fund-raising consultant...together with a statement setting forth the specific terms of the arrangement for salaries, bonuses, commission, expenses, or other compensation."

Once state officials match lists of nonprofits with registered fundraising counsel, some nonprofits may be in for a surprise. A nonprofit's registration in North Carolina could be jeopardized if even one of its multiple fundraising counsel is not registered. Although a fundraising counsel may only advise a nonprofit, and their name never appears anywhere on a mail sent into North Carolina, state law still apparently requires their registration. A nonprofit could have their own license to solicit contributions revoked if one of their counsel did not register with North Carolina officials.

This "back-door" potential punishment for nonprofits is outrageous. Nonprofits cannot and should not be held responsible for the activities of their consultants. Imagine if the same standard was applied to a nonprofits' lawyers, accountants, plumbers, electricians, etc.

FSC Urges End to Oklahoma Bottleneck
The State of Oklahoma continues to ignore applications for charitable solicitation licenses (except to deposit the application fees). The Attorney General's office says the backlog is now hundreds of applications, and is growing daily. Current state law criminalizes charitable solicitation without a license, with penalties ranging from loss of tax-exempt status to a $1,000 fine and two years in prison, making it a felony. The solution to Oklahoma's problem is clear: end this useless and confiscatory registration requirement.

The lawyer retained by the Free Speech Coalition to help on this project, former Oklahoma Attorney General Susan Loving, recently met with an Assistant Attorney General in Oklahoma City and explained FSC's solution: focus on prosecuting fraud, rather than investigating and registering every nonprofit that mails into Oklahoma.

Even if the requirement for out-of-state nonprofits is not dropped completely, current law allows for the Attorney General's office to enter into reciprocal agreements with other states to accept copies of forms filed by nonprofits in those states (18 O.S. Supp. 1995, Section 552.13). Oklahoma has the opportunity administratively to drop its archaic registration requirements for nonprofits, allowing nonprofits to spend more of their contributions on programs and less on meaningless (and expensive) registration.

The Free Speech Coalition, Inc. is a nonpartisan, nonprofit 501(c)(4) organization which educates, lobbies, and litigates to defend the rights of advocacy organizations and their members. FSC needs your support to continue its fight to protect the rights of citizens to associate together and exercise their First Amendment right to petition their government for redress of their grievances. Contributions to the Free Speech Coalition, Inc. are not tax-deductible.