Censorship of Nonprofit Issue Advocacy Passes U.S.
Only after the Freshmen Bill is voted on will one of these two bills go to the Senate.
The House has rejected a proposed Constitutional amendment which would change the First Amendment freedoms guaranteed to issue advocacy (and upheld by the U.S. Supreme Court in the 1976 case Buckley v. Valeo). The House also rejected a proposal which would have created a temporary commission to propose federal campaign finance reforms, to be considered by Congress under fast-track procedures (i.e., they cannot be amended).
FSC takes no position with regard to
campaign reform legislation except where it restricts
advocacy organizations' exercise of their Constitutional
IRS Issues Proposed Intermediate Sanctions
The IRS states that independent contractors, such as attorneys, accountants, and investment managers, are not "organization managers." Furthermore, where the IRS is examining a possible excess benefit transaction, the status of being an independent contractor is described as a fact and circumstance tending to show that the individual is not a "disqualified person" (unless the individual acted as an attorney, accountant, or investment manager with respect to a transaction that resulted in an excess benefit to him or her).
However, fundraisers beware. A revenue-sharing transaction may constitute an excess benefit transaction regardless of whether the economic benefit provided to the disqualified person exceeds the fair market value of the consideration provided in return &emdash; if "it permits a disqualified person to receive additional compensation without providing proportional benefits that contribute to the organization's accomplishment of its exempt purpose." (Emphasis added.) One factor the IRS will look at is the ability of the party receiving the compensation to control the activities generating the revenues on which the compensation is based. The IRS provides examples to illustrate the principles used in determining whether a revenue-sharing transaction constitutes an excess benefit transaction. Proposed §53.4958-5, example 2 addresses a contract between a nonprofit ("L") and a company that manages charitable gaming activities for public charities ("H"). Under the contract, H agrees to provide all of the staff and equipment necessary to carry out charitable gaming operations on behalf of L, and to pay L a certain percent of the net profits, which are calculated as the gross revenue less rental for the equipment, wages for the staff, prizes for the winners, and other specified operating expenses. The IRS concludes:
All of the gross revenues generated by the charitable gaming operation belong to L. The arrangement between H and L allows a portion of those revenues to inure to H. Therefore, this arrangement results in the inurement of L's net earnings to the benefit of H, and the entire amount paid to H under this arrangement constitutes an excess benefit under the rules of this section. (Emphasis added).
Evidently, the IRS is advancing the proposition that any contingency arrangement which provides for a portion of the nonprofit's gross revenues to be paid to the fundraiser results in the inurement of nonprofit's net earnings to the benefit of the fundraiser. Moreover, under this example, the only reasonable contingent compensation appears to be no compensation &emdash; as the entire amount paid to the fundraiser constitutes an excess benefit, not the portion calculated to be excessive.
According to published reports, Treasury Associate Tax Legislative Counsel Catherine Livingston told the American Bar Association's Exempt Organizations Committee that the key in analyzing revenue-sharing arrangements under the proposed regulations is "whether the arrangements could cause the interests of the organization and disqualified person to diverge."
The proposed regulations provide that a compensation arrangement between an applicable tax-exempt organization and a disqualified person is presumed to be reasonable, and a transfer of property or any other benefit or privilege between an organization and a disqualified person is presumed to be at fair market value, if three conditions are satisfied. The three conditions are as follows: (1) the compensation arrangement or terms of transfer are approved by the organization's governing body or a committee of the governing body composed entirely of individuals who do not have a conflict of interest with respect to the arrangement or transaction; (2) the governing body, or committee thereof, obtained and relied upon appropriate data as to comparability prior to making its determination; and (3) the governing body or committee adequately documented the basis for its determination concurrently with making that determination. The proposed regulations also provide a special safe harbor (i.e., the governing body's reliance on comparability data from 5 similar groups) for organizations with annual gross receipts of less than $1 million.
The proposed regulations would apply to "transactions occurring on or after September 14, 1995." (Emphasis added.) However, these taxes are not applicable to transactions "pursuant to a written contract that was binding on September 13, 1995, and at all times thereafter before the transaction occurred." (Emphasis added.) The IRS states that contracts which are materially modified, including term extensions, would be treated as a new contract.
One immediate impact of the proposed regulations would be the additional recordkeeping imposed on nonprofits. The IRS estimates the annual recordkeeping burden will increase by between 3 and 308 hours per year.
A prominent issue regarding intermediate
sanctions has been the standards which will determine when
such sanctions are imposed in addition to revocation of
tax-exempt status. The IRS notice stated that imposition of
section 4958 excise taxes would "be the sole sanction
imposed in those cases in which the excess benefit does not
rise to a level where it calls into question whether, on the
whole, the organization functions as a charitable or other
tax-exempt organization." (Emphasis added.) The IRS states
that this analysis would examine factors such as:
Comments and requests for a teleconference on these proposed regulations are due by November 2, 1998. Comments (a signed original and eight copies) may be mailed to CC:DOM:CORP:R (REG-246256-96) Room 5226, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, D.C. 20044, hand delivered to CC:DOM:CORP:R (REG-246256- 96) Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue NW, Washington, D.C. 20044, or submitted electronically at www.irs.ustreas.gov/prod/tax_regs/comments.html.
Comments were sought concerning the relationship between revocation of tax-exempt status and the imposition of section 4958 excise taxes. Comments were also requested with respect ot the effect of the proposed regulations on different compensation arrangements, including revenue-based compensation, deferred compensation, and the use of options as compensation. We encourage readers of FREE SPEECH to submit comments regarding these proposed regulations to the IRS, and ask that you provide us with a copy of your comments. For a copy of FSC's comments to help you prepare your comments, please call (703) 356-6912.
FSC members will be receiving a copy of
these proposed regulations, with a more detailed analysis of
State Charitable Solicitation Speech Police Visit
No credible reason was given for the visits &emdash; in one case the agents of both agencies expressed an interest in simply confirming the address of the nonprofit.
If nothing else, this visit adds an
interesting insight to the analysis of state charitable
solicitation laws published by FSC entitled "Consumer
Protection or Bureaucratic Racket." Not only do state and
local governments impose $100 million of administrative fees
and costs each year on U.S. nonprofits, but the income which
they have derived from nonprofits provides state and local
governments with money to burn (e.g., sending state
employees out-of-state merely to confirm nonprofit
addresses, and to hand-deliver packets of information).
FSC Leadership Considers Litigation Against AICPA Over
SOP 98-2 provides new financial standards (for Fiscal or Calendar Years starting on or after December 15, 1998) for costs of joint activities &emdash; activities involving both fundraising and other functions, such as program activities or management and general activities. SOP 98-2 requires that unless certain standards regarding the (1) purpose, (2) audience, and (3) content of an activity (as defined in the SOP) are met, all the costs of these joint activities should be reported as fundraising costs, including costs that otherwise might be considered program or management and general costs if they had been incurred in a different activity. This is a change from the standard in SOP 87-2 (currently in effect) which called for all circumstances surrounding the activity to be considered together when determining allocations.
The allocation of costs from joint
activities solely to fundraising is important, because more
and more regulatory and quasi-regulatory agencies use
fundraising expenditures (as a percentage of total
expenditures) as the basis for judging nonprofits. For
example, the Attorney General of New York, Dennis Vacco,
offers Internet access to a database
charities/pennies98/intro98.html) which he claims provides
data on the percentage of 1996 fundraising expenditures (out
of total expenditures) for 4,200 charities. Further, federal
and state agencies encourage donors to inquire regarding the
percentage of expenditures allocated to fundraising before
donating funds. By requiring nonprofits to exaggerate the
resources actually spent on fundraising activities, the
AICPA's SOP 98-2 has become part of NAAG's effort to squeeze
nonprofits which do not receive large foundation or
government support out of business.
Oklahoma Attacks Nonprofit for Failure to Register
Under Dormant State Charitable Solicitation Statute
New Law Protects Charitable Donations from Bankruptcy
United Cancer Council Case Amicus Briefs Filed
Supreme Court Refuses To Define Political
Several individuals, including James Akins, filed a complaint with the FEC stating that the American Israel Public Affairs Committee ("AIPAC") had made more than $1,000 in political expenditures in a year, making it a "political committee" subject to the reporting requirements of the FECA. AIPAC responded that the expenditures identified in the complaint were not political expenditures, but rather its communications (as a membership organization) to its members. The FEC's General Counsel rejected AIPAC's description of its expenditures, and concluded that AIPAC had exceeded the $1,000 threshold on political expenditures. However, the Commission decided that AIPAC was not a political committee because the nomination or election of individuals was not a "major purpose" of the organization, and therefore dismissed the complaint.
Akins and the other complainants sued in federal court, asking it to review the FEC's dismissal of their complaint. The trial judge gave summary judgment to the FEC, but the U.S. Court of Appeals for the District of Columbia Circuit, sitting en banc, reversed, stating that the FEC's dismissal of the complaint reflected a definition of "political committee" which was based upon a mistaken interpretation of the FECA.
The FEC appealed the case to the U.S.
Supreme Court, challenging whether the complainants had any
right to sue the FEC, and asking whether AIPAC qualified as
a political committee under the FECA. However, the U.S.
Supreme Court did not decide whether AIPAC is a political
committee, ruling that AIPAC's characterization of the
expenditures cannot be assessed until after the FEC has
completed its efforts to redefine "membership" &emdash; in
response to the rejection of the FEC's rules in that area by
the Court of Appeals for the District of Columbia Circuit in
another case. The Supreme Court did affirm the right of
Akins and the other complainants to file suit in federal