Vol. VI, No. 5November - December 1998

FSC Seeks AICPA Reconsideration of SOP 98-2
The Free Speech Coalition has contacted the American Institute of Certified Public Accountants ("AICPA"), laying the groundwork to seek reconsideration of its Statement of Position ("SOP") 98-2. 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 would require that unless strict 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.

SOP 98-2 is important, because it would require nonprofits to exaggerate the resources actually spent on fundraising activities. Currently, more and more regulatory and quasi-regulatory agencies use fundraising expenditures (as a percentage of total expenditures) as the basis for judging nonprofits. Further, federal and state agencies encourage donors to inquire regarding the percentage of expenditures allocated to fundraising before donating funds. Additionally, SOP 87-2 is cited in the Instructions for the 1997 IRS Form 990 (in the section addressing joint cost allocations involving fundraising). It can be anticipated that SOP 98-2 will replace SOP 87-2 in a future set of IRS instructions

SOP 98-2 is controversial, because it was adopted in the face of vehement and nearly universal opposition from the nonprofit community, as well as opposition from an overwhelming majority of the Certified Public Accountants who commented on the prior draft that was publicly distributed (the "exposure draft"). The Free Speech Coalition actively encouraged nonprofits and fundraising agencies to submit comments to the AICPA regarding the exposure draft. FSC's own comments observed that the exposure draft (which is essentially identical to SOP 98-2) would create serious distortions (instead of accurate accounting allocations), was internally inconsistent, and established problematic tests in its effort to establish whether of not a particular activity is a "bona fide" program (or management and general) function.

The Free Speech Coalition has contacted the AICPA, seeking correspondence and memoranda regarding possible revisions to SOP 87-2, including comments received regarding the exposure draft, as well as documentation as to how the SOP was field tested, the actual field testing results, and any reports and recommendations. Some information has been received from the AICPA, and efforts to obtain the remaining information are ongoing. FSC is in the process of preparing a Request for Reconsideration that FSC is advised would be circulated to the relevant AICPA committees and considered. If that approach does not work, FSC will be examining a possible legal challenge to these new standards.

FSDEF Files Amicus Brief in 10th Circuit ATA v. Giani Appeal
On November 10, 1998, the Free Speech Defense & Education Fund, Inc. (FSDEF) and 30 other nonprofits and companies filed an amicus curiae brief with the United States Court of Appeals for the 10th Circuit. This brief argued that the Utah Act is unconstitutional: it violates appellant fundraising agency American Target Advertising's ("ATA") Due Process rights because there is no nexus between ATA and Utah justifying the state's licensing jurisdiction; it violates ATA's rights under the Commerce Clause because it imposes an excessive burden upon ATA's interstate operations without resulting in any legitimate benefit to the state; and it violates ATA's First Amendment rights because it imposes a discriminatory prior restraint upon nonprofit solicitors and the residents of Utah, and grants unconstitutional discretion to Utah government authorities.

The following 501(c)(3)s joined FSDEF's brief: American Center for Law & Justice, American Studies Center, Americans Back in Charge Foundation, America's Future Inc., Citizens United Foundation, Claremont Institute, Free Congress Research & Education Foundation, Lincoln Institute for Research and Education, Inc., Local Government Council, National Center for Cardiac Information, Policy Analysis Center, Second Amendment Foundation, United States Equestrian Team, Inc., United States Taxpayers Institute , and Young America's Foundation. The following 501(c)(4)s also joined the brief: American Conservative Union, Christian Coalition, Citizens United, Council for Government Reform, Council of Volunteer Americans, Inc., The Seniors Coalition, 60 Plus Association, TREA Senior Citizens League, and United Seniors Association Inc. Direct Mail agencies joining the brief were: Concepts Direct, Inc., Delta Group USA, Inc., Morgan-Meredith & Associates, Richard Norman Company, Squire & Heartfield Direct, Inc., and Stephen Winchell & Associates.

Mark Fitzgibbons, Esquire, attorney for ATA, believes that the Tenth Circuit's decision in this case is likely to be reviewed eventually by the U.S. Supreme Court, because the case will greatly affect future discussions of public policy issues in America. He anticipates that the Court will recognize that this case is one of the most important First Amendment cases in a long time, as Utah's statute, and similar state statutes, are having a significant impact on the right of Americans to receive public policy information &emdash; core political speech &emdash; from nonprofits. The states have continued to grow bolder and more aggressive, adding more conditions every year through their licensing and regulation of nonprofit communications. Mr. Fitzgibbons observes that one fearful consequence of a court decision upholding the existing state charitable solicitation laws (in light of state officials' propensity to expand their power) would be the imposition of additional bureaucratic burdens on nonprofit communications. By contrast, a win by ATA would certainly inhibit state regulators' aggression against nonprofits' Constitutionally-protected expression (as well as American's rights to receive &emdash; and continued access to &emdash; political speech).

U.S. Supreme Court Rejects Effort to Reduce First Amendment Protections of Political Speech
On November 16, 1998, the U.S. Supreme Court refused to hear the appeal of an April 1998 decision (by the U.S. Court of Appeals for the Sixth Circuit) which had struck down a Cincinnati ordinance as unconstitutional. The Cincinnati ordinance had limited the amount which city council candidates could spend on their election &emdash; a restriction which is popular among incumbent politicians as a means of limiting spending by unknown challengers, and ensuring incumbents' re-election.

The appeal of the Sixth Circuit opinion was openly admitted to be an effort to convince the Court to overturn its 1976 decision in Buckley v. Valeo, which recognized that political speech (including expenditures by political candidates) was protected under the First Amendment. The Director of the National Voting Rights Institute, which represented the city of Cincinnati in the appeal to the Supreme Court, stated that his organization's effort to reduce the First Amendment protections accorded political speech in elections "is potentially a decades-long fight."

New Nonprofit Postage Rates Become Effective January 10, 1999
Another increase to nonprofit postage rates is scheduled to be implemented on January 10, 1999. Rates will increase an average of 9.6 percent. However, the "Basic" nonprofit standard rate with no destination entry discount will increase by 25 percent &emdash; from 13.5 cents per piece to 16.9 cents per piece

There are currently three ongoing appeals (including one brought by the Alliance for Nonprofit Mailers) in the U.S. Court of Appeals for the District of Columbia Circuit which are challenging the new postage rates. However, none of these appeals will delay the scheduled implementation of new rates.

IRS Drops Proposal to Raise Threshold for Form 990 Reporting
The Internal Revenue Service has announced that it is not exploring an increase in the annual revenue threshold determining which nonprofits must file a Form 990. Currently, nonprofits with annual revenues at or above $25,000 a year generally must file a Form 990 with the IRS each year.

The IRS solicited comments on a proposal to increase the threshold to $40,000 or higher, noting that the threshold had not increased since 1982. However, opposition from state attorneys general and other bureaucrats led the IRS to drop the proposal. For example, comments from the National Association of State Charities Officials to the IRS asserted that "[i]t is often the smaller, less sophisticated charities that have the greatest need for checks and balances and public scrutiny." Of course, any action which might reduce state charity officials' ability to micromanage nonprofits will be fought tooth and claw by those state bureaucrats. Evidently, it is more important that the revenues of these small nonprofits benefit regulators than that the nonprofits accomplish their intended charitable purposes.

AARP, Federal Trade Commission, and State Attorneys General Jointly Attack Telephone Solicitations
In an unusual move, the Federal Trade Commission and 40 state attorneys general have joined with a section 501(c)(4) organization &emdash; the American Association of Retired Persons (AARP) &emdash; to attack fundraising practices by other tax-exempt organizations. AARP has apparently been selected by these government officials to instruct seniors regarding which telephone solicitations are legitimate.

As a first step, the FTC worked with AARP and state officials to develop this program. Later, federal and state officials joined AARP in a press conference where AARP announced its operation of what it called a "reverse boiler-room," using telemarketing to warn seniors against telephone fundraisers. AARP-recruited volunteers have also taped telemarketing calls (the legality of this practice has been questioned).

The government officials' hostility towards telephone solicitations is modeled by Connecticut AG Richard Blumenthal, who intoned that, "Consumers should see red, and hear warning bells and whistles, whenever a telephone solicitor calls. The tactics may vary...but the result, invariably, is to deprive truly critical public and worthwhile charities of scarce dollars and credibility."

The Director of the FTC's Bureau of Consumer Protection was somewhat more restained when she said that, "together, an aggressive law enforcement effort and an educated consumer can stop fraudulent charitable fundraising. We encourage consumers to continue their record of generous giving, and suggest that they investigate, ask questions, and seek information that will assure them their contributions are being used as they intended." As part of the joint program, the FTC has filed five federal lawsuits alleging deceptive practices by telemarketers, while 10 state attorneys general have filed a total of 34 legal actions alleging deceptive charity appeals.

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. However, contributions to the Free Speech Defense & Education Fund, Inc., a 501(c)(3) public charity, are tax-deductible.