June 2013

In this issue:

  • In California, on May 29, 2013, the state senate approved legislation that strips tax-exempt status from youth groups that discriminate on the basis of sexual orientation.
  • Beginning January 1, 2014, Nevada will require charities to register as a condition to solicitation. Only charities will be required to register initially.
  • Under a new law, first time donors to a registered charity in Canada will receive an extra 25% credit when claiming their charitable donation.


In an interesting case, governmental institutions are the parties to a lawsuit.  The University of Arkansas sought a property tax exemption in Pulaski County that was denied.  The university took the matter to court and again received an adverse ruling, which was appealed to the Arkansas Supreme Court.  The university claimed that it had sovereign immunity, and therefore could not be subject to the tax.  The Arkansas Supreme Court ruled that the immunity is based upon a jurisdictional rule that creates immunity from the lawsuit, but does not include immunity from taxation.

Comment: If the University of Arkansas cannot get a property tax exemption, who can?  The case is another example of government’s need for tax income and achieving same by narrowing the exemptions, or eliminating them completely.

On May 29, 2013, the state senate approved legislation that strips tax-exempt status from youth groups that discriminate on the basis of sexual orientation.

Nonprofit corporations that were formed in the District of Columbia prior to 1963 have until the end of this calendar year to make an election to be governed under the nonprofit laws of the District.  The Nonprofit Corporation Act passed in the District in 2010 creates some degree of uncertainty.  Regulations under the Act have yet to be finalized, but by taking this step may clarify the status of the charitable organizations.

The Department of Agriculture & Consumer Services will no longer accept a contract addendum extending the term of a contract without a new notice.
* * * * *
According to a Tampa newspaper, Charity for Homeless Youth has filed a lawsuit against two participants who, contrary to their contracted agreement, dropped out of their program after receiving guidance and financial help.  The contract that the participants signed obligates them to return all the items and repay the cost of the aid provided if they fail to complete the program.  Here is the twist.  The question is whether the contracts are enforceable because some of those who signed were minors.

Comment: It is an unusual circumstance for a charity to sue for the return of aid that was provided, regardless of the situation.

House Bill 996 increases the fee for charities that apply to engage in charitable gambling from $200 to $400.  It also decreases the length of the license that is granted from two years to one year.  Further, it requires a larger payment to the state, to-wit: from three percent to five percent.  The bill expands the number of events that can be held from eight to twelve so long as they hold no more than one per month.
* * * * *
Twenty counts of mail fraud have been filed against an individual in the Rockford area for starting two children’s charities which collected over $120,000.  The allegations include the assertion that none of the funds went to help children, but rather, went to help pay personal expenses of the founder.  The founder has maintained his innocence, and claimed the charities were in the earliest stages of work.

Apparently an attempt to reinstate property taxes against otherwise tax-exempt nonprofit organizations has been stalled in the legislature.

What happens when families who are officers and directors of a private foundation that has over $1 billion in assets have disagreements over the goals and vision of the foundation?  In this instance, they went to court attempting to split the foundation in two.  The lawsuit to divide the William Davidson Foundation was dismissed by an open county probate court in late May for lack of jurisdiction.

Comment: Obviously this decision did not resolve the differences.  You can expect more legal action to be taken between the factions of the family in a case that will be worth following.

* * * * *
The Office of the Attorney General has ordered a professional fundraiser to cease and desist its use of telemarketing rebuttals that mislead callers by referencing the company’s charitable solicitation license issued by the Charity Law Section.

Comment:  This opens up a very interesting question.  Can the professional fundraiser who has certain rights of freedom of speech be found guilty of violating a law for simply stating something that is true?  The law at issue generally prohibits the use of the registration as an implied endorsement.  The question is: whether the truthful statement of fact can be actionable.

* * * * *
If the City of Detroit files for bankruptcy and the trustee begins selling off assets to pay creditors, will the Detroit Institute of Arts lose its treasured collection?  That concern has caused state legislators to try and pass legislation to protect the collection.  According to an article in the Detroit Free Press, the legal experts consulted expressed doubt that legislation could have that effect.

This was one of the few remaining states that did not require charities to register as a condition to solicitation.  That will change on January 1, 2014.  Only charities will be required to register initially.  The law does not contain any provisions requiring fundraisers or fundraising consultants to register.

On June 21, 2013, the Senate and the Assembly unanimously passed legislation sponsored by the Office of the Attorney General titled “The Nonprofit Revitalization Act,” which seeks to reform state law governing the operation and governance of nonprofit entities, allowing them to incorporate, dissolve, and facilitate mergers more easily.  The law also incorporates new standards allowing the state greater flexibility for the Office of the Attorney General to provide oversight on governance.  The law requires board members to be more actively involved, and necessitates the requirement of a conflict of interest policy.  The Office of the Attorney General called the legislation the “first major overhaul of the state’s charity laws in over 40 years.” 
* * * * *
A state court judge assessed nearly $3.1 million in restitution from a telemarketing fundraiser in the state.  Previously, the court had determined that there was liability.  The verdict is expected to be appealed.

The generosity of Americans never ceases to amaze.  According to a Cleveland newspaper, a charity established to help the three women who were kidnaped has already raised $650,000.

House Bill 2060 allows the Attorney General to issue an order disqualifying a charitable organization from receiving a contribution that is tax deductible for the purposes of the Oregon Income Tax and Corporate Excise Tax, if the Attorney General deems that the charitable organization has failed to expend at least thirty percent of its total annual functional expenses on program services when the expenses are averaged over the most recent three fiscal years.  The law provides the Attorney General further discretion allowing him to decline issuing the disqualification if he/she finds certain mitigating circumstances.  Charities that are disqualified are required to give a mandatory disclosure that they are subject to disqualification orders.  Presumably this legislation will go into effect on or about September 1, 2013.

Comment: There are number of issues of constitutional concern in this legislation.  Forced disclosures at the point of solicitation have been consistently struck down as a form of prior restraint.  Equally troubling in its application may be the use of subjective standards.  The fact that the Attorney General can subjectively rescind the disqualification in specified circumstances is also troublesome.

Legislation has been introduced to amend the Pennsylvania Constitution, which could have the effect of broadening exemption from property tax for land owned by qualified nonprofit organizations.  Critics of the bill claim that will only serve to worsen the financial condition of municipalities that are already struggling for financial resources.

The Department of Commerce recently appointed Daniel O’Bannon as Head of the Division of Consumer Protection.  Mr. O’Bannon replaces Traci Gunderson, who served in the position for the last several years.

As many of you know, the Tampa Bay Times, the Center for Investigative Reporting and CNN issued a report which they described as “America’s Worst Charities.”  The report was compiled over a nine-month period and focused on small charitable organizations which have traditionally used high-cost telemarketing fundraising as their primary source of income.  The report did not take into consideration non-cash contributions or program service represented by same.  The entire focus was on financial efficiency based on dollars received versus dollars netted by the charitable organizations and spent for program.  The report has resulted in a number of reactions with most of them positive from the industry reaffirming the concept that the worth of a charity cannot be judged simply by its financial efficiency. 

Far more important, many in the industry have argued that the true measure of effectiveness should be the impact the charitable organizations are making.  The evaluation of a charity requires a much deeper analysis.  Without any attempt to be exhaustive, the analysis should include:
(1) The program of the charity and how it relates to the prospective donor;
(2) How the charitable organization is pursuing its mission;
(3) How the charitable organization compares with other charities with similar missions that are of equal size or age;
(4) The reputation of the organization in the charitable community;
(5) The assurance that the charity operates in a transparent manner; and
(6) the financial efficiency of the charity.  The willingness of some of the private “watchdog” agencies to write a letter talking about the impact of charities as compared to financial efficiency is a step in the right direction.

The Aspen Institute’s Program on Philanthropy and Social Innovation reported that President Obama’s 2014 budget includes the proposal to phase in required electronic filing of the Form 990 to increase transparency in the sector.

On June 13, 2013, the Senate Finance Committee released a report outlining options on how giving to tax-exempt organizations might be modified.  The Committee indicated that the options described in the report offers a wide range of recommendations and were in no way intended to be complete, and that the options listed were not necessarily endorsed by the Committee.

In 1920, an Iowa resident made a gift to Columbia University of more than $500,000.  The gift was to fund a fellowship for graduate students at the university.  The university has not touched the trust in years because the restrictions placed upon the disbursement of the funds were found to be impractical, impossible, and perhaps even illegal.  It turns out the restrictions required the recipients to be white.  To remedy the situation, JP Morgan Chase filed a lawsuit in state court in the State of New York to change the terms of the fellowship.  Columbia University stated that it has long allowed donor restrictions that violate laws or policies to be ignored.  The university also noted that federal, state and local laws bar discrimination based upon race as does university policy.

Comment: No doubt the court will modify the terms of the trust.  The case, however, is another example on the issue of donor imposed restrictions and the failure to understand the long-term effect.

The Minister of National Revenue has encouraged Canadians to take advantage of what is called a “first time donor’s super credit” by making a donation to a registered charity.  Under the law, first time donors will receive an extra 25% credit when claiming their charitable donation.

Comment: What a great idea.

A new charity fraud line has been implemented in the UK by Independent Crime Charity Crime Stoppers.  According to a published report, the organization stated that charity fraud currently defrauds registered charities in the UK of over £1 billion per year.