of
counsel |
by bruce r. hopkins
Legal Issues for Non-profits
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Charities’ Use of the Internet
Use of the Internet by charitable organizations is the hottest issue of the day. These organizations use the Internet for fund-raising purposes, and for lobbying and political activities. E-commerce is also raising questions as to whether these activities are unrelated businesses. At the state and local level, unanswered questions include whether charities fund-raising in this fashion must register and report under charitable solicitation acts and ordinances.
The IRS may provide guidance in
this area, although that is months away at best.
The IRS has solicited comments on a number of questions on this
subject.
Intermediate Sanctions: The intermediate sanctions penalties are next in importance. Although these rules were enacted in 1996, IRS enforcement has just begun. The accompanying regulations remain in proposed form and probably will be issued in final form in 2001.
Penalties are imposed on persons having a close relationship with the charity and that engage in economic transactions that are unfair to the charity. The taxes start at 25 percent and go as high as 200 percent.
The focus is on excessive
compensation, involving employees and independent contractors (such as
fund-raising companies). The
IRS is scrutinizing high salaries and arrangements where the amount paid
is based on the charity’s revenue flow.
Rental, lending, and sales transactions are also included.
For some charities, these rules are affecting composition of their
boards of directors. In
egregious cases, the tax-exempt status of the charity can be on the line.
Disclosures: Fund-raising
is now occurring in an information-rich environment. The annual
information returns of charities are now public information. (By law, they
must be provided in hard copy or over the Internet.) This places
considerable information in the hands of prospective and ongoing donors.
Many more disclosure requirements may be coming.
Donor-Advised Funds: The
Administration has recommended statutory law concerning donor-advised
funds. To qualify a fund as a
public charity, there would not be any material restriction that prevents
the organization from freely and effectively employing the assets in its
donor-advised funds, or the income therefrom, in furtherance of its
charitable purposes. Distributions from donor-advised funds could only be
made to public charities, private operating foundations and governmental
entities. There
would be a 5 percent payout requirement.
Corporate Sponsorships: Recent years have seen corporate sponsorships become a staple of many charitable fund-raising programs. In many instances, however, the IRS wants to tax this money, as unrelated business income, as payments for advertising services.
Congress, in 1997, passed legislation to differentiate between taxable corporate sponsorships and nontaxable ones (these being payments that are merely acknowledged.) In February, the IRS issued proposed regulations to accompany these rules.
Where the payor receives a
substantial return benefit, the revenue is taxable.
There is no tax where the charity merely acknowledges the gift
using the donor’s name, logo, or product line.
The regulations state that a payment may have to be bifurcated,
with a portion of it taxable.
Other Issues: The IRS is
also contending with abusive charitable remainder trusts, abusive
charitable lead trusts, charitable split-dollar insurance plans,
charitable family limited partnerships, used vehicle gift programs, and
misuse of supporting organizations.
IRS Restructuring: The IRS is restructuring. The Tax Exempt/Government Entities Division (one of four business units it has developed) serves three segments: tax-exempt organizations, employee plans, and government entities (federal, state, local, and Indian tribal governments). This unit will administer complex tax law affecting 3 million customers representing more than $6.7 trillion in assets.
The sheer size of this sector — no matter how measured — is certain to bring great attention to the charitable sector.
Bruce R. Hopkins is an attorney specializing in non-profit law with the firm of Polsinelli, Shalton & Welte. Phone: 816.753.1000. e- Mail: bhopkins@pswlaw.com