The cases are founded on the similar legal challenges to California’s insistence on nonpublic filing of donor information. The cases have been consolidated and the question presented for consideration is: Whether the scrutiny this Court has long required of laws that abridge the freedoms of speech and association outside the election context—as called for by NAACP v. Alabama ex rel. Patterson, 357 U.S. 449 (1958), and its progeny—can be satisfied absent any showing that a blanket governmental demand for the individual identities and addresses of major donors to private nonprofit organizations is narrowly tailored to an asserted law-enforcement interest.

Freedom of Association and Free Speech
A discussion of government infringement of donor privacy inevitably begins with the seminal case on the First and Fourteenth Amendments rights of freedom of association. In 1958, the National Association for the Advancement of Colored People (NAACP) challenged an Alabama state court order that required the NAACP to reveal the names and addresses of its local Alabama affiliate’s members. When they refused to comply, the Court issued an order preventing the NAACP from conducting business or further activities in the State and levied a $100,000 fine for contempt of court.

Behind this refusal was the justified fear of violent retaliation from white supremacists against members of an organization actively fighting to overthrow Jim Crow laws. The NAACP appealed the decision to the Supreme Court[2] which overturned the State Court decision ruling on grounds that as applied to the NAACP, the disclosure requirement violated the First Amendment right to association, which is ” an inseparable aspect of…freedom of speech.”[3]

Some sixty years later, Citizens United (a 501(c)(4) advocacy organization) and the Citizens United Foundation (a 501(c)(3) charitable organization) brought a challenge to enforcement by the New York Office of Attorney General of the requirement to submit an unredacted copy of the annual IRS 990 Information filing required of most 501(c)(3) and (c)(4) organizations.[4] The Form 990 contains a disclosure schedule listing the donors to the organization whose gifts exceeded $5,000 in the reported fiscal year. This section of the Form 990 is known as Schedule B. While federal law requires that the Form 990 be made public, it specifically exempts public disclosure of the donors listed in Schedule B.[5]

Importantly, the compliance registration required of most nonprofits soliciting in New York State must be made prior to seeking support from New York State residents. Such appeals are often inseparably intertwined with persuasive speech and as such they are fully protected under the First Amendment as a core free speech right.[6]

The Citizens United groups argued that enforcement of the reporting regulations violated their First Amendment rights in two ways: 1) by creating a climate of fear among donors that limits their ability to raise the funds to promote controversial causes and 2) by operating as a prior restraint on their ability to ask for money. They also argued that these regulations are preempted by the Internal Revenue Code’s disclosure rules and that the Attorney General went beyond his authority by including 501(c)(4) organizations in the regulations’ definition of ” charitable organization.”

Challenges were brought on First Amendment grounds as a facial challenge (the regulation is unconstitutional regardless to whom it is applied), as applied (it is unconstitutional as applied the Citizens United organizations) and due process (the change in the enforcement regime was made without proper notice to those effected).  The United States Second Circuit Court of Appeals held “It is well established that the Schedule B policy must satisfy exacting scrutiny, [b]ecause the Schedule B policy is a disclosure requirement and there is a substantial relation between the disclosure requirement and a sufficiently important governmental interest.”[7]

The Court applied the intermediate or exacting scrutiny test rather than the more stringent strict scrutiny test used to determine content-based restrictions of governmental regulation of free speech activities. The latter requires that such government action be narrowly tailored using the least restrictive means possible to serve a substantial government interest. Exacting scrutiny requires only that the government demonstrate “a substantial relation between the disclosure requirement and a sufficiently important governmental interest”[8] citing an earlier decision in the same case. [9]

Notably, prior to the New York’s enforcement of its regulations requiring the filing of the full Form 990, including an unredacted version of Schedule B, no other state had attempted to enforce such a requirement. (Currently, New York, California and New Jersey require disclosure of the Schedule B – pending the outcome of the current case before the Supreme Court.)

Enter California
In 2010, the California Registry of Charitable Trusts began issuing deficiency letters to charities demanding that they submit their Schedule B as part of their annual registration renewal.  The Registry sent about eight thousand Schedule B deficiency letters to various charities, creating a de facto requirement that the tens of thousands of charities registered in California must annually submit Schedule B to the State in order to renew their registrations. California assured the charities that the confidential donor information contained in Schedule B would remain confidential and would not be publicly disclosed. Despite such assurances, litigation brought by the Center for Competitive Politics (now the Institute for Free Speech), Americans for Prosperity Foundation and the Thomas More Law Center uncovered at least 1,778 Schedule Bs that the Registry had posted online. In one notable instance involving a well-known controversial cause, the Registry posted the Schedule B for Planned Parenthood Affiliates of California, Inc. which included the names and addresses of hundreds of large donors.

The Americans for Prosperity Foundation won at the district court level after Judge Manuel Real agreed that the documented history of violent threats against the group’s members, donors, and leadership meant it should not be forced to turn over its list. That decision was later overturned by the U.S. Court of Appeals for the Ninth Circuit, having consolidated both the Americans for Prosperity and Thomas More Law Center cases. After reviewing the evidence, The Ninth Circuit held that neither organization had established that the requirement to submit to the State, on a confidential basis, the same limited information they must report to the IRS each year would have a chilling effect on charitable contributions.

The Ninth Circuit also determined that collecting Schedule Bs serves the State’s interests in detecting fraud and other abuses and that the alternatives of case-by-case audits or subpoenas would compromise the State’s law enforcement interests. The State’s confidential reporting requirements thus survived “exacting scrutiny”.

Petitioners, in their appeal to the Supreme Court, argued that the court departed from decades of precedent and the Attorney General must show such a blanket demand is narrowly tailored to advancing the government’s purported law-enforcement interests. The decision prompted sharp disagreement on the Ninth Circuit, with five members of that court dissenting from denial of rehearing en banc when additional evidence of harm was presented by the charities.  The Ninth Circuit purported to apply “exacting scrutiny,” while jettisoning any requirement that California “narrowly tailor” its chosen means to fit its asserted ends as required by the “strict scrutiny” test.

State Donor Disclosure Landscape
According to the Philanthropy Roundtable, in 2020, fifteen states have considered twenty-nine donor-disclosure bills that would threaten donor privacy for 501(c)3 organizations. Just four of these bills remain active, with the rest failing to advance in the legislative process.

On the other side, seven states advanced donor-privacy legislation in 2020—six of them using the “Personal Privacy Protection Act,” which prevents state and local officials from demanding nonprofit donor information without a subpoena, or nonprofits from disclosing donor information they might possess. Similar legislation was originally passed by the Michigan Legislature in late 2018, though it was vetoed by the outgoing governor. Mississippi passed the Personal Privacy Protection Act in 2019 as did four other states which introduced similar legislation in 2020: Louisiana, Oklahoma, Utah, and West Virginia. In each, it was supported by broad bipartisan majorities and coalitions of organizations spanning the ideological spectrum, including state chapters of the American Civil Liberties Union and Americans for Prosperity. In addition, in three states, Iowa, Nebraska, and Tennessee, lawmakers have introduced bills that would bar public agencies from publicly disclosing identifying information about nonprofit donors. The bills would prohibit public agencies from: (1) requiring tax-exempt 501(c) groups to provide public agencies with personal identifying information about their donors, members, supporters or volunteers, and (2) releasing any personal identifying information public agencies might possess.

In a recent case focused on political advocacy, the Rio Grande Foundation (a free-market think tank in New Mexico, organized as a 501(c)(3) charity) filed a lawsuit in December 2019 challenging a law that would force it and other nonprofits to disclose donors if an organization engaged in issue advocacy mentioning anyone who is a candidate for office. An additional wrinkle in the universe of donor disclosure regulations.

And the Winner is….
Despite some legislative and judicial victories, Philanthropy Roundtable and other organizations argue that the vital right to donor privacy remains under assault in a variety of venues across the country.  Thus, the philanthropic sector needs to be vigilant and ready to act quickly whenever activists and politicians seek to diminish the right to donate anonymously to charitable organizations and civic causes.

Whether the Supreme Court will find in favor of donor privacy no one knows for sure. A number of leaders in the philanthropic arena and various other pundits predict that the Court, with its conservative majority, will rule against California in a 5-to-4 decision. But Free Speech cases bring together unusual bedfellows, so my prediction is that the decision will not break along lines of political ideology and the Court will rule against California by a 7-to-2 majority.  The one thing that is certain, the outcome of this interesting and important case will set the future course for state oversight of donor disclosure and privacy.

[1] Also see: Center for Competitive Politics v. Harris, 784 F.3d 1307 (9th Cir. 2015)
[2] National Association for the Advancement of Colored People v. State of Alabama ex rel. Patterson, 357 U.S. 449, 78 S.Ct. 1163, 2 L.Ed.2d 1488 (1958)
[3] Id. at 460, 78 S.Ct. 1163
[4] Citizens United v. Schneiderman, 203 F.Supp.3d 397 (S.D.N.Y. 2016).
[5] 26 U.S.C. § 6104(d)(3)(A).
[6] See Vill. of Schaumburg v. Citizens for a Better Env’t, 444 U.S. 620, 632, 100 S.Ct. 826, 63 L.Ed.2d 73 (1980)
[7] Citizens United v. Schneiderman, 203 F.Supp.3d 397, 407 (2016)
[8] Citizens United v. Schneiderman, 115 F.Supp.3d 457, (2015)
[9] See also Ctr. for Competitive Politics v. Harris, 784 F.3d 1307, 1312 (9th Cir. 2015)

The post Schedule B Disclosure Cases Head to the Supreme Court – Is Donor Privacy Threatened? first appeared on Perlman Sandbox.

On July 16, 2018, the IRS issued Revenue Procedure 2018-38. Under the pending rule modification, many nonprofits, including 501(c)(4), (5), and (6) organizations, that  must include the donor information  on Schedule B  will no longer be required to do so. (Other organizations formed under Section 501(c)(3) or Section 527 will still need to provide it on Schedule B.) The change takes effect for tax years ending on or after December 31, 2018. The move by IRS to limit its collection of contributor information has been met with both cheers and jeers, which I summarize below.

Cheers

In the eyes of those supporting the change to the reporting requirements, the collection of contributor information represents a chilling of free speech and a donor’s right of association and privacy. The supporters also point to the IRS’ occasional inadvertent disclosure of donor information, making the case that removing the requirement to submit it will further insure protection of the contributors’ speech and privacy rights. The argument is also made that the IRS has no need for the information except in the case of an audit. For its part, the IRS reasons that the reporting and redacting of donor information is a waste of time and resources for both the agency and nonprofits.

Jeers

Critics of the move argue that the IRS is inviting additional improper funding into so called “dark money” groups (such as 501(c)(4) organizations) which have become increasingly active in American elections since the Citizens United Supreme Court decision in 2010. Since donors to these groups already avoid much of the public disclosure required of traditional political organizations, the fear is that the new rule invites abuse of existing campaign finance laws, including foreign contributions. Critics are also quick to point out that the IRS’ change came on the same day news outlets reported an arrest of a Russian national accused of attempting to improperly influence American politics through, among other things, the influence of U.S. nonprofit organizations.

Further, the adversaries note that inadvertent disclosures made by the IRS of protected information have been rare and do not appear to have chilled the free speech activity of those organizations. As to the IRS’ rationale that its rule change protects limited resources, they counter that the Schedule B change will increase initial investigatory costs as the request for donor information will have to be assessed and handled on a case-by-case basis. When the IRS needs to audit an organization’s financials, it will create even more work for IRS agents and nonprofits and could result in more frequent and invasive audits.

States Seek to Shine a Light on Dark Money

The new rules by the IRS may be made less relevant by state legislatures. New York, as an example, recently enacted a statute requiring both 501(c)(3) organizations (public charities and private foundations) who provide support to 501(c)(4) organizations (advocacy organizations) in excess of $2,500 in any six  month period, regardless of the purpose and the form of that support, to reveal its major donors on a public website established by the Attorney General’s office. In addition,  the new law requires that 501(c)(4)s that expend more than $10,000 in any one year on broadly communicated lobbying type activities also report their donors on the Attorney General’s  public website. (For a more in-depth discussion see:  Shining a Light on Dark Money: Floodlight or Flashlight ).  Although they are unlikely bedfellows, Citizen’s United and the ACLU have each challenged the new statute, resulting in a stay of its implementation.

Practical Effect

One thing the supporters and critics agree on is that IRS rarely uses the contributor information it currently collects, and nonprofits will still be required to keep records of their donations. The rules regulating the nonprofit sector are under-enforced at the federal level.  State charities regulators tend to be on the front lines of enforcement. The IRS’s change may have the effect of encouraging proactive states, as New York has done, to begin requiring contributor information as part of state filing and disclosure requirements. Regardless of how the states react to the decreased disclosure and transparency, the clear message to the nonprofit sector is that the current administration places less of an emphasis on transparency than its predecessors.

Just In

In late breaking news, the Governor of Montana, Steve Bullock (D), sued the Trump administration to void the new rules stating that it would  undermine the state’s ability to regulate nonprofits and make it harder to police illegal spending in political campaigns. It should be noted that Montana has some of the least rigorous oversight of charitable activities of any state in the country and as a result they depend heavily on the information filed with the IRS.  Undoubtedly, other states are likely to follow Montana’s lead as well.

The post Left In the Dark, IRS Moves to Limit Donor Transparency first appeared on Perlman Sandbox.

The IRS’s attempt to sift through the deluge of new 501(c)(4) applications was handled in a manner that raised the hackles of Republican commentators and legislators. In order to sort through the morass, the IRS reviewers targeted applications that included Tea Party or other politically ideological names in the titles, causing an uproar that practically decimated the IRS Exempt Organizations Division.

The IRS, despite an attempt to offer clarifying regulations for political activity by 501(c)(4)s, had been essentially neutered: Congress expressly forbid the agency from issuing new or enforcing existing rules and regulations affecting 501(c)(4) political activities until September of 2016. The new federal administration is unlikely to provide the IRS resources or encouragement to renew regulatory efforts or clarifying regulations. In fact, among the recently issued flurry of executive orders are prohibitions that appear to further tie the hands of the IRS.

As a result, the states have been left to their own devices to stem the flow of dark money from 501(c)(4)s into political and candidate-related policy campaigns. Predictably, California and New York have been leading that effort. Both states (and only these two states) now require that organizations operating or simply soliciting within their states file the IRS 990 Schedule of Contributors (Schedule B) along with their state registration filings. As per IRS rules, the Schedule B is not available for public inspection and the states are allegedly respecting that prohibition. New York and California have each faced legal challenges in their efforts to obtain the Schedule B, considered by many to contain important trade secret donor information. Among the challengers is, of course, Citizen’s United.

New York has decided to take an even more radical step in an attempt to facilitate transparency of lobbying and political campaign-related activities occurring within the state. A bill drafted by the Office of New York State Governor Andrew Cuomo and passed by the legislature (literally in the wee hours of the morning with little, if any, chance for review or debate), added Executive Laws Sections 172-e and f, requiring 501(c)(3) charitable organizations that contribute monies, goods or services in excess of $2,500 in any six month period to a 501(c)(4) to fully and publicly disclose any donor who contributed cash or securities in excess of $2,500 to the 501(c)(3). This is true whether or not the monies were used for lobbying or campaign-related purposes or were specifically restricted from being used for such purposes.

A second provision of this new legislation impacts any 501(c)(4) that expends more than $10,000 in a calendar year on communication broadcasts to more than 500 people that refer to or advocate for or against i) an elected official; ii) the policy position of an elected official; iii) any existing, pending or proposed legislation; or iv) any regulation, hearing, rule or decision of any legislative, executive or administrative body. In such cases, the 501(c)(4) must publicly  disclose the names of donors who contributed more than $1,000 to the 501(c)(4).

Under these provisions both disclosures are to be published on the website maintained by the Attorney General or the Joint Commission on Public Ethics. These rules take effect on January 30, 2017 for calendar year 2016 contributions. The quick passage of this legislation and the lack of public comment have taken the sector by surprise, if not shock. The ramifications are not fully clear. Of particular concern is the provision in 172-e that impacts 501(c)(3)s providing in-kind services to 501(c)(4)s. Many 501(c)(3)s provide pro bono services such as legal, academic, or others types of voluntary services to 501(c)(4)s with a value in excess of $2,500. Do these constitute in-kind services that trigger the public filings and disclosures of donors under these new laws? The answer seems to be yes. If a 501(c)(3) gives funds to a 501(c)(4) for community services that are clearly restricted to non-lobbying purposes, why should the 501(c)(3) now have to reveal its major donors? Again, the answer seems to be yes, as the purpose does not seem to matter.

These concerns were important enough to prompt two affiliated groups of organizations, directly and significantly affected by the new law, to challenge its enforcement in Federal Court. A few weeks ago, Citizens Union Foundation, a 501(c)(3), together with its affiliated 501(c)(4), Citizens Union,  and the American Civil Liberties Union (ACLU) together with NYCLU, its state affiliate, both 501(c)(4)s, and the NYCLU Foundation, a 501(c)(3), filed separate actions in the Federal District Court in lower Manhattan. Both complaints seek a declaration from the Court that the new law is unconstitutional under the 1^st and 14^th Amendments of the United States Constitution and ask the Court to enjoin its enforcement.

In essence, these organizations complained that these new laws compel speech, regulate expressive conduct and infringe upon the free speech and free association rights of the 501(c)(3)s and their donors without regard to whether the donor’s contribution is  related to lobbying. They further complain that the activity affected is pure issue-based political advocacy that does not qualify as lobbying or election-related speech, and as such constitutes core free speech, which is fully protected under the 1^st Amendment. They further point out that the reporting obligations are not limited to contributions made within a certain period of any election.

In this facial challenge to the law it appears, (without having seen the responses from the State), that the plaintiffs have a strong argument. Indeed, New York may have made the classic mistake of using too blunt a tool to achieve its intended purposes. As a result, the State may have effectively threatened the legitimate rights of charities and advocacy organizations to share resources or be involved in public issue advocacy.

In cases involving inviolable free speech and association rights, a more precise and delicate tool is required. Undoubtedly, this is only the beginning of a long struggle in the tug of war between the forces of unfettered advocacy and those seeking to keep unconstrained money out of politics and secure transparency in all things political.

The post Shining a Light on Dark Money: Floodlight or Flashlight first appeared on Perlman Sandbox.

As with most reactionary legislation and regulations, this ill-conceived proclamation fails to fully comprehend the collateral impact as it was guided by political expediency and the myth that high overhead cost equates with poor performance.

The Executive Order sets limits on administrative expenses and executive compensation to any entity regulated by a list of thirteen specified state agencies if those entities receive more than $500,000 in annual state support and at least 30% of their annual funding from the State (or from New York City or other local jurisdictions through State funded programs). EO #38 became effective as of July 1^st, 2013. (10 NYCCR Part 1002)

The regulations require that “covered entities” shall not use State funds to pay Executive Compensation (10 NYCCR Part 1002.5) in amounts greater than $199,000 a year unless (i) the entity obtains a waiver from the state; (ii) the compensation is paid from other sources; or (iii) the compensation is for direct services, and

• the compensation, regardless of its source, is not greater than the 75^th percentile of compensation paid to comparable executives as established by state recognized compensation surveys; and
• the Executive compensation is approved by the entity’s board of directors or compensation committee after reviewing the comparability data and surveys.

EO #38 also limits Administrative Expenses (10 NYCCR 1002.2a), calculated as a percentage of total operating expenses, to no more  than 15% of the funds provided by the State or from State authorized funds. (This limit started at 25% in 2013 and was reduced to 15% in 2015.)

To complicate matters, the covered entity may obtain a waiver of the compensation and administrative expense limits if the entity can demonstrate “good cause” by showing that the availability and quality of the program services will be negatively impacted due to the nature, size, and complexity of the programs funded. If the covered entity fails to comply with these rules or obtain the appropriate waivers from one of the thirteen State Agencies (each of which appear to have their own process for obtaining a waiver), the entity is subject to suspension, modification or termination of its State funded service contracts and/or its Office of Mental Health (OMH) or Department of Health (DOH) license. Non-compliance can potentially be cured through a corrective action plan approved by the State. The entity can also file an administrative appeal of the sanctions.

The Conflict:

From the start, the proclamation has been controversial with state funded nonprofits and exceptionally difficult to administer. In response to an outcry from major health care providers a waiver system was enacted. In addition, further changes to the implementing regulations stirred additional controversy (10 NYCRR sub-part 69-4). The Department of Health (DOH) adopted amendments to address potential conflicts of interest involving early intervention program evaluators. This change in the conflict of interest rule in conjunction with the burden of the other limitations appears to have stimulated covered providers to challenge EO # 38 in court.

Tale of Two Cases:

Case 1  In an April 2014 decision, the Nassau County Supreme Court agreed with the challenging agency’s theory alleged in its suit (Agencies for Children’s Therapy Services, Inc. v. NYS Department of Health et al), which challenged the validity of the Governor’s action as a violation of the separation of powers doctrine. The suit claimed that the state legislature, not the Governor, had the power to enact rules governing state funded executive compensation, administrative expense limitations and conflict of interest rules at private facilities and that the legislature in its 2012 budget evinced no legislative intent to do so.

The Court held that the DOH “usurped the role of the legislature in making public policy assessments” and that DOH lacks “the authority to determine how much a for-profit entity may pay executives and how much to expend on administrative expenses.”

Case 2   In a very similar case brought in the Suffolk County Supreme Court (Concerned Home Care Providers, Inc. v. NYS Department of Health, et al.) the Court ruled that EO #38 and its implementing regulations were a constitutional exercise of Executive power. This decision was completely contrary to the holding in Agencies for Children’s Therapy Services, Inc. Suffolk County Supreme Court Justice Pines concluded that the regulations “are well within the legislatively mandated policy and “that inherent in such authority is the power to determine the terms of such contract so long as they do not deviate from other legal authority.”

The Appeal:

Emboldened by the decision of Judge Pines in Concerned Home Care Providers, the DOH appealed the adverse decision in Agencies for Children’s Therapy Services. On December 30^th, 2015 the Appellate Division 2^nd Department (New York’s intermediate Appeals Court) issued a surprising decision. It reversed the holding in Agencies for Children’s Therapy Services and found that the DOH had not violated the standards enunciated in the precedent setting Court of Appeals decision Boreali v. Axelrod.

 The Appellate Court ruled that the DOH is statutorily required to award service contract “on the basis of best value  . . . in a manner that optimizes quality, cost and efficiency.” The Court went on to state that “ the administrative cost and executive compensation limits contained in the use-of-funds rule are not inconsistent with the above statutory provisions or the underlying purpose of obtaining high quality services with limited available funds.” In what appears to be a stretch by the Court, it went on to determine that high quality services are made available “by ensuring that the DOH awards service contracts to agencies that will use most of the tax dollars they receive directly on the provisions of services rather than upon administrative overhead and executive compensation.”

Clearly, the Court bought into the often challenged and widely discredited theory that lower overhead and executive compensation expenses ensure optimized quality, lower costs and better efficiency. From where and how the Court formed this notion is not clear. —I suspect they simply believe it is common knowledge.  Unfortunately for New York service agencies and the philanthropic sector at large, there is nothing common or empirical about this equivalence. This decision illustrates the uphill battle that the charitable sector faces in convincing the public and our public servants that broad restrictions on the ability of charities to use their funds to appropriately scale and attract much needed talent is counter-productive and ultimately handicaps service providers’ ability to impact and solve difficult social problems.

The New York State Court of Appeals (New York’s top Appellate Court) has issued a stay of the decision in the Agencies for Children’s Services decision pending the outcome of its decision on the appeal of the lower Court’s decision. We shall see if these justices fall prey to the same misguided notion of charitable efficiency and impact which guided the decision of the lower Court.

The post New York Court Upholds Governor Cuomo’s Arbitrary Restrictions on Executive Compensation first appeared on Perlman Sandbox.

• Audit filing requirements and audit oversight procedures
• Governance requirements (conflict of interest policy, related party transactions, whistleblower policy, electronic board and member activities)
• Corporate transactions (mergers, real estate transactions, dissolutions)
• Incorporation procedures (elimination of Types, administrative agency consents)
• Enhanced Attorney General powers

The Act applies to nonprofit organizations incorporated in New York, New York charitable trusts, and organizations that solicit charitable contributions in New York, regardless of the state of incorporation. Our summary details the provisions relating to the various covered entities.

The Act requires many New York not-for-profit organizations and charitable trusts to adopt governance policies, including a conflict-of-interest and whistleblower policy. It also requires nonprofit organizations that solicit charitable contributions in New York (whether or not they are incorporated in New York) to adopt audit committee oversight procedures. While many organizations may already have these documents in place, we recommend a review of your current bylaws, governance policies, and procedures, and either a revision or replacement to ensure compliance when the Act comes into effect.

The post Governor Cuomo Signs New York Non-Profit Revitalization Act of 2013 first appeared on Perlman Sandbox.

Charity Navigator has decided to ignore GAAP requirements, ignore the reality of joint purposes and the inherent cost savings in donor outreach with multiple purposes and instead conclude that if any part of the communication is fundraising, it is all fundraising. This drastic approach is not condoned by the BBB Wise Giving Alliance, but has historically been the approach of the charity bashing American Institute of Philanthropy (now known as Charity Watch) and its self-styled muckraker, Daniel Borochoff.

Charity Navigator’s reasoning is cited below in an excerpt from their Methodology section “How Do We Rate Charities Financial Health?”

Joint Cost Allocation Adjustment

Generally Accepted Accounting Principles (GAAP) allow for organizations that follow SOP 98-2 or ASC 958-720-45 to report their specific joint costs from combined educational campaigns and fundraising solicitations and the IRS requires organizations to disclose this on the Form 990. In most cases, charities utilizing this technique allocate a small percentage of their solicitation costs to program expenses from fundraising expenses. However, we believe that donors are not generally aware of this accounting technique and that they would not embrace it if they knew a charity was employing it, nor does Charity Navigator. Therefore, as an advisor and advocate for donors, with rare exception, when we see charities using this technique we factor out the joint costs allocated to program expenses and add them to fundraising.

Although Charity Navigator claims that it reviews tens of thousands of non-profit financial documents “to develop an unbiased, objective, numbers-based rating system,” its decision to ignore key financial disclosures prepared by accounting professionals in accordance with GAAP is yet another demonstration  of the bias that infiltrates  the  Charity Navigator rating system.

The post Charity Navigator Dismisses Use of Joint Cost Allocations first appeared on Perlman Sandbox.

1.         Clearly Describe the Promotion

 Companies should clearly disclose the following key terms of any cause marketing promotion:

a.       the name and mission of the charity receiving a donation;

b.      the benefit the charity will receive from each purchase of the product or service;

c.       any flat donation, minimum guarantee, or donation cap;

d.      any consumer action required for the charity to receive the donation; and

e.       the start and end dates of the campaign.

Many groups have already adopted the above disclosures as part of existing best practices in the cause marketing industry, most of which were previously established by the Wise Giving Alliance. The Attorney General recommends that these key promotional terms be displayed in a clear and prominent format and size, and close to the text used in marketing the promotion. The Attorney General has also put forth a template “donation information” label for disclosing key promotional details on products or websites. While standardizing the disclosure of material terms may be a helpful tool in providing consumers with consistent disclosures, companies may find it challenging to implement the recommended label format within the available product packaging space.

2.         Allow Consumers to Easily Determine the Donation Amount

 Companies should indicate that a fixed dollar amount per unit purchased will be donated to charity, to enable consumers to easily determine their charitable donation. If the campaign is not based on a set donation per unit sold, the Attorney General recommends using a fixed percentage of the sales price rather than vague statements such as that “profits” or “a percentage of proceeds” will be donated. This recommendation is also in line with existing best practices, and will hopefully help companies focus on not merely providing a truthful disclosure, but one that allows consumers to evaluate the actual impact of their purchase.

3.         Be Transparent About What Is Not Apparent

The Attorney General recommends that companies disclose all facts related the cause marketing promotion that are not apparent to the consumer, such as:

a.       Where a flat donation has been or will be paid to the charity, make clear that consumer action will not trigger a donation.

b.      Make clear if the intended donation is an in-kind donation rather than a cash contribution, such as donating a book to a children’s literacy organization for every purchase made.

c.       Where a ribbon, color, logo, or other indicia associated with a charitable cause is used in connection with a cause marketing campaign, the Attorney General recommends that the company clearly disclose whether a consumer’s purchase will trigger a charitable donation. If cause marketers are required to affirmatively state that no charitable donation will be made whenever an awareness symbol is used, this recommendation could have the effect of discouraging charitable awareness campaigns.

d.      Where there is a set minimum guaranteed donation, there should be enough products available for sale to comfortably exceed the minimum donation.

e.       Where there is a set cap on the donation, make sure the market is not flooded with products.

4.         Ensure Transparency in Social Media

Companies conducting cause marketing campaigns via social media are encouraged to clearly disclose all terms of the social media campaign, including campaigns where a charitable donation is made without the purchase of any products or services, such as where a consumer “likes” a Facebook page, or follows a company’s Twitter feed. This recommendation moves beyond the typical focus on campaigns in which consumers purchase a product to benefit a cause. The Attorney General also recommends that companies provide a means for consumers to track the campaign’s progress in real-time, and alert consumers to the campaign’s end. This recommendation may be challenging to implement in promotions involving product sales (e.g., due to returns and other sales reconciliations).

5.         Tell the Public How Much Was Raised

 The Attorney General recommends that cause marketers and charities disclose the results of their campaigns on their websites soon after the completion of any cause marketing campaigns.This represents a newly-articulated industry best practice.This requirement could discourage companies from experimenting with innovative cause marketing campaigns for fear that post-campaign reporting will reveal poor sales results.

The post New York Attorney General Issues Guidance on Cause Marketing Practices first appeared on Perlman Sandbox.

The issue in the case was whether the FEC’s regulation that allowed 501(c)(4) groups to conduct electioneering communications without disclosing their donors was simply an regulatory interpretation of the McCain-Feingold campaign finance law or a violation of that law. The 2002 McCain-Feingold law required groups making “electioneering communications” to disclose their donors. The FEC regulation arguably created a loophole by interpreting the law so that disclosure was only required of those donors who specifically gave “for the purpose of” funding electioneering communications. The Court found the regulation to be an attempt at interpretation, but did recognize that the law was not at all clear on the issue of disclosure and directed the lower Court (whose Spring 2012 decision was overturned) to give the FEC the opportunity to revise the regulation in a rulemaking proceeding. In so doing, the Court virtually guaranteed that the issue would not be resolved before the end of the current electoral season.

The case (Van Hollen v. Federal Election Commission) was originally brought by Rep. Chris Van Hollen (D-Md.) who represented by Public Citizen, Democracy 21 and others, prevailed at the federal district court level. The case was thereafter appealed by a group of conservative organizations lead by Citizens for Individual Freedom and the Hispanic Leadership Fund.

The post Court of Appeals Ruling on Campaign Donor Disclosures by 501(c)(4)s first appeared on Perlman Sandbox.

Adding juice to the initiative is DOL’s  increased coordination between federal and state labor agencies. Ms. Smith announced that the DOL has established partnerships with various states, including approximately 13 memoranda of understanding that allow for the sharing of information between federal and state authorities. A determination at the state level could now bring an action by the DOL, significantly raising the stakes.

The DOL has also started to file amicus briefs supporting claims by individuals against employers over exempt classification and overtime payments. Plaintiff attorneys have been having a field day filing suits against unsuspecting employers.

The use of unpaid interns is also under scrutiny.  The fragile economy has made the practice of using unpaid interns more common. Although not necessarily unlawful, the DOL considers a series of factors when assessing the legality of such arrangements. In particular, the criteria include whether the internship provides training similar to that provided at an academic or vocational school; displaces a regularly paid worker; and whether the employer derives any immediate advantage from the intern’s activities.

Nonprofits certainly could be subject to the DOL enforcement efforts and should therefore exercise caution about their employment and contracting practices.  The DOL, along with State Labor commissions, have issued rules and guidelines for companies and organizations that employ unpaid interns. Organizations that offer unpaid internships to young workers should consider creating written policies incorporating the federal DOL criteria. In addition, the IRS has been running an amnesty program called the Voluntary Classification Settlement Program that provides partial relief from federal employment taxes for eligible taxpayers that agree to prospectively treat workers as employees. (see our post IRS Continues Amnesty Program for Misclassified Workers).

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