Ask the Legal Expert

Good afternoon, and good morning everyone. I’d like to thank everyone who has joined us today. My name is Arlene Berkowitz and I’m joined by my colleague Debbie Scarlett foster from the training department. Today’s program as the legal expert Read More

Good afternoon, and good morning everyone. I’d like to thank everyone who has joined us today. My name is Arlene Berkowitz and I’m joined by my colleague Debbie Scarlett foster from the training department. Today’s program as the legal expert part one will feature Laura and Solomon Esquire, the founder of Laura Solomon and Associates, LS and a is a law firm devoted to the representation of nonprofit charitable and other tax exempt organizations and philanthropic planning for individuals. Ms. Solomon currently serves on the charity working group of the US Treasury Department, and the tax exempt organization subcommittee of the American Bar Association. She is an officer of the charitable organizations committee of the Pennsylvania Bar Association, and a faculty member of the nonprofit Institute of the Philadelphia bar Institute.

Miss Ullman also lectures at LaSalle University nonprofit center, the University of Pennsylvania and Villanova, Drexel, and Temple University’s prior to starting her firm muscleman was associated with Ballard Spahr Andrews and Ingersoll LLP. She’s a member of the Bar Association’s of New Jersey and Pennsylvania, and received her BA magna cum laude from Tufts University and her JD from the University of Pennsylvania.

For those of you who would like to share this session with a colleague, today’s session is being recorded, and a video will be made available in our nonprofit newsroom and in the knowledge base next week. Wonderful. Thank you, Arlene. Thanks for the lovely introduction. And hello, everyone who is dialed in. It’s a pleasure to speak with you today. I know we have limited time, we have just an hour. And Arlene shared the questions that were previously submitted with me. And I think we were both surprised, but slightly bowled over at the number of questions. So I want to say just a few things about the approach today. So we got about 150 questions, I combed through them, and quickly saw that the vast majority of questions really related to the same three subjects. And that’s why you’ll see on the deck of slides, I will be focusing on the solicitation of contributions did have different kinds, right cash, in kind contributions, corporate sponsorships, special events, the acknowledgement of those contributions, and then doing a slightly deeper dive on corporate sponsorships. And again, this is intended to address the vast majority of questions that I got, and also intentionally to reserve other questions that we got on a smattering of other topics. And DonorPerfect has graciously agreed to host a second webinar in March. So at that time, I will be addressing the other topics noted in your questions. And those include, for example, charities that do international grant making, the fiduciary duties of directors and officers, liability issues 501 C three startup issues, and those issues related to the relationship between nonprofit and for profit organizations. Okay, so hope that makes sense, everybody, I will remind folks at the end, but just so you know, to the extent that you’re sending questions in and we will have time at the end, I’m going to reserve questions on these, this second set of topics for our March seminar so that we really can give appropriate attention to the topic for today. Okay, so that’s where we are. So Arlene, I’ll ask you to advance and we’ll dive into the topic for the day. Thank you. Okay, so a little bit of law that I want to mention, because you’ll hear that it really will sort of thread throughout the presentation. And that is that there are two levels of regulation that come in, when we talk about the solicitation of gifts, the acknowledgement of gifts, and in particular corporate sponsorships, and those are federal tax laws and regulations, and also state laws that govern the solicitation of charitable contributions. Okay, so you’ll hear me sort of flipping in between, and I think that’ll make sense to you. But I wanted to at least note that at the outset. Okay, you can continue Arlene. Thank you.

So first, I’m going to start a little basic and just remind everybody that a donation for both federal and state purposes, is a disinterested act of generosity, you know, it’s a gift. And donations are actually regulated both at the federal level, right in terms of what’s deductible on our tax returns and the sorts of acknowledgments that you need to issue and then also regulated at the state level, as I will describe by charitable solicitation statutes that

Governor in 39 states and the District of Columbia. In any case, as you well know from donor relations, you should always document a donation contemporaneously. That is soon after you get the gift, and you want to do it in writing. Okay. Arlene, if you could advance again.

So charitable solicitation registrations and interestingly many, many of your questions related to this.

And I’ll back up for a minute. So as I mentioned, 39 states in the District of Columbia have charitable solicitation registration statutes. Again, these are creatures of state law. And unfortunately, for our purposes, every single state is different. If you happen to be in Delaware, or Texas, those states do not regulate charitable contributions. But again, most other states do. And the statutes regulate the solicitation of donations. Okay. So again, you remember from the previous slide, what’s a donation? Donation is a gift, the solicitation of a gift is the ask for that gift. And again, we have lots of questions on this topic. But the definition of solicitation under these statutes is very broad. So for example, somebody asked, If I send an email to somebody, is that a solicitation? Yes. If I submit a grant proposal to a private foundation, is that a solicitation? Yes. Any ask in whatever form, we’re in writing in person by email, any asked is considered a solicitation by the Attorney General of that particular state, and under the definition and the charitable solicitation registration statute, and it is that solicitation, which then triggers registration under the laws of that state. Now, there are exemptions. So for example, if your organization typically gets $25,000 or less, from all sources around the country, and you have no paid employees, so you’re really a little grassroots organization. And that case, and certain other cases, for example, religious institutions, schools and hospitals, you may be exempt. But I think it’s pretty safe to assume that everybody on this call

that uses DonorPerfect is probably getting $25,000 or more in donations. And what that means is that you need to register to solicit contributions in every single state, where you are asking for money. Okay, so certainly the state where you incorporated where you’re formed. And I would venture a guess and say that we have somebody from every state in the United States on the call, right? So wherever it is that you sort of live, and your office exists, certainly in that state, but also to the extent that you get gifts from other states, right. And typically, when a charity is starting out, we register the organization just in the state where we incorporate it. But then over time, you know, the scope of donations begins to expand to neighboring states, or even to a state across the country, because your board member moved across the country. And they are hosting parlor meetings for you. So the key takeaway here is, you need to register to solicit contributions, both with an initial registration, and then with ongoing reports in every single state, where you are asking for money. And again, the key is not where you are, but rather, where is the person or corporation or private foundation that you are soliciting? Where are they because that’s the solicitation. And you can probably understand, you know, from the view of the Attorney General, or the regulator in your state, you know, their job is to protect individuals in their state from consumer fraud. And they want to make sure that there are no charlatans out there, you know, taking money under the guise of charity, and then misusing it for other purposes. So that’s where the regulations come from. And what it means is that anytime you’re asking, you know, whether I’m calling you or I’m emailing you, if you’re sitting in another state, and you send me money, I now need to register in that state. And you can imagine the issue itself can become a little unwieldy. So what we tend to recommend to our clients is that, again, we registered in the state of incorporation initially. And then at least once a year, we have the organization use DonorPerfect to print out a listing of the various states where donations are coming from, and the amounts and the numbers of those contributions. And then we can reevaluate on a yearly basis, whether and how many additional states we need to register in. Okay, a couple of other key things here. And this is really important. Your organization’s failure to register and report appropriately can result in fines and penalties. Every single one of these statutes allow

was for either a per contribution fine or a per day fine for the period, you’re not in compliance. Some states like Pennsylvania have just a statutorily mandated fine of $25 a month. But perhaps even more important, even though obviously, the fines can be significant, for example, they could come after you with a $10,000 Cease and desist order. Perhaps even more important is the idea that if a state comes after your organization, that is you don’t voluntarily register, and somehow they find out that you’re not registered, many of them will issue a cease and desist order. It’s kind of a form of public shaming, and they will put that cease and desist order right on their website. And that, as you can imagine, means that when you call somebody to ask for a gift, if they happen to type the name of your charity into Google, what will come up, unfortunately, not your annual report or website, but also the cease and desist order on the state, you know, attorney general website, so you certainly don’t want that to happen. And the risks, again, are fines and penalties, but also really damage to donor relations. Also, you will probably find that many private foundation grant agreements, now specifically require that you represent as a condition of getting their grant that you are in full compliance with charitable solicitation laws and regulations. And that’s a relatively new thing that I’m seeing in private foundation grant agreements. But I think a sign overall of an expectation of transparency and compliance, coupled with more aggressive enforcement of these statutes on the state level. You know, as we all know, the recession really took a toll on state coffers, regulators are looking for revenues everywhere. And these charities bureaus, which have had the laws on the books for many, many years, but historically, in some cases, didn’t enforce them are now going after charities in some cases very aggressively. Some states more than others, but in particular, you know, if you’re soliciting and not registering, for example, in New York, California, Florida, Massachusetts and Pennsylvania, you really want to focus on it and you really want to come into compliance. If you want to get more information on the registration statutes themselves. I’ve included a link here, NASSCO net dot o RG NASSCO is the National Association of State charities officials. So that’s where all of these attorneys general, you know, they hang out, they get together and they talk about their statutes. And that is a great website that serves as a kind of portal into all of the various states elicitation statutes. Okay. So that’s a, you know, pretty high level, but hopefully enough information to get you started and thinking about whether your organization is in fact in compliance with solicitation registration. Okay, we can advance our lead. Thank you. Actually, if you don’t mind, Laura, I’d like to introduce a poll to find out how many states the attendees work in. Okay. So I do have a poll question. Sure. That’d be great.

Wonderful.

And, Arlene, while you’re doing that, I want to mention one other thing, because again, it came up in a question. Somebody asked whether merely having a donate now button on the website, whether that’s considered solicitation. And I will say that passively having a donate now button is not considered solicitation in and of itself. However, if you are doing your development in the way that I hope, if somebody does click on that donate now button, shortly within the course of the next year, you’re going to email them and ask for another contribution. So oftentimes, we see that having a donate now button precedes what is naturally a solicitation to follow. The state of charities officials got together years ago and created something called the Charleston principles back when the worldwide interweb was really getting all fired up. And they specifically said that merely having a website is not solicitation. But again, you will see that having that donate now button will lead quickly to solicitation.

Okay, thank you. All right. I’m going to close the poll now so that we can all see the results.

Okay, so that’s interesting. So the vast majority of you are registered in one state. And that certainly makes sense. I would hope that that number is 100%, by the way, so you really want to talk to a lawyer, you know, or an accountant about coming into compliance there. If you are soliciting at all, you need to be registered. And interesting. Also, you know that the numbers go up a little bit for folks who are registered in more than one state.

The last thing I want to say about solicitation registration and reporting is that these statutes are primarily aimed at charities themselves, but there are all

also provisions in some of the states that relate as well to fundraising solicitors that is people who are asking for money on behalf of a charity, like an outside contracted party, or fundraising council. So a fundraising consultant who’s advising your charity on how to run a capital campaign. Those folks in some cases are also required to register and your organization’s contract with them may be subject to certain requirements for exam, and by the way, the requirements are all protected to charities. So for example, in some states, it’ll say that they’ll ask specifically, are you contracted with any fundraising counsel or fundraising solicitor, and then the statute will require that the charitable organization has the right to terminate the agreement on 60 days notice, it will also require that the fundraising solicitor or counsel maintain insurance and bonding, certainly in the case where they are taking in money for the organization. So just be mindful of that as well. If you contract, you know, with outside folks. And lastly,

somebody asked about audit requirements, that is, you know, whether a particular organization is required to get audited financial statements. And, and believe it or not, that issue of audits is actually tied back to charitable solicitation registration, because there’s nothing under federal law that requires a nonprofit, tax exempt organization to get an audited financial, nothing at all. You do know, however, that nonprofit tax exempt certainly charitable organizations are required to file Form 990 tax returns or information returns as we call them. But again, no separate audit requirement. The requirement to get a reviewed or audited financial statement comes in under the solicitation laws, which say that if your organization raises above a certain amount of typically contributed income, you are required to attach to your solicitation registration, either an internally prepared financial statement, a reviewed financial statement that is reviewed by an outside CPA or an audited financial statement. And the thresholds that trigger those various requirements vary from state to state. Here again, I’ll use Pennsylvania as an example because I think it’s fairly typical. So in Pennsylvania, if you get contributed income of $100,000 or less, you can submit an internally prepared financial statement. If you have contributed income of between 100,300 1000, you need a reviewed financial statement. And above 300,000, is when you will need an audited financial statement. You also by the way need to disclose on every solicitation and again that the language from each day vary slightly, but it’s typically something like charity XYZ is registered to solicit contributions in the Commonwealth of Pennsylvania, information about our registration may be obtained by calling one 800, you know, charity bureau. So you also want to make sure that that disclosure language appears on any written solicitation, whether it’s in your Annual Report with a tear out envelope, or certainly in any sort of direct mail solicitation. And for folks who are concerned about coming into compliance and, you know, have questions about how best to do that, you guys can email me my contact information is at the end of the presentation, I will tell you that a lot of charities really struggle with how to do this in a cost effective way. Given that every state has a registration fee, that’s tied to revenues. And that ranges literally from $25 to $300, you’ve got to do it every year. And you’ve got to prepare and file the forms. But I will tell you that there are some commercial registration companies that can handle this for you, one of which we really like, based out of Colorado called affinity. They have a great sort of portal system where you upload information and then it populates the various state forms. So if you have questions about that, in particular, you know, feel free to feel free to reach out. Okay, we can move on. Thank you, Arlene.

Okay, so next big topic about which we got tons of questions. And that is your acknowledgement of a gift, right. And this is a really, really big deal. And an area where there have been a lot of changes recently. So I’m so glad that that you folks are mindful of this and that, you know, you brought the questions up. So briefly, you know, I mentioned before that you want to substantiate a donation in a contemporaneous way, right? That is to say soon after you get the gift, both for donor relations issues and also because you want to comply with federal law. And these requirements all come out of federal tax laws and regulations that apply to the charity, okay. So, a donor can take