ETHICS, INTEGRITY AND THE LAW October 22, 2013 Presented by: Thomas A. Tupitza, Esq. & Mark A. Denlinger, Esq. Knox McLaughlin Gornall & Sennett, P.C

ETHICS, INTEGRITY AND THE LAW

October 22, 2013

Presented by:Thomas A. Tupitza, Esq. &Mark A. Denlinger, Esq.

Knox McLaughlin Gornall & Sennett, P.C.120 West Tenth StreetErie, Pennsylvania 16501(814) [email protected]@kmgslaw.com

Copyright 2013 Knox McLaughlin Gornall & Sennett, P.C.

ETHICS, INTEGRITY AND THE LAW

I. Legal Standards

II. Industry Best Practices

III. Ethical Decision-making

IV. Fundraising Ethics & Integrity

LEGAL STANDARDS

A. Pennsylvania Solicitation of Funds for Charitable Purposes Act

B. Multistate and Internet Solicitation

C. Internal Revenue Code & IRS Policy Considerations

Background

– Nonprofit Status Under State Law

• PA Dept. of State

• PA Attorney General

– 501(c)(3) Status Under Federal Law• IRS – Code and Regulations

Pennsylvania Solicitation of Funds for Charitable Purposes Act

Registration of Charitable Organizations

• Any person or group soliciting charitable contributions in Pennsylvania must first register with the Bureau, unless excluded from definition of “charitable organization” or exempt from registration provisions of Act.

– Notice on all solicitations

• “The official registration and financial information of (registered legal name) may be obtained from the Pennsylvania Department of State by calling toll free within Pennsylvania, 1-800-732-0999. Registration does not imply endorsement.”

• Violations can result in criminal and civil penalties

– Excluded organizations:

• Law enforcement, firefighting or other public safety personnel soliciting funds for their own organization

• Tax-Exempt religious institutions and affiiated groups that are

integral parts of religious institutions

• Organizations exempt from registration:– educational institutions– hospitals– veterans’ organizations, volunteer firemen, ambulance and

rescue squad organizations if all fundraising is done by volunteers

– public libraries– tax-exempt senior citizen centers and nursing homes, if all

fundraising is done by volunteers– parent-teacher organizations– charitable organizations that receive contributions of no

more than $25,000 annually, if no compensated solicitors are used

• Must file registration annually within 135 days of close of fiscal year, including IRS Form 990 and:

– compiled financial statements if gross contributions exceed $50,000 per year; or

– reviewed financial statements if greater than $100,000 per year; or

– audited if greater than $300,000 per year

“Professional Fundraising Counsel”

– Retained for fixed fee or rate under written agreement

– Does not solicit or have custody of contributions

– Not a salaried employee of the charitable organization

– Registration statement and contract must be filed at least ten (10) days before fundraising services commence, and be approved by Department

– Contract must include clear statement of duties and compensation

“Professional Solicitor”

– “Makes the ask”

– Professional fundraising counsel whose compensation is related to amount raised

– Not a salaried employee of the charitable organization

–Must file registration statement and contract

–Must post $25,000 bond and submit campaign reports (within 90 days after event has ended, and on each anniversary of start date if campaign lasts more than one year)

–Must retain records of all contributions for at least three years

Provisions Applicable to all Charities

–Must retain records for at least three years

–May solicit only for stated purposes

–Must apply contributions in a manner substantially consistent with those purposes

• Must disclose:

– Legal name or organization

– Name and address or phone number of representative

– Description of purpose

– Source from which a financial statement may be obtained (including breakdown of program services, administrative costs and fundraising costs)

– If solicit nationally, may need to register in 39 states + District of Coumbia

– Unified Registration Statement (URS) is accepted by most (www.multistatefiling.org)

– National Assn. of State Charity Officials (NASCO) provides links to state websites (www.nasconet.org)

Multistate and Internet Solicitation

http://www.multistatefiling.org/

http://www.nasconet.org/

Internet Solicitation: “The Charleston Principles”

• Not legally binding but developed by NASCO to assist states develop own regulatory approach to Internet solicitations

“The Charleston Principles”

• Must register in another state if:

non-Internet activities require registration there; or

solicit through interactive website and specifically target persons located in that state for solicitation or receive contributions on a repeated, ongoing, or substantial basis from that state through website; or

do not use interactive site, but specifically invite further offline activity to complete a contribution, or send email messages or other communications promoting the website, and target or receive contributions, as in case of interactive website

• Definitions:

– Interactive: can contribute online

– Targeted: refers to state on website or sends other communications to that state

• Website that merely provides description of program services but does not solicit contributions does not trigger registration requirement even if unsolicited donations are received

IRS CONSIDERATIONS

– Deductibility of contributions:

• Earmarked, conditional and restricted gifts

• Quid pro quo contributions

• Substantiation of contributions (IRS Pub. 1771)

– Private inurement, private benefit and excess benefit transactions

– Unrelated business income tax and Form 990

Earmarked Gifts

• Contributions earmarked for the benefit of a particular person or small group are not deductible

• Conditional gifts are not deductible until the condition has been met

• Restricted gifts are deductible when made

Substantiation of Contributions• General Rules:

– A donor may not deduct a charitable contribution of $250 or more unless the donor obtains a contemporaneous, written acknowledgement of the contribution from the charity

– No deduction allowed for any monetary contribution unless donor maintains a bank record or written communication from charity with name of charity, date and amount of gift

– Donor is responsible for requesting and obtaining the acknowledgement

– No aggregation of separate contributions

Substantiation of ContributionsWhat is “Contemporaneous”?

– The donor must receive the acknowledgement by the earlier of:

• The date the donor files his or her tax return for the year in which the donation was made, or

• The due date, including extensions, for the filing of the return

Substantiation of Contributions

What is “Written”?

– IRS does not provide specific forms or formats

– Letters, postcards, or computer generated forms are acceptable

– Can be transmitted on paper or by email

Substantiation of Contributions

Typical Content of Acknowledgement -

• Name of Organization

• Amount of monetary contribution

• Description (but not value) of non-cash contribution

• Statement that no goods or services were provided by the organization or description and good faith estimate or value of goods or services provided, or statement that the only services provided were intangible religious benefits

Quid Pro Quo ContributionsSafe Harbor Exceptions from Disclosure:

– “Token items” such as bookmarks, calendars or mugs with charity’s name or logo, if contribution is at least $51.00 and the cost of the item is $10.20 or less

• (Note: 2013 amounts; annual adjustments are available from the IRS at 877-829-5500)

– Free, unordered items worth $10.20 or less

– Items with fair market value the lesser of 2% of contribution or $102.00 (2013 figure)

Quid Pro Quo Contributions

Membership Package Benefits Safe Harbor:

– Provided for an annual payment of $75 or less and consisting of benefits such as:

• Free or discounted admission to the organization’s facilities or events

• Discounts on purchases from the organization’s gift shop

• Free or discounted parking

• Free or discounted admission to members-only events sponsored by the organization, where per-person cost (not including overhead) is not more than $10.20

Quid Pro Quo Contributions

– Payment that a donor makes partly as a contribution and partly for goods or services received

– Deduction may be taken only to the extent that the contribution exceeds the fair market value of the goods or services

– Must provide a written disclosure statement, including good faith estimate of value, to any donor of a quid pro quo contribution of $75 or more

Substantiation of Non-Cash Contributions

Non-Cash Contributions:

– If a charity sells or disposes of property worth over $5,000 within 3 years, the charity must file IRS Form 8282 (Donee Information Return), unless:

• The property is publicly-traded securities, or

• The property is consumed or distributed for charitable purposes (e.g., medical supplies)

– For property valued at more than $5,000, donor must obtain appraisal and file IRS Form 8283 (Donee acknowledgement on form does not mean agreement with appraised value)

Private Inurement and Private Benefit

– Private inurement: No part of the net income of the charity may inure to the benefit of an insider or other private individual (e.g. outside fundraiser)

– Precludes organization from allowing even a small (de minimis) amount of benefit to inure to an “insider”, that is, an officer, director, key executive, or other person with substantial influence over the affairs of the organization

Private Inurement and Private Benefit

– Public benefit: permits an insubstantial benefit to individuals who are not insiders if that benefit is required to accomplish the organization’s exempt purposes.

• Need to be wary of “excess benefit transactions”

– Previously, the penalty for violation of requirements was a “death sentence” for charity: revocation of tax-exempt status

• Now, “intermediate sanctions” may be utilized by IRS

Excess Benefit Transactions

Intermediate Sanctions:

– “Intermediate sanctions” are imposed by IRS on “excess benefit transactions” between 501(c)(3) organizations and “disqualified persons”

• “Excess benefit transaction:” compensation paid by the charity exceeds fair market value of the goods and services provided

• “Disqualified persons:” directors, officers, persons in a position to exercise substantial influence over the charity, family members of such persons, and companies controlled (35% or more) by such persons and their family members

Excess Benefit Transactions

Intermediate Sanctions:

– “Intermediate sanctions:” 25% tax on amount of excess benefit is payable by recipient (plus 200% if enire excess benefit is not repaid)

• 10% on directors who approved (up to $20,000 total)

– Rules may be triggered when a charity pays excessive or unreasonable compensation to an employee or fundraising professional

Unrelated Business Income Tax

• Unrelated business income tax is imposed on revenue derived from the conduct of a trade or business that is regularly carried on but not substantially related to its exempt purpose

– Charity owns a piece of property with a parking lot and rents spaces similar to a commercial parking garage = unrelated business income

– Museum has a theater to show educational films while museum open to the public = NOT unrelated business income


Exceptions:

• Substantially conducted by volunteers (e.g., sale of Girl

Scout cookies)

• Involves sale of merchandise, substantially all of which has been donated to the organization (e.g. thrift shops)

• Bingo games conducted (a) on a noncommercial basis and (b) in compliance with state or local law


Exceptions (cont.)

– Qualified sponsorship payments

• No benefit other than the use or acknowledgement of the name, logo, or product lines of the donor’s trade or business

• No qualitative or comparative language, price information, indications of savings or value, endorsements, or inducements to purchase or use such products or services

– Required for most public charities

– Form 990-EZ permitted if gross receipts are normally more than $25,000 but less than $100,000, and total assets are less than $250,000 at end of the year

– Form 990-N (e-postcard) permitted if gross receipts are normally less than $25,000

– Substantially revised in 2007/2008

IRS Form 990

• Expanded questions concerning governance matters

• Three “Guiding Principles” of (Redesigned) Form 990

– Enhancing transparency to provide the IRS and the public with a realistic picture of the filing organization;

– Promoting compliance by accurately reflecting the filing organization’s operations so the IRS may efficiently assess the risk of noncompliance; and

– Minimizing the burden on filing organizations.

• Provides an opportunity to tell organization’s story

IRS Form 990

• Form 990 follows trend of requiring more and more information about financial transactions with “insiders”

– Requires charity to provide information regarding composition of governing body, its certain governance and financial statement practices, and means by which the organization is accountable to the public

• IRS believes good governance and accountability practices provide safeguards that assets will be used for exempt purposes

IRS Form 990

INDUSTRY BEST PRACTICES

A. Historical Standards

B. The New Environment for Nonprofits and New Industry Standards

HISTORICAL STANDARDS

• Donor Bill of Rights

• AFP Code of Ethical Principles and Standards of Professional Practice

• AFP E-Donor Bill of Rights

• Model Standards of Practice for the Charitable Gift Planner (Partnership for Philanthropic Planning)

NEW ENVIRONMENT FOR NONPROFITS

– Fallout from Sarbanes-Oxley (SOX)

– State Regulatory Proposals

– U.S. Senate Inquiries

– IRS Initiatives

– Industry Self-Regulation

NEW INDUSTRY STANDARDS

• Panel on the Nonprofit Sector (Independent Sector) – Principles for Good Governance and Ethical Practice: A Guide for Charities and Foundations

• BBB Wise Giving Alliance Standards for Charity Accountability

• Standards for Excellence (Maryland Association of Nonprofit Organizations; now PANO and other state organizations)

• ECFA Standards and Best Practices

PANEL ON THE NONPROFIT SECTORPRINCIPLES

• Panel convened with encouragement of U.S. Senate Finance Committee

– 150 recommendations for action in Final and Supplemental Reports, many embodied in 2006 Pension Protection Act

PANEL ON THE NONPROFIT SECTOR PRINCIPLES – cont.

– Advisory Committee on Self-Regulation of the Charitable Sector created as follow-up

– Examined standards and principles established by over 50 self-regulation and accreditation systems

– 33 principles arranged in four categories, including “Responsible Fundraising”

PRINCIPLES FOR RESPONSIBLE FUNDRAISING

– “Solicitation materials and other communications addressed to donors and the public must clearly identify the organization and be accurate and truthful.”• Specify intended use of funds

• Provide contact information

• Identify status of solicitor

• Provide current and accurate descriptions of program activities and financial condition

PRINCIPLES FOR RESPONSIBLE FUNDRAISING – cont.

• “Contributions must be used for purposes consistent with the donor’s intent, whether as described in the relevant solicitation materials or as specifically directed by the donor.”

– document the donor’s intent

– state in writing how oversubscriptions will be handled

– enter into an upfront agreement indicating right to modify use of funds?


• “A charitable organization must provide donors with specific acknowledgements of charitable contributions in accordance with IRS requirements, as well as information to facilitate the donors’ compliance with tax law requirements.”


• “A charitable organization should adopt clear policies, based on its specific exempt purpose, to determine whether accepting a gift would compromise its ethics, financial circumstances, program focus, or other interests.”

– gift acceptance policy

– criteria for evaluation by legal counsel


• “A charitable organization should provide appropriate training and supervision of the people soliciting funds on its behalf to ensure that they understand their responsibilities and applicable federal, state and local laws, and do not employ techniques that are coercive, intimidating, or intended to harass potential donors.”

– Do not give legal, financial or tax advice


• “A charitable organization should not compensate internal or external fundraisers based on a commission or a percentage of the amount raised.”

– Clearly delineated criteria for bonuses


• “A charitable organization should respect the privacy of individual donors and, except where disclosure is required by law, should not sell or otherwise make available the names and contact information of its donors without providing them an opportunity at least once a year to opt out of the use of their names.”

BBB WISE GIVING ALLIANCE STANDARDS

• Spend no more than 35% of contributions on fundraising expenses

• Make annual report available on request, to include:

– mission statement– summary of program accomplishments– roster of officers and directors– financial information, including: income; expenses,

categorized as program, fundraising, or administrative; ending net assets

BBB WISE GIVING ALLIANCE STANDARDS – cont.

• Include annual report information on any websites that solicit contributions

• Provide electronic access to Form 990

• Disclose how organization benefits from any cause-related marketing, including portion of purchase price that will benefit the organization

• Respond promptly to complaints

STANDARDS FOR EXCELLENCE (PANO)

– Over five-year period, realize contributions at least three times the amount spent on fundraising

– Do not provide percentage or commission compensation for fundraising employees or independent contractors

– Only use state-registered consultants

– Control all solicitors, whether volunteer, paid or businesses/other organizations

ECFA STANDARDS AND BEST PRACTICES

– Do not create unrealistic expectations of what gift will accomplish

– Guide and advise donors to consider adequately the broad interests of family and other ministries supported

– Do not permit officer, director, or other principal of organization to receive royalties for any product the organization uses for promotion or fundraising

– Do not knowingly place a hardship on donor or place donor’s future well-being in jeopardy

ECFA STANDARDS ANDBEST PRACTICES – cont.

– Develop standards for “deputized fundraising” (i.e. workers raising funds for their own work within organization)

• adopt policy evidencing organization's discretion and control over gift

• clearly communicate to donors that gifts belong to the organization

• clearly communicate same concept to workers (including when worker leaves organization)

• avoid terminology such as "give to" or "give for" an individual

ETHICAL DECISION-MAKING

• After considering legal and professional standards, consider four (4) tests for ethical and moral analysis of issues and decisions:

– (from J. Rohrbach, “Ethics and philanthropy: looking at some fundamentals and emerging issues” lecture delivered at AFP Franklin Forum)

THE VISION TEST

• Can you look yourself in the mirror and tell yourself that the action you have taken is okay? – If not, then do not do it.

THE WHAT-WOULD-YOUR-PARENTS- SAY TEST

• Could you explain to your parents the rationale for your action?

– If you could look them in the eye and not get a quizzical response, or be sent to your room, then proceed.

THE KID-ON-YOUR-SHOULDERS TEST

• Would you be comfortable if your children were observing you?

• Are you living the example you preach?

THE PUBLICITY TEST

• Would you be comfortable if your decision appeared on the front page of the newspaper tomorrow? Or was mentioned on the nightly news?– Note: Sometimes, it very well might be!

Fundraising Ethics & Integrity


• “It takes many good deeds to build a good reputation and only one bad one to lose it.”


• Conflicts of Interest

– Disclose financial interests annually, not just at meetings when issues arise

– Honesty in decision-making maintains public and donor trust in organization’s reputation and fiduciary obligations

• Transparency

– Open and accurate requests for charitable donations and use of funds

– Maintain candor and accuracy in communications


• Accountability/Strategic Management

– Donors often expect cost-effective use of resources in “doing good”

– “Money held in public trust should be well spent, not just well-intentioned.”

• Financial Integrity

– Appearances do matter, and thus may need to avoid certain affiliations

– Sometimes difficult to separate mission/purpose from unpalatable conditions/associations


• Investment Policies

– Consider ensuring the charity’s financial portfolio is consistent with values

– Pressure to maximize financial return may lead to a mixed moral message

– Written investment policy and gift acceptance policy needed

• Donor Relationships & Privacy

– Respect the donor’s intent = use written agreements– Respect donor’s privacy, especially if donation requested to

remain “anonymous”


• Ensure Effective Codes of Conduct and Compliance Programs

– Need to review code of ethics . . . and enforce it– But codes and policies need to be flexible and encourage

moral and ethical behaviors

• Promote Effective Financial Management

– Utilize resources in socially responsible manner– “Overhead” analysis can be flawed and result in short-term

focus


• Institutionalize an Ethical Culture

– Top management needs to lead with integrity and reinforce ethical conduct

– Strive for a decision-making process that is transparent and responsive to competing stakeholder interests

–Must be ready, willing and able to ask uncomfortable questions and invite unwelcome answers

Questions??

Disclaimer

• These materials should not be considered as, or as a substitute for, legal advice and they are not intended nor do they create an attorney-client relationship. Because the materials included here are general, they may not apply to your individual legal or factual circumstances. You should not take (or refrain from taking) any action based on the information you obtain from these materials without first obtaining professional counsel. The views expressed do not necessarily reflect those of the firm, its lawyers, or clients.

Thank You!

Presented by:Thomas A. Tupitza, Esq. & Mark A. Denlinger, Esq.

Knox McLaughlin Gornall & Sennett, P.C.120 West Tenth StreetErie, Pennsylvania 16501(814) [email protected]@kmgslaw.com

mailto:[email protected]

mailto:[email protected]

Documents

ETHICS, INTEGRITY AND THE LAW October 22, 2013 Presented by: Thomas A. Tupitza, Esq. & Mark A. Denlinger, Esq. Knox McLaughlin Gornall & Sennett, P.C