Charitable Solicitation Rules and Volunteer Issues

1. Charitable Solicitation Rules and Volunteer Issues Law 603: Howard Bunsis Spring 2012

2. Basics • If an individual or corporation makes a charitable contribution, and they itemize, then the contribution is tax deductible. • What is a charitable contribution? A gift to or for the use of one or more qualified donees. • There is also the ability to use gift and estate tax laws to donate (next outline). • What does this mean? If you make a $100 deduction, and your marginal tax rate is 30%, your tax bill is $30 lower. • $100 out of pocket charitable contribution • $30 tax savings • $70 out of pocket cost

3. Types of Charitable Giving • Impulse Giving • Interest Giving • Integrated Giving

4. Impulse Giving • Donor responds on impulse, based on an appeal, for a charitable gift. The appeal comes from TV, mail, internet, etc. • Usually cash and a small amount • The donor may get a magazine subscription or other small trinket • If the donor does not itemize or if the donee is not a charitable entity, then the deduction is not available.

5. Interest Giving • The donor has a special interest in the charitable organization. Typically the donee’s church, synagogue, or mosque, or possibly where the donee went to college • The giving happens periodically (weekly at church or annually). • Typically larger in amount than impulse giving, and sometimes the gift is stock or other property.

6. Integrated Giving • Most sophisticated giving, as it is part of the donor’s financial, tax, and estate planning. • The donor has a substantial interest in the charitable organization

7. Is a Gift a Gift? • For the charitable deduction to count, it has to be a gift. • Two elements: • Transfer that is voluntary • Motivated by something other than consideration • When payment is made to a university for education, this is a purchase, and not a gift. • See the gift tax cases file, where the Supreme Court found that a gift is a transfer motivated by “detached or disinterested generosity.”

8. More Gift Issues • Donor gives to a college or university and then granted preferential seating to a sporting event of the university. • The IRS has said these are not gifts, as there is a substantial benefit received • Congress passed a law allowing that 80% of the deduction is ok • Check out http://wsjclassroomedition.com/archive/07may/07may_additional_skyboxes.pdf, where U of M is funding a renovation of the Big House using the 80% deduction rule

9. Giving Property • Usually Stock • 3 Classifications • Ordinary Income property • Short term capital gain • Long term capital gain (hold 12 months; stocks, bonds, real estate) • For the first two categories, the value of the gift is the cost basis (what you paid for it) • For long term capital gain, the value of the gift is the current fair market value

10. Gift Substantiation Rules • Donors who make a separate charitable contribution of $250 or more in a year must get written confirmation from the donee charitable organization. The cancelled check is not enough. • Cancelled checks are ok as substantiation for gifts under $250

11. Quid Pro Quo Contributions • If a donor pays $180 for a dinner at a museum, and the value of the dinner is $100, then the deduction is $80. • Buying raffle tickets at a charity is not a deduction • If you receive free membership or admissions as part of a donation, then the entire check you write is not deductible. • These rules do not apply if you get a token back, such as a calendar or key chains • If the amount is less than $75, the amount is ignored.

12. Quid Pro Quo Contributions • Donor receives something of value back (ticket to performance or a dinner). • The IRS has held that payments by corporate sponsors for bowl games are not charitable gifts to the bowl game associations, because the corporation got a valuable advertising package. • Rule: It is a deduction if the only return benefit is the use or acknowledgement of the name or logo or product lines of the donor firm – this is not advertising the firm’s goods and services (there is no comparative price information, etc).

13. Fundraising Regulations • Typically done at the state level • Michigan’s act is at: http://www.legislature.mi.gov/(S(tbmkwle1ptmhdbjyr2o4gxbu))/mileg.aspx?page=GetMCLDocument&objectname=mcl-Act-169-of-1975 • Michigan on professional fundraising is at: http://www.legislature.mi.gov/(S(tbmkwle1ptmhdbjyr2o4gxbu))/mileg.aspx?page=getObject&objectName=mcl-400-287 • A charitable organization must obtain a license before fund raising starts.

14. Constitutional Considerations • Free Speech • First amendment at federal level • 14th amendment at state level • Forms of free speech • Pure free speech – highly protected. Fundraising by a charity is a form of pure free speech • Commercial free speech – reasonable restrictions • US Supreme Court in Heffron v. International Society for Krishna Consciousness (1981) at http://www.law.cornell.edu/supct/html/historics/USSC_CR_0452_0640_ZX.html • Percentage limitations on how much a charity can spend on fund raising

15. State Police Power • Why can states regulate this type of speech? • To protect the public from deceit, fraud, unreasonable annoyance, or the unscrupulous obtaining of money under false pretenses.

16. Contributions You Cannot Deduct • A contribution to a specific individual, • A contribution to a nonqualified organization, • The part of a contribution from which you receive or expect to receive a benefit, • The value of your time or services, • Your personal expenses, • A qualified charitable distribution from an individual retirement arrangement (IRA),.

17. Contributions to Nonqualified Organizations • Certain state bar associations • Chambers of commerce and other business leagues or organizations. • Civic leagues and associations. • Communist organizations. • Country clubs and other social clubs. • Foreign organizations Labor unions. But you may be able to deduct union dues as a miscellaneous itemized deduction, subject to the 2%-of-adjusted-gross-income limit, on Schedule A (Form 1040). See Publication 529, Miscellaneous Deductions. • Political organizations and candidates.

18. Travel Issues Generally, you can claim a charitable contribution deduction for travel expenses necessarily incurred while you are away from home performing services for a charitable organization only if there is no significant element of personal pleasure, recreation, or vacation in the travel. This applies whether you pay the expenses directly or indirectly. You are paying the expenses indirectly if you make a payment to the charitable organization and the organization pays for your travel expenses.   The deduction for travel expenses will not be denied simply because you enjoy providing services to the charitable organization. Even if you enjoy the trip, you can take a charitable contribution deduction for your travel expenses if you are on duty in a genuine and substantial sense throughout the trip. However, if you have only nominal duties, or if for significant parts of the trip you do not have any duties, you cannot deduct your travel expenses.

19. Volunteer Questions and Answers

20. Volunteer Protection Act of 1997 In general, this provides immunity from tort claims (what is a tort?) that may be filed against volunteers of nonprofits Why is this an issue? A volunteer can cause physical injury, and this could lead to large legal judgments. Principal-agent law leads to liability for both the volunteer and the NPO. The NPO carries general liability insurance to shield itself from such claims. This covers board members and employees. However, most of these policies do not cover volunteers. Having said that, many small NPOs do not carry general liability insurance, though of course they should.

21. The Act Itself • The volunteer will be immune from a lawsuit where the claim is that the volunteer carelessly (negligently) injured another in the course of helping the nonprofit. The Act does not provide immunity to the NPO itself • Prior to the Act, negligent volunteers were liable. • The Act applies to uncompensated volunteers helping 501(c)(3) and 501(c)(4) organizations • This does NOT protect the volunteer against claims of: • Gross negligence • Willful or criminal misconduct • Reckless misconduct • Flagrant indifference to the rights or safety of the individual harmed by the volunteer • Civil rights claims

22. What is Gross Negligence? What is negligence? The failure to use reasonable care. The doing of something which a reasonably prudent person would not do, or the failure to do something which a reasonably prudent person would do under like circumstances. A departure from what an ordinary reasonable member of the community would do in the same community. Gross negligence involves a greater degree of carelessness than negligence. Not protecting gross negligence may not provide much protection to volunteers

23. Downside of the Law A volunteer of an NPO seriously hurts someone. The NPO has no money. The volunteer is immune from a lawsuit. This may leave the injured party without any recourse. The Act allows a State to require than an NPO has a general liability policy. This does divert resources away from the mission, but may be necessary to avoid disaster.

24. Does a Nonprofit Need D&O Insurance? D&O = Director and Officer A general liability policy does not cover "wrongful acts," in all likelihood. Its coverage is limited to bodily injury and property damage. The federal Volunteer Protection Act of 1997 does not eliminate the need for nonprofit D&O insurance. An NPO can be sued for a wrongful act by anyone with any interest in the NPO’s activities. These can include employees, members, one director against another, vendors, governmental authorities and others. Without nonprofit directors and officers coverage, the NPO must pay for its own defense, even if the NPO is proven blameless.

25. More on D&O Insurance Among nonprofits, the most frequent allegation involving board liability is employment practices - wrongful termination, sexual harassment, or discrimination in hiring practices. Traditional, commercial general liability insurance usually does not respond to such allegations, or to most other legal actions nonprofit boards are likely to face. D&O insurance does not pay for bodily injury or property damage. You buy auto insurance, workers' compensation, and general liability for such claims Who is covered? Officers, the executive director and possibly a few "key" employees. However, many policies don't include staff and volunteers or the entity itself.