Milwaukee Legal Initiative for Nonprofit Corporations (M-LINC)

1. Milwaukee Legal Initiative for Nonprofit Corporations (M-LINC) LEGAL ISSUES OF fundraising & REVENUE GENERATING ACTIVITIES NONPROFIT CENTER OF MILWAUKEE MAY 19, 2009 With support from the Helen Bader FoundationH

2. A Reminder about M-LINC • M-LINC is the Milwaukee Legal Initiative for Nonprofit Corporations • Housed at Marquette University Law School • Launched in September 2008 • Karin Holmberg Werner, JD, the director of M-LINC ,was hired in July 2008 • Currently serving as a resource for Wisconsin nonprofits with legal questions • M-LINC coordinates FREE legal advice and educational programs on legal issues important to small and mid-sized nonprofits

3. What are we going to discuss today? • This program is aimed at ensuring that your organization is operating within the legal guidelines for nonprofit fundraising and revenue generating activities.  • As the end of the year approaches, most nonprofits will be busy preparing thank you letters for certain donations that they have received as well as contemplating their 2009 tax filings (which now, with the revised Form 990, ask more questions concerning fundraising and revenue generating activities). 

4. In particular, we will discuss: • Why states regulate fundraising by nonprofits. • Whether your organization and its professional fundraisers (if any) are properly registered to conduct fundraising in Wisconsin. • Whether your organization should be registered to conduct fundraising in other states. • Required disclosures for your organization’s charitable solicitations. • Required acknowledgments to donors. • Rules relating to the potential taxation of income generated by your organization. • Steps to follow if your organization owes taxes on such income.

5. Why do states regulate fundraising by nonprofits? What are limits on state regulation of fundraising? There are elaborate state registration and filing requirements. • Why state regulation? • Wisconsin’s desire to prevent fraud on its residents by regulating charitable solicitations. • Concern that professional fundraisers are overly compensated. Generally, only 1/3 of money raised on behalf of nonprofits by professional telemarketers is paid over to the nonprofit. • Money to nonprofits is viewed by some as a diversion of tax proceeds (due to charitable tax deduction). • Ultimate beneficiaries of charity are often powerless (poor, elderly, etc.), so the state helps protect them via regulation of fundraising. • Limits on state regulation of fundraising: • Solicitation is an important way nonprofits disseminate their ideas. • Hence, restrictions on fundraising can be restrictions on the nonprofit’s right to free speech. • Restrictions are only allowed if narrowly tailored to prevent fraud, such as Wisconsin’s required disclosures.

6. Increased Scrutiny of Fundraising Under New IRS Form 990 (for Larger Nonprofits) • Schedule G must be filled out for organizations that: • Pay more than $15,000 for professional fundraising; • Generate more than $15,000 in income from fundraising events; or • Generate more than $15,000 in income from gaming activities. • Schedule G asks detailed questions about fundraising, including: • Amounts paid to professional fundraisers; • Whether the nonprofit had agreements relating to its professional fundraising activities; • All states where the nonprofit is registered to solicit; • Details on revenue and expenses for fundraising events; and • Details on revenue and expenses for gaming activities.

7. Is your organization is properly registered to conduct fundraising in Wisconsin and other states, as appropriate? • Required registration of nonprofits and professional fundraisers with the Wisconsin Department of Regulation and Licensing before soliciting funds. • What constitutes soliciting funds? • A solicitation is a direct or indirect request for a contribution, coupled with a representation or implication that the contribution will be used for some charitable purpose or will benefit a charitable organization. • Sometimes an organization’s name alone, because of public awareness of its charitable purpose, is enough to indicate that a solicitation is charitable. (e.g., “Please contribute to the Red Cross”) • Moreover, solicitations that mention no charitable purpose but that state contributions will benefit a charitable organization are considered charitable solicitations. • Note: special registration requirements for bingo games or raffles.

8. Organizations Exempted from Registration to Solicit in Wisconsin • Religious organizations • Political candidates and political parties • State agencies or local governmental units • Private schools • Charitable organizations not intending to raise or receive more than $5,000 in a year and using only volunteer solicitors • Etc.

9. Process for Registration to Solicit in Wisconsin • A nonprofit that intends to solicit in Wisconsin must file a registration form with the Department of Regulation and Licensing (DRL) before any soliciting occurs. • The registration form (DRL Form 296) requires basic information about the nonprofit and how it will use the contributions, as well as a $15 registration fee. The form also asks whether the organization uses professional fundraisers or fundraising counsel. • The registration remains in effect until the following August 1, when all registrations expire unless renewed. Registration may be renewed for additional one-year periods upon completion of a new registration form and payment of the $15 renewal fee.

10. Annual Report to Wisconsin • A registered organization that receives more than $5,000 in a year must file an annual report (Form 308) setting forth its financial operations for the year. The report must be filed with the DRL within six months after the end of the organization’s fiscal year. • These reports are available for public inspection as the purpose of the reports is to permit the DRL and the public to evaluate the organization’s financial operations. • The DRL will accept IRS Form 990 in lieu of Form 308. • Note: varying accounting standards based on gross receipts of the organization. • If less than $5,000 statewide or $50,000 in one community was raised, no financial statement is necessary so long as the organization files an affidavit to that effect on Form 1943.

11. Professional Fundraisers and Fundraising Counsel • Professional fundraisers and fundraising counsel must also register with the DRL and must be registered before soliciting begins. The initial registration fee is $50. • Registration is effective until September 1 of the following even numbered year, when all professional fund raiser and fundraising counsel registrations expire. Initial registration for professional fundraisers and fundraising counsel is $53. Registration may be renewed for additional two-year periods upon proof that an approved bond (generally $20,000) has been maintained and upon payment of the prescribed fee. ($93 for professional fundraisers) • Contracts: Whenever a nonprofit organization enters into an agreement with a professional fundraiser to solicit contributions, that contract must be in writing, with a copy forwarded to the DRL. The contract must state the amount of gross revenue the charitable organization will receive.

12. Should your organization be registered to solicit funds in any other state? • Generally, a nonprofit must register in any state where it solicits funds (i.e., in person, phone or mail solicitations). • New Form 990 requires larger nonprofits to provide extensive information about their fundraising, including listing the states where the organization is registered to solicit. • Confusion due to solicitation over the internet. Should a nonprofit have to register in every state when it has a website via which it accepts donations? • The Charleston Principles: • Guidelines on charitable solicitation over the internet issued by an association of state charity officials. Nonbinding guidelines for state regulators. • Register in nonprofit’s home state (i.e., Wisconsin) and register in states where residents are specifically targeted or if the nonprofit receives donations from residents of the state on a repeated and ongoing basis or a substantial basis; or sends email messages or contacts them in other ways to promote its website.

13. Do your organization’s charitable solicitations contain required disclosures? • All states prohibit unfair or deceptive solicitation. Thus, a nonprofit preparing to solicit contributions directly or through a fundraiser should carefully analyze the accuracy and honesty of the solicitation message. (E.g., if the statement “every penny of your donation will be used to help disabled children” is made, it is a deceptive solicitation if any part of the donation is used to pay a professional fund raiser.) • Additionally, there are required disclosures for all professional fundraisers and volunteer fundraisers: • The name and location of the organization; • The fact that the organization’s financial information is available upon request; and • A clear description of the primary charitable purpose for the solicitation. • A professional fundraiser must also disclose his or her name and professional fundraiser status. • Disclosure must be made during solicitation or with a written confirmation of solicitation, prior to accepting contribution. • Note: A charity that operates solely in one community and raises less than $50,000 in one year may apply to the DRL for an exemption from the disclosure requirements.

14. Are the proper acknowledgments being provided to your donors? • New requirements for acknowledgements to donors under the Pension Protection Act of 2006. • All Contributions: A donor must have a bank record or written communication from a charity for any monetary contribution before the donor can claim a charitable contribution on his/her federal income tax return. • Contributions of $250 or more: A donor is responsible for obtaining a written acknowledgment from a charity for any single contribution of $250 or more before the donor can claim a charitable contribution on his/her federal income tax return. • Contributions where goods or services are received in exchange: A charitable organization is required to provide a written disclosure to a donor who receives goods or services in exchange for a single payment in excess of $75. • Note: special rules for contributions of cars, boats or airplanes.

15. Recordkeeping Requirement for ALL Contributions • A donor must have a bank record or written communication from a charity for any monetary contribution before the donor can claim a charitable contribution on his/her federal income tax return. • A bank record includes a canceled check, bank statement or credit card statement. • A written communication from the nonprofit should include: • Name of nonprofit; • Date of contribution; and • Amount of contribution • Old rule permitted any reliable written record and donors often kept diaries or notes from the time of donation. Those types of records are no longer sufficient. • TIP: To assist donors, nonprofits may wish to begin substantiating all cash charitable gifts with a letter or other form of written receipt.

16. Recordkeeping Requirements for Contributions of $250 or More • A donor is responsible for obtaining a written acknowledgment from a charity for any single contribution of $250 or more before the donor can claim a charitable contribution on his/her federal income tax return. • The written acknowledgment MUST include: • Name of organization; • Amount of cash contribution; • Description (but not value) of non-cash contribution; • Statement that no goods or services were provided by the organization in return for the contribution, if that was the case; • Description and good faith estimate of the value of goods or services, if any, that an organization provided in return for the contribution; and • Statement that goods or services, if any, that an organization provided in return for the contribution consisted entirely of intangible religious benefits, if that was the case.

17. Tips for Such Acknowledgments • TIP: An annual summary may be used to substantiate several single contributions of $250 or more. • Acknowledgments may be provided via an email addressed to the donor. • Separate contributions of less than $250 each will not be aggregated (e.g., a church need not provide this type of acknowledgment to a parishioner who contributes $50 each week, even though total annual contributions are $250 or more).

18. By what date must the charity send the acknowledgment to the donor? • Generally, nonprofits send acknowledgments no later than January 31 of the year following the donation. • The law requires the acknowledgment be received by the earlier of (i) the date the donor files his/her tax return or (ii) the date the tax return is due (including extensions).

19. Contributions Where Goods or Services are Received in Exchange • A charitable organization is required to provide a written disclosure to a donor who receives goods or services in exchange for a single payment in excess of $75. • The disclosure must: • Inform the donor that the amount of the contribution that is deductible for federal income tax purposes is limited to the excess of money contributed by the donor over the value of the goods or services provided by the organization; and • Include a good faith estimate of the value of such goods or services. • The written disclosure must be furnished during the solicitation of the contribution or the receipt of the contribution. • The statement must be in writing and must be made in a manner that is likely to come to the attention of the donor. For example, a disclosure in small print within a larger document might not meet this requirement. • Penalty: $10 per contribution up to $5,000 per fundraising event or mailing. Can be avoided if failure to meet requirements was due to reasonable cause.

20. Important Exceptions • Token: Insubstantial goods or services do not have to be described in the acknowledgment. Insubstantial goods are given in the context of a fundraising campaign and the fair market value is less than 2% of the payment or $91, or the payment is at least $45.50 and the only items provided bear the organization’s logo (e.g., calendars, mugs or posters) and the cost of the items is $9.10 or less. Note: dollar amounts are for 2008. • Membership Benefits: An annual membership benefit is also considered to be insubstantial if provided in exchange for an annual payment of $75 or less and consists of privileges such as free or discounted admission, discounts on purchases from the charity’s gift shop, free or discounted parking, etc. • Intangible Religious Benefits

21. Unreimbursed Expenses • If a donor makes a single contribution of $250 or more in the form of unreimbursed expenses, e.g., out-of-pocket transportation expenses incurred in order to perform donated services for an organization, then the donor must obtain a written acknowledgment (similar to those described before for contributions of $250 or more), but also containing a description of the services provided by the donor • The donor must maintain adequate records of the unreimbursed expenses. • EXAMPLE: A chosen representative to an annual convention of a charitable organization purchases an airline ticket to travel to the convention. The organization does not reimburse the delegate for the $500 ticket. The representative should keep a record of the expenditure, such as a copy of the ticket, and should obtain from the organization a description of the services provided and a statement that he/she received no goods or services from the organization.

22. Examples of Written Acknowledgments • “Thank you for your cash contribution of $300 that (organization’s name) received on December 12, 2008. No goods or services were provided in exchange for your contribution.” • “Thank you for your cash contribution of $350 that (organization’s name) received on May 6, 2008. In exchange for your contribution, we gave you a cookbook with an estimated fair market value of $60.” • “Thank you for your contribution of a used baby crib and matching dresser that (organization’s name) received on March 15, 2008. No goods or services were provided in exchange for your contribution.”

23. Are you generating income from a business venture?Do you owe taxes on such income? • A nonprofit must pay ordinary corporate income tax on its profits from business activities unrelated to its exempt purpose. • This is one of the most controversial aspects of the law of tax-exempt organizations. • Source of rule: unfair competition between nonprofits that are not taxed on income and for profits in same business • Hence, nonprofits may earn profits, free of tax, from business activities that are related to the nonprofit’s exempt purpose. • Definition: Unrelated business taxable income is the gross income derived by a nonprofit from an “unrelated trade or business” that is regularly carried on by the nonprofit, minus any allowable deductions that are directly connected with the carrying on of such trade or business.

24. Elements of UBTI • Gross income from a trade or business; • Trade or business is regularly carried on by the nonprofit; and • The trade or business is not substantially related (other than producing income) to the nonprofit’s exempt purposes (i.e., feed the poor)

25. Trade or Business • Trade or business is any activity carried on for the production of income. • For example, soliciting, selling, and publishing commercial advertising is a trade or business even though the advertising is published in an exempt organization’s periodical that contains editorial matter related to the organization’s exempt purpose.

26. Regularly Carried On • Regularly carried on is activities pursued in a manner generally similar to comparable commercial activities of for profits. • For example, a hospital auxiliary’s operation of a sandwich stand at a state fair for two weeks would not be the regular conduct of a trade or business. The stand would not compete with similar facilities that a nonexempt organization would ordinarily operate year-round. • However, operating a commercial parking lot every Saturday year-round, would be the regular conduct of a trade or business.

27. Related to the Nonprofit’s Exempt Purposes • Business activities are related to the nonprofit’s exempt purpose only when the conduct of the business activities has a causal relationship to the achievement of the exempt purposes (other than through the production of income). • Activities are substantially related only if the causal relationship is a substantial one. • Thus, the conduct must contribute importantly to the accomplishment of the nonprofit’s exempt purposes.

28. UBIT or Not? • Cafeteria in an art museum • University travel tour #1: A tax exempt university alumni association provides travel tours for its members and their families. No formal educational program conducted with these tours and they do not differ from regular commercially operated tours. • University travel tour #2: A tax exempt university operates a tour that involves 5 to 6 hours of organized study per day, preparation of reports, lectures, instruction, and recitation by the students with examinations at the end of the tour. Academic credit is awarded for tour participation. • Folk art museum gift shop: Each line of merchandise must be considered separately to determine if sales are related to the exempt purpose. • Sale of greeting cards that display reproductions of works from the museum’s collections. • Sale of scientific books and souvenir items of the city where the museum is located

29. Exemptions from UBIT • Volunteer Workforce: Any trade or business where substantially all the work in carrying on the trade or business is performed without compensation. (e.g., an orphanage’s retail store where unpaid volunteers perform substantially all of the work). • Convenience: Any trade or business carried on by a 501(c)(3) organization primarily for the convenience of its members, students, patients, officers or employees (e.g., a college laundry for cleaning dormitory linens and students’ clothing). • Donated Items: Any trade or business involving the selling of items, substantially all of which was contributed to the nonprofit (e.g., a thrift shop selling contributed items with the proceeds going to the nonprofit).

30. Items to Note if Your Organization Owes Taxes on UBTI • Form 990-T must be filed if the nonprofit’s gross income from unrelated businesses is $1,000 or more. • Form 990-T must be filed by the 15th day of the fifth month after the end of the nonprofit’s taxable year. (May 15th for calendar year organizations). • A nonprofit must make estimated tax payments if it expects its tax to be $500 or more. • Note: Deduction for first $1,000 of UBTI. (IRC 512(b)(12)) • Other deductions allowed only if directly connected with the carrying on of the unrelated trade or business. • What if dual use of a facility (e.g., library that is rented out for weddings and corporate parties)? • Should electricity bills and salaries be deducted? • UBTI generally excludes passive income such as dividends, interest, annuities, rents from real property, royalties, and gains or losses from the sale of capital assets, except where debt-financed. • Note: Forms 990-T now must be available to the public for inspection.

31. M-LINC’s Recent and Upcoming Educational Programs • October 20th – Record podcast at the Nonprofit Management Fund on the subject of excess benefits (basically compensation) • October and November - Meet and Greet Sessions at Nonprofit Management Fund to introduce M-LINC and its offerings • Late 2008 or early 2009 – Speak about M-LINC to Donors Forum meeting • November 18th 7:30 to 9:30 a.m.  - Agency Executive Group meeting via the Nonprofit Center of Milwaukee speaking on the subject of legal issues of fundraising and revenue generating activities for nonprofits • February 2009 – Educational program at the Nonprofit Center of Milwaukee on legal issues in managing volunteers and protections for volunteers • May 2009 – Educational program at the Nonprofit Center of Milwaukee on employment law for nonprofits

32. Thank You and Contact Information Thank you for coming today. M-LINC www.nonprofitlinc.org (414) 288-6631 mlinc@marquette.edu Karin Holmberg Werner, JD Director of the Milwaukee Legal Initiative for Nonprofit Corporations Marquette University Law School Office 22 – Lower Level of the Library karin.werner@marquette.edu (414) 288-5536