The California Department of Justice (“DOJ”) published a notice on December 23^rd stating that certain key provisions of the new law governing charitable fundraising platforms, known as California Assembly Bill 488, go into effect on January 1, 2023 (as is stated in the law), and noting that the registration and other requirements in the new law are delayed until January 1, 2024 while the California Attorney General finalizes the regulations necessary to administer the new law.

According to the December 23^rd notice, the key provisions of Assembly Bill 488 that become operative on January 1, 2023 are:

1. Soliciting or Receiving Funds Only for Charities in Good Standing

A charitable fundraising platform or platform charity may only facilitate solicitations or the receipt of donations for the benefit of charitable organizations in good standing.  “Good standing” means the platform charity or other recipient charity’s tax-exempt status has not been revoked by the Internal Revenue Service or the California Franchise Tax Board, or is not prohibited from soliciting or operating in California by the Attorney General. The notice includes links to the Attorney General’s list of charities that may not operate or solicit in California, as well as to the Internal Revenue Service’s list.

2. Segregation of Funds

Charitable fundraising platforms and platform charities must hold charitable funds raised in a separate account or accounts from other funds belonging to the platform or platform charity.

3. Required Disclosures

The new law requires charitable fundraising platforms to clearly disclose certain information, including: (1) a statement about who will receive the donations; (2) if applicable, a statement that a recipient charity may not receive donations or grants of recommended donations, with an explanation identifying the circumstances under which a recipient charity may not receive the funds; (3) the length of time it takes to send the donation or a grant of the recommended donation to a recipient charity; (4) the fees or other amounts (if any) deducted from or added to the donation or a grant of the recommended donation; and (5) whether the donation is tax-deductible or not.

The new law permits some, but not all, of these disclosures to be provided through a conspicuous hyperlink, so long as the disclosure is conspicuous when the hyperlink is selected.  The proposed regulations include additional details relating to these disclosure requirements.

4. Solicitations for Non-Consenting Charities

The law generally requires that a charitable fundraising platform or platform charity obtain the written consent of any recipient charity before using its name in a solicitation, but provides that such written consent is not needed if all of the following circumstances are met: (1) the platform only includes certain information about the recipient charities on the platform, as set forth in the new law or future regulations (e.g., the recipient charities’ name, address, telephone number, internet website, EIN, registration number with the California AG’s office, NTEE Code, and publicly available information from the recipient charity’s tax or information returns filed with the Internal Revenue Service or the California AG’s office); (2) the platform conspicuously discloses before persons can complete a donation that the recipient charity has not provided consent or permission for the solicitation, and has not reviewed or approved the content generated by individuals engaging in peer-to-peer charitable fundraising, when applicable; (3) the platform promptly removes any recipient charity from its list or any solicitation regarding the recipient charity upon written request by the recipient charity; and (4) the platform or platform charity does not require that a recipient charity consent to any solicitations as a condition for accepting a donation or grant of a recommended donation.

The notice states that the registration and other requirements in California Government Code section 12599.9 are being delayed to January 2024, given the pending nature of the proposed regulations.  The notice further states that “[p]roposed regulations do not carry the force of law.”

Status of the Proposed Regulations

Under Assembly Bill 488, the Attorney General is authorized to establish rules and regulations necessary to administer the new law. This includes regulations governing: (1) the additional acts of solicitation that meet the definition of a charitable fundraising platform or platform charity, as needed, in order to address changes in technology and charitable fundraising through platforms; (2) the content of the registration and annual reporting forms and other information to be provided to the Attorney General’s office; (3) the requirements for any written agreement between a consenting recipient charitable organization and a charitable fundraising platform or platform charity; and (4) the requirements for holding donations or distributing donations and grants of recommended donations (including the maximum length of time it takes to send the donated funds, taking into account various considerations; and the circumstances under which donors or persons may be contacted to provide alternate recipient charitable organizations or notified when the donated funds are sent).

On May 27, 2022, the California DOJ published a Notice of Proposed Rulemaking for Charitable Fundraising Platforms and Platform Charities regulations, including draft regulations to implement the law, and draft registration forms to implement the new registration requirement applicable to charitable fundraising platforms.  The California DOJ invited comments to be submitted by July 12^th, and held a public hearing on July 13^th.

On November 21, 2022, the California DOJ published a Notice of Modifications related to the Department of Justice Charitable Fundraising Platforms and Platform Charities proposed rulemaking initially noticed on May 27, 2022.  Comments to the Notice of Modifications were accepted through December 7^th. Final regulations have not yet been issued.

For a summary of the key provisions of California Assembly Bill 488, and additional context leading up to its enactment, read this earlier blog post.

The post Key Provisions of California Assembly Bill 488 Regulating Charitable Fundraising Platforms Take Effect January 1, 2023 first appeared on Staging Perlman and Perlman.

Any responsible business must stay within the law when conducting revenue-generating activities. For nonprofits, this means taking steps to ensure that its fundraising activities are compliant with all applicable laws and regulations. This is prudent from a business perspective, especially because charitable fundraising is the activity that most state charity regulatory agencies across the country focus their oversight efforts.

Although many of the fundraising compliance requirements arise from state charitable solicitation laws, federal tax law compliance must also be addressed, given its role in determining the tax-deductibility of donations and to ensure that nonprofits aren’t inadvertently treating revenues from commercial business activities as charitable sponsorships, and thereby improperly avoiding payment of unrelated business income tax (UBIT).

What should an organization do to assess its overall fundraising compliance? Following are ten steps nonprofit organizations can take to ensure their fundraising activities are legally compliant.

1. Review your organization’s state charitable registration compliance.

• Generally, if a charitable organization is engaged in the solicitation of funds for charitable purposes, there are state rules that require registration, reporting and disclosures by the charitable organization or someone fundraising on its behalf. Forty-four (44) states and the District of Columbia have laws that regulate fundraising activities, with the specific rules and requirements varying from state to state. Most charitable organizations must register in about thirty-eight (38) states.  Click here for a chart of states that require charitable organizations to register.
• Review and confirm that all fundraising contracts that need to be filed as part of the organization’s registration file are being submitted in the correct states. This includes contracts with professional fundraisers, fundraising counsels, and commercial co-venturers.

2. Ensure that the organization’s fundraisers are properly registered where applicable.

• About 42 states require professional fundraisers to register, post a surety bond, file contracts with their nonprofit clients, and file campaign financial reports.
• About 28 states require fundraising counsels to register and file contracts.
• Up to 8 states require commercial co-venturers to register and/or file a copy of any commercial co-venture contract and a campaign report per contract.
• Click here for a chart of states where professional fundraisers, fundraising counsels and commercial co-venturers are required to register.

3. Review your fundraising contracts to ensure they include any state-required language as well as other general protections (e.g., termination; indemnification; trademark license and approval rights).

• Click here for more information about professional fundraiser contract provisions.
• Click here for more information about fundraising counsel contract provisions.
• Click here for more information about commercial co-venturer contract provisions.

4. Review corporate sponsorship arrangements for qualification as a qualified sponsorship payment.

• Review the organization’s corporate sponsorship cultivation strategy to ensure that it takes into account potential UBIT implications.

5. Review other fundraising contract templates (e.g., corporate sponsorship agreements, pledge agreements, royalty agreements, etc.) to ensure that they take into account any legal considerations, including donor benefits and gift restrictions.

• Ensure that pledge agreements clearly outline the expectations of the parties with respect to the gift, including the scope of any gift restrictions, and whether the agreement is intended to be legally binding (including on successors and assigns or the donor’s estate).
• Ensure that passive licensing or royalty agreements are properly structured so that the income generated is not subject to UBIT.

6. Review compliance with state solicitation disclosures (in mailings, online, emails, etc.).

• Click here for a summary of state charitable solicitation disclosures for charities and professional fundraisers, and model disclosure statements.
• Click here for more information about advertising disclosure requirements in commercial co-venture promotions.

7. For 501(c)(3) organizations in particular, review donation tax receipts for compliance with federal tax law requirements.

• Make sure the organization complies with the special rules governing quid pro quo donations
• Be aware of special exceptions whereby donations given in exchange for low-cost token items or certain recurring membership benefits may be disregarded.
• Tax-exempt organizations other than 501(c)(3) organizations should ensure that solicitations and donation receipts clearly state that donations are not tax-deductible.

8. Review direct mail solicitation practices to ensure that the communications are truthful, accurate, and not misleading.

• Consider the best practices established by the Better Business Bureau Wise Giving Alliance with respect to accuracy of solicitation materials, specifically Standards 15 and 19.

9. Ensure that special solicitation campaigns are reviewed for compliance (matching gift campaigns, sweepstakes, raffles, etc.).

• Click here for more information regarding legal considerations in matching gift campaigns.
• Note that state and federal laws govern the conduct of sweepstakes, and require specific disclosures to be made. Sweepstakes may also be subject to possible state registration and bonding requirements (although there may be an exclusion for charities if the sweepstakes is not undertaken in connection with the advertising, promotion or sale of consumer products or services).
• Note that charitable raffles are strictly regulated at the state and local level, and are difficult to conduct in multiple jurisdictions. Review the state and local laws of the jurisdiction where any raffle will be undertaken.

10. Ensure that solicitations associated to gifts-in-kind are communicated in a clear and transparent manner, and that the corresponding receipt, valuation and disposition of the gifts-in-kind are properly handled.

• Consider the best practices established by the Accord Network in connection with the receipt and distribution of gifts-in-kind.

A fundraising legal audit is a core component of a comprehensive legal audit for nonprofits, which reviews an organization’s compliance with legal requirements and best practices applicable to tax-exempt organizations across various operational areas. Stay tuned for another blog post coming soon, which will discuss the key components of a comprehensive legal audit!

The post Ten Key Components of a Nonprofit Fundraising Legal Audit first appeared on Staging Perlman and Perlman.

Hawaii, which requires companies to file a written consent form at least ten (10) days before a charitable sales promotion begins, has recently begun to enforce its statutory late filing fee of $20 per day (up to $1,000 maximum penalty) for failure to timely file a written consent.  In order for the written consent to be timely filed, it must be “fully executed” by both parties through an electronic approval process. A delay in obtaining either party’s electronic consent can mean late fees will begin to accrue.

While not new, companies should be also be aware that South Carolina regularly imposes administrative fines of $10 per day for late filing of campaign reports, up to a maximum fine of $2,000 per report. Illinois, which requires companies to register under their charitable trust law to conduct charitable sales promotions, has been enforcing its $100 late filing fee for campaign reports.

While California 1 has the statutory right to impose a late fee of $25/month for registration statements or campaign reports, we have not observed this late fee being regularly imposed.

To avoid incurring late fees and penalties, companies should ensure that they are monitoring their filing deadlines and planning ahead in order to avoid getting hit with significant and unanticipated financial penalties.

For a general overview of the laws regulating commercial co-ventures and charitable sales promotions, please read Do Good And Sell It Well: An Overview Of Cause Marketing Regulation on Engage for Good’s website.

1 Registration in California is not required if certain contract and related compliance requirements are met, including transfers of payments every 90 days. However, note that some companies engaging in online campaigns may need to register as a charitable fundraising platform in California beginning on January 1, 2023. For more information, see the post California Enacts New Law to Regulate Charitable Fundraising Platforms.

The post What are the Penalties for Making a Late Filing of CCV Registrations and Campaign Reports? first appeared on Staging Perlman and Perlman.

While most nonprofits are required to register in many states to conduct charitable fundraising, religious organizations are generally exempt from the registration requirement. It’s important to be aware, however, that the scope of the states’ religious exemption varies. Therefore, religious organizations should carefully review each state’s statutory exemption to determine where they are exempt, and where they are not exempt and therefore may need to register to solicit contributions.

Overview of Charitable Solicitation Registration & Religious Exemptions

Charitable fundraising activities are primarily regulated at the state level, through the offices of the Attorney General, Departments of State, Consumer Protection and the like. Charitable solicitation regulations were established to protect the public from fraudulent fundraising and assist prospective donors in making well-informed giving decisions. Each state’s statutory framework typically requires charities to register with the state, disclose information about their finances and fundraisers, and provide certain oral or written disclosures to their prospective donors. Currently, forty-one (41) states and the District of Columbia require most organizations to register before soliciting charitable contributions in their respective jurisdictions.

Most states exempt or exclude religious organizations from their charitable solicitation registration and reporting requirements. Keep in mind, however, that each state defines the scope of its exemption for religious organizations differently. As a result, some religious organizations may be required to comply with a state’s registration requirements while others may not. Several states require that religious organizations make a written request to confirm that they are exempt from the state’s registration requirements, while others consider it a legal determination to be made by the organization, and explicitly advise that they do not provide legal advice or make a formal determination as to whether or not an organization is exempt.

For some states, the religious exemption provisions are broadly constructed, and exempt any “duly organized religious corporation, religious institution or religious society.” Other exemption provisions are more narrowly drafted, exempting only those religious organizations that are not required to file the Form 990 with the IRS, which primarily includes churches¹, their integrated auxiliaries², and ecclesiastical or denominational organizations. Churches and other non-990 filers are exempt from registering in all states unless they use the services of a professional fundraiser.

As a general matter, religious organizations that are required to file the Form 990 with the IRS will be exempt in some, but not all, states. Many religious organizations that are required to file Form 990 describe their mission as both religious and charitable as together these constitute an expression of their religious faith and values. Direct services for human needs may include the provision of food, shelter, education, and medical support to vulnerable populations. Oftentimes, they incorporate prayer and religious instruction in their programmatic work, and will require their employees to agree to an organizational statement of faith.

It is worth noting that the laws of a few states continue to include a provision in their religious exemption law which the Supreme Court has declared unconstitutional. These unenforceable provisions limit the scope of the religious exemption to only those religious organizations that are primarily supported by contributions from their members or congregation.³

Impact of Religious Exemptions on Fundraising Professionals

Even when a religious organization is exempt from registering in a state to solicit contributions, in most states, when a fundraising professional provides their services to the organization, the fundraiser must be registered with the state. In a few states, the religious organization’s exemption also extends to the fundraiser’s contract filing and reporting obligations, thereby relieving them of any such filing requirements.

Professional fundraisers (also known as commercial fundraisers or paid solicitors) that directly solicit funds on behalf of charitable organizations are required to register in up to forty-four (44) states. In addition, they must post surety bonds in each state, file copies of their fundraising contracts, and file annual financial reports relating to each fundraising campaign conducted in the state. There are ten (10) states that extend the religious organization’s exemption to their professional fundraiser’s contract filing and reporting obligations.

Fundraising counsels (also known as fundraising consultants) that help plan, manage, advise, or produce and design solicitation campaigns, but do not directly solicit or have custody or control of contributions, are also required to register in twenty-seven (27) states, file contracts, and in a few states, post bonds. There are seven (7) states that extend the religious organization’s exemption to their fundraising counsel’s contract filing and reporting obligations.

Fundraising professionals need to understand the scope of a religious organization’s registration or exemption status in those states in which they will be providing fundraising services to the organization. Not only must they comply with their corresponding filing obligations, but they must also ensure compliance with collateral obligations, such as solicitation disclosures. Thus, it would be prudent for religious organizations to ensure that they have appropriately assessed their exemptions, have documentation to support the exemption in each applicable state, be registered to solicit where required, and communicate with their fundraising professionals to ensure alignment on the impact of their status as a religious organization on both parties’ filing obligations.

Does a religious organization need to register if it solicits on the internet?

In addition to ascertaining whether a religious organization is exempt from registration based on its religious status, a separate analysis should be undertaken to determine if the organization’s solicitation activity creates a jurisdictional nexus that would trigger a state’s registration requirement. For example, a website with a donate button that is accessible to residents in all states does not necessarily create a sufficient jurisdictional nexus. In many cases, it makes sense to undertake a jurisdictional analysis based on the organization’s targeted and/or online fundraising activities before delving into the religious exemption analysis as there may only be a few states where the organization has a jurisdictional nexus based on its fundraising activities. In such cases, the organization may simply review the applicability of the religious exemption in those relevant states.

For more information on how to assess an organization’s registration requirements based on its online fundraising activities, please read this article.

What are the practical steps for religious organizations to determine their registration requirements?

Assess whether registration is necessary or not based on a jurisdictional analysis, taking into account both traditional forms of fundraising (e.g., direct mail, telemarketing, events) and online fundraising activities.
Review with your legal counsel whether your organization qualifies for the religious exemption in the relevant states.
Apply for religious exemptions where applicable and appropriate.
Follow the exemption application procedures in the states that have such procedures in place.
For states that take a “self-determination” approach, and will not formally confirm an organization’s qualification for the state’s religious exemption, it may nevertheless be prudent to submit a letter, putting the states on notice of the organization’s position that it is statutorily exempt from registering as a religious organization.
Register in all applicable states where: (1) a registration requirement exists; (2) the organization is soliciting (and the state has jurisdiction over their solicitation activity); and (3) the organization does not qualify for the religious exemption. Note that charitable solicitation registration must be renewed annually in each applicable state.

The post When are Religious Organizations Exempt from Charitable Registration? first appeared on Staging Perlman and Perlman.

The new law defines a “charitable fundraising platform” as “any person, corporation, unincorporated association or other legal entity that uses the internet to provide an internet website, service, or other platform to persons in this state, and performs, permits, or otherwise enables acts of solicitation to occur.”  The broad definition of charitable fundraising platform applies to most consumer-facing websites that facilitate the receipt of online donations, with limited exceptions.[1] It also applies to websites that run multiple promotions advertising that a portion of the purchase price from the sale of goods or services will be donated to specified charities, as well as websites or platforms that voluntarily invite customers to add a donation during the check-out process, or that encourage individuals to take certain actions to trigger donations.  According to one legislative analysis, examples of charitable fundraising platforms include Amazon, Benevity, Charity Navigator, CrowdRise, eBay, Facebook, GoFundMe, Google, GuideStar (Candid), Lyft, Overstock, and PayPal.

The bill also regulates platform charities, which are charitable organizations that facilitate acts of solicitation on a charitable fundraising platform.

Key New Requirements
The bill contains a number of new requirements applicable to charitable fundraising platforms and platform charities, including the following:

1. Registration and Reporting. Charitable fundraising platforms and platforms charities must annually register and submit financial reports to the California Attorney General’s office. Additional regulations addressing the content of the registration and annual report forms and the manner and timing of the filings will be issued by the Attorney General.[2]

2. Required Disclosures. The new law will require charitable fundraising platforms to clearly disclose certain information, including: (1) a statement about who will receive the donations; (2) if applicable, a statement that a recipient charity may not receive donations or grants of recommended donations, with an explanation identifying the circumstances under which a recipient charity may not receive the funds; (3) the length of time it takes to send the donation or a grant of the recommended donation to a recipient charity; (4) the fees or other amounts (if any) deducted from or added to the donation or a grant of the recommended donation; and (5) whether the donation is tax-deductible or not. The new law permits some, but not all, of these disclosures to be provided through a conspicuous hyperlink, so long as the disclosure is conspicuous when the hyperlink is selected.

3. Written Consent of Charity Beneficiaries (and a Limited Exception). The law generally requires that a charitable fundraising platform or platform charity obtain the written consent of any recipient charity before using its name in a solicitation, but provides that such written consent is not needed if all of the following circumstances are met: (1) the platform only includes certain information about the recipient charities on the platform, as set forth in the new law or future regulations (e.g., the recipient charities’ name, address, telephone number, internet website, EIN, registration number with the California AG’s office, NTEE Code, and publicly available information from the recipient charity’s tax or information returns filed with the Internal Revenue Service or the California AG’s office); (2) the platform conspicuously discloses before persons can complete a donation that the recipient charity has not provided consent or permission for the solicitation, and has not reviewed or approved the content generated by individuals engaging in peer-to-peer charitable fundraising, when applicable; (3) the platform promptly removes any recipient charity from its list or any solicitation regarding the recipient charity upon written request by the recipient charity; and (4) the platform or platform charity does not require that a recipient charity consent to any solicitations as a condition for accepting a donation or grant of a recommended donation.

4. Soliciting or Receiving Funds Only for Charities in Good Standing. A charitable fundraising platform or platform charity may only facilitate solicitations or the receipt of donations for the benefit of charitable organizations in good standing.  “Good standing” means the platform charity or other recipient charity’s tax-exempt status has not been revoked by the Internal Revenue Service or the California Franchise Tax Board, or is not prohibited from soliciting or operating in California by the Attorney General.

5. Segregation of Funds; Accounting of Fees. Charitable fundraising platforms and platform charities must hold charitable funds raised in a separate account or accounts from other funds belonging to the platform or platform charity, and must promptly ensure that donations and grants of recommended donations are sent to recipient charities with an accounting of any fees imposed for processing the funds.

6. Prompt Distribution of Donations/Grants. In addition to the requirement for platforms to disclose the amount of time it takes for donations to be sent to recipient charities, the Attorney General is authorized to establish regulations regarding the maximum length of time a platform or platform charity may take to send the donated funds, taking into consideration various facts and circumstances.[3] For platforms that make donations or grants based on purchases or other activity performed on the platform, the platform must send donations or grants of recommended donations to the recipient charities no less frequently than on a quarterly basis and subject to any minimum amounts, which may not exceed ten dollars ($10).  In addition, donations or grants must be sent after four consecutive quarters regardless of any established minimum amount, unless the recipient charitable organization is not eligible to receive the funds (which ineligibility must be disclosed pursuant to the statutory disclosure requirements).

Avoiding Duplicative Registration and Compliance Obligations
Recognizing that some charitable fundraising platforms could meet the definition of one or more other regulated fundraising categories — namely, commercial fundraisers (e.g., telemarketers), fundraising counsels (e.g., direct mail companies), and commercial coventurers (e.g., retail businesses advertising that the purchase or use of their goods or services will benefit a charitable organization) — the law provides the following clarifications to avoid such overlap:

1. Fundraising Counsel: If an entity meets the definition of both a fundraising counsel and a charitable fundraising platform, it will only be a charitable fundraising platform.

2. Commercial Fundraiser:
If an entity meets the definition of both a commercial fundraiser and a charitable fundraising platform, it will only be a commercial fundraiser when the entity, for compensation, performs any of the following acts of solicitation:
(i) Direct mail solicitation, excluding electronic mail or messages;
(ii) Estate gift or estate planning solicitation;
(iii) In-person solicitation through a fundraising event, door-to-door or other public spaces, or a vending machine or similar equipment that does not use a person to perform the solicitation;
(iv) Noncash solicitation;
(v) Nonincidental acts of solicitation that are not internet based, including solicitation through print, radio, or television;
(vi) Solicitation involving receiving something of value, or a chance to win something of value, in connection with a donation; or
(vii) Telephone solicitation.

3. Commercial Coventurer: An entity that meets the definition of both a commercial coventurer and a charitable fundraising platform by listing one or more recipient charities to receive donations or grants of recommended donations made by the platform based on purchases made or other activity performed by persons who use the platform will be only a commercial coventurer when the acts of solicitation through an internet website, service, or other platform to persons in the state are for six or fewer recipient charities per calendar year.[4] Entities that undertake charitable sales promotions or other activities that trigger donations on the internet for seven or more recipient charities per calendar year will be a charitable fundraising platform.

During the annual conference of the National Association of Attorney General (NAAG) and the National Association of State Charity Officials (NASCO) held on October 13, 2021, NASCO President, Yael Fuchs, noted that while she could not advise whether any specific states were planning to introduce similar legislation to AB 488, NASCO does have a Crowdfunding Working Group that has been following the California bill closely, and that the various state agencies are watching to see whether and how California’s law enhances regulatory oversight of online fundraising activities.

The new law goes into effect on January 1, 2023.  Beginning on January 1, 2022, the Attorney General is authorized to establish rules and regulations necessary to administer the new law.

[1] Exceptions include a charity’s own website, vendors that solely provide technical or supportive services to such platforms (e.g., domain hosting services or payment processing services), and sponsoring organizations of donor-advised funds that do not list or name recipient charities for solicitation purposes on its platform to individuals other than its donor-advisors. Additional clarifications for determining when an entity is a charitable fundraising platform when it meets more than one regulated fundraiser category is discussed later in this article.

[2] The law also signals that the Attorney General may issue regulations that would increase reporting efficiency by allowing partnering charitable fundraising platforms or platform charities to submit an annual report on behalf of other charitable fundraising platforms in a consolidated fashion.

[3] The considerations affecting the maximum length of time for funds to be distributed to recipient charities include the acts of solicitation being performed, the number of donations made through the platform, who the donations are made to (e.g., the platform, platform charity, recipient charities, or peer-to-peer fundraisers), whether the recipient charity has provided consent for a solicitation, whether further verification information is requested to prevent fraud, and whether donations are sent to alternate recipient charities.

[4] California does not require commercial coventurers to register with the state if they enter into a written agreement with each beneficiary charity signed by two charity officers, distribute funds to the charity every 90 days throughout the promotion, and, and provide an accounting with each payment.

The post California Enacts New Law to Regulate Charitable Fundraising Platforms first appeared on Staging Perlman and Perlman.

What is a fiscal sponsorship?  A fiscal sponsorship generally refers to a contractual arrangement in which one entity that is a 501(c)(3) tax-exempt organization (the “fiscal sponsor”) serves as the fiscal and legal “host” of a charitable project.  While the term fiscal sponsor is not officially defined in the federal tax code, the IRS has generally approved of the function of fiscal sponsors. The critical requirement is that the fiscal sponsor must retain the legal right to ensure that the project funds are used to accomplish the tax-exempt purposes of the sponsored project.

Benefits of a Fiscal Sponsorship

There are many benefits to using a fiscal sponsorship to conduct a charitable project. Here are a few key reasons that frequently drive the decision to set up a fiscal sponsorship.

1. Ability to receive tax-deductible contributions. Donors will only receive a charitable tax deduction for financially supporting the project if the legal recipient of the donation is a 501(c)(3) tax-exempt organization.  A fiscal sponsor’s tax-exempt status and role as the legal fiduciary of the donated funds qualify them as tax-deductible.  Tax-deductible contributions, whether from the project organizer or from the public, are typically critical to funding the requirements of the project.
2. Piloting an innovative new program. Project organizers often seek to test a new approach to solving an issue, but are uncertain whether the project will have long-term viability and be worth the time and money it takes to establish a nonprofit organization.  A fiscal sponsorship can provide a convenient vehicle to pilot the project more quickly and at less cost than setting up a new tax-exempt entity.
3. Receiving the legal, financial, and administrative support of a fiscal sponsor. A fiscal sponsor takes on the legal responsibility for the funds raised. In the Direct Project Model (discussed below), it also takes on all of the legal obligations of the project. Having the benefit of a fiscal sponsor’s team to handle the legal, financial and administrative aspects of the project can allow the project organizers to focus on fundraising and implementation of the program.
4. Temporary fiscal sponsorship while awaiting independent 501(c)(3) tax-exempt status. Some organizations decide to enter into a fiscal sponsorship while their tax-exempt application is pending review. This allows them to begin receiving tax-deductible donations for the project much sooner. As of August 19, 2021, the IRS website says that applications postmarked after January 15, 2020 have not yet been assigned for review.  That seven-month queue doesn’t include the additional time needed for review once the application is assigned.  Although expedited application processing is available under limited circumstances, there is no guarantee that it will be granted.  Setting up a fiscal sponsorship may take time as well, but generally should not take as long as the IRS tax-exempt application review process.

What are the Roles and Responsibilities of a Fiscal Sponsor?

1. Project selection responsibilities
   1. Mission fit. The fiscal sponsor must ensure that any project it sponsors is consistent with, and within the scope of, the fiscal sponsor’s legal and tax-exempt mission and purposes. For example, a fiscal sponsor whose legal purposes are focused on environmental conservation will generally only take on projects that are consistent with that core mission.
   2. Written fiscal sponsorship agreement. The terms of the relationship between the fiscal sponsor and the sponsored project should be clearly outlined in a written agreement detailing the terms and expectations of the parties. Key terms include: (1) the duration of the fiscal sponsorship; (2) a clear description of the project; (3) fiscal sponsorship service fees, if any; (4) confirmation of which party will be responsible for key compliance obligations on behalf of the project; (5) the timing and process for distributing funds to, or using funds for, the sponsored project; (6) ownership of intellectual property; and (7) a clear outline of how the project will be transitioned at end of the relationship.
2. Financial responsibilities
   1. Use of project funds. The fiscal sponsor should only utilize funds raised for the project for the stated charitable purposes of the project.
   2. Donation tax receipts. The fiscal sponsor is responsible for issuing tax receipts to all donors in accordance with applicable law.
3. Legal oversight responsibilities
   1. Compliance with laws. The fiscal sponsor should comply with all applicable federal, state, and local laws and regulations. This includes annually filing its Form 990 with the IRS, and maintaining its registration with applicable state charity regulatory agencies, based on where the fiscal sponsor (including all of its projects) are operating and soliciting charitable contributions.  Project organizers should ensure that they select a fiscal sponsor that is aware of and willing to comply with all of the compliance requirements necessary to support the needs of the project.

What are the Most Common Types of Fiscal Sponsorships?

The two most common types of fiscal sponsorships are the Direct Project Model and the Pre-Approved Grant Model.

Direct Project Model:  In this model, the project has no separate legal existence from that of the fiscal sponsor.  That said, the fiscal sponsorship agreement outlines how the fiscal sponsor provides ultimate oversight of the project, in accordance with its fiduciary duties, while delegating the day-to-day operation of the project to the project organizers.  All revenues/expenses and assets/liabilities of the project are attributed to the fiscal sponsor, and are incorporated into the fiscal sponsor’s financial reports, and all legal compliance obligations (e.g., federal and state compliance filings; execution of contracts; hiring of employees) are undertaken by the fiscal sponsor.  Project organizers should consider whether the fiscal sponsor has appropriate insurance policies reflective of the activities and risks associated with the project (e.g., employer practices liability insurance; cybersecurity insurance).

Pre-Approved Grant Model: In this model, the fiscal sponsor is the legal recipient of all donations in support of the project, and issues donation tax receipts to the project donors.  The fiscal sponsor distributes the funds raised as a grant to a separate project grantee.  The fiscal sponsor must pre-determine that the project grantee, a separately incorporated entity lacking 501(c)(3) tax-exempt status, is an appropriate recipient of grant funds to carry out the purposes of the project.  Once funds have been raised for the project, the fiscal sponsor grants the funds to the project grantee, pursuant to certain oversight requirements.  For example, the project grantee must provide reports to the fiscal sponsor on how granted funds have been used in furtherance of the charitable purposes of the project.  This model is often used by organizations that are in the process of applying to the IRS for 501(c)(3) tax-exempt status.

Beginning at the End

While the start of a new project is exciting, one of the most important steps in selecting a fiscal sponsor is to plan for the end of the relationship.  The fiscal sponsorship agreement should outline a clear process for the project to be transitioned to a successor tax-exempt organization (including a newly formed organization whose 501(c)(3) tax-exempt status has been approved), subject to the fiscal sponsor’s ultimate discretion to ensure that the successor is capable of carrying out the project.

[1] For many people who have a long-term vision for their charitable program, the best approach may be to set up your own separate tax-exempt organization. An FAQ on setting up a new nonprofit organization is available here.

The post Should We Use a Fiscal Sponsorship for our Charitable Project? first appeared on Staging Perlman and Perlman.

This article answers five key questions about private operating foundation status that can help philanthropists determine if it is the right tax-exempt vehicle for their charitable objectives, including:

• What are the key characteristics of a private operating foundation?
• How does private operating foundation status differ from public charity status and private non-operating foundation status?
• What are the financial tests that must be met in order to maintain private operating foundation status?
• What expenditures are considered “directly for the active conduct of” an operating foundation’s tax-exempt activities?
• What if the organization meets the private operating foundation tests initially, but fails to meet it in a given future year?

(1)  What are the key characteristics of a private operating foundation?

A private operating foundation is a 501(c)(3) tax-exempt private foundation that devotes most of its resources (i.e., earnings and/or assets) toward the active conduct of its tax-exempt activities.  More specifically, a private operating foundation is any private foundation that spends at least 85 percent of its adjusted net income or its minimum investment return (whichever is less) directly for the active conduct of its exempt activities – this is known as the income test.  In addition to meeting the income test, the foundation must also meet one of the following tests: (1) the assets test; (2) the endowment test; or (3) the support test. Questions 3 and 4 of this blog post explain these requirements in greater detail.

A private operating foundation is a type of private foundation because it is funded by one or a few sources, however, since it operates more like a public charity (e.g., by conducting programs rather than focusing primarily on grantmaking), the Internal Revenue Code treats the organization partly like a private nonoperating foundation and partly like a public charity.

When seeking 501(c)(3) tax-exempt status, the default classification is that of a private non-operating foundation. Non-operating foundations must distribute a certain amount of their assets annually to support charitable purposes, but those distributions can be solely in the form of grants to other charitable organizations. Organizations seeking private operating foundation status must affirmatively explain or demonstrate to the IRS at the time of applying for tax-exempt status that they meet or will meet the requirements of private operating foundation status, and must annually provide financial disclosures to the IRS demonstrating that they continue to meet those requirements.[2]

(2)  How does private operating foundation status differ from public charity status and private non-operating foundation status?

Private operating foundations are subject to a number of the same regulations as public charities on a few key matters, which are generally more favorable than the rules applicable to non-operating foundations:

• Greater tax-deductibility of donations than non-operating foundations: Private operating foundations are subject to the more generous donation deductibility limits applicable to public charities (whereas donations to non-operating foundations have lower deductibility limits). Because wealthier donors are sensitive to the deductibility cap, the more generous tax-deductibility limits available to private operating foundations is typically the primary motivation for founder-philanthropists to seek private operating foundation status over non-operating foundation status.
  • Like public charities, cash contributions to operating foundations are deductible up to 60%[3] of a taxpayer’s adjusted gross income (“AGI”) (compared with 30% for non-operating foundations).
  • Like public charities, donations of long-term capital gain property (e.g., artwork; real property) to operating foundations are deductible up to 30% of the taxpayer’s AGI (compared with 20% for non-operating foundations).[4] In addition, the deduction for long-term capital gain property for an operating foundation is typically based on the fair market value of the property on the date of the contribution, whereas for non-operating foundations, the deduction for long-term capital gain property (other than qualified appreciated stock) is deductible only to the extent of the donor’s tax basis in the property.
• Differing requirements with respect to annual distributions: Private nonoperating foundations are required to make “qualifying distributions” (most typically in the form of charitable grants) each year equal to at least five percent (5%) of the fair market value of the foundation’s assets.[5] Non-operating foundations are subject to a tax on their failure to distribute income as “qualifying distributions.” Private operating foundations are subject to a different “qualifying distribution” requirement — they are required to devote most of their resources to the active conduct of tax-exempt activities (instead of through grantmaking), as further discussed in Question 3, below.
• Private operating foundations can obtain grants from private non-operating foundations more easily than non-operating foundations: The federal tax laws make it easier for an operating foundation to receive grants from a non-operating foundation compared to a non-operating foundation grantee.[6]  As such, this more favorable treatment of grants to operating foundations than non-operating foundations is a distinct advantage of operating foundation status over non-operating foundation status.  This benefit might not be that important to all operating foundations because many (and perhaps most) operating foundations are fully funded by their founder(s), and as such, may not be seeking external funding.

Now that we’ve reviewed some of the key “advantages” of private operating foundation status, we should also recognize that operating foundations are still subject to many of the stricter tax regulations applicable to all private foundations, which are not applicable to public charities.  The penalties for violating these rules are in the form of tax penalties.  In some cases, those penalties are significant enough that the restricted activities are effectively viewed as prohibited.  Private foundations (including both operating and non-operating foundations) are subject to the following taxes:

• Taxes on Self-dealing: The taxes on self-dealing are designed to prevent “disqualified persons” (e.g., directors, officers, and managers of the foundation, and their related businesses and family members) from benefiting personally from any transactions that the foundation engages in.[7]
• Taxes on Excess Business Holdings: A significant tax is assessed against any private foundation where the combined holdings of the private foundation and all of its disqualified persons exceeds 20 percent of the voting stock in a business enterprise that is a corporation.[8]
• Taxes on Jeopardizing Investments: Certain excise taxes are imposed on foundations that engage in risky investments, with the goal of discouraging such investments, which may detract from a foundation’s ability to further its charitable purposes.
• Tax on Net Investment Income: Operating foundations are subject to the tax on net investment income and to the other requirements and restrictions that gener­ally apply to all private foundations. [9]
• Taxes on Failure to Distribute Income (generally, grants): As discussed earlier, non-operating foundations that fail to distribute the required annual minimum qualifying distributions are subject to a tax. However, the types of distributions that constitute “qualifying distributions” differ for operating vs non-operating foundations.

(3)  What are the financial tests that must be met in order to maintain private operating foundation status?

To obtain and maintain private operating foundation status, operating foundations must meet a combination of financial tests on an ongoing basis, explained further below.

(Mandatory) Income Test

The one universal requirement applicable to every private operating foundation is that it must spend at least 85% of its adjusted net income or minimum investment return, whichever is less, directly for the active conduct of its exempt activities. This is known as the “income test.”

In addition, all operating foundations must also annually meet one of the following three financial tests: (1) the assets test, (2) the endowment test, or (3) the support test.  These three tests reflect different approaches by which a foundation can devote most of its resources towards the active conduct of its tax-exempt activities.

(a)  Assets Test: A foundation will meet the assets test if at least 65% of its assets:

1. Are devoted directly to the active conduct of its exempt activity, a functionally related business, or a combination of the two,
2. Consist of stock of a corporation that is controlled by the foundation (by ownership of at least 80% of the total voting power of all classes of stock entitled to vote and at least 80% of the total shares of all other classes of stock) and at least 85% of the assets of which are so devoted, or
3. Are any combination of (1) and (2).

Example: Assets such as real property, physical facilities or objects (such as museum artwork that is publicly displayed, classroom fixtures, and research equip­ment) and intangible assets (such as patents, copyrights, and trademarks) are directly de­voted to the extent they are used by the founda­tion in directly carrying on its exempt activities or program. Museums and research organizations are likely to meet the Assets Test.

(b)  Endowment Test: A foundation will meet the endowment test if it normally distributes at least two-thirds of its annual minimum investment re­turn for the active conduct of its exempt activities

Example: An organization whose founder funds the foundation with a significant endowment in the form of cash as well as stocks or other investments held primarily for the production of income, is likely to meet the Endowment Test.

(c)  Support Test: A private foundation will meet the support test if: (1) at least 85 percent of its support (other than gross investment income) is normally received from the general public and 5 or more unrelated exempt organizations; (2) not more than 25 percent of its support (other than gross investment income) is normally received from any one exempt organiza­tion; and (3) not more than 50 percent of its support is normally received from gross investment income.

Example: This test is used by operating foundations that are funded by fairly diverse sources of support (including at least five unrelated exempt organizations) rather than just by their founder-donor, but whose funding sources may not be diverse enough to consistently meet the public support tests required for public charity status. This is the least used financial test for meeting private operating foundation.

To qualify as an operating foundation in a given tax year, a foundation must meet the income test and either the assets, endowment, or sup­port test for any three years during a four-year period (“three-out-of-four-year method”), or based on a combination of all pertinent amounts of income or assets held, received, or distributed during the four-year period (“four-year combination method”). The four-year period consists of the tax year in question and the three years immediately preceding that year.

(4)  What expenditures are considered “directly for the active conduct of” an operating foundation’s tax-exempt activities?

Let’s look more closely at the principle that private operating foundations must devote most of its resources “directly for the active conduct of the activities” constituting the foundation’s tax-exempt purposes.  The following are examples of expenditures that would be considered “directly for the active conduct of the” foundation’s tax-exempt activities:

• Amounts paid to buy or maintain assets used directly in the conduct of the foundation’s exempt activities, e.g., the operating assets of a museum, public park, or historic site.
• Pro rata allocations of staff compensation, travel, overhead costs (office space, supplies) based on a reasonable allocation of use towards direct program activities.
• An amount set aside by a foundation for a specific project, e.g., to buy and restore or build buildings/facilities to be used by the foundation directly for the active conduct of the foundation’s exempt activities, if the set-aside meets certain requirements.

Under certain circumstances, payments or grants to individuals (including scholarships) made in conjunction with ongoing supervision by the foundation and certain grantee reporting requirements may qualify as “active conduct” expenditures.  If a foundation awards grants or scholarships, or makes other payments to individuals (including program-related investments[10], such as to support active programs to carry out its exempt purpose, the payments will be treated as qualifying distributions made directly for the active conduct of exempt activities only if the foundation maintains some significant involvement in the programs. Whether the foundation is considered to maintain significant involvement sufficient for these grants to individuals to be treated as “active conduct” expenditures depends on the facts and circumstances in each case.

Examples of “significant involvement” in a program involving grants to individuals include: (1) a grant program in which the recipients, in addition to independent study, attend classes, seminars, or conferences sponsored or conducted by the foundation, or (2) a grant to engage in social work or scientific research projects which are under the general direction and supervision of the foundation.

If, however, a foundation’s role in the grant process is limited to selecting, screening, and seeking out applicants for grants or scholarships, pursuant to which the recipients perform their work or studies alone or exclusively under the direction of some other organization, such grants or scholarships will not be treated as expenditures made directly for the active conduct of the foundation’s exempt activities.

(5)  What if the organization meets the private operating foundation tests initially, but fails to meet it in a given future year?

For any year in which a foundation that has been approved as qualifying for private operating foundation fails to meet the income test and one of the other three tests in a given tax year, the foundation must report as a non-operating foundation on its Form 990-PF.

The deductibility of contributions to an operating foundation will not be affected until notice of a change in the status of the foundation is made to the public (such as by publication in the Internal Revenue Bulletin), unless, at the time of the contribution, the donor was aware that the IRS would remove the foundation’s operating foundation status, or the donor was responsible for, or was aware of, the act or failure to act which caused the foundation to be unable to qualify as an operating foundation.

[1] Philanthropists who do not have the time, interest, or intention to conduct direct programmatic activities on a continuous basis may find it more appropriate to establish a non-operating foundation or even a donor-advised fund. Note that private non-operating foundations can also conduct direct charitable activities, but are not required to do so.

[2] Public charities must also demonstrate to the IRS that they are not a private foundation, but that is not the subject of this article.

[3] The limitation was previously 50% of AGI, but the limit was temporarily raised to 60% as part of the Tax Cuts and Jobs Act of 2017 through January 1, 2026, but was increased to 100% of AGI for 2020 and 2021 under the CARES Act.

[4] 26 U.S.C. § 170(b)(1)(B). The deduction for long-term capital gain property is typically based on the fair market value of the property on the date of the contribution.

[5] 26 U.S.C. § 4942.

[6] A grant by a non-operating foundation to an operating foundation counts towards the non-operating foundation’s annual minimum qualifying distribution requirement, whereas a similar grant to a non-operating foundation generally would not.  26 U.S.C. § 4942. Note, however, that a non-operating foundation must still exercise expenditure responsibility with respect to grants to most operating foundations, whereas it would not have to do so for grants to public charities.

[7] See IRC §4941. The following transactions are generally considered acts of self-dealing between a private foundation and a disqualified person: (1) sale, exchange, or leasing of property; (2) leases; (3) lending money or other extensions of credit; (4) providing goods, services, or facilities; (5) paying compensation or reimbursing expenses to a disqualified person; (6) transferring foundation income or assets to, or for the use or benefit of, a disqualified person; and (7) certain agreements to make payments of money or property to government officials.

[8] The rules governing excess business holdings were designed to prevent individuals from retaining control of businesses by transferring a significant amount of ownership in the businesses to their private foundation.

[9] Effective January 1, 2020 following enactment of new legislation, the net investment income tax applicable to private foundations is a flat, one-tier rate of 1.39%. This is not an excise tax aimed at restricting any type of transaction, like some of the other taxes, but is simply applicable to all private foundations.

[10] An example of a program-related investment that can constitute the “active conduct of” an operating foundation’s exempt purposes is a low-interest loan program designed to stimulate the local economy and create jobs in an economically depressed area, where the foundation has significant involvement in the form of staff who design, implement, and supervise the program, and the provision of technical assistance and training to borrowers. In that case, the loan funds as well as the expenses of conducting such program would be considered qualifying distributions for the active conduct of the operation foundation’s exempt purposes. See, e.g., PLR 9826048.

The post Private Operating Foundations: An Option for Hands-On Philanthropists first appeared on Staging Perlman and Perlman.

On February 8^th, California Assemblywoman Jacqui Irwin introduced Assembly Bill 488, which would establish a new statutory framework for the ever-evolving world of online charitable fundraising platforms.[1]

The proposed  bill for “charitable fundraising platforms” and “platform charities” would require:
(1) “charitable fundraising platforms” and “platform charities” to register and provide reports to the California Attorney General’s office;
(2) conspicuous disclosures to prevent a likelihood of deception, confusion, or misunderstanding;
(3) the platform or platform charity to obtain written consent of any recipient charitable organization before using its name in a solicitation unless specific requirements are met; and
(4) the funds raised to be held in a separate bank account, and donations and grants of recommended donations to be sent promptly to recipient charities, along with an accounting of any fees imposed for processing the funds.

Key Definitions
The bill defines “charitable fundraising platform” as “any person, corporation, unincorporated association or other legal entity that uses the internet to provide an internet website, service, or other platform to persons in this state, and performs, permits, or otherwise enables acts of solicitation to occur.”  Charitable fundraising platforms would likely include companies such as GoFundMe, Facebook, Amazon, Tiltify, Pledgeling, and the many other technology platforms that enable charitable giving.

“Platform charity” is defined as a trustee or charitable corporation that facilitates acts of solicitation on a charitable fundraising platform.  Platform charities would likely include well-known organizations like PayPal Giving Fund and Network for Good, as well as the many other charities that serve as the intermediary and legal recipient of all donations raised through fundraising platforms.

Disclosure Requirements
If passed, the new law will require charitable fundraising platforms and platform charities to provide all of the following key disclosures to potential donors.

• A statement about who will receive the donations (e.g., that the recipient is the charitable fundraising platform, the platform charity, the recipient charitable organization, or the person engaging in peer-to-peer charitable fundraising).
• If applicable, a statement that a recipient charitable organization may not receive donations or grants of recommended donations, with an explanation identifying the circumstances under which a recipient charitable organization may not receive the funds. (Note: This disclosure relates to the “variance power” that is well-recognized in other contexts, such as donor-advised funds and fiscal sponsorships)
• The maximum length of time it takes to send the donation or a grant of the recommended donation to a recipient charitable organization with an explanation as to the length of time.
• The fees or other amounts (if any) deducted from or added to the donation or a grant of the recommended donation that are charged or retained by the charitable fundraising platform, platform charity, or any other partnering vendor, other than digital payment processing fees.[2]
• Whether the donation is tax-deductible or not.

Written Consent
While current California law requires that a charitable fundraising platform or platform charity obtain the written consent of any recipient charitable organization before using its name in a solicitation, the proposed law would provide that such written consent is not required if all of the following circumstances are met:

• The charitable fundraising platform or platform charity only references the recipient charitable organization’s name, address, telephone number, internet website (including through a hyperlink), employer identification number (EIN), corporation or organization number, or registration number with the Attorney General’s Registry of Charitable Trusts, classification in the National Taxonomy of Exempt Entities (NTEE) system, or other information set forth in rules or regulations established under Section 12599.10, if any. (Note that, as drafted, a recipient charity’s mission statement taken from its Form 990 cannot be included, unless written consent is obtained from that charity or the AG adopts rules to permit it. The inability to include a mission statement could potentially lead to unintended confusion by donors who are intending to support one charity and inadvertently designate their gift to benefit a different charity with a similar name but different mission)
• The charitable fundraising platform or platform charity conspicuously discloses before persons can complete a donation (or select or change a recipient charitable organization) that the recipient charitable organization has not provided consent or permission for the solicitation, and has not reviewed or approved the content generated by persons engaging in peer-to-peer charitable fundraising, when applicable. (Possible concerns remain about how this disclosure must be worded, and whether it could hamper giving by appearing to be like a “warning label”, notwithstanding the consent that may exist between a platform and a platform charity)
• The charitable fundraising platform or platform charity promptly removes any recipient charitable organization from its list or any solicitation regarding the recipient charitable organization upon written request by the recipient charitable organization.
• The charitable fundraising platform or platform charity does not require that a recipient charitable organization consent to any solicitations as a condition for accepting a donation or grant of a recommended donation.

Good Standing
Pursuant to the bill, a charitable fundraising platform or platform charity may only facilitate solicitations or the receipt of donations for the benefit of charitable organizations in good standing.  “Good standing” means the platform charity or other recipient charity’s tax-exempt status has not been revoked by the Internal Revenue Service, or the California Franchise Tax Board, or is not prohibited from soliciting or operating in California by the Attorney General.

Intersection with Other Fundraiser Registration Requirements
Over the last two decades, charitable fundraising platforms have been in a regulatory gray area, as the charitable solicitation laws were established decades before the Internet was around.  The existing regulatory framework in California and other states covers professional fundraisers (e.g., telemarketers), fundraising counsels (e.g., direct mail companies), and commercial co-venturers (e.g., retail businesses advertising that sales or use of their goods or services will benefit a charitable organization).  Many states require contracts between a regulated fundraiser and a charity to be submitted or at least disclosed, and separate campaign reports to be filed per contract (some forms even require two original notarized charity signatures!).

Most fundraisers that fall into the existing regulated categories do not support the fundraising efforts of hundreds or thousands of charities simultaneously, so compliance, while somewhat burdensome, is generally manageable.  Most new fundraising platforms, however, aim to assist hundreds or thousands of charities in broadening their fundraising reach through new innovative methods of giving.  If a platform provider is required to file hundreds or thousands of contracts and campaign reports, these reporting burdens would most likely hamper innovation and, ultimately, severely limit donations to thousands of charities, large and small.

The proposed regulations for charitable fundraising platforms provide a streamlined approach that is more appropriately suited to the way in which charitable fundraising platforms work.  The bill recognizes the potential overlap between the new “charitable fundraising platform” category and the three existing fundraiser categories, and explicitly carves out “charitable fundraising platforms” from the definition of commercial fundraiser, fundraising counsel and commercial co-venturer “when the acts of solicitation for charitable purposes occur solely through an internet service, website, or other platform provided by the charitable fundraising platform.”

While many charitable fundraising platforms will not need to comply with inconsistent or duplicative requirements applicable to the other regulated fundraiser categories, the limited scope of the carveout could still cause many fundraising platforms to remain subject to the additional regulatory requirements of other fundraiser categories.  For example, what if a platform sends an email about a specific campaign conducted on the platform to individuals who have signed up to receive communications?  What about a social media post?  Exactly how these definitional carveouts are finalized and implemented will significantly affect the amount of the compliance obligations applicable to charitable fundraising platforms.[3]

The passage of Assembly Bill 488 will not resolve the ambiguity in other states’ charitable solicitation laws and their applicability to charitable fundraising platforms. However, given the various states’ interest in providing oversight to these new technology-driven fundraising platforms, there is a good chance that other states may follow suit in adopting similar legislation.

Stakeholder Engagement
Assemblywoman Irwin and the California Attorney General’s office have been actively engaging with various stakeholders in the community in the development of this legislation (which has included associations of nonprofits and fundraisers, including The Nonprofit Alliance and the California Association of Nonprofits, as well as various fundraising platforms and platform charities) to ensure that innovation in charitable giving is encouraged within a framework of oversight and transparency.

In Conclusion…
The new bill is, in many respects, a much-needed update to the existing fundraising regulatory framework that more appropriately reflects the nature of charitable fundraising and giving in the age of the Internet.  However, the final codification of the legislation could have significant regulatory implications on the charitable fundraising community, so our firm is paying close attention to the bill as it makes its way through the legislative process.

[1] Since 2018, Assemblywoman Irwin has introduced several bills that would govern charitable fundraising platforms, including Assembly Bills 2556 (2018), 1539 (2019), and 2208 (2020). Among the comments submitted as part of the legislative process for Assembly Bill 2208, the National Association of State Charity Officials submitted a statement of support: “The National Association of State Charities Officials (NASCO) is an association of state offices (attorneys general, secretaries of state and other offices) charged with the regulation and oversight of charitable organizations and charitable solicitation in the United States. As state regulators, we have witnessed the impact of the internet on charitable fundraising over the past 20 years. Charitable fundraising is no longer limited to solicitations through telephone, direct mail, or even a charity’s own website. Fundraising through third party websites, social media apps, and live video streaming have become the norm. The sheer volume of charitable solicitations made through online fundraising has exploded; most recently, for solicitations concerning the COVID-19 and the civil rights crises. This issue is so important that NASCO has formed a working group to look at the breadth of charitable giving through the internet, the regulatory and enforcement challenges this presents, and the need for states to address it [… ]  NASCO believes that these issues require a legislative solution to protect charities and the public, and to provide the platforms with a regulatory scheme that fit their business model. Assembly Bill 2208 represents a thoughtful and comprehensive approach to address these problems.”

[2] While transparency around fees assessed is critically important in promoting trust in fundraising and avoiding deceptive solicitation violations, there may be constitutional implications depending on exactly how this disclosure requirement is ultimately codified. In a series of four cases from 1980 (Schaumburg) to 2003 (Madigan), the U.S. Supreme Court consistently held that regulation based upon fees paid to fundraisers violate First Amendment rights.  In particular, Riley v. National Federation of the Blind of North Carolina, 487 U.S. 781 (1988), invalidated a requirement that fundraisers disclose at the point of solicitation the percentage of funds they raised in the past year which went to the charity.  The Court found such “compelled speech” to improperly burden protected speech (i.e., a fundraising solicitation). 487 U.S. at 798. This mandatory financial disclosure requirement was found to be overbroad and not justified by the state’s interests in informing donors or prohibiting fraud. The Court determined that “the compelled disclosure will almost certainly hamper the legitimate efforts of professional fundraisers to raise money for the charities they represent.” 487 U.S. at 799. Since then, most state charitable solicitation laws require fundraisers to disclose their fees upon request of any donor. Given the online nature of charitable fundraising platforms, a balance may need to be struck between the constitutional concerns of compelled speech and the need for transparency in an online context. One option is to permit such fees to be disclosed within a conspicuous hyperlink.  The bill, as introduced, permits certain of the required disclosures to be included in a conspicuous hyperlink, but this fee disclosure is currently not among them.

[3] Consider that a professional fundraiser that registers in 40 states and has national contracts with 100 charities would have to file up to 8,000 separate filings each year! (That number is based on one contract/solicitation notice and one campaign report per contract per state x 40 states per year) While the exact reporting that will be required under Assembly Bill 488 and related regulations to be established by the California Attorney General’s office is still to be determined, I anticipate it will be a much more streamlined reporting process that will not require separate per-charity filings. The bill does not require each charity contract to be filed either, as is required of other types of fundraisers, although contracts must be available for inspection by the Attorney General. To minimize the compliance burdens of the current regulatory framework, one solution that has been adopted is for a fundraising platform that registers as a professional fundraiser to partner with a single platform charity so that there is only one professional fundraiser relationship – the relationship between the fundraising platform and the platform charity.

The post California Proposes Law to Regulate Online Fundraising Platforms first appeared on Staging Perlman and Perlman.

Are you looking for answers to legal questions that arise in cause marketing and corporate partnerships?  If so, look no further!

Last year, Selfishgiving.com founder and blogger  Joe Waters and I distributed a five-question survey to businesses and nonprofits regularly engaged in cause marketing and corporate partnerships, asking them to share their top legal compliance questions and challenges.  After reviewing the survey responses, we decided to create a series of blog posts to address the most common corporate partnership legal compliance questions covering four issue categories: (1) Advertising Disclosures; (2) Registration and Reporting Requirements; (3) Contracts; and (4) Unrelated Business Income Tax (UBIT).   I hope you will find these FAQs useful in helping to navigate the legal and regulatory issues that arise as your company or charity engages in corporate partnerships.

Click on the FAQ headers below to read the answers to each question, which are posted on SelfishGiving.com, and sign up for Joe’s informative and entertaining weekly email newsletter, which has all the latest trends and strategic advice about cause marketing and corporate partnerships!

Part 1: Advertising Disclosures

1. Are cause marketing advertising disclosure “best practices”  required by law? Some of our corporate partners think they are just “suggestions.”
2. What if a company insists on structuring a campaign where the donation is based on a percentage of its profits, rather than a percentage of the purchase price?
3. Have any companies gotten into trouble with regulators for failing to include certain information in their cause marketing advertisements?
4. Advertising disclosure problems only present a real legal risk to the corporate partner, not the charity, right?
5. Can the company simply state on the hang-tag or store signage, “10% of the purchase price will be donated to ABC Charity, see www.company.com/ABCCharity for details,” and then include the website URL where the minimum guarantee and/or donation cap can be found?

Part 2: Registration and Reporting Requirements

Company FAQ

1. Our company is conducting its first ever cause marketing campaign. I heard that we may need to file state registrations. How do I know if I need to register, what does it entail, and how long will it take?  Note: The answer to this includes a chart on the state registration and reporting requirements applicable to companies acting as commercial co-venturers.
2. I operate a small e-commerce business in Massachusetts that sells clothing online, and would like to run a promotion in which the company will donate $5 to a local, nonprofit homeless shelter for every special edition T-shirt sold through our website. Does my company need to register nationally? What, if anything, does the nonprofit need to do?  Note: The answer explains how to determine the parties’ fundraising compliance obligations specifically in the context of an online cause marketing promotion.
3. Our company’s cause marketing campaign launched last week and we just found out we are supposed to register in certain states as a commercial co-venturer! Are we going to face fines or other penalties?

Charity FAQ

1. Our charity was asked to be the beneficiary of a company’s charitable sales promotion, but we’ve never engaged in a cause marketing campaign before. What do we need to be aware of before we proceed with this opportunity?
2. Our nonprofit is already registered nationally, and discloses all of its CCV partners as part of our annual charitable solicitation registration renewals, so we should be set with our CCV-related compliance, right?  Note: The answer includes a chart on the state reporting requirements applicable to charities that have entered into a CCV agreement.
3. Our charity was approached by a start-up company that wants to conduct a cause marketing campaign to benefit our organization. When we told them they may need to register with certain states and obtain bonds, they were concerned about the cost and burden of compliance. We don’t want to lose the opportunity to build a partnership with this company. What can we do?

Part 3: Contracts

1. We are entering into a cause marketing promotion in which our charity will receive a portion of the proceeds from the sale of each Sellco product. SellCo sent us a draft contract to sign. It seems to describe the promotion the way we discussed it. Should we go ahead and sign it?
2. What provisions should be included in our cause marketing agreement? Note: The answer includes a 15-point cause marketing contract checklist!
3. Is there a way to streamline the preparation of cause marketing agreements so they are compliant with all 50 states’ laws as well as for online sales?
4. Our corporate partner wants to enter into a multi-year relationship that includes a significant financial commitment, and will involve numerous customer activations.  Only the details for the first activation have been solidified. How do we draft an agreement to cover this type of arrangement?

Part 4: Unrelated Business Income Tax (UBIT)

1.  My organization, Charity Corp., has a corporate partner, Cool Products Co., that is conducting a charitable sales promotion in which it will advertise that it is donating a portion of the purchase price from sales of a particular product to Charity Corp.  Cool Products has asked to promote their sales campaign to our members and donors through email and social media. I heard that charities aren’t allowed to promote these types of campaigns because it might subject the charity to a tax called UBIT.  What is UBIT, and why and when is it a potential problem? How do we avoid creating taxable income?
2. How can our organization appropriately communicate about a corporate partnership to our donors/members/social followers without crossing  the line into marketing for the corporate partner?
3. The UBIT rules make our corporate partnerships team feel constrained in our partner cultivation strategy. What options does our organization have to provide value to our corporate partners?

The post Key Legal Issues in Corporate Partnerships first appeared on Staging Perlman and Perlman.

1. Can my 501(c)(3) charitable organization conduct an emergency hardship assistance program, even if such assistance was not part of the stated purposes of my organization when it applied for tax-exempt status with the IRS?

With respect to federal tax law considerations, 501(c)(3) organizations do not have to obtain pre-approval from the IRS to provide emergency hardship or disaster relief assistance, including fundraising to make grants for such purpose.  However, if a public charity carries on emergency hardship and disaster relief assistance as one of its three largest programs, it will need to describe those services in the organization’s annual Form 990 filed with the IRS. The organization may also need to report grants and other assistance given to organizations or individuals within and outside the U.S., and noncash contributions received, such as donations of food or other supplies to distribute to families in need.

With respect to state law considerations, organizations should review their statement of legal purposes, as documented in their certificate of incorporation filed with the state in which they are incorporated.  Some organizations draft their statement of purpose very broadly to include any charitable purposes and activities that are permissible under section 501(c)(3) of the Internal Revenue Code (which would include operation of a disaster or emergency hardship assistance program).  However, some organizations draft their statement of purposes narrowly.  If the organization’s legal purposes are drafted narrowly, and would not include the operation of a disaster or emergency hardship assistance program, the organization may need to amend the purposes in its certificate of incorporation to conduct the program.  In addition, organizations should use donations that were previously received for a different charitable purpose for those specified purposes only, and only apply new donations solicited for purposes that include disaster or emergency hardship assistance for that purpose.

2. Can my organization solicit donations to support specific individuals or families in need?

An emergency hardship or disaster relief assistance program cannot be designed to serve any particular individuals, but rather, must be designed to assist a “charitable class.” An assistance program serves a “charitable class” if the group of eligible beneficiaries is either: (1) large enough that the potential beneficiaries cannot be individually identified, or (2) sufficiently indefinite such that the entire community benefits from the charitable assistance.

If the group of eligible beneficiaries is limited to a smaller group, an assistance program will still be considered to benefit a charitable class if the group of beneficiaries is indefinite. For the group of beneficiaries to be indefinite, the program should be open-ended such that the total number of potential members making up the charitable class cannot be counted or identified. For example, if a financial assistance program is designed to benefit families of alumni from a particular college in connection with a current disaster or emergency as well as future disasters and emergencies, the program would be viewed as serving an indefinite charitable class.

3. What kind of documentation must my organization maintain as part of an emergency assistance program?

In general, organizations must maintain adequate records to show that the organization’s assistance, whether in the form of tangible goods, services, or cash assistance, furthered charitable purposes, and that the recipients are needy or distressed.

Organizations providing emergency short-term assistance (e.g., hot food, clothing) to individuals in need of immediate assistance with basic necessities are not required to undertake a needs assessment. The organization should document the criteria for disbursing assistance (e.g., sudden loss of home and/or belongings), date/place of distribution, estimated number of individuals assisted, the charitable purpose intended to be accomplished, and the cost of the aid.

For longer-term assistance, organizations must maintain more detailed records to demonstrate that the organization has conducted an appropriate needs assessment which confirms that the individuals or families are financially in need. Being in financial need does not require individuals to be totally destitute; it is sufficient if they simply lack the resources to obtain basic necessities. An organization’s decision to provide financial assistance should be based on a reasonable determination that the individual’s financial resources, such as available cash, expenses, other financial obligations, assets that can be disposed of without causing further personal hardship, and anticipated cash flow (income, insurance proceeds, etc.), will be insufficient to provide for timely coverage of his/her existing obligations and basic needs.  Longer term financial assistance may include assistance with rent, mortgage payments or car loans to prevent loss of a primary home, utilities payments, and childcare and tuition costs for children.

Documentation relating to long-term assistance should generally include:

• a complete description of the assistance provided,
• costs associated with providing the assistance,
• the purpose for which the aid was given,
• the charity’s objective criteria for disbursing assistance under each program,
• how the recipients were selected,
• the name, address, and amount distributed to each recipient,
• any relationship between a recipient and officers, directors, or key employees of, orsubstantial contributors to, the charitable organization, and,
• the composition of the selection committee approving the assistance.

4. How do we determine the appropriate amount of assistance to provide to families as part of our financial assistance program?

An organization’s decision about how much to distribute to individuals and families in need must be based on an objective evaluation of the individual’s needs at the time the grant is made.  The amount needed to relieve financial hardship and distress should be based on all the facts and circumstances of the individual’s situation and the charity’s resources.  Making an individual whole on account of a disaster or emergency hardship does not, necessarily, further charitable purposes. IRS guidance cautions that an outright transfer of funds based solely on an individual’s involvement in a disaster or without regard to meeting the individual’s particular distress or financial needs would result in private benefit, which is impermissible. Similarly, grants to replace lost income rather than to meet basic living needs would generally be viewed as serving personal and private interests, which is also impermissible.  Adequate documentation should be maintained to justify that the individual grants are appropriate in amount and further charitable purposes.

5. Will recipients of financial hardship funds need to pay taxes on the amounts received from a 501(c)(3) tax-exempt organization?

Financial assistance that a 501(c)(3) tax-exempt organization gives to individuals or families in need for emergency hardship situations are excludible from the recipient’s gross income as a gift under Section 102 of the Internal Revenue Code.

6. Can a public charity, private foundation, or donor-advised fund established by a company provide disaster or emergency hardship assistance to the company’s employees and their families as a result of COVID-19?

Companies can provide disaster or emergency hardship assistance to employees and their families in connection with the COVID-19 outbreak through these charitable vehicles, but as further discussed below, need to structure their programs in ways that do not provide impermissible private benefit to the employer.

Employer-sponsored public charities, which typically receive broad financial report from the general public and are subject to greater transparency requirements, may provide disaster or emergency hardship assistance to their employees and their family members, as long as a related employee does not exercise excessive control over the organization.  Typically, a significant portion of the board of such employer-sponsored public charities are individuals who are not in a position to exercise substantial influence over the affairs of the employer.

Employer-sponsored donor-advised-funds (DAFs) and private foundations are only allowed to provide assistance to employees and their family members if they’ve been affected by a “qualified disaster.” COVID-19 was officially declared a “qualified disaster” on March 13, 2020, so employer-sponsored DAFs and private foundations can provide payments to employees and their family members as long as there are safeguards in place to make sure the payments are for charitable purposes.

Employer-sponsored assistance programs should follow the program requirements discussed above (e.g., support of a charitable class, selection of recipients based on an objective determination of need, and adequate documentation of recipients’ need for assistance). In addition, the selection of beneficiaries must be made using either an independent selection committee or adequate substitute procedures to ensure that any benefit to the employer is incidental and tenuous. The selection committee is considered “independent” if a majority of the members of the committee are not in a position to exercise substantial influence over the affairs of the employer.  Pursuant to statutory restrictions applicable to donor-advised funds, no payment may be made from the DAF to or for the benefit of any director, officer, or trustee of the sponsoring public charity, or members of the fund’s selection committee.

Additional information about providing disaster relief assistance through charitable organizations, including employer-sponsored assistance programs, is available in IRS Publication 3833.

The information provided does not constitute legal advice, and is not intended to substitute for legal counsel.

The post Establishing a COVID-19 Charitable Assistance Program first appeared on Staging Perlman and Perlman.