Wrap up nonprofit developments in 2016

NONPROFIT NEWS

As we wrapped up 2016, we saw a relatively quiet December with respect to new laws affecting the nonprofit sector. At the beginning of the month, exempt organizations attorneys gathered in Los Angeles for the annual Western Conference on Tax Exempt Organizations. In this column, I briefly address crowdfunding and some of the legal issues it raises for nonprofits and the solicitation of charitable funds - one of the many topics addressed at the conference. Towards the end of the month, we also heard an announcement from President-elect Donald Trump that he intends to close the private foundation bearing his name. While the dissolution of the foundation has the potential to bring an end to the many stories that have surfaced recently regarding its operational issues and improper use of charitable funds, the New York attorney general made clear that the foundation remains under investigation by the office and will not be permitted to dissolve until such investigation is concluded.

Crowdfunding

At the 20th annual Western Conference on Tax Exempt Organizations, hosted by Loyola Law School, my colleague, Gene Takagi, moderated a panel on crowdfunding and wrote an accompanying article published by the EO Tax Journal (he also wrote an unfinished rap on the topic, available on the Nonprofit Law Blog).

The article noted that an estimated $16 billion was raised through crowdfunding around the world in 2014 and it's been projected that the amount more than doubled in 2015. A 2013 study commissioned by the World Bank projected that crowdfunding would be a more than $90 billion industry by 2025. Given this trend, it's not at all surprising that nonprofits are exploring the power of crowdfunding to support their missions and work. However, from a legal perspective, crowdfunding raises some issues that are worth being aware of.

As mentioned above in connection with the Trump Foundation and the New York attorney general, many states require individuals or entities that are soliciting or otherwise holding charitable contributions in those states to register with an appropriate oversight entity (often the attorney general). The rise in online solicitations, which are not necessarily occurring within any particular state, has led to confusion regarding when charitable solicitation registration in a state is required, with state regulators taking different positions. Professional and commercial fundraisers may also be subject to registration or oversight under applicable state laws, and be required to establish certain defined relationships with nonprofits with which they work. It's not entirely clear whether crowdfunding sites fall within the professional and commercial fundraiser definitions of various state laws, although at least some have taken a clear position that they do not. We've seen increased enforcement activity by several state attorneys general of late and it's possible that this may be an area ripe for clarification and regulation.

For 501(c)(3) organizations, it is also important to keep in mind the prohibition on providing an impermissible private benefit. In order to qualify for exemption under Section 501(c)(3), a nonprofit must serve a public, and not a private, interest. While such organizations may provide benefits to individuals, such benefits must be incidental to furthering their exempt purposes. If a 501(c)(3) organization operates to benefit an individual who is a member of a charitable class served by the organization, the class must generally be sufficiently large and undefined to ensure the nonprofit is operating for a public benefit. With the rise of crowdfunding, we've also seen increased attention to the possibility of 501(c)(3)s being established to benefit a single individual or family with a particular need, particularly given the ease of obtaining recognition of exemption through use of the Form 1023-EZ. Organizations eligible to receive deductible charitable contributions under Internal Revenue Code Section 170(c) (which includes most, but not all, 501(c)(3)s) are also not permitted to act merely as a conduit for donors to pass funds on to specific individuals or taxable entities, including through crowdfunding.

The rise of crowdfunding has also seen an increased concern of unauthorized fundraising for certain nonprofits. While nonprofit boards of directors and authorized officers may and often do delegate authority to certain agents of the organization, including fundraisers, such delegation should be done carefully, with a clearly defined scope of delegated authority and subject to appropriate oversight. If a nonprofit discovers an unauthorized individual claiming to act on behalf of the organization, whether seemingly well meaning or not, it is often advisable for the organization to take steps to stop such activity to avoid potential exposure to liability and/or damage to its reputation.

Nonprofits using crowdfunding to partially sell a good of some sort, rather than to merely solicit charitable contributions, may also need to be aware of whether such sales subject them to applicable seller's permit requirements, sales taxes, written disclosure requirements documenting quid pro quo contributions, and possibly unrelated business income implications, among other things. With the continued growth crowdfunding, we are likely to see increased attention to, and regulation of, the industry as it pertains to nonprofits.

Trump Announces Plans to Shut Down Foundation

The Donald J. Trump Foundation has come under intense scrutiny in recent months for a range of reasons. The New York attorney general began an investigation of the foundation last summer as a result of reports of improper transactions. At the end of September, the attorney general informed the foundation that it was violating applicable law by soliciting charitable funds within the state without being properly registered with the New York Charities Bureau and ordered it to immediately cease all fundraising activities in New York.

In its Form 990-PF filed with the IRS for the 2015 tax year, the foundation further admitted that it had engaged in acts of self-dealing by transferring income or assets to a disqualified person or otherwise making either available for the benefit or use of a disqualified person. It also reported that it had engaged in an act of self-dealing in a prior year that was not corrected before the first day of the 2015 tax year. It was also earlier discovered that Trump directed the foundation to make a $25,000 contribution to a political committee affiliated with the with the campaign of Pam Bondi for Florida attorney general, in violation of the rules prohibiting organizations exempt under Section 501(c)(3) from impermissibly intervening in a political campaign.

Perhaps unsurprisingly, Trump announced at the end of December that he would be seeking to shut down the foundation. Without acknowledging the various violations of the foundation, Trump stated "to avoid even the appearance of any conflict with my role as president I have decided to continue to pursue my strong interest in philanthropy in other ways." While Trump offered no timeline for the dissolution of the foundation, a spokeswoman for the New York attorney general's office stated "[t]he Trump Foundation is still under investigation by this office and cannot legally dissolve until the investigation is complete."