ETHICS, INTEGRITY AND THE
LAW
October 22, 2013
Presented by:
Thomas A. Tupitza, Esq. &
Mark A. Denlinger, Esq.
Knox McLaughlin Gornall & Sennett, P.C.
120 West Tenth Street
Erie, Pennsylvania 16501
(814) 459-2800
ttupitza@kmgslaw.com
mdenlinger@kmgslaw.com
Copyright 2013 Knox McLaughlin Gornall & Sennett, P.C.
ETHICS, INTEGRITY AND THE LAW
I.
Legal Standards
II.
Industry Best Practices
III. Ethical Decision-making
IV. Fundraising Ethics & Integrity
LEGAL STANDARDS
A. Pennsylvania Solicitation of Funds for
Charitable Purposes Act
B. Multistate and Internet Solicitation
C. Internal Revenue Code & IRS Policy
Considerations
Background
– Nonprofit Status Under State Law
• PA Dept. of State
• PA Attorney General
– 501(c)(3) Status Under Federal Law
• IRS – Code and Regulations
Pennsylvania Solicitation of Funds for
Charitable Purposes Act
Registration of Charitable
Organizations
• Any person or group soliciting charitable
contributions in Pennsylvania must first
register with the Bureau, unless excluded from
definition of “charitable organization” or
exempt from registration provisions of Act.
– Notice on all solicitations
• “The official registration and financial information of (registered
legal name) may be obtained from the Pennsylvania Department of
State by calling toll free within Pennsylvania, 1-800-732-0999.
Registration does not imply endorsement.”
• Violations can result in criminal and civil penalties
– Excluded organizations:
• Law enforcement, firefighting or other public safety personnel
soliciting funds for their own organization
• Tax-Exempt religious institutions and affiiated groups that are
integral parts of religious institutions
• Organizations exempt from registration:
– educational institutions
– hospitals
– veterans’ organizations, volunteer firemen, ambulance and
rescue squad organizations if all fundraising is done by
volunteers
– public libraries
– tax-exempt senior citizen centers and nursing homes, if all
fundraising is done by volunteers
– parent-teacher organizations
– charitable organizations that receive contributions of no
more than $25,000 annually, if no compensated solicitors
are used
• Must file registration annually within 135 days of
close of fiscal year, including IRS Form 990 and:
– compiled financial statements if gross contributions
exceed $50,000 per year; or
– reviewed financial statements if greater than $100,000
per year; or
– audited if greater than $300,000 per year
“Professional Fundraising Counsel”
– Retained for fixed fee or rate under written
agreement
– Does not solicit or have custody of contributions
– Not a salaried employee of the charitable
organization
– Registration statement and contract must be filed
at least ten (10) days before fundraising services
commence, and be approved by Department
– Contract must include clear statement of duties and
compensation
“Professional Solicitor”
– “Makes the ask”
– Professional fundraising counsel whose
compensation is related to amount raised
– Not a salaried employee of the charitable
organization
– Must file registration statement and contract
– Must post $25,000 bond and submit campaign
reports (within 90 days after event has ended, and
on each anniversary of start date if campaign lasts
more than one year)
– Must retain records of all contributions for at least
three years
Provisions Applicable to all Charities
– Must retain records for at least three years
– May solicit only for stated purposes
– Must apply contributions in a manner substantially
consistent with those purposes
• Must disclose:
– Legal name or organization
– Name and address or phone number of representative
– Description of purpose
– Source from which a financial statement may be
obtained (including breakdown of program services,
administrative costs and fundraising costs)
Multistate and Internet Solicitation
– If solicit nationally, may need to register in 39 states +
District of Coumbia
– Unified Registration Statement (URS) is accepted by
most (www.multistatefiling.org)
– National Assn. of State Charity Officials (NASCO)
provides links to state websites (www.nasconet.org)
Internet Solicitation: “The Charleston
Principles”
• Not legally binding but developed by NASCO to
assist states develop own regulatory approach to
Internet solicitations
“The Charleston Principles”
• Must register in another state if:
 non-Internet activities require registration there; or
 solicit through interactive website and specifically target
persons located in that state for solicitation or receive
contributions on a repeated, ongoing, or substantial basis from
that state through website; or
 do not use interactive site, but specifically invite further offline
activity to complete a contribution, or send email messages or
other communications promoting the website, and target or
receive contributions, as in case of interactive website
• Definitions:
– Interactive: can contribute online
– Targeted: refers to state on website or sends other
communications to that state
• Website that merely provides description of
program services but does not solicit
contributions does not trigger registration
requirement even if unsolicited donations are
received
IRS CONSIDERATIONS
– Deductibility of contributions:
• Earmarked, conditional and restricted gifts
• Quid pro quo contributions
• Substantiation of contributions (IRS Pub. 1771)
– Private inurement, private benefit and excess
benefit transactions
– Unrelated business income tax and Form 990
Earmarked Gifts
• Contributions earmarked for the benefit of a
particular person or small group are not
deductible
• Conditional gifts are not deductible until the
condition has been met
• Restricted gifts are deductible when made
Substantiation of Contributions
• General Rules:
– A donor may not deduct a charitable contribution of $250
or more unless the donor obtains a contemporaneous,
written acknowledgement of the contribution from the
charity
– No deduction allowed for any monetary contribution unless
donor maintains a bank record or written communication
from charity with name of charity, date and amount of gift
– Donor is responsible for requesting and obtaining the
acknowledgement
– No aggregation of separate contributions
Substantiation of Contributions
What is “Contemporaneous”?
– The donor must receive the acknowledgement by the earlier
of:
• The date the donor files his or her tax return for the year in which
the donation was made, or
• The due date, including extensions, for the filing of the return
Substantiation of Contributions
What is “Written”?
– IRS does not provide specific forms or formats
– Letters, postcards, or computer generated forms
are acceptable
– Can be transmitted on paper or by email
Substantiation of Contributions
Typical Content of Acknowledgement • Name of Organization
• Amount of monetary contribution
• Description (but not value) of non-cash contribution
• Statement that no goods or services were provided by the
organization or description and good faith estimate or value
of goods or services provided, or statement that the only
services provided were intangible religious benefits
Quid Pro Quo Contributions
Safe Harbor Exceptions from Disclosure:
– “Token items” such as bookmarks, calendars or mugs
with charity’s name or logo, if contribution is at least
$51.00 and the cost of the item is $10.20 or less
• (Note: 2013 amounts; annual adjustments are available from
the IRS at 877-829-5500)
– Free, unordered items worth $10.20 or less
– Items with fair market value the lesser of 2% of
contribution or $102.00 (2013 figure)
Quid Pro Quo Contributions
Membership Package Benefits Safe Harbor:
– Provided for an annual payment of $75 or less and
consisting of benefits such as:
• Free or discounted admission to the organization’s facilities or
events
• Discounts on purchases from the organization’s gift shop
• Free or discounted parking
• Free or discounted admission to members-only events sponsored by
the organization, where per-person cost (not including overhead) is
not more than $10.20
Quid Pro Quo Contributions
– Payment that a donor makes partly as a contribution and
partly for goods or services received
– Deduction may be taken only to the extent that the
contribution exceeds the fair market value of the goods or
services
– Must provide a written disclosure statement, including
good faith estimate of value, to any donor of a quid pro quo
contribution of $75 or more
Substantiation of Non-Cash
Contributions
Non-Cash Contributions:
– If a charity sells or disposes of property worth over $5,000
within 3 years, the charity must file IRS Form 8282 (Donee
Information Return), unless:
• The property is publicly-traded securities, or
• The property is consumed or distributed for charitable purposes
(e.g., medical supplies)
– For property valued at more than $5,000, donor must obtain
appraisal and file IRS Form 8283 (Donee acknowledgement on
form does not mean agreement with appraised value)
Private Inurement and Private Benefit
– Private inurement: No part of the net income of
the charity may inure to the benefit of an insider or
other private individual (e.g. outside fundraiser)
– Precludes organization from allowing even a small
(de minimis) amount of benefit to inure to an
“insider”, that is, an officer, director, key
executive, or other person with substantial
influence over the affairs of the organization
Private Inurement and Private Benefit
– Public benefit: permits an insubstantial benefit to
individuals who are not insiders if that benefit is
required to accomplish the organization’s exempt
purposes.
• Need to be wary of “excess benefit transactions”
– Previously, the penalty for violation of requirements
was a “death sentence” for charity: revocation of taxexempt status
• Now, “intermediate sanctions” may be utilized by IRS
Excess Benefit Transactions
Intermediate Sanctions:
– “Intermediate sanctions” are imposed by IRS on
“excess benefit transactions” between 501(c)(3)
organizations and “disqualified persons”
• “Excess benefit transaction:” compensation paid by the
charity exceeds fair market value of the goods and services
provided
• “Disqualified persons:” directors, officers, persons in a
position to exercise substantial influence over the charity,
family members of such persons, and companies controlled
(35% or more) by such persons and their family members
Excess Benefit Transactions
Intermediate Sanctions:
– “Intermediate sanctions:” 25% tax on amount of
excess benefit is payable by recipient (plus 200% if
enire excess benefit is not repaid)
• 10% on directors who approved (up to $20,000 total)
– Rules may be triggered when a charity pays excessive
or unreasonable compensation to an employee or
fundraising professional
Unrelated Business Income Tax
• Unrelated business income tax is imposed on revenue
derived from the conduct of a trade or business that is
regularly carried on but not substantially related to its
exempt purpose
– Charity owns a piece of property with a parking lot and rents spaces
similar to a commercial parking garage = unrelated business income
– Museum has a theater to show educational films while museum open to
the public = NOT unrelated business income
Unrelated Business Income Tax
Exceptions:
• Substantially conducted by volunteers (e.g., sale of Girl
Scout cookies)
• Involves sale of merchandise, substantially all of which
has been donated to the organization (e.g. thrift shops)
• Bingo games conducted (a) on a noncommercial basis
and (b) in compliance with state or local law
Unrelated Business Income Tax
Exceptions (cont.)
– Qualified sponsorship payments
• No benefit other than the use or acknowledgement of
the name, logo, or product lines of the donor’s trade or
business
• No qualitative or comparative language, price
information, indications of savings or value,
endorsements, or inducements to purchase or use such
products or services
IRS Form 990
– Required for most public charities
– Form 990-EZ permitted if gross receipts are normally more
than $25,000 but less than $100,000, and total assets are
less than $250,000 at end of the year
– Form 990-N (e-postcard) permitted if gross receipts are
normally less than $25,000
– Substantially revised in 2007/2008
IRS Form 990
• Expanded questions concerning governance matters
• Three “Guiding Principles” of (Redesigned) Form 990
– Enhancing transparency to provide the IRS and the public with a realistic
picture of the filing organization;
– Promoting compliance by accurately reflecting the filing organization’s
operations so the IRS may efficiently assess the risk of noncompliance; and
– Minimizing the burden on filing organizations.
• Provides an opportunity to tell organization’s story
IRS Form 990
• Form 990 follows trend of requiring more and more
information about financial transactions with “insiders”
– Requires charity to provide information regarding composition
of governing body, its certain governance and financial statement
practices, and means by which the organization is accountable to
the public
• IRS believes good governance and accountability
practices provide safeguards that assets will be used for
exempt purposes
INDUSTRY BEST PRACTICES
A.
Historical Standards
B.
The New Environment for Nonprofits and New
Industry Standards
HISTORICAL STANDARDS
• Donor Bill of Rights
• AFP Code of Ethical Principles and Standards of
Professional Practice
• AFP E-Donor Bill of Rights
• Model Standards of Practice for the Charitable
Gift Planner (Partnership for Philanthropic
Planning)
NEW ENVIRONMENT FOR
NONPROFITS
– Fallout from Sarbanes-Oxley (SOX)
– State Regulatory Proposals
– U.S. Senate Inquiries
– IRS Initiatives
– Industry Self-Regulation
NEW INDUSTRY STANDARDS
• Panel on the Nonprofit Sector (Independent Sector) –
Principles for Good Governance and Ethical Practice: A
Guide for Charities and Foundations
• BBB Wise Giving Alliance Standards for Charity
Accountability
• Standards for Excellence (Maryland Association of
Nonprofit Organizations; now PANO and other state
organizations)
• ECFA Standards and Best Practices
PANEL ON THE NONPROFIT SECTOR
PRINCIPLES
• Panel convened with encouragement of U.S.
Senate Finance Committee
– 150 recommendations for action in Final and
Supplemental Reports, many embodied in 2006
Pension Protection Act
PANEL ON THE NONPROFIT
SECTOR PRINCIPLES – cont.
– Advisory Committee on Self-Regulation of the
Charitable Sector created as follow-up
– Examined standards and principles established by
over 50 self-regulation and accreditation systems
– 33 principles arranged in four categories, including
“Responsible Fundraising”
PRINCIPLES FOR RESPONSIBLE
FUNDRAISING
– “Solicitation materials and other communications
addressed to donors and the public must clearly
identify the organization and be accurate and
truthful.”
•
•
•
•
Specify intended use of funds
Provide contact information
Identify status of solicitor
Provide current and accurate descriptions of program
activities and financial condition
PRINCIPLES FOR RESPONSIBLE
FUNDRAISING – cont.
• “Contributions must be used for purposes
consistent with the donor’s intent, whether as
described in the relevant solicitation materials or
as specifically directed by the donor.”
– document the donor’s intent
– state in writing how oversubscriptions will be handled
– enter into an upfront agreement indicating right to
modify use of funds?
PRINCIPLES FOR RESPONSIBLE
FUNDRAISING – cont.
• “A charitable organization must provide
donors with specific acknowledgements of
charitable contributions in accordance with
IRS requirements, as well as information to
facilitate the donors’ compliance with tax law
requirements.”
PRINCIPLES FOR RESPONSIBLE
FUNDRAISING – cont.
• “A charitable organization should adopt clear
policies, based on its specific exempt purpose,
to determine whether accepting a gift would
compromise its ethics, financial circumstances,
program focus, or other interests.”
– gift acceptance policy
– criteria for evaluation by legal counsel
PRINCIPLES FOR RESPONSIBLE
FUNDRAISING – cont.
• “A charitable organization should provide
appropriate training and supervision of the people
soliciting funds on its behalf to ensure that they
understand their responsibilities and applicable
federal, state and local laws, and do not employ
techniques that are coercive, intimidating, or
intended to harass potential donors.”
– Do not give legal, financial or tax advice
PRINCIPLES FOR RESPONSIBLE
FUNDRAISING – cont.
• “A charitable organization should not
compensate internal or external fundraisers
based on a commission or a percentage of the
amount raised.”
– Clearly delineated criteria for bonuses
PRINCIPLES FOR RESPONSIBLE
FUNDRAISING – cont.
• “A charitable organization should respect the
privacy of individual donors and, except where
disclosure is required by law, should not sell or
otherwise make available the names and
contact information of its donors without
providing them an opportunity at least once a
year to opt out of the use of their names.”
BBB WISE GIVING ALLIANCE
STANDARDS
• Spend no more than 35% of contributions on
fundraising expenses
• Make annual report available on request, to
include:
–
–
–
–
mission statement
summary of program accomplishments
roster of officers and directors
financial information, including: income; expenses,
categorized as program, fundraising, or administrative;
ending net assets
BBB WISE GIVING ALLIANCE
STANDARDS – cont.
• Include annual report information on any
websites that solicit contributions
• Provide electronic access to Form 990
• Disclose how organization benefits from any
cause-related marketing, including portion of
purchase price that will benefit the
organization
• Respond promptly to complaints
STANDARDS FOR EXCELLENCE
(PANO)
–
Over five-year period, realize contributions at least
three times the amount spent on fundraising
–
Do not provide percentage or commission
compensation for fundraising employees or
independent contractors
–
Only use state-registered consultants
–
Control all solicitors, whether volunteer, paid or
businesses/other organizations
ECFA STANDARDS AND BEST
PRACTICES
– Do not create unrealistic expectations of what gift will
accomplish
– Guide and advise donors to consider adequately the
broad interests of family and other ministries
supported
– Do not permit officer, director, or other principal of
organization to receive royalties for any product the
organization uses for promotion or fundraising
– Do not knowingly place a hardship on donor or place
donor’s future well-being in jeopardy
ECFA STANDARDS AND
BEST PRACTICES – cont.
– Develop standards for “deputized fundraising” (i.e. workers
raising funds for their own work within organization)
• adopt policy evidencing organization's discretion and control over
gift
• clearly communicate to donors that gifts belong to the organization
• clearly communicate same concept to workers (including when
worker leaves organization)
• avoid terminology such as "give to" or "give for" an individual
ETHICAL DECISION-MAKING
• After considering legal and professional
standards, consider four (4) tests for ethical
and moral analysis of issues and decisions:
– (from J. Rohrbach, “Ethics and philanthropy:
looking at some fundamentals and emerging
issues” lecture delivered at AFP Franklin Forum)
THE VISION TEST
• Can you look yourself in the mirror and tell
yourself that the action you have taken is
okay?
– If not, then do not do it.
THE WHAT-WOULD-YOURPARENTS- SAY TEST
• Could you explain to your parents the rationale
for your action?
– If you could look them in the eye and not get a
quizzical response, or be sent to your room, then
proceed.
THE KID-ON-YOUR-SHOULDERS
TEST
• Would you be comfortable if your children were
observing you?
• Are you living the example you preach?
THE PUBLICITY TEST
• Would you be comfortable if your decision
appeared on the front page of the newspaper
tomorrow? Or was mentioned on the nightly
news?
– Note: Sometimes, it very well might be!
Fundraising Ethics & Integrity
Fundraising Ethics & Integrity
• “It takes many good deeds to build a good reputation and
only one bad one to lose it.”
Fundraising Ethics & Integrity
• Conflicts of Interest
– Disclose financial interests annually, not just at meetings
when issues arise
– Honesty in decision-making maintains public and donor
trust in organization’s reputation and fiduciary obligations
• Transparency
– Open and accurate requests for charitable donations and
use of funds
– Maintain candor and accuracy in communications
Fundraising Ethics & Integrity
• Accountability/Strategic Management
– Donors often expect cost-effective use of resources in “doing
good”
– “Money held in public trust should be well spent, not just wellintentioned.”
• Financial Integrity
– Appearances do matter, and thus may need to avoid certain
affiliations
– Sometimes difficult to separate mission/purpose from
unpalatable conditions/associations
Fundraising Ethics & Integrity
• Investment Policies
– Consider ensuring the charity’s financial portfolio is consistent
with values
– Pressure to maximize financial return may lead to a mixed moral
message
– Written investment policy and gift acceptance policy needed
• Donor Relationships & Privacy
– Respect the donor’s intent = use written agreements
– Respect donor’s privacy, especially if donation requested to
remain “anonymous”
Fundraising Ethics & Integrity
• Ensure Effective Codes of Conduct and Compliance
Programs
– Need to review code of ethics . . . and enforce it
– But codes and policies need to be flexible and encourage
moral and ethical behaviors
• Promote Effective Financial Management
– Utilize resources in socially responsible manner
– “Overhead” analysis can be flawed and result in short-term
focus
Fundraising Ethics & Integrity
• Institutionalize an Ethical Culture
– Top management needs to lead with integrity and
reinforce ethical conduct
– Strive for a decision-making process that is
transparent and responsive to competing
stakeholder interests
– Must be ready, willing and able to ask
uncomfortable questions and invite unwelcome
answers
Questions??
Disclaimer
• These materials should not be considered as, or as
a substitute for, legal advice and they are not
intended nor do they create an attorney-client
relationship. Because the materials included here
are general, they may not apply to your individual
legal or factual circumstances. You should not
take (or refrain from taking) any action based on
the information you obtain from these materials
without first obtaining professional counsel. The
views expressed do not necessarily reflect those
of the firm, its lawyers, or clients.
Thank You!
Presented by:
Thomas A. Tupitza, Esq. &
Mark A. Denlinger, Esq.
Knox McLaughlin Gornall & Sennett, P.C.
120 West Tenth Street
Erie, Pennsylvania 16501
(814) 459-2800
ttupitza@kmgslaw.com
mdenlinger@kmgslaw.com