Fundraising for Nonprofits Requires Strict Adherence to Law
Every 501(c)(3) nonprofit must navigate the legal world of fundraising--one of the most highly regulated areas of nonprofit law. The nonprofit must satisfy both federal and state laws, with each state handling things differently. In this post, we introduce you to some of the legal issues your nonprofit can expect to encounter.
Deductibility of a Contribution
Whether a contribution to a nonprofit is tax-deductible to the donor does not depend solely on whether the organization is tax-exempt. Deductibility also depends under which section of the Internal Revenue Code the organization has claimed nonprofit status. In short, typically only contributions to Section 501(c)(3) organizations are tax-deductible.
Let's pause for a moment to make an important distinction. There are two phrases people tend to use interchangeably even though they don't have the same meaning: nonprofit and tax exempt.
A nonprofit is a business entity organized under state law for a nonprofit purpose. The entity is usually a corporation. But it could be a type of trust, an association or even a limited liability company. Although the nonprofit has a nonprofit purpose, it is subject to taxation just like any other business entity unless the IRS approves it as a nonprofit. The nonprofit must file a Form 1023 with the IRS, or if it qualifies, the much shorter Form 1023 EZ.
The nonprofit must receive IRS approval of its status for its fundraising to be deductible to those donating. In other words, suppose you itemize your deductions on your income tax returns. You can include in those deductions all gifts to 501(c)(3) nonprofits.
Most States Require Registration for Fundraising
Most, but not all, states require at least some form of nonprofit registration to conduct fundraising in that state. There are fifty states (plus the District of Columbia). The rules in each state regulate nonprofits differently from all the other states.
Our practice area is Kansas and Missouri. In Kansas, due to a recent change in the law, nonprofits must register with the Kansas Attorney General instead of the Secretary of State. Not only must the nonprofit register, but those conducting fundraising, as well as solicitors, must register. Missouri also requires registration with its Attorney General. Missouri requires registration for fundraising, and solicitors, like Kansas, but has its own sets of forms required by law. Most states, including Kansas and Missouri also have many exceptions from registration as well (for example, Missouri exempts organizations that have active 501(c)(3) tax-exempt status).
Fundraising Over the Internet and State Registration
Fundraising now often takes place over the Internet. A nonprofit located in one state can reach people in all the other states and even around the world. Must a nonprofit register in every state that its fundraising might reach?
The National Association of State Charity Officials (“NASCO”) answered this question for us in the infancy of the Internet. In 1999, NASCO drafted guidelines for states to regulate online fundraising. These guidelines are called the “Charleston Principles” because NASCO drafted them in Charleston, where it held its annual conference that year. Although the Charleston Principles are not binding on states, most states take them into account when deciding nonprofit issues. In short, in many circumstances, the Charleston Principles require registration in every state in which a nonprofit conducts fundraising.
Gift Substantiation and Quid Pro Quo Contributions
Charities sometimes receive contributions from donors in exchange for goods or services. These contributions are called “quid pro quo” contributions because the donor receives something of value back from the charity. To avoid abuse, the IRS requires that for a taxpayer to claim a fundraising deduction, the value of what the taxpayer gave to the nonprofit must exceed the value of the goods or services the taxpayer received. In addition, the IRS requires a nonprofit to provide a written disclosure statement to the donor if the donor makes a donation exceeding $75 in exchange for good and services from the nonprofit.
Gift Acceptance Issues When Fundraising
Many people donate cash to nonprofits but nonprofits also receive gifts of property. When a nonprofit receives a gift of property valuation issues arise. The donor might think the property is worth more than the charity thinks it is worth. If the charity accepts the gift at the donor's value, then both the donor and the charity could get into trouble with the IRS. The IRS might determine that the property really wasn't worth that much. The safest thing for a nonprofit to do in these circumstances is have the property appraised.
Necessity of a Gift Acceptance Policy
Nonprofits should have an established gift acceptance policy approved by the nonprofit's board of directors. In addition to requiring appraisals when in doubt about a property's value, the policy should require the nonprofit to consider these issues:
- Should the nonprofit even accept the gift? A proposed gift of property might be accompanied by legal issues. For example. a tract of land might need environmental cleanup. There could even be criminal law issues. What if the donor wanted to give a nonprofit a house that the donor bought with embezzled money? Nonprofits should always use caution and due diligence when deciding whether to accept a gift.
- Nonprofits normally don't want to hold property unless there is some way they can actually use it. For example, a nonprofit might accept a building because it could use the building for storage. But what if a donor wants to give the nonprofit some stock? If the stock trades on a stock exchange, the nonprofit can readily sell it. But if a privately-held company issued the stock, prohibitions on stock transfers might make the stock worthless.
- Another fundraising issue that a nonprofit should consider is the source of the gift. For example, it would not be consistent with an environmental nonprofit's mission to accept a gift of stock in a chemical manufacturer that has an unsavory reputation as a polluter.
- Some proposed gifts come with restrictions. In other words, the nonprofit can use the gift only in pursuit of specific activities of the nonprofit. For example, a donor might require that a nonprofit use the proceeds from a gift to construct a branch office. But the nonprofit might not want or need a branch office. Thus, it might decide to forego the gift or ask the donor to reconsider the restriction.
Many Fundraising Issues to Consider
In summary, nonprofits should be sure to obtain IRS approval of their nonprofit status so that gifts to them will be deductible. They should be sure to register with the states in which they are located. If they engage in fundraising over the Internet, nonprofits may potentially need to register with other states. Nonprofits should be careful to document quid pro quo transactions. Finally, a nonprofit should have explicit policies to evaluate gifts before deciding whether to accept them.
We at Mission Counsel would be delighted to assist your nonprofit with these issues. Most of our practice centers on nonprofit law in Kansas and Missouri. We offer free consultations. Please feel free to call us at 816-368-1181 or fill out the form on our Contact page.