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Back in early March 2018, we posted The EU Data-Privacy Law That May Affect U.S. Nonprofits (GDPR) to alert readers of a set of rules in the European Union that may apply to more than a few American organizations. There are hefty penalties for violations; the 2016 law included a grace period until May 25, 2018, after which these penalties would take effect.

We correctly guessed that few readers back in March had ever heard of GDPR and likely wondered how this unknown GDPR thing could possibly be relevant to nonprofit organizations based in the United States. But a month or so later, most of us started noticing our inbox full of “We’ve Updated Our Privacy Policy” messages from our favorite websites.

It’s time now to revisit this topic with a bit more information.

What is GDPR? Why did the EU enact it?

The General Data Protection Regulation (GDPR) is a regulation “designed to give individuals more security and peace of mind with the activities online.” It focuses on the “collection of personal data, and the use of that data. And a lot of it boils down to getting informed consent from individuals before doing anything with that data.” It “raises the bar for the protection of personal data, which is any data that can be linked to an individual.”

Why did the EU adopt this new law? “In Europe, privacy is a fundamental right, and the EU is dedicated to protecting it. The EU’s operational philosophy is built on the concept that personal data belongs to the individual. This is different than how the United States operates, where information collected on an individual is seen as the property of the organization that collects it.”

Since “data breaches have become part of our everyday life,” the European Union wanted to be the world leader requiring “companies to be more principled and transparent around data use and invest in security and data protection. Any company or agency collecting or utilizing personal information may do so only if they have lawful basis to process the information.”

Before enactment of the GDPR in 2016, the EU had a rule called “Data Protection Directive 95/45/ec” (the “Directive”) that had been the “primary law regulating how companies protect EU citizens’ personal data.” It was ineffective, though, to meet the current realities about the easy hack-ability and misuse of personal data.

How Does GDPR Apply to U.S.-based Nonprofits?

Perhaps the biggest change relevant to entities and organizations based outside the European Union is that the territorial scope of the GDPR has been broadened over the prior law.

The General Data Protection Regulation “imposes new rules on companies, government agencies, nonprofits, and other organizations” – wherever located – that “offer goods and services to people in the European Union (EU) or that collect and analyze data tied to EU residents. ”

GDPR represents “ sweeping changes” over prior rules. “From the perspective of a U.S. nonprofit organization, the primary difference is the concept of a new, broader geographical reach”: now, “in many cases,” to “non-European Union (EU)-based organizations.” “According to the Nonprofit Times, the new law ‘applies to organizations established in Europe that process the personal data of individuals in Europe and, in a shift from the Directive, to non-EU-based organizations that offer goods or services to individuals in Europe. This means that nonprofits with donors, grantors, or member in Europe might be subject to the new law.’”

American Technology Services, a U.S. based company that offers services in connection with preparation for the new GDPR, offers helpful examples of how or why United States nonprofits may come within the scope of this new European Union regulatory scheme.

ATS first underscores that any nonprofit that already “markets itself to EU countries” will, of course, have to comply with the new GDPR.

But what about groups that only operate in the U.S. and are thinking ….”this can’t possibly affect us.” ATS responds: “That seems logical, but if you have a website, you’d be wrong. It really depends on a number of factors, some of which are tricky to understand….”

For instance, “(w)hat if someone in England is researching your association’s cause on the Internet,” visits your website and fills out an online form providing data covered under GDPR, bearing in mind that “this transnational web transaction doesn’t have to be financial; it just has to be data process to fall within the purview of GDPR?” According to ATS, the answer may be yes. And, in the case where “your organization has deliberately targeted an EU audience with intentional marketing (say, copy that targets an EU country audience), yes, GDPR applies.”

GDPR will not apply, though, if an “EU individual found your website randomly, or even through a Google search.”

What are Key Requirements of GDPR?

“The average person will have more explicit rights under GDPR to know who stores, processes, and has access to their personal data. Under GDPR, EU residents can request access to, rectification of, and deletion of their data.”

Organizations collecting this personal data “need to review their data governance practices” and eliminate older data that wasn’t collected under the GDPR standard.

“The GDPR requires enhanced security, data protection, appropriate technical and organizational measures, transparency, record keeping, accountability, and supporting data subject requests. It also requires a 72-hour personal data breach notification by data controllers to the authorities.”

Key principles” include:

Processing must be lawful, fair and transparent, and done in a way that “ensures security of the data and protects it from unauthorized use.”
Personal data must be collected for “specified, explicit and legitimate purposes and not further processed in an incompatible way”; also, “limited to what is necessary to achieve the purposes for which it was collected” and “not be kept in identifiable form for longer than necessary.”

The main feature is “… getting freely given consent, with a statement of clear affirmative action. This basically means that you gave individuals all the autonomy and choice to opt into your communications.

For example, in the nonprofit sector, this may affect “how you interact with and build your various mailing lists. From soliciting new donors to stewarding relationships with existing donors, a lot of your communication with constituents is through email marketing.

“A simple change you can make to get more GDPR compliant is to change all of your sign-up forms (or anything that captures data, online) into forms that have double or even triple opt in processes. Most sign up form-builders and email marketing platforms will give you this option and flexibility. Even things like having an option for “Subscribe to my Newsletter” left unchecked by default will help.

Conclusion

Additional resources include:

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Since the end of World War II, “proprietary” post-secondary institutions have popped up around the nation, taking advantage of generous G.I. benefits to lure students into programs that often were shady and didn’t produce serious education or vocational training. Governments of both parties cracked down from time to time on these mostly small operations.

About thirty years ago, it all changed. Suddenly, “large for-profit college chains emerged and began expanding, attracting mostly poor students with slick advertisements and devoted recruiters.” The heyday was from 2000 to 2010; “publicly listed colleges devoted nearly a quarter of their revenues to marketing and recruiting.” Enrollments surged and executive salaries exploded; they became “…the darlings of Wall Street.”

Unbound by the norms and restrictions of the nonprofit higher-education world and 501(c)(3) rules, eventually, these behemoths faltered under the weight of scandalous predatory practices, student backlash, media exposes, and – finally – government regulation in the Obama Administration.

For-Profit Rush to Nonprofit World

Recently, those institutions that have managed to survive at all have changed strategies. “(S)ome are focusing on graduate education, where accusations of predatory practice have been less common.” Others tried to convert to non-profit status or have been sold to, or absorbed by, nonprofit institutions. In a November 2017 article in the Economist, “For-profit colleges in America relaunch themselves as non-profits,” the writers explore this trend, despite the much more lenient regulatory posture of the current Administration towards for-profit schools.

Under ordinary circumstances, converting a for-profit entity to a nonprofit institution with tax-exempt 501(c)(3) status is fraught with difficulties, and may not be possible at all.

A strategic alliance with an existing nonprofit in good standing faces hurdles, too: both for the former for-profit institution as well as for the nonprofit college or university. “Purdue University, a well-regarded public higher education institution in Indiana, has bought the for-profit Kaplan University in the hope of launching an online school.” Kaplan, now “reformed” as a “nonprofit public institution” is called Purdue Global. This union is in the headlines, but for all the wrong reasons. Certain just-announced policies for the new Purdue Global are being criticized as out of place in a nonprofit, higher education environment.

Purdue Unit: Shades of For-Profit?

“Purdue University is emulating corporate America’s practice of requiring employees to agree to confidentiality and non-compete agreements as a condition of employment,” according to The Nonprofit Quarterly. “At the heart of the issue is the intent and meaning of a four-page agreement that all employees of Purdue University Global are required to sign.”

There is criticism as well from the American Association of University Professors (AAUP), which asserts that “the practice sets a dangerous precedent and violates their understanding of the purpose of a nonprofit educational and research organization.” According to Greg Scholtz, that organization’s director of the academic freedom, tenure, and governance department, the new policy is “breathtakingly inappropriate” for higher education and said it was unlike anything he had ever seen in his work, which is focused on nonprofit institutions.”

For its part, Purdue disagrees; critics are “overreacting and making a mountain out of a molehill.”

Agreement Details

There are two aspects of the new mandatory agreement that are, in particular, raising eyebrows.

First, the document “includes a one-year, non-compete period and appears to limit the ability of faculty to consult with other teachers and researchers.” Critics worry that this is an unfortunate move by this “Big Ten school to increase control over its instructors and reduce the nature of professional independence.” A Purdue psychology professor, David Nalbone, sees this as a move to “intimidate faculty into keeping their head down and just [be] drones.” He asserts that the “noncompete clause” is “a particularly pernicious poison pill”; many adjunct teachers are in a precarious financial position to begin with and work several jobs to make ends meet.

Second, the “highly legalistic language” of this agreement appears to appropriate the intellectual property ordinarily retained by faculty members; that is, “any ‘written, graphic, audiovisual, audio, visual or other works for purposes of education delivery’ that faculty members produce as employees….are considered to have been ‘commissioned and owned by Purdue Global as a work-for-hire’ and may not be used, duplicated or distributed unless the university waives its rights to the materials. For anything not owned by Purdue Global as a ‘work-for-hire,’ it retains a ‘perpetual nonexclusive, royalty-free license to use, duplicate and distribute all such copyrightable works for all research and educational purposes.’”

In response to this criticism, Betty Vandenbosch, the Purdue Global chancellor, admits that “the agreement’s language may be legalistic and possibly confusing,” but – she asserts – “its meaning is clear.” In explaining why this cryptic language doesn’t mean what it says, Chancellor Vandenbosch fails to give a meaningful response..

Martin Levine, writing for The Nonprofit Quarterly, asks: “If the conditions of the agreement are not intended to be rigorously enforced, then why would Purdue continue to require faculty to sign as a condition of their employment?”

Why indeed?

Conclusion

Mr. Levine concludes by posing the next logical question: “Do these concessions change the nature of a public nonprofit so much that it no longer provides the public with the benefits that justify its status?” Professor Nalbone agrees: “This entity is no longer a private entity” and “it needs to start behaving like one.”

In April 2018, Professor Brian Galle of Georgetown University wrote an article about a different for-profit turned nonprofit in Conversions of For-Profit to Nonprofit Colleges Deserve Regulators’ Scrutiny, arguing that these transactions need a better look. Referring to the for-profit conversion discussed there, he observed: “That is not a charity. It is a trustworthy-looking wrapper around a for-profit business.”

The post Troubling Policies at Purdue’s (Formerly For-Profit) Arm appeared first on For Purpose Law Group.

In 2016, the world-renowned MacArthur Foundation took a huge leap of faith when it announced its bold 100&Change contest. The challenge for applicants: present a proposal to “solve one of the world’s most critical social challenges.” Who was eligible: any organization or collaboration “working in any field, anywhere in the world.” The prize: a $100-million grant.

The project was more successful than even MacArthur officials had dared hope. Applicants submitted over 1900 proposals. As the competition proceeded, the field was narrowed but, during this process, the philanthropy community was permitted to take a glimpse into many thoughtful, creative, and innovative proposals.

We enjoyed watching as competitors vied for the top prize; see our coverage, beginning with The MacArthur $100-Million Grant Contest, and continuing here, here, here, and here. MacArthur proudly announced the winner in late December 2017 from among the four finalists: Sesame Workshop and International Rescue Committee (IRC) had designed a compelling project to “educate young children displaced by conflict and persecution in the Middle East. It would be “the largest early childhood intervention program ever created in a humanitarian setting.”

In a nod to the high level of proposals submitted, the MacArthur Foundation awarded additional grants – $15 million – to each of the other three finalists and promised assistance in helping them win additional financing. Other enthusiastic funders pledged $254 million more to support the competition applicants’ exciting proposals.

Now, MacArthur has launched a second phase of the 100&Change project.

New MacArthur Foundation Contest

Through the success of the inaugural round of the competition, foundation officials learned “there is no shortage of compelling ideas with the potential for tremendous social impact.” This realization led to extending and expanding the project.

In a February 27, 2019 press release, MacArthur introduced a “new round of its 100&Change competition for a single $100 million grant to help solve one of the world’s most critical social challenges. Again, it will be open to the same broad range of potential applicants as the original contest. Applicants may submit proposals – online only – from April 30 to August 6, 2019, that “identify a problem and offer a solution that promises significant and durable change.”

There is an additional exciting dimension to this second phase. MacArthur is creating a new nonprofit organization called Lever for Change. The goal is to unleash capital from philanthropists and help them apply their wealth to “accelerate social change.”

Cecilia Conrad, MacArthur’s Managing Director – who heads up 100&Change – explains that “at its essence, Lever for Change is a new type of philanthropic infrastructure, facilitating more and better giving.” It “complements and expands the emerging field of collaborative philanthropy.” Ms. Conrad, who is now also the CEO of Lever for Change, adds that this project is a way for more donors “to engage in ‘big bet’ approaches” to charitable giving. (We’ll have much more to say about the “big bet” concept in a follow-up post.)

The new organization will “connect donors with high-impact philanthropic opportunities by administering custom competitions or by matching donors with vetted proposals from such competitions.” The goal is to develop a “pipeline” of innovative projects and organizations to tackle important social challenges on a broad scale.

There will be an initial grant of $10 million supplemented by $25 million more (co-funding by MacArthur’s $20 million and an additional $5 million from LinkedIn founder Reid Hoffman for technical support, as needed.)

Lever for Change was designed in collaboration with the Bridgespan Group, “whose research identified barriers, such as perceived risk and lack of staff capacity, that impede wealthy donors from fully realizing their aspirations to contribute significantly to social change.” Lever for Change expects to continue to work with Bridgespan.

MacArthur officials proudly mentioned that “Lever for Change has hit the ground running.” The new organization will manage the $100&Change competition just launched. In partnership with Pritzker Traubert Foundation, the first Lever for Change competition will be launched. Three additional contests are in the planning stages. Two of them are supported by families requesting anonymity; one will aim to increase economic opportunity in the United States and the second will focus on global climate change.

Conclusion

On February 20, 2019, the first-round 100&Change winners issued a press release heralding the newly chosen name – “Ahlan Simsim,” meaning “Welcome Sesame” in Arabic – of this humanitarian program in the Syrian response region. That announcement also includes details of the project to date. Check it out: It’s an exciting and important venture that provides a glimpse into the extraordinary quality of the MacArthur Foundation’s 100&Change vision.

The post MacArthur Foundation Launches New $100 Million Competition appeared first on For Purpose Law Group.

The recent federal government closure was the longest in U.S. history, causing incalculable pain, financial and otherwise, most directly to the workers and contractors who went without paychecks. There were serious ripple effects, too, through the economy as a whole. And the important work of government stopped for almost a month, creating backlogs for the foreseeable future which may never be fully remedied

The news media have documented much of this entirely unnecessary (and unproductive) fallout. From the standpoint of the 501(c)(3) world, though, there has been devastating damage that experts are only beginning to assess.

Huge Toll of Shutdown on Organizations

The new Congress acted to authorize back pay for the affected federal employees, but they will never be fully compensated for their additional losses including – for example – negative credit-rating effects, evictions, and delays of urgent medical treatment.

The employees of federal contractors have been left in an even more unfair and precarious situation; Congress has not yet voted to reimburse them for their lost wages or compensate them for any of the consequential damages from their furloughs.

And a fact often overlooked in media reports about “federal contractors” is that many nonprofits are included in that category – including organizations that stepped up to the plate during the shutdown to provide emergency assistance to community members. These groups have been left without assurances that missed grant or contract payments will ever be paid. These sudden, severe losses are on top of funding cutbacks and other actions by the current Administration in the past two years that had already created spikes in demand for their services.

Certain communities were affected more acutely than the nation as a whole. “The biggest impact [was] likely felt in the Washington, D.C. area.” But in other parts of the United States with “a large per-capita federal workforce or military,” like Alaska, charitable organizations had to scramble to provide widespread assistance, according to NCN’s Thompson. In large parts of the western U.S., especially where there are many Native American tribes, the loss of services by and through the Department of the Interior has negatively impacted areas that “most politicians in D.C. don’t pay attention to.”

One of the few “good news” aspects of the shutdown crisis was the highly visible and immediate response by nonprofits all around the nation to help their neighbors and friends with financial and other assistance. “Charities large and small have diverted their attention to address needs of furloughed employees and others affected by the shutdown.” Here in San Diego, for instance, alongside the many groups expanding food-assistance services to the human victims, the San Diego Humane Society sprang into action providing emergency food relief for their pets.

Another instance is The National Parks Foundation helping to clean up public recreational areas when federal services stopped. It’s a good move in some respects, according to David Thompson of the National Council on Nonprofits, but it “could be detrimental in the long run.” When nonprofits “step in to do what they do — solve problems,” governments “get used to these volunteers doing the work.” Nonprofits that “divert from their mission for government not doing its job” have been burned in the past; often they are never reimbursed.

Shutdown Set Back IRS Oversight Capabilities

For several years, the Internal Revenue Service has endured cutbacks, with losses of “about $715 million in funding and 22,000 full-time employees.” The agency has also had an attrition problem; many long-time workers are reaching retirement, and it’s been difficult to replace them.

The Tax Exempt/Government Entity Division (TE/GE) has been particularly hard-hit for a variety of insupportable reasons pushed by certain legislators. This has caused ongoing problems and backlogs including the notoriously long time it used to take for approval of a tax exemption application. In 2014, the IRS tried to reverse this lag time by launching the ill-designed Form 1023-EZ. In the short term, this move cleared the backlog, but there are new headaches now as large numbers of ineligible groups have slipped through and achieved tax-exempt status.

Will the IRS ever catch up from almost four weeks of an absent workforce? It’s anybody’s guess. The shutdown has magnified the preexisting staffing shortfall and has likely created a new backlog that will be difficult to remedy.

There may also be a long-term effect on this agency’s workforce. In Shutdown Pain May Make Working at IRS a Tough Sell, the authors wonder whether the stoppage has set up “a serious question for IRS employees: is working there even worth it?” And will prospective employees consider it at all? They may be able to get a better salary in the private sector without any risk of work stoppages because of political stalemates.

The important role of the Internal Revenue Service in the proper oversight of the charitable community has been hurt severely over a period of years. This rash, pointless government action has made matters much worse. “Given all the budget cuts we’ve had over the years, and the grievous harm that’s been inflicted upon employees during this shutdown, it could take a generation to repair the harm that’s been done,” according to University of Pittsburgh law professor Philip Hackney, a nonprofit expert who previously worked in the IRS Office of the Chief Counsel.

Conclusion

Perhaps the only silver lining to this miserable episode is the spike in the reputation of the federal worker, long-maligned (unfairly) as lazy or superfluous. Looking good, too, is the philanthropic community; already held in fairly high regard, our sector has emerged as more vital than ever for the nation in times of crisis and hardship.

The post Shutdown: Fallout for Nonprofits appeared first on For Purpose Law Group.

An important report released in November 2018 by the Washington-D.C.-based Institute for Policy Studies raises the alarm about a troubling trend in philanthropy and charitable giving in the United States.

Traditionally, American charities have been broadly supported by “low-dollar and mid-level donors.” In recent years, though – and particularly as the nation emerged from the 2008 economic crisis – there has been a marked change. Now, the “charitable sector in the United States is increasingly top-heavy”; more and more “philanthropic power” is wielded by a “handful of very wealthy individuals and foundations.”

The report, “Gilded Giving 2018: Top-Heavy Philanthropy and Its Risks to the Independent Sector” is an update to a 2016 report which had “pointed out this trend.” More current data “shows that the trend is not only continuing, but accelerating.”

Problematic Philanthropy Trend

While “there’s nothing wrong with wealthy people giving bigger gifts,” there are significant near- and long-term risks to the overall integrity of the nonprofit independent sector if this anti-democratic shift continues without some needed reform and safeguards.

“The problem is the rules regulating our charitable sector have become skewed toward prioritizing tax write-offs for the ultra-wealthy and not toward solving social problems.” And a “tiny group of mega-philanthropists – techies – … have set up funds with huge amounts directed to their favorite causes.” Making the problem worse is that more and more money is “directed into wealth-warehousing vehicles such as private foundations and donor-advised funds and away from direct nonprofits serving immediate needs.”

The Gilded Giving 2018 report authors pose this question: “What are the risks to the autonomy of the independent sector – not to mention our democracy – when a growing amount of philanthropic power is held in fewer hands?

They identify “implications” of this trend away from broad-based popular support of charities for: (1) charity fundraising; (2) the role of the independent sector; and (3) the health of American democracy.

One of the significant risks to U.S. charitable organizations is the issue of “volatility and unpredictability in funding” as reliable sources of revenue shift. This change makes budgeting and income forecasting more difficult. A related problem is that nonprofits must undertake the cultivation of mega-donors and compete for those significant dollars. A third issue of concern is that the organizations may need to dilute their own mission and vision to bend to the funding biases of the new crop of uber-wealthy donors.

There is risk as well for the public including – most notably – an “increasingly unaccountable and undemocratic public sector” as well as “use of philanthropy” as an “extension of power and privilege.” In addition, there are significant problems and objections to the “warehousing of wealth” particularly in “the face of urgent needs.” When mega-donors choose avenues of charitable giving – donor-advised funds, for instance – that do not include sufficient requirements to pay out the money in the short-term, these wealthy individuals are gaining valuable immediate tax benefits but charitable organizations are not given the immediate cash they need to alleviate poverty, further medical research, advance the arts, or pursue whatever charitable mission they have been created to accomplish.

Proposed Philanthropy Reforms

The Gilded Giving 2018 authors conclude that “urgent reform of the philanthropic sector” is needed to combat the problems identified in the report.

In connection with the use of private foundations, they recommend that: (1) the annual payout requirement be raised; (2) foundation overhead be excluded from any calculation of “payout percentage”; and (3) the foundation excise taxes be linked to the payout distribution amount.

As to donor-advised funds, the authors suggest a three-year payout requirement as well as a ban of gifts from private foundations to DAFs and vice versa.

More generally, they endorse a policy change from the current rules to a universal charitable deduction. This may stimulate giving by the growing percentage of taxpayers that no longer itemize deductions. In addition, to curb some of the exploitation of the tax code by uber-wealthy individuals, the authors recommend a lifetime cap on charitable deductions.

The authors caution, though, that these reforms must be accompanied as well by any and all possible efforts to combat wealth inequality in our society.

Conclusion

A key downside to the trend toward mega donations is that “the rules regulating our charitable sector have become skewed toward prioritizing tax write-offs for the ultra-wealthy and not toward solving social problems.” While that’s a good deal for the top 1%, it’s a bad deal for the Treasury, the taxpayers, and charitable organizations and beneficiaries.

The post Top-Heavy Philanthropy Creates Risks for Democracy appeared first on For Purpose Law Group.

In the 1980’s, the American Express company tried out an advertising technique that had not been done before. The financial services giant joined with the nonprofit organization that was leading the fundraising campaign to pay for restoring the Statue of Liberty. This experiment was a huge success for both sides.

Here’s how it worked: American Express launched an advertising campaign to sign up new cardholders. American Express pledged to donate part of each credit card purchase to the nonprofit as well as an additional contribution for each new, approved credit card application.

Commonly referred to as “cause-related marketing” or “cause” marketing,” this type of joint venture between a business and a 501(c)(3) has surged in popularity over the years and is now a billion dollar industry. It’s been described as the “model of choice for collaborations between nonprofit organizations and for-profit companies.”

Many states, including California, have approved these arrangements but also passed laws regulating cause-related marketing campaigns and the professionals who facilitate them. There has been little oversight or enforcement, though: only a 1999 report issued by the Federal Trade Commission (FTC) along with sixteen state Attorneys General and the District of Columbia Corporation Counsel that raised regulatory concerns about false advertising, consumer fraud, and deceptive trade practices arising from certain commercial-nonprofit product advertisements.

Now, for the first time in almost two decades, there is official, decisive action by regulators. In the summer of 2018, a coalition of 12 states entered into a settlement agreement with a Tennessee nonprofit (and perhaps eventually its for-profit partner) for a cause-related marketing project regulators proved was a nationwide attempt to violate state charitable solicitation laws.

Cause-Related Marketing

These cause-related projects can take one of several formats, the most common being the simplest and most direct: telling the general public that a set portion of the sale proceeds of a product or service will be donated to a designated charity.

Sometimes there will be a special promotion: for example, the sale of color-coded items including pink to support breast cancer research nonprofits and red to support HIV/AIDS prevention. Other popular variations include:

Purchase Plus: Customers are asked at a checkout line to add a small donation to the bill.
Licensing of Logo or Brand: An example is the American Heart Association certifying that a product meets its standard for heart health.
Social or public service marketing: Using marketing principles and techniques to encourage behavior change in a particular audience: for instance, the American Cancer Society and Novartis partnering on their Great American Smokeout campaign.

The nonprofit, of course, receives the windfall of substantial financial support without having to do much else other than consent to joining in this arrangement and allow the for-profit business to announce to the general public that a percentage of sales will be donated to the charity. (It’s important for the nonprofit to remain as passive a partner as possible in order to avoid the IRS claiming that the activity constitutes an unrelated business activity, subject to the unrelated business income tax.)

The for-profit business benefits from the “halo effect” of being associated in the public’s mind with a worthy cause; the marketing campaign generally has the effect of boosting sales of the firm’s product line.

Tennessee Case

The case that caught the eye (and ire) of regulators around the nation is the campaign by a Tennessee nonprofit, Operation Troop Aid (OTA), and its “commercial co-venturer” Harris Jewelers. The organization entered into a settlement agreement acknowledging it had engaged in a nationwide cause-related marketing campaign that violated state charitable solicitation laws in the following ways:

Failing to properly oversee its commercial co-venturer which had advertised on its website and in its retail stores that, for each teddy bear purchased, it would donate a specific amount of money to Operation Troop Aid for the express purpose of sending care packages to service members;
Failing to segregate the funds as restricted;
Using these funds for purposes other than those expressly represented as its charitable purposes;
Spending funds on non-charitable purposes; and
Engaging in unfair, false, misleading or deceptive solicitation and business practices.

More specifically, Operation Troop Aid did not meet its oversight duty of Harris Jeweler’s “Operational Teddy Bear”; it never requested an accounting of the numbers of bears sold or any other information to determine that the per-bear dollar figure sent by Harris Jewelers to OTA was accurate. Nor did the nonprofit provide Harris Jewelers with information on how the funds donated by the company were used or how many care packages were sent to service members.

Operation Troop Aid also admits it spent funds on non-charitable purposes and took these actions without any discussion, approval, or oversight by its board of directors. The organization has agreed to cease operating and wind down its operations. CEO Mark Woods is barred from serving as a fiduciary or soliciting for any nonprofit. There will be civil penalties against the organization as well, and OTA has agreed to continue helping authorities in their continued investigation of Harris Jewelers.

Conclusion

This aggressive, multi-state enforcement action should be a wake-up call for the many charities around the nation which have cause-related marketing campaigns. Important steps to take include: having a comprehensive written agreement requiring compliance with law (and verification) by both sides; reviewing the business co-venturer’s advertisements; and adopting adequate procedures and controls to deal with restricted donations.

The post Cause-Related Marketing: New Aggressive Enforcement appeared first on For Purpose Law Group.

In the philanthropy sector – as in every other – the start of a new year marks an avalanche of fortune-telling: which issues that were big in the past year will continue to dominate news and commentary and which sleeper topics will erupt onto center stage.

Some of the prognotiscating appears in published articles and blog posts. Some of it also pops up in long, thoughtful threads on Twitter among academics; we in the non-professor-lurker class benefit from those impromptu conversations.

What’s in store for nonprofits? A consensus emerges as certain issues show up on most of these lists. On one point, there is almost universal agreement: 2018 was a “tumultuous” year for our sector; 2019 is likely to continue on that roller-coaster path.

Our list highlights just a few (and in no particular order) of the most commonly cited items that we wrote about in 2018 and are likely to continue discussing this year.

Donor-Advised Funds

Donor-advised funds have been around for decades, but they exploded in popularity after large commercial firms jumped in with aggressive marketing. Particularly in the last decade or so, this hybrid model became the charitable-giving vehicle of choice for the wealthy in the United States because it offers benefits not available in the private foundation format. Most folks are surprised to learn that the nation’s largest charity is not United Way or The Salvation Army. It’s the Fidelity Charitable Gift Fund, the biggest donor-advised fund in the U.S.

DAFs have been especially attractive to tech-entrepreneurs-turned-billionaires, some of whom used the Silicon Valley Community Foundation as DAF of choice. While there were critics of the DAF model well before SVCF imploded in April 2018, that crisis was the catalyst for ripping off the shutters and letting much-needed sunlight on the matter. Our series about SVCF, some of which includes discussion of that organization’s reliance on the DAF model, begins with Secrets and Lies at Silicon Valley Community Foundation (July 24, 2018) and continues here, here, and here.

In the months following that scandal, and continuing to the present, there’s been a continual stream of commentary and chatter on the subject. See, for instance, There’s A Target On Charity’s Booming Donor-Advised Funds (August 2, 2018) and Why DAFs Pose Big Problems for Nonprofits and Social Progress (November 26, 2018) – just two of the many published commentaries about this issue. There’s been speculation that the recent big move by Elon Musk into the DAF pool may well be the trigger for government regulators to seriously consider some rules and restrictions. [Update: CA legislators are taking up this issue in the current session. See here.]

Crowdfunding

“It seems like a perfect marriage: the internet and charitable fundraising.” We wrote that 2-½ years ago in Crowdfunding: What California Charities Should Know (July 21, 2016). This “lightning speed way to pitch alerts about causes – often in times of emergency” became a phenomenon a few years and shows no signs at all of slowing down.

It’s been dramatically successful in many instances including cases we highlighted: Sweet Briar College in Virginia, and the Girl Scouts of Western Washington.

But we cautioned back then: “…as in the case of any hasty union, it’s wise to slow down just a bit, get directions, and avoid driving off in the dark and over a cliff.”

By last year, as we wrote in CA Considers a Charity Crowdfunding Bill (June 28, 2018), there were concerns and calls for some amount of government regulation and guidance. Of course, there are laws already on the books around the nation because crowdfunding is “plain and simple – fundraising.” Notwithstanding the sometimes ad hoc nature of these appeals, they are “charitable solicitations” and charity regulators – at all levels of government – take an interest in charitable solicitations and solicitors.”

In last year’s California legislature, the issue was raised and a proposed crowdfunding bill was introduced. Interested stakeholders, lawmakers, and regulators worked together to create a regulatory atmosphere in which these online donations could flourish, donors and charitable beneficiaries are protected, and existing principles of charitable-solicitation regulation and oversight are maintained.

It was a good effort, but – as written – fell short of these goals. So it’s back to the drawing board for another try in this year’s session; see Crowdfunding Regulation in CA: What’s Next? (January 18, 2019) In the meantime, in an Open Letter to Crowdfunding Companies, dated November 16, 2018, CalNonprofits asks for cooperation and dialogue in light of certain “concerns” about “the easy access for scam artists purporting to be legitimate nonprofits, undisclosed fees, uncertainty about tax-deductibility, and slow fund disbursement to nonprofits, among many others.” This leading association of nonprofits points to its Principles for Responsible Crowdfunding which it hopes will “serve as a guide for policymakers in the Golden State, and help set the standard as the rest of the states take their own look at this evolving field.” [Update: CA legislators are taking up this issue in the current session. See here.]

Cryptocurrencies

In early April 2018, we posted Bitcoin and More: The New World of Donations. Cryptocurrencies were introduced just a decade ago, but by 2017, it became all the rage. Donors want to get into the game by making charitable donations of cryptocurrencies. Organizations want to know more about this new funding avenue so they are not passed over as wealthy people choose this method for their contributions. This new technology certainly “has some notable benefits including quicker processing, lower fees, and easier access to international donors.”

On January 29, 2019, we posted Second Thoughts About Cryptocurrency Donations? “By the fall of 2018, experts and observers were ready to take a second look at the cryptocurrency craze and evaluate it anew from the perspective of donee organizations, donors, and philanthropy generally.”

The great Bitcoin Crash of 2018 showed that there are serious downsides to this untested market. That volatility continues, there are lawsuits, and the government looks ready to step in for some much-needed regulation.”

There are also unanswered questions and uncertainties about how to successfully claim the touted tax benefits. We ended that post with the famous Betty Davis line from All About Eve: “Fasten your seatbelts, it’s going to be a bumpy ride.”

Conclusion

These are just a few of the issues we expect will be newsworthy for the charitable community in 2019. There are others, of course, including volatility in government funding, wealth inequality and the role of billionaires in the future and direction of philanthropy, and the (hopefully) continued erosion of the Overhead Myth – just to name a few.

The post Hot Issues for Nonprofits in 2019 appeared first on For Purpose Law Group.

Recently, Bryan McQueenly raised a provocative issue to his neighbors in an op-ed in the Ventura County Star. In The Real Costs of Disasters for Nonprofits, this Southern California-based CEO of a 501(c)(3) asserts that the reality of recurring – and, indeed escalating – natural disasters poses a serious threat to the short- and long-term viability of most Golden State nonprofits.

Like other residents of Ventura County, he knows first-hand about the devastation brought by natural disasters to the community at large and, particularly, to the local nonprofits who are expected to bear a good part of the load of disaster aid and relief.

In his county, the year 2018 began with catastrophic mudflows and ended with worse-than-usual wildfires. As a piece in the Los Angeles Times made clear, “whether fire or earthquake, mudslide or drought, natural disaster is an inextricable part of the California experience.” And, of course, there are man-made disasters like the mass shooting in Ventura in 2018.

Mr. McQueeny lauds the emergency response by “first responders, the nonprofit community and the people of Ventura County,” but argues that the burden is unsustainable. “The immediate costs of the crises can be measured in buildings burned, people displaced, those injured and lost. Those tragic losses are compounded by longer-term costs that can be harder to quantify. For nonprofits, this can trigger yet another catastrophe.”

Insufficient Safety Net

The vast majority of nonprofit organizations are severely underfunded; they operate on a shoestring. Some 53% of nonprofits have three months or more less of cash on hand.” A significant reason is that “governments rarely or never cover the full costs of a program for 70 percent of nonprofits.” Foundations and private donors “do only slightly better, covering the full costs of a program 48 percent of the time.” These funders want to support direct program costs, and have traditionally balked at paying for overhead or general operating support – although, as we and others have reported – there is a push to change the negative thinking about this “overhead myth.”

On a normal day, the philanthropy sector is somewhat “fragile and vulnerable.” Throw into that mix just one emergency and “nonprofits that are already stretched can break.” Just a single crisis can mean massive evacuations and dislocations as well as damage to physical facilities and necessary utilities services. There is immediately a giant leap in demand for services by the nonprofits, on top of the damage and losses suffered directly by these organizations.

Disaster Planning Must Change

Mr. McQueenly’s key point in his op-ed is that a community’s nonprofits are needed as part of an area’s critical infrastructure. The “long-term health” of the philanthropy sector must be protected as part of the overall disaster planning. Funders must rethink and reconsider objectives in light of the reality of recurring disasters.

In particular, there should be an understanding of the true, full costs that arise in the immediate hours, days, and weeks following a community-wide emergency – in addition to actual physical damage. They include, for instance, costs for evacuation, overtime, emergency care, and shutdowns when service delivery is interrupted.

They also include significant disruptions and changes in donation patterns for area nonprofits; routine donations are supplanted by money contributed for emergency response. There is often a decrease in annual support because of the emergency response, donor exhaustion, and “long-term shifts in giving patterns caused by the destruction of thousands of homes and businesses.”

Conclusion

Just as it’s important for funders to correct the traditional imbalance in support for direct program costs vs. overhead, it’s also critical for grantmakers and donors in disaster-prone areas to take into account (and allocate money for) the special, catastrophic costs arising from these predictable and expected crises.

The rationale for “funding for emergency response is no different” than the arguments set out in favor of increased general operating support funding. “Now is not the time for foundations to micro‐manage or second‐guess nonprofits. It is time for full‐throated support of a critical partner which can fill the gaps ripped open by a crisis.”

The post Rethinking Nonprofits’ Disaster Planning appeared first on For Purpose Law Group.

It’s safe to say it’s a new day in the U.S. Congress.

There’s an entirely different House of Representatives after the blue wave of November 2018. Of course, there’s still a GOP-controlled Senate and White House, so the power dynamics won’t significantly change. Nevertheless, the lower chamber has the power of the purse; controlling appropriations is a significant cudgel.

In addition, Democrats now control which issues are explored in committee and which bills make it to the House floor for votes. Of particular interest to the nonprofit sector is the House Ways and Means Committee; the new chairman is Representative Richard Neal (D-MA). He – along with Charles Grassley (R-NE) (now) Ranking Member of the Senate Finance Committee – have expressed interest in working in a bipartisan manner for tax policy in the new Congress.

The National Council of Nonprofits (NCN), the nation’s largest network of nonprofits with some 25,000 members, took the opportunity, just a few weeks after the November election, of approaching lawmakers Neal and Grassley with a wish-list of America’s charities. NCN takes pain to remind them that the nonprofit sector is more than a bunch of do-gooders; it is a big slice of the national economy that employs more than 14 million people. The 4-page letter is here.

Writing for NCN, Tim Delaney, CEO & President, and David L. Thompson, Vice President for Public Policy, emphasize that “(t)ax policy does far more than just define the nonprofit sector as tax exempt; whether intentionally or not, it also can promote fairness or its opposite, pick winners and losers, and support or ruin well-managed operations trying their best to improve the lives of others.”

Against that framework, NCN offers recommendations that address ongoing problems in tax administration, deficiencies and unfairness in last year’s Tax Cuts and Jobs Act, and suggestions for policies that will advance and promote charitable giving.

Wish 1: Protect Johnson Amendment

Right out of the gate, NCN’s Delaney and Thompson exhort these tax-writing legislators to “first, do no harm” by protecting the Johnson Amendment that has worked for 64 years to shield “charitable nonprofits, houses of worship, and foundations from the rancor of divisive partisanship and schemes by the unscrupulous to profit from tax deductions for disguised political campaign contributions.”

They assert, correctly, that “the 501(c)(3) nonprofit community – frontline charities, churches, and foundations – stands strongly united in support of” current federal law banning political campaign activities. (This support is not unanimous, of course, but NCN’s characterization of robust support is accurate.) They ask for a “pledge” to preserve the Johnson Amendment and reject “all effectors to repeal or weaken this vital, and … existential, protection.”

Wish 2: Correct TCJA Problems

In the next section titled “restoring balance, removing impediments,” Delaney and Thompson draw up a list of what the charitable sector sees as missteps in adopting the Tax Cuts and Jobs Act of 2017 (TCJA). Since most American charities are small- or mid-sized organizations who struggle financially to fulfill their missions, it is “quite troubling,” they write, that offsets for revenue losses on account of tax cuts for businesses and wealthy individuals were put on the backs of the nonprofit sector by eliminating benefits or imposing new excise taxes.

Fringe Benefits

NCN takes aim at the 21% unrelated business income tax under Internal Revenue Code section 512(a)(7) on nonprofits which give transportation fringe benefits, including parking and transit passes, to their workers. The stated rationale was to create “parity” between for-profits and nonprofits under the new tax scheme, but the effect was to impose a significant new burden on charities. “Nonprofits received little, if any, gains under the Tax Cuts and Jobs Act,” argues NCN, “and yet are now subject to a new, illogical income tax on transportation benefits in the name of “parity.” They ask for the repeal of this misguided new tax.

Note: In mid-December, the IRS issued Notice 2018-99 which included some interim guidance as well as the news that Treasury will publish proposed regulations soon. We’ll have a post on this specific development soon.

Separate “Trade or Business”

NCN also urges repeal of the mind-numbingly misguided, confusing, and unfair new rule for 501(c)(3)s subject to the unrelated business income tax with more than a single, separate and distinct, “trade or business.” As Delaney and Thompson aptly explain, “[n]ew Section 512(a)(6) of the tax code directs nonprofits ‘with more than 1 unrelated trade or business’ to somehow compute their unrelated business income (and related losses) earned ‘separately with respect to each such trade or business.’”

The law does not define what constitutes a “separate” trade or business, and there has been no final or reasonable guidance by Treasury or the IRS, notwithstanding that it was effective almost immediately on January 1, 2018.

Paid Leave Tax Credit

The TCJA added a generous new tax incentive for some employers who pay their workers who take family and medical leave. The benefit, though, comes in the form of an income tax credit; nonprofit employers, of course, cannot take advantage of it. Once again, the tax legislation gives tax cuts and credits to for-profit employers, with no corresponding benefit to charities. “This oversight in the law is easily remedied by permitting nonprofits,” who the NCN officials again remind lawmakers are a big, important part of the U.S. economy, “to apply the credit to payroll and other taxes they do pay.”

Excess Compensation; Endowments

NCN also criticizes the two new taxes on excess executive compensation and on endowment returns of certain higher-education institutions. While these new measures target relatively few nonprofits, nevertheless, “[e]very dollar taken from nonprofit entities as a tax is a dollar diverted from missions of serving individuals and communities.” More to the point, argues NCN, these new measures are “unsound policy,” that make attracting qualified executives more difficult, improperly “invade the boardrooms of independent organizations,” and override “the fiduciary-based decisions of trustees.” Delaney and Thompson politely ask lawmakers to refrain from imposing their “political judgments that do not take into account the challenges and solutions that these local experts deal with every day.”

Wish 3: Strengthen Giving Incentives

An important part of the charities’ wish list for Congress is for lawmakers to reconsider the changes in the 2017 TCJA that had the “undeniable adverse consequences” of depressing incentives for Americans to give to charity. “Experts from across the political spectrum agree: the 2017 tax law significantly reduced tax incentives for Americans to” make donations. NCN asks that lawmakers enact “immediate tax-law changes to provide stronger tax incentives” for charitable donations, offering “three potential solutions, all of which are needed”:

Create a universal or non-itemizer charitable deduction
Extend the IRS charitable rollover to retirement security plans
Increase the volunteer mileage rate

Wish 4: Beef Up Tax Enforcement

NCN pulls no punches in asking for more oversight as well as resources and support for the Internal Revenue Service’s charity-regulating functions. “As the primary cop on the nonprofit beat, the IRS needs resources and support of lawmakers in promoting transparency, ethical conduct, and close attention to the laws that protect nonprofits, taxpayers, and the public.”

The most pointed attack is directed at the decision to introduce the Form 1023-EZ in 2014. “In doing so, [the IRS] ignored strong opposition and warnings expressed by its own expert Advisory Committee on Tax Exempt and Government Entities, the National Association of State Charity Officials (state regulators of nonprofit organizations), and the National Council of Nonprofits, among others.” This ill-fated move has resulted in close to universal approval of applicants submitting the streamlined tax-exemption application, and the “agency’s near abdication of its duties to protect the public by screening out unqualified or unscrupulous individuals who seek charitable tax-exempt status.” These duties are “being shirked with every application process.” Not for the first time, NCN, on behalf of the charitable sector, asks that the Form 1023-EZ be “withdrawn immediately.”

Conclusion

NCN’s letter ends “with the offer made at the outset…”: the willingness of the charitable community to work with the House and Senate tax-writing committees to develop legislation that “promote stronger nonprofits and stronger communities.”

The post Charities’ Congressional Wish List appeared first on For Purpose Law Group.

The proliferation of the donor-advised fund (DAF) model of charitable donation has been one of the biggest recent trends in philanthropy. In both news and commentary articles, experts have weighed in on the pros and cons of DAFs including the possible need for more regulation and oversight.

In late November 2018, a U.S. Magistrate Judge from the Northern District of California issued a ruling that Fidelity Charitable, now the biggest donor-advised fund in the nation, surely did not welcome. It is being sued by a couple who donated some $100 million in stock. They allege that, contrary to representations and assurances by Fidelity agents, the DAF liquidated the stock holdings almost immediately. This sale caused the share values to crash and damaged the couple’s claim to a hefty charitable deduction.

Fidelity filed a Motion to Dismiss the lawsuit but Judge Jacqueline Scott Corle sided with the plaintiffs in this early and critical stage of the litigation. She ruled that the claim has legal merit and that these donors have standing to sue on this matter.

Fidelity Charitable, which opened its doors in 1991 as a 501(c)(3) public charity, has an “independent board of trustees” comprising “dedicated professionals from across the nation who lend their deep expertise to” Fidelity’s “mission of growing philanthropy.” Notwithstanding this early setback, Fidelity vows to vigorously oppose the lawsuit going forward.

Alleged Wrongdoing

The plaintiffs in Fairbairn v. Fidelity Investments Charitable Gift Fund (N.D. CA, No. 18-cv-04881, 11/28/18) are Emily and Malcolm Fairbairn of San Francisco. They operate Ascend Capital, an investment group that “manages billions of dollars” for clients. According to court pleadings and the ruling on this motion, they faced a “substantial” tax liability for 2017. So the couple researched firms sponsoring donor-advised funds to determine their best course of action for making a hefty charitable gift with a corresponding tax deduction.

Specifically, the Fairbairns wanted to donate 1.9 million shares of a company called Energous. That stock had just leaped 39% after the FCC had approved its key technology. If the Fairburns sold the stock directly, the couple would face a large capital gains tax liability. If they donated it to a DAF, then the couple would have “more money for a fund to fight Lyme disease,” a cause of great importance to them.

Based on the representations and assurances of Fidelity agents, Mr. and Mrs. Fairbairn deposited 700,000 shares with Fidelity on December 28, 2017, and 1.2 million more the next day, which was the last trading day of the year. To the dismay of these donors, Fidelity liquidated all 1.9 million of the donated stock in a three-hour window on December 29th. According to the lawsuit allegations, this caused a loss of “tens of millions of dollars” of overall value and wreaked havoc on the Fairbairns’ proposed claim for a charitable deduction.

They allege that, on December 27, 2017, they “spoke with a representative of Fidelity, who ‘aggressively pitched’ them on why Fidelity would be a better vehicle than JP Morgan or Vanguard.” The agent “repeatedly boasted of Fidelity’s sophistication and ‘superior ability to handle complex assets.’”

They had expressed particular concerns about what they characterize as Fidelity’s policy and practice of dumping stock “at the earliest possible date.” The Fairbairns allege they were reassured when Fidelity Charitable, through its agents, “had given them four promises to convince them to donate their Energous shares: It would use sophisticated, state-of-the-art tactics to liquidate large blocks of stock; it wouldn’t trade more than 10 percent of the daily volume; it would let the Fairburns oversee the price limit; and it wouldn’t liquidate shares until the beginning of 2018.”

The Litigation Issues

The Fairbairns filed a lawsuit in August 2018, claiming misrepresentation, breach of contract, negligence, and violation of the California Unfair Competition Law. Defendant Fidelity Charitable then filed the motion to dismiss which was the subject of the recent court ruling.

Fidelity made several key arguments in opposition to the litigation. First, Fidelity asserted that these plaintiffs’ Complaint was not argued with the specificity required for fraud/misrepresentation complaints under the Federal Rules of Civil Procedure. The Court disagreed, ruling that the Complaint had sufficiently detailed allegations “to put Fidelity on notice of the particular misconduct charged.” The Court ruled also that the agents’ promises to use “state-of-the-art methods” for liquidating stock were not mere (nonactionable) “puffery.”

Fidelity also defended the lawsuit on grounds that the plaintiffs “lack standing to sue because the Attorney General had exclusive authority to bring such cases.” The court reviewed both California and Massachusetts law, ruling that, while both of these states generally grant the attorney general primary authority, both also have exceptions when someone “has a particularized interest beyond that of the general public.”

In this case, the court found, plaintiffs have such a “particularized interest” for several reasons. First, Fidelity holds the donated funds in a “dedicated account” and makes eventual donations “in the donors’ name.” Second, Fidelity gives donors “exclusive advisory rights” over the fund. Third, the firm states it will not take money out of the account “without action by the donors.” Fourth, while Fidelity retains veto power over the donors’ decisions, it exercises that power only when the donor attempts to “use the money for an improper or non-charitable purpose.”

Conclusion

This ruling on Fidelity’s Motion to Dismiss is just the first one in what may well turn out to be protracted litigation that should be of interest to the nation’s donor-advised funds as well as to their present and prospective donor-clients.

In particular, the “standing to sue” element is critical; the court ruled that the donors have a “special relationship” to the fund administering their DAF accounts and “to the gifts bearing” their names. – giving them “standing along with the Attorney General to enforce their expectations for the Fund, especially when the DAF sponsor gives them additional rights.”

The post A Different Kind of Donor-Advised Fund Story appeared first on For Purpose Law Group.

There’s so much governmental action – (or inaction, when action is necessary) directly or indirectly affecting the nonprofit sector and charitable beneficiaries, it’s hard to keep up with it all.

One issue that’s been flying somewhat under the radar is the assault against Medicaid expansion and eligibility promoted by many “red” states and aided by actions of the current administration in Washington. Short of a full rollback of the Medicaid program, these states have pushed hard to impose work or equivalent requirements on Medicaid recipients. In this case, the “equivalent” is going to school or what is commonly referred to as “mandatory volunteering” with a charitable organization.

Shutting down Medicaid has been on the GOP wish list for some years and, in early 2017, with a new federal government taking over, there was a jump in interest and action. Through 2018, some ten states had submitted waiver proposals; those from Kentucky, Indiana, and Arkansas were approved.

There was blowback from many opponents including the charitable sector. In Mandatory Volunteerism: A Bad Idea All Around (March 2018), we explained why the nonprofit community has consistently taken a strong stance against these initiatives to make getting Medicaid as hard as possible.

There are two key downsides of this policy for the charitable sector. First, there is the crushing administrative burden on 501(c)(3) organizations in accepting and managing an influx of “volunteers” who are not committed to the cause or even minimally motivated beyond the “stick” of having their much-needed health benefits yanked. Second, if Medicaid beneficiaries are denied coverage, the slack will be picked up, at least in part, by the already-overburdened social services agencies in each community.

Activists in Kentucky opposing the waiver on more broad-based grounds filed a lawsuit early in 2018 as soon as the federal waiver was granted permitting that state to go forward and institute work/school/volunteer requirements for Medicaid eligibility.

There’s been an important development recently; in March 2019, an appellate court upheld a federal district court’s fall 2018 ruling striking down this waiver.

The Medicaid Waiver Rulings

The federal government and the states jointly fund the Medicaid program. The states are the administrators. Under long-established law, eligibility is income-based. States are permitted to impose work requirements by asking for, and receiving, a “waiver” from the federal government. While the Obama Administration had denied these requests, the federal Centers for Medicare and Medicaid Services (CMS) has actively promoted this policy and encouraged states to ask for this permission.

In Kentucky, which was the first state to receive federal approval, opponents filed a lawsuit as soon as the waiver was granted in early 2018. A federal court blocked the waiver, ruling for the plaintiff-opponents, on the grounds that “federal officials had not adequately considered how the requirements, including mandatory volunteerism, impacted the primary purpose of the program”; that is, granting access to individuals for medical services.

How did the government respond? Instead of appealing this adverse ruling, the Administration responded by “reopening Kentucky’s proposal for public comment.” As expected, in November, HHS announced it “had determined the requirements under the plan ‘are likely to promote the objectives of Medicaid’” and, for the second time, approved Kentucky’s waiver request.

The plaintiffs in the Kentucky lawsuit amended their pleadings and challenged the latest government “findings.” In March 2019, the same federal district judge ruled against the government and in favor of the opponents to this Medicaid “waiver.” He also ruled that same day that the waiver approval of Arkansas must also be blocked.

Specifically, in these twin rulings, U.S. District Court Judge James Boasberg ruled that “the federal government failed to justify that adding employment conditions and other changes to Medicaid in Arkansas and Kentucky advanced Medicaid’s basic purpose of providing health coverage.”

The Federal Response

The federal government wasted no time at all in brushing off the appellate ruling as if it were a fly at a summer picnic. “Less than 48 hours after a federal judge struck down Medicaid work requirements, the Centers for Medicare & Medicaid Services on Friday gave Utah permission to use those mandates.” In her approval letter for the Utah waiver, CMS Administrator Seema Verma wrote that “that requiring Medicaid enrollees to work was allowed because it helps make them healthier.”

Yes, really; that’s the government’s position.

There have been devastating real-world results for policymakers and lawmakers to study and consider. After Arkansas implemented its new Medicaid eligibility rules, thousands of Medicaid recipients were thrown off the rolls, and additional rounds of disqualification followed. Critics also point out that the Arkansas government seems to have gone out of its way to make qualification as difficult as possible. In the state that has the lowest access to the internet, officials created an online-only reporting system for individuals to prove compliance with the new work/volunteer/education requirements.

A March 27th article in the Washington Post – A job-scarce town struggles with Arkansas’s first-in-nation Medicaid work rules – poignantly shows the devastating results of this draconian policy particularly in areas hard-hit by economic downturns.

Conclusion

The philanthropic community must continue its efforts to loudly oppose harsh new Medicaid-eligibility requirements and – particularly – the misguided and harmful “mandatory volunteerism” aspect of these waiver applications.

Last year, in an official policy statement, the National Council of Nonprofits minced no words: “Mandatory volunteerism is harmful because the policy imposes increased costs, burdens, and liabilities on nonprofits by an influx of coerced individuals” who will view this requirement as “doing time rather than doing good.”

The November election results have also thrown a twist into this debate. Generally, voters demonstrated that GOP efforts at cutting back on health services and insurance coverage have been unpopular. The voters in several states – in Maine, for example – approved ballot measures to reverse these policies and mandate expand Medicaid coverage.

While the November 2018 elections around the nation have put a halt in some of this momentum in states with newly “blue” governors and legislatures, it’s still alive and well in certain parts of the United States. The Commonwealth Fund has posted a map of the status of Medicaid expansion efforts in various states as of March 15, 2019, and presumably will update that graphic from time to time.

The post New Medicaid Work/Volunteer Court Ruling appeared first on For Purpose Law Group.

One of the most hopeful developments in the past few years has been the philanthropy community’s increasing openness to reexamining the roles of donors as well as organizations and to addressing entrenched problems in society including wealth inequality and social justice.

The Stanford Social Innovation Review (SSIR) is a treasure of thought leadership for social change. In its Winter 2016 issue, the editors published a lengthy article titled Making Big Bets for Social Change, challenging readers to address this paradox: “Why does such a large gap exist between what donors say they would like to achieve with their philanthropy and where they actually make their biggest bets? And how can we close it.”

The Bridgespan Group’s William Foster was a lead author of that landmark piece from a few years that “has been receiving more attention, … and is increasingly used as a framework by philanthropists and nonprofit leader alike.”

Now he turns his attention to participate in – and introduce – a new series by SSRI for Spring 2019: Unleashing Philanthropy’s Big Bets for Social Change.

“Big Bets”: The Time Has Come

Mr. Foster wrote the first article, Introduction to Unleashing Philanthropy’s Big Bets for Social Change, to set the stage for this new forum to build on the momentum from the Winter 2016 article and “inform the current debate on big-bet philanthropy.”

He gives an overview of the history of the “big bets” phenomenon including important demographic trends rocking the philanthropy establishment as well as significant challenges.

The Bridgespan Group has participated in this “big bet” movement for several years and has gained experience and understanding about its issues and problems. From this work, Bridgespan has learned of the pivotal role that “big bets” have played over many decades in “propelling major social advances, from eliminating age-old infectious diseases to securing civil rights….”

Nevertheless, recently, there have been seismic demographic and societal changes at work that have radically changed the philanthropy landscape. The large institutional foundations in the United States that dominated 20th century philanthropy – and “played an outsize role in” it – are declining in influence, in large part “…as a consequence of unprecedented wealth accumulation and the rise of new philanthropists over the last two decades.”

In addition, “…looking at the gifts of all U.S. donors to causes anywhere in the world, the large majority of major gifts still go to universities, medical research, or cultural institutions.” While this is good – “these gifts strengthen important pillars of a vibrant and educated society and advance scientific frontiers” – “few of these institutional gifts are focused on poverty, justice, or other social change goals.” The paradox, though, is that donors say these goals are the most important reason for their charitable giving.

Research on “Big Bets”

SSRI introduces the latest research on the “big bet” movement by way of two articles. First, Becoming Big Bettable, by Mr. Foster along with Bridgespan’s Gail Perreault and Bradley Seeman, is for nonprofits and nongovernmental organizations that want to attract and receive large philanthropic support. It presents guidelines by which social-change leaders can better position their organizations and causes.

Many prospective donees approach the “big-bet” grant process with a single storyline that rarely succeeds; that is, “the problem is enormous, you should care about it even more than you do, our organization is terrific, and more money will allow us to do more important work.”

According to these authors, this is “not only a communications problem, it is a strategy problem.” There are many donors who want to make a “big-bet” impact with their wealth, but they “are stymied by a lack of compelling opportunities.” The answer is in training social-change leaders to present their causes as “shovel-ready” opportunities.

Second, in Reimagining Institutional Philanthropy, another set of Bridgespan authors – Alison Powell, Willa Seldon & Nidhi Sahni – tell foundations how to refocus their giving for more impact on society’s problems.

In addition to the decline in market share by institutional foundations in recent years, there “is a sense that …[they] are not living up to the full potential of the assets and influence they do have.” They have succumbed to “fossilized thinking” while the “rate of change in society accelerates.” For decades, there has been no “outside force requiring them to change and few variations on the basic operating model to inspire innovation.” That has, of course, all changed.

Series Articles

The articles comprising this SSIR forum are impressive. In addition to the first three already cited, they are (with links):

Conclusion

“Today,” Mr. Foster concludes, “we stand at a pivotal moment in the history of philanthropy.” We must understand the challenges as well as the opportunities in order to move forward productively.

The post The “Big Bet” Social Change Movement appeared first on For Purpose Law Group.

Back in 2007, when the Public Service Student Loan Forgiveness (PSLF) program was established, it seemed like an excellent way to help both struggling college grads as well as the nation’s government agencies and nonprofit organizations to lure needed talent away from the private sector which – generally – pays better than public service jobs.

To qualify for PSLF, an applicant must (1) work for a government agency or for certain types of nonprofits; (2) work full-time; (3) have Direct Loans (or consolidate other federal student loans); (4) repay the loans on an “income-driven repayment plan; and (5) make 120 qualifying payments.

At the end of the 10-year-period, the applicant is supposed to have the student loans wiped out.

There were reports of problems all along, but the deluge opened up when, in 2017, the first of the program enrollees reached their ten-year marks, and applied for the promised cancellation of their debts.

Seth Frotman, the student loan ombudsman at the Consumer Financial Protection Agency, resigned in disgust in August 2018. He and his staff had reviewed “thousands of borrower complaints” the summer before. His office, in 2017, released a detailed analysis of the program’s administrative failings.” The problems continued and got worse.

In March 2018, Congress enacted a special, $350-million fund to “forgive the loans of some borrowers hurt by those mistakes,” but that has been a dud so far.

And a devastating report in September 2018 by the Government Accountability Office (GAO) revealed shocking news. The title of the New York Time’s September 2018 expose on this situation says it all: 28,000 Public Servants Sought Student Loan Forgiveness. 96 Got It.

Student Loan Forgiveness Program Problems

Even 12 years ago, it was clear that the fallout from the massive student-loan burden acquired by many students to help defray rising college costs was a huge burden for them as well as a drain on the economy. Graduates who would, ordinarily, shift into consumer mode and purchase cars or even homes were unable to do so.

It was a no-brainer win-win for everyone. Or so it seemed at the time.

Under the law that Congress enacted in the last months of the Bush Administration, the United States Department of Education (DOE) has the burden of carrying out what turned out to be a complex law with lots of ambiguities and uncertainties.

The way the federal student loan program is structured is that the DOE “is, essentially, a trillion-dollar bank, serving more than 40 million student borrowers.” This agency that writes the student loans doesn’t have the capacity to administer the paperwork, run the call centers, and handle the day-to-day servicing of these loans. So the DOE contracts with nine firms to handle these duties. “These servicers, as they’re known, are glorified record-keepers and debt collectors. But they’re also powerful gatekeepers.”

The CPFA’s Frotman sadly concluded that “…these servicers, … with a big assist from the Education Department, were wreaking havoc with the Public Service Loan Forgiveness Program.”

The General Accountability Office agrees. One of the the key conclusions of its September 2018 audit report is that the DOE “failed to provide the necessary, specific, written instructions to the outside firm[s] hired to run the program.

The many ways in which borrowers were left hanging out to dry almost from the beginning of the application process through to the time for seeking confirmation of the student loan forgiveness are described in the articles and links cited here. “Major administrative failings had left both the program’s administrator and borrowers in a state of confusion about the program’s rules.”

Suffice it to say, it was a mess and continues to be a mess – capped off by the dismally tiny percentage of matured student loan forgiveness applications that have been approved.

Student Loan Forgiveness Program Updates

Corrective Action Mandated

The latest official oversight report was released on February 12, 2019, by the Office of the Inspector General (OIG) of the Department of Education. In Federal Student Aid: Additional Actions Needed to Mitigate the Risk of Servicer Noncompliance with Requirements for Servicing Federally Held Student Loans, the OIG pulls no punches. It exposes “failures to follow federal rules by the loan servicers who manage the student loans and collect the payments” as well as deficiencies of the Federal Student Aid (FSA) department of DOE which oversees the student loans. The FSA “rarely penalized loan servicers when errors” were found. More specifically, these deficiencies included a “lack of accountability provisions to hold servicers accountable for noncompliance” and a “lack of performance metrics” for the services.”

The OIG ordered the FSA to develop and submit a “final corrective action plan” with 30 days.

Federal Judge Clarifies Terms

There have been at least three lawsuits in the past few years by private plaintiff-borrowers as well as by the American Bar Association and by the Attorney General of Massachusetts, Maura Healey.

One of these lawsuits came to a conclusion in late February 2019 as a federal judge upheld the claims of 3 of 4 of the lawyer/borrower- plaintiffs.

Under the federal Public Service Loan Forgiveness program, borrowers must jump through several hoops to earn the right, at the end of the ten-year period, to have their loans forgiven. They must have the “right type of federal loan, make 120 on-time payments, enroll in the correct category of repayment plans and work for an eligible public-service employer.”

The requirement to work for an “eligible public-service employer” has been a minefield of problems during the years of this program. In terms of nonprofit organizations, if the employer is a 501(c)(3), then the borrower is fine. But for other 501(c) categories, there are ambiguities.

In 2017, four public-interest lawyers filed a lawsuit – (along with the American Bar Association) – to “defend their access” to the PSLF program. They asserted that “FedLoan Servicing, which administers the program for the Education Department, issued approval letters that were then rescinded with little or no opportunity to appeal the decision.”

On February 22, 2019, Judge Timothy J. Kelly of the District Court for the District of Columbia issued a lengthy ruling. Three of the four lawyer-borrowers were successful because they had worked for a 501(c)(6) legal organization. The fourth, though, who worked for a 501(c)(19) veterans association, had his claim denied.

Conclusion

This is an evolving story that affects huge numbers of public-service-employee student loan borrowers as well as the many nonprofit organizations that have participated in the Public Service Loan Forgiveness program – or who want to benefit from a vast pool of talent in the future.

We’ll follow it and report on further developments.

The post Public Student Loan Forgiveness Program: Problems & Update appeared first on For Purpose Law Group.

During the presidency of Franklin Roosevelt, it was not widely known that, as a younger man, he had been stricken with polio, then called infantile paralysis. Unlike the current practice of the news media poking its collective nose into the deepest crevices of public figures’ private lives and concerns, there was an understanding that Roosevelt’s deep desire to keep his medical condition private would be honored.

But Roosevelt actively tried to help the cause of his fellow victims, including opening his beloved estate in Warms Springs, George, to afflicted people from around the nation, so they could benefit from its spa-like waters that provided some relief.

In 1938, he created the National Foundation for Infantile Paralysis, also known as the March of Dimes. Back in the mid-20th century, when a nickel or a dime could actually buy something, supporters including school children toted cardboard dime holders to fill up with small contributions from family and neighbors.

Ten years after FDR’s death in 1945, there was a vaccine finally available and effective against polio. In 1958, the organization expanded its purpose to “broader medical causes” but retreated in 1965 to a narrower, birth-defects focus. In 1979, the group changed its name to March of Dimes Birth Defects Foundation, but the phrase “birth defects” was removed in 2006.

Struggles to Rebrand and Refocus

As with many venerable charitable organizations that have been around for many decades, the March of Dimes struggled over the years to rebrand and refocus. Its revenues have been shrinking for several years.

In 2017, the organization put its suburban New York headquarters building up for sale, moved its main office, laid off 100 people and made cuts to their pension program. “Internally, the March of Dimes appears to have been trying to maintain an image of vitality in the face of a long-term decline.” Unfortunately, its troubles continue and have accelerated recently and now extend beyond the organization itself.

March of Dimes had a history of funding “pioneering studies on premature birth, infant mortality, and birth defects.” But in late July 2018, the organization, without warning, told 37 of 42 of its individual research grantees that their multi-year funding would be cut off. “Worse, grantees were informed of this a month after funding had lapsed, leaving them presumably in deficit with no planning time.” March of Dimes is also lowering grants to its prematurity research centers located within academic institutions around the nation. It will not award any new research grants this year except its 2-year, $150,000 awards for young scientists in 2019.

Researchers also learned – at the time their grants were canceled – that the March of Dimes had been delinquent on tens of thousands in grant payments back to late 2017.

“The moves are part of an effort to slice about $3 million from the March of Dimes’s annual research budget of roughly $20 million,” according to Kelle Moley, the group’s chief scientific officer. “It’s vital,” she says, “that we invest all of our resources into research programs that have the greatest potential to impact the biggest threat right now facing newborn babies, and that’s preterm birth.”

The organization has suffered declining donations, particularly from its signature fundraising effort, the March for Babies. “The walks were our main funding source … and now there’s a million different kinds of walks.

Consequences from Abrupt Cuts

It’s unusual for a nonprofit organization to cut off grants without warning. Marc Kastner, president of the Science Philanthropy Alliance told the Baltimore Sun that he has “never heard of a case where commitments are not fulfilled. To get scientists working on a project and then cut them off is wasteful and creates enormous hardship.”

Research grantees were left scrambling to find other sources of funding in the middle of ongoing projects. Chromosome biologist Andreas Hochwage was “was startled to learn [in early August] that the organization would only disperse 2018 funding owed through the end of June. ‘For the whole month of July, they didn’t tell me that I wasn’t being supported anymore…that I find a little outrageous.’” Molecular cell biologist Andrew Holland of Johns Hopkins University School characterized “the way they’ve approached this” as “completely inhumane,” adding: “The lack of transparency has been nothing short of appalling.”

Conclusion

The funding shortfall facing the March of Dimes in the middle of 2018 did not happen overnight or without warning. To make sudden cuts to one of its key program efforts – research – in such an abrupt manner was a major failure in organizational planning. Time will tell, but it’s unlikely that the organization can or will regain the trust – and the research services – of the scientists who work and livelihoods were tossed aside.

The post More Troubles for the March of Dimes appeared first on For Purpose Law Group.

“Philanthropy, honey, it’s time for an intervention.” – E. Villanueva

When one of the philanthropic community’s most influential leaders, Darren Walker, head of the Ford Foundation, makes an impassioned call for change, it is newsworthy. And when Ruth McCambridge, the editor-in-chief of one of the sector’s leading publications, The Nonprofit Quarterly, writes that he “hits it out of the park,” that, too, is noteworthy.

At the close of an old year and the beginning of a new one, it’s not unusual for people of a philosophical bent to take stock and make resolutions for the future.

The Coming of Hope: A Vision for Philanthropy in the New Year is Darren Walker’s important and inspirational article on January 9, 2019, in the Ford Foundation blog Equal Changes.It is beautifully written and while “expressing faith in hope and collective longing for shared peace and prosperity,” Ms. McCambridge points out that Mr. Walker pulls no punches and “succinctly names the problem that challenges us all.”

This existential threat is growing inequality; it must be addressed now, and the philanthropic community must acknowledge some complicity in it.

Inequality as Key

“Millions of people,” writes Mr. Walker, “feel frustrated with, and excluded by, an out-of-balance global economic system they are decreasingly willing to tolerate.”

The causes are known; “global capitalism” contributing to ever-growing inequality, “authoritarian leaders” who stoke this discontent; rapid technology changes with little-understood consequences, “and the long-standing evils of racism, classism, ableism, homophobia, and patriarchy.”

Making these problems worse is the unrelenting assault on facts and truth as well as the conduct of leaders who “openly disdain, demean, and deconstruct vital public institutions designed to serve us and our system of self-government” and the “disregard for what democratic government can do to promote equality, justice, and human dignity.”

But then Mr. Walker lowers the boom: Philanthropy, for all its achievements and good intentions, is part of the system in which this inequality germinates. And “philanthropy is by no means immune from the plague of inequality.”

The Role of Philanthropy

Walker notes that, recently, many thought leaders have presented important “critiques of philanthropy as an enterprise.” He lists three good examples who raise valid concerns: “Many have pointed to the ways philanthropy replicates the worst dynamics and inequalities of our broader system.” He notes that he doesn’t necessarily agree with each and every point of these books or others in a “growing chorus.” But we “ignore them at our own peril.”

Winners Take All: Anand Giridharadas. It “rightly skewers that segment of philanthropic giving that boasts of saving the world while fundamentally strengthening the economic and social structures that separate the haves and have-nots.”
Decolonizing Wealth: Edgar Villanueva. The book explains how “colonialism and oppression” contributed to our current imbalanced financial system and how “structural racism continues to shape philanthropy today.”
Just Giving: Robert Reich. While expressing admiration for the past of philanthropy and its potential, he discusses the “undemocratic nature of wealth and philanthropy” and calls for more transparency and accountability “in service of democratic values.”

Going Forward

The current crises did not develop overnight, and will not be solved quickly either. But, right now, “philanthropists and funders of every stripe must invest in the architects and architecture of progress—the individuals, ideas, and institutions that make change happen.”

A first step – “placing meaningful resources close to the people” – is one that the Ford Foundation itself is championing by important changes in its own grantmaking. Philanthropists must “trust those we fund, and fund them adequately to do what they believe is best, not what we think is best, including “entrusting organizations with long-term general support funding and project grants that provide adequate overhead.”

A second step is committing to “good government” notwithstanding differences of opinion among philanthropists about the size or function of government. “Good works require good government.”

A third step is “reckoning with privilege.” Darren Walker wants funders to examine their own “unconscious biases” and more clearly understand “how others experience the institutions of philanthropy – how remote we can be, how insular, how difficult to navigate.” He wants philanthropists to recognize that “the communities most proximate to the problems possess unique insights into the solutions.” That means committing to diversity – especially at the top of organizations.

Conclusion

The president of the Ford Foundation concludes his call to action with optimism and hope. “The good news is that I see a growing movement to appreciate the criticisms of philanthropy, and to face them head-on,” to move from “generosity to justice.” To him, this is “the best response to philanthropy’s deepest flaws and inherent contradictions.

The post Ford Foundation Chief: Transform Philanthropy Now appeared first on For Purpose Law Group.

More than a few nonprofit organizations operate on the assumption that they are relatively safe from fraud or theft not just by outsiders but from trusted insiders as well. As statistics show each year, this belief is incorrect and dangerous.

In more than a handful of previous blog posts, we’ve highlighted this persistent danger. See for example: Charity Embezzlement: Thwart It With Good Controls; Nonprofits Beware: Pfishing Trips; and Charity Fraud: Secret Billing Schemes. Nonprofit groups must learn about fraud prevention with special emphasis in the ways that criminals target the charitable sector.

Credit Card Vulnerabilities

A particular area of risk that persists is the use of credit cards. Despite the introduction several years ago of the chip technology now featured on most cards, there are still vulnerabilities.

Chip-based cards and the accompanying card readers are, indeed, safer than before. They are “dynamic” and data is changed with each use. The earlier magnetic-strip cards that remain in a static stage are more prone to copying.

According to credit-card giant Visa, the introduction of the newer card technology has resulted in a 70 percent decrease in fraud, but the effect is restricted to in-person payments. The benefit of the chip technology evaporates in the case of online credit card transactions.

The popularity of online financial transactions is accelerating; more consumers are making this choice. This trend, as well as an alarming number of security breaches in all sectors has created a significant jump in the prevalence of online credit card fraud.

In recent years, partly as a result of demand from savvy donors, more and more organizations have created and encouraged online, electronic, charitable giving opportunities.

There are two particular vulnerabilities in connection with this new donation route. First, a credit card hacker will use stolen information to make a donation on your website for various reasons including “card testing.” A “bot” may spam your donation page with transactions “every few seconds, looking for a credit card hit.” The numbers being tested may be just “random number combinations and sequences” instead of numbers from stolen credit cards. The card-testing method is used so that the criminals can search for information “pending the acceptance of the card payment. If the credit card payment is accepted,” it is tagged as a valid card number that can be sold to others for use in unrelated fraud schemes.

Second, a criminal can engage in “refund fraud,” where a significant online contribution is made with a stolen credit card, followed by a call to the organization that the donation was a mistake. For instance, the caller says that he or she “accidentally donated $2,000” when the intent was to give just $200. Then a request is made to refund the erroneous amount to a different card.

Safeguards Against Credit Card Fraud

There are important precautions that can be put in place to minimize a nonprofit organization’s risk of online fraud, including adopting systems safeguards and careful monitoring practices.

System Controls

Adopting practices that permit the organization to uncover and prevent fraud can dramatically minimize risk. There are payment systems available that monitor and decline transactions that are suspicious; one example is the Advanced Fraud Detection Suite from Authorize.net.

In addition, the organization should ask for the security code for any credit card offered. Known as “CVV,” it is the familiar 3- or 4-digit number on the front or back of most credit cards. “This helps to show that the cardholder is actually physically possessing the card at that moment.”

Another important safeguard is to use an “address verification system” known as AVS. It verifies that the person using the credit card is aware of the correct address. But legitimate donors using their own cards can make mistakes and AVS doesn’t work well for addresses outside of the United States. An extra level of protection is to have “error messaging specific to AVS issues” on the organization’s donation page.

Another important practice called “rate throttling” is to “limit the number of transactions” that can be sent by a single computer in a designated period of time; for instance, in an hour. This minimizes card testing in which bots may submit many contributions from the same computer in rapid succession. Similarly, use “hold transactions for review,” especially for any that exceed the maximum number of allowable donations; include an on-screen message to that effect. That way the card testers won’t know if the card being tested is accepted or declined, and should discourage them from targeting your organization further.

Monitoring Vigilance

As a complementary safeguard to the systems controls, to the extent feasible, monitor your organization’s credit-card processing. This includes setting up email alerts about suspicious transactions and designating a staff member to follow-up. “A word of caution: make sure to respect the balance between vigilance and paranoia, as you do not want to frustrate your legitimate, innocent donors.”

Extra Step

For organizations that are plagued by relatively heavy card-testing attacks, “deploy reCaptcha as another safety measure” at least on an intermittent basis. But avoid the types of reCaptcha features that seriously annoy most people – like offering a hard-to-read code that is difficult to duplicate. You don’t want to have donors give up in frustration.

Conclusion

Nonprofits may be unaware of the types of threats that online credit card use may pose to them, particularly if they are a small group with limited personnel and budgetary resources. But the consequences of this pernicious type of fraud are significant enough that they should adopt adequate safeguards commensurate with the threat.

The post Tips to Protect Your Nonprofit from Credit Card Fraud appeared first on For Purpose Law Group.

The editors of The Nonprofit Times recently published a warning to charities around the nation: More than ever, state regulators are taking aim at certain accounting practices they assert are misleading and improper. In particular, they are focusing on two issues: (1) allocation of joint costs and (2) valuations of gifts in kind (GIK); that is, non-cash donations.

While – so far – the regulators’ positions on these accounting practices have not yet been reviewed by any court, organizations that engage in them are clearly in the cross-hairs of these enforcement agencies. “By taking the time to understand and properly apply these accounting principles, organizations can reduce their risk of being the target of regulatory scrutiny.”

In the past, charities have worried the most about a possible audit by the Internal Revenue Service. More recently, though, the enforcement power and focus have shifted to the state officials. There are several reasons for this change. First, since the early 2000s, state regulators have ramped up their enforcement interests and capabilities to run somewhat concurrently with federal regulators’ activities. Second, the IRS has suffered from severe budget cutbacks and staffing shortages, and otherwise has been hamstrung by Congressional negativity toward the agency.

States Aggressively Target Accounting Irregularities

Key states – especially California, New York, and Michigan – have brought high profile enforcement actions in recent years alleging that “as a result of an incorrect allocation of joint costs, the organization […under scrutiny…] has, in effect, made materially false statements in the financial documents they submit as part of their required state reporting.” California has also recently taken aim at “similar false statement allegations” related to “GIK valuations.”

In Charity Issues of Concern to CA Attorney General (10/24/17), we mentioned a July 2017 conference in Northern California, where Elizabeth Kim, the Supervising Deputy Attorney General, told nonprofit leaders and professional advisers about the primary areas of concern on the radar of that state’s officials. In particular, she pointed to (1) Gifts in Kind (misleading donors in ways including over-valuing gifts, or acting only as a pass-through); and (2) Joint Cost Allocation (misleading donors by artificially reducing or mischaracterizing fundraising expenses).

We’ve covered one such enforcement sweep in 2018 by the California Attorney General, based on allegations of improper gift-in-kind valuations that seeped into misleading fundraising solicitations, reaching prospective donors around the nation including in California. AG Xavier Becerra argued that California has jurisdiction in cases of fraudulent interstate solicitations.

Gifts-in-Kind

In CA Issues Cease-and-Desist Orders to Out-of-State Charities, we tackled explaining why certain gifts in kind raise the hackles of regulators, noting that the Attorney General’s plain-English Complaint against the four charities in question did an admirable job of it.

The government explained that the four cases [joined in the action] are similar – though, otherwise, apparently unrelated, in that they involve a consistent fact pattern. Each is part of a chain of distribution of soon-to-be-expired pharmaceutical drugs, donated by the drugmakers, to the developing world. The gist of the AG’s claims is that the targeted organizations (1) used an accounting ploy that is, itself, wrongful because it’s misleading; and (2) touted these inflated figures to support fundraising appeals in California for additional (and, in at least one case, nonexistent) projects.

The Nonprofit Times editors suggest that “leaders at organizations who want to accept and use GIK donations” learn about and understand the rules; that is, the “use of donated goods in compliance with an organization’s mission, valuation of the donated goods, recognition of revenue and expenses and financial statement disclosures.” In particular, donations “should be properly valued at fair value as of the date of the donation.”

Joint Cost Allocations

The danger in improper joint cost allocations is that “organizations are unfairly stating their expense ratios in their charitable solicitation materials for the purpose of skewing the percentage of program versus fundraising expenses.”

An example is the “popular use of the program vs. fundraising/administration [figures] included in many direct mail solicitations.” The state regulators claim that “these ratios can misrepresent the size or complexity of a charity’s business operations.” This is viewed as a deceptive fund-raising practice that violates state charitable solicitation laws.

Generally, under the joint cost allocation rules, organizations may allocate expenses associated with a fundraising activity as a program expense if there is a “call to action” within the fundraising campaign. For instance, “an antismoking organization… might send a mailing that asks for a donation, but also includes various tips on how to quit smoking.”

There are three frequent mistakes:

“Allocating when the solicitation has no call to action”; merely describing the organization, its mission, and programs is not a call to action sufficient to justify it.
“Over allocating” in inappropriate circumstances.
Audience selection “based on ability or likelihood to contribute, rather than based on the audience’s reasonable potential to use the call to action or ability to carry out the call to action.”

Conclusion

A caveat: There is some disagreement among experts about the correctness of the expansive position taken by the attorneys general on recent gift-in-kind cases. “One of the challenges for organizations is that the regulators’ interpretation of GAAP does not, in all cases, align with published guidance interpreting GAAP….”

The post Accounting Irregularities: Regulators Zooming In appeared first on For Purpose Law Group.

Few Americans would have guessed when they woke up on Tuesday, March 12, 2019, that the lead news story that day would be the FBI hauling Aunt Becky off in handcuffs. What next? Are we soon to learn that police have discovered a dead body in the backyard of the home once owned by Mr. Rogers?

Information on the biggest college admissions scam in history unfolded rapidly that day. For the philanthropy community, a particularly unsettling feature is that the ringleader set up a sham 501(c)(3) charity through which to receive the bribe money and to pay it out to the people facilitating the cheating and other fraudulent acts. To add insult to injury, the use of the phony charity added an extra element of “value” for the parent-participants. Their payments bought them not only the desired college admissions but a tax deduction to boot! (Of course, no such tax deduction is permitted under these circumstances.)

IRS in Hot Seat on Admissions Scandal

It took no time at all before armchair critics wondered why the Internal Revenue Service hadn’t earlier discovered this fraudulent scheme. (Neither did the FBI uncover the criminal enterprise as a result of its own sleuthing. It had serendipitous help from a tipster who offered the information in exchange for a better plea deal in his securities-fraud case.)

Could – or should – the tax agency have suspected and probed the Worldwide Keys Foundation? Experts in the nonprofit field quickly posted some thoughts on this issue. A consensus quickly emerged that the IRS should not be reproached; the agency has been under relentless budgetary attack by Congress for most of this decade. It no longer has the resources – above all, personnel – to maintain a rigorous (or even minimally adequate) audit or oversight capacity.

Paul Streckfus, a former IRS attorney and editor of the EO Tax Journal, believes that much of any possible blame here is at Congress’s doorstep for intentionally and repeatedly slashing the Internal Revenue Service’s charity oversight capabilities.

The question remains: if the agency had been sufficiently funded and staffed, could it have sniffed out this fraudulent scheme? Were there easily discoverable irregularities? Were there warning signs that should have triggered a serious investigation?

Marcus Owens, a former head of the exempt organizations division, says: “It goes to show the need for a much more sophisticated and real audit program…. And even so, they still would have trouble catching them.”

“Tax practitioners caution that even increased audit coverage by the IRS wouldn’t have caught the case, as it involves vast, outright fraud.”

In Could a More Robust IRS Have Nipped the Varsity Blues Scandal in the Bud?, Notre Dame law professor Lloyd H. Mayer responds to his own question: “Maybe, although we will never know for sure” noting that “there were certainly enough yellow flags in the IRS filings [of the Foundation] to signal something was wrong.” But, he adds, the IRS is so underfunded that it doesn’t have the “capacity to review those filings carefully” or “to pursue those flags” in most cases – “which the organizers of this scheme seemed to have recognized.”

The National Council of Nonprofits’ Rick Cohen agrees. “It’s gotten to the point where only ‘screaming red flags’ are sufficient to draw the attention of the IRS” because of the massive underfunding of the section of the IRS that regulates nonprofits.

Admissions Scandal Nonprofit’s Yellow Flags

Professor Mayer’s “yellow flags” for Worldwide Keys Foundation gleaned from publicly available information returns include, for example:

Zero fundraising expenses, although it has public charity status, and reports eventual contributions of millions of dollars annually
Dramatic jumps in revenue, year after year
No paid employees or volunteers
Payments of huge, steadily escalating amounts to a consultant (who turned out to be the head tennis coach at Georgetown University)
Only three directors; none were “independent”; that is, “all had financial ties to the foundation or related entities”
Disclosure of ties to a related for-profit
Odd patterns of grants and incomplete (or yellow-flag-raising) details
No charitable organization recipients of grants

Why Did They Use a Charity?

Some observers have wondered why the scheme ringleader used a charity at all in this criminal enterprise. Wouldn’t the special rules and restrictions, and the government oversight of a 501(c)(3) public charity, be a reason not to go this route?

Professor Mayer posits three reasons:

“Using a charity may have caused fewer questions to arise when people not involved in the scheme happened to see the checks or electronic transfers.”
It offered a charitable deduction to the parents, or the option (according to information from the FBI affidavit) to pay from family foundations, or a donor-advised fund.
The “organizers and maybe some of the parents knew that the IRS is mostly asleep at the switch.” The gutting of the IRS budget has been well documented in the news.

Roger Colinvaux, a nonprofit tax law professor at Catholic University of America, agrees with the third point. The (scam) Foundation “appeared to be operating as though it had no fear of getting audited or getting caught.”

Conclusion

“Nonprofit tax practitioners and former IRS officials say the agency needs to have more bite behind its bark going forward: a low rate of auditing nonprofits won’t spur the necessary compliance with tax laws.”

This case highlights why precisely why underfunding the tax agency is so shortsighted and dangerous.

The post Nonprofits and the College Admissions Scandal appeared first on For Purpose Law Group.

Article I, Section 2 mandates that there be a census taken every ten years to count everyone in each state. This is generally a low-drama process, but it’s important because this count determines how the 435 districts of the House of Representatives are proportioned and how hundreds of billions of dollars of federal funds are allocated.

The 2020 Census, though, is taking a high-drama turn and “shaping up to be a mess of historic proportions.”

There are two reasons. First, it will be the initial “digital” census despite evidence that access to the internet is sparse in some geographic locations and among lower-income groups. Second, the substance of the census has been “weaponized” with an unprecedented demand by the Trump Administration that it include a mandatory question about citizenship status. Uncontroverted data establishes that asking about citizenship will materially depress the final count, resulting in fewer Congressional seats (in states with high immigrant populations) and a lesser share of billions of dollars. That issue is currently awaiting decision in the United States Supreme Court, and most tea-leaf readers who listened to the oral argument on April 23, 2019, believe a 5-4 conservative majority will permit the mandatory citizenship question to remain on the 2020 census form.

The Census Drama in the Courts

Historically, the census has not included a citizenship question. The Administration decided, well after the usual deadline for creation of the official census form, that it wanted this item included. Census Bureau professionals objected “because the information could be obtained other ways and adding the unnecessary question would decrease the census count, cost taxpayers more, and corrupt the data.”

When Commerce Secretary Wilbur Ross went ahead and belatedly added the citizenship matter to the form, legal challenges were filed. “Following trials in three separate courts, federal judges in all the cases, most recently in Maryland [on April 5th], blocked the question, holding that Secretary Ross violated administrative and/or constitutional law.” The Administration asked that the U.S. Supreme Court take up the dispute on an expedited basis. The decision is expected by or before June.

Among the many amicus briefs filed in this case opposing a mandatory citizenship inquiry was one by the National Council of Nonprofits, joined by the National Human Services Assembly and YWCA USA, explaining “how the ‘undercount resulting from the citizenship question will hurt … charitable nonprofits throughout the country in significant ways. Chief among those are a loss of funding for their work, a loss of data and effectiveness, and a loss of faith in democracy and government’.”

Legislative Action on the Census

There is activity as well in the legislative branch in response to the Administration’s insistence on inclusion of the citizenship question in the 2020 Census. The House Committee on Oversight and Reform held a hearing in March 2019 “to learn from the Commerce Secretary why he added the citizenship question, partly because evidence uncovered during the trials contradicted what Secretary Ross had testified to Congress in 2018.” On April 2, 2019, the Oversight Committee issued a subpoena to Secretary Ross to gain “more fulsome answers and documents.”

States, Cities Gear Up to Help

States around the nation have been so concerned about problems in the 2020 Census that many have taken action including increasing budget appropriations to promote a full and complete count within their jurisdictions. Cities, also, “are stepping into the breach to explain the importance of the census to their communities and to provide secure sites for filling it out.” They are working through mostly voluntary Complete Count Committees and teaming up with libraries, local nonprofits, and county governments.

Conclusion

“The stakes are high in communities across the country: for every person who is not counted, states stand to lose between $533 to $2,309 annually in federal funds.” And “…the Court’s decision could have a profound impact on nonprofits for the next decade.”

The time to mobilize – whether or not the citizenship question remains on the census form – is now.

The post Why the Census is a Big Deal for Nonprofits appeared first on For Purpose Law Group.

We’re continually impressed by the scope and quality of online, free-of-charge, resources available to the philanthropic community on topics ranging from governance to fundraising rules. As we periodically discover these gems of knowledge, we like to pass them on to you.

For instance, last month we highlighted the Internal Revenue Service’s own web-based Exempt Organizations, The IRS, and YouTube (April 19, 2019) for links to helpful information about charitable organizations right from the horse’s mouth. A few months earlier, we told you about a collaborative presentation by the legal staff of four major U.S. foundations in Foundation Law: Free Online Learning (January 10, 2019).

Our newest discovery is a series by Independent Sector, announced last summer to highlight – one a week – each of its 33 “Principles of Good Governance and Ethical Practice.” While we’re a bit late to the rodeo – (by late April, the series had already reached Principle 28) – this information is important enough to mention and recommend right now.

Good Governance and Ethical Practices

Independent Sector is a national membership organization created in 1980: a coalition of nonprofits, foundations, and corporate-giving programs to “advance the common good.” Among its many programs and initiatives is The Principles of Good Governance and Ethical Practice. These 33 Principles arose in large part from a big push by government lawmakers in the aftermath of the huge scandals in the early 2000s, most notably including Enron Corporation. Although that firm and other wrongdoers were multinational, for-profit corporations, the alarm bells were loud enough to spill over into concerns about the nonprofit sector.

Wheels were turning around the nation to rein in bad corporate behavior. Specifically, “[p]rompted by tales of fund-raising fraud, conflicts of interest and bloated overhead, a number of state and federal legislators …[began]… working to create new rules for nonprofit groups.”

For instance, in 2004, California enacted the Nonprofit Integrity Act, overhauling duties of charitable directors and trustees as well as oversight standards; other states followed.

There was considerable activity in Congress with the goal of adopting federal legislation. “At the request of Senator Grassley […(R-IA)…] and Senator Max Baucus, Democrat of Montana, a further discussion and review by a national panel of experts [was] convened by Independent Sector,… [to be] followed by a report to Congress.”

Independent Sector created the Panel of the Nonprofit Sector in 2004, in response to this Congressional challenge for the “… charitable community to propose reforms to prove we are actually good actors.” IS explains on its website that “we came together as a sector to tell them, we got this. We told them we would check ourselves.”

This Panel “gave several reform recommendations, some that became law and others that were turned into the Principles for Good Governance and Ethical Practice” in 2004. These Principles were updated in 2015 to reflect new trends and issues in the charitable sector.

The 33 Principles are grouped in four categories: Legal Compliance and Public Disclosure, Effective Governance, Strong Financial Oversight, and Responsible Fundraising. The goal is to facilitate knowledge and application of these concepts as well as to highlight excellent examples.

Keeping It Ethical Series

In July 2018, Independent Sector launched its “Keeping It Ethical” Series to give these Principles a renewed public focus. About once a week, on its blog, the organization is showcasing the Principles in order, from 1 through 33, with explanations and links to additional useful resources.

For instance, Principle 23 is Loans to Directors, Officers, and Trustees. The corresponding blog post dated March 15, 2019 is “Nope, You Can’t Loan That.” The link to the Principle includes great information, but the blog post adds even more.

Conclusion

This series is well worth a good look as is the Principles Resource Center on the Independent Sector website, with a downloadable guide and more than 300 other digital resources and tools.

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