The road to the presidential election this year has been a bumpy one—that’s certainly nothing new. However, this year, nonprofit organizations and the rules that define them have been in the spotlight in an unprecedented way. As practitioners in this space whose job is to guide our clients through both the benefits and responsibilities of being tax-exempt entities, the Leaffer Law Group would like to speak to several of the prominent nonprofit issues that have been in the news due to the election. Our goal is to use the headlines as a teaching tool to inform our clients and the nonprofit sector on these important topics, and bring some additional clarity from a legal and tax adviser’s point of view.
This post will focus on charitable solicitations registration, which was in the headlines recently when the Attorney General of New York prohibited the Donald J. Trump Foundation from making charitable solicitations in the state of New York. In the remaining weeks leading up to the election and beyond, we’ll continue to address highly publicized topics such as self-dealing/private inurement, political activity and the issues surrounding accepting donations from those who may be seeking benefits from insiders in exchange for those donations.
Pulled From the Headlines Part I – Charitable Solicitations Registration
As a starting point, approximately 40 states regulate charitable solicitations within their state. Each state’s laws differ in terms of what constitutes a charitable solicitation, when registration is required, whether an exemption applies, ongoing reporting and compliance, and penalties for violation.
The legal basis for charitable solicitations regulation lies in consumer protection law. These laws are designed to protect both donors and the charitable sector from bad actors who would take undue advantage of those seeking to do good. Therefore, failure to comply with the laws is a serious matter that can result in serious consequences ranging from imposition of large fines, to orders to cease fundraising in the state, to very negative publicity.
Charitable solicitation is defined in many states, including Colorado, as a direct or indirect request for a contribution on the basis or understanding that the contribution will be used for a charitable organization or for a charitable purpose. The term “charitable” is broadly defined, and is not limited to contributions for which a donor may claim a charitable deduction for tax purposes. It’s also not necessary for the ultimate beneficiary to be a charity. For example, a company that offers customers the opportunity to buy carbon offsets with each purchase may be considered conducting a charitable solicitation in some states.
The term “solicitation” is also broadly defined. It is not necessary for a donation to actually be given in response to the solicitation, only that the “ask” is made. A charitable solicitation may be made in writing, orally or in electronic form. In the case of a “donate now” button on a website, some states view the button itself as a charitable solicitation that triggers the need to register with the state (though that interpretation is susceptible to legal challenge on the basis of insufficient jurisdiction over the organization). Other states, namely those that have adopted the “Charleston Principles,” require something more, such as a follow-up email, phone call, mailed letter or other directed contact with a resident of a state.
It cannot be stressed enough that under charitable solicitations laws, organizations typically are required to register BEFORE they begin to solicit charitable donations from a state’s residents, unless they fall within an exemption. Like the registration requirements themselves, even the exemptions differ from state to state, including whether there is a formal process for applying for exemption. In many cases, the state laws do not stop with the registration process, which can be quite involved. Annual renewal of the registration is typically required, as well as filing financial statements or other disclosures, in many cases depending on the size of the organization.
Efforts to streamline and make charitable solicitations registration uniform across the country have not been successful to this point. As such, it is no small task for a charitable organization that casts a wide fundraising net to comply with every state’s requirements. The result is that organizations often focus on compliance where they are incorporated, have business offices or conduct active fundraising, rather than undertaking registration in all 40 states. They do so at some risk, because even a small amount of solicitations in another state can trigger a registration requirement, and the exemptions from registration are not uniform or guaranteed. Organizations that increase or diversify their fundraising may also trigger registration, whereas they may have been exempt from registration in the past.
Case in point: the Donald J. Trump Foundation. According to news reports, initially, the Trump family was the primary (if not sole) donor of the Foundation. At some point, the Foundation started receiving significant donations from other individuals and businesses. While every charitable organization or foundation should continuously monitor their obligations under the charitable solicitations laws, they should take special care when they make a change in their fundraising approach. It appears the Foundation failed to do so … and they’re not alone.
Not to excuse failure to register in any way, the problem is common enough that, for those of us in the nonprofit sector, it was not a major surprise to learn that the New York Attorney General on September 30, 2016, sent the Donald J. Trump Foundation a notice of violation letter. In the letter, the Attorney General immediately prohibited the Foundation from making any charitable solicitation in the state of New York ostensibly for failing to register with the state. The Attorney General’s office gave the Foundation just 15 days to submit all the required paperwork for registering to make charitable solicitations with the state. Further, all financial reports that should have been filed with the state since the Foundation was created in 1987 must also be submitted within that same 15 day window. In a nod to the consumer protection origins of charitable solicitations laws, the letter states that any failure to comply with these demands will be a “continuing fraud upon the people of the state of New York.”
Though the actions of the New York Attorney General and the wording in his letter may appear harsh (and has been alleged as politically motivated by the Foundation), for regulators charged with ensuring compliance with the charitable solicitations laws, these actions are more likely to be viewed as standard operating procedure for dealing with violations. After all, their job is to protect the public trust in the charitable sector. At least in Colorado, we find that our regulators work first and foremost to bring charitable organizations and foundations into compliance.
It remains to be seen what further steps, if any, the New York Attorney General will take, once he completes his investigation and/or the Foundation comes into compliance, and whether fines will be assessed or other consequences imposed. But for now, important lessons can be learned from these headlines: charitable solicitations laws exist for a reason, and failure to comply can snag well-meaning but uninformed organizations and foundations. While charitable solicitations registration may seem burdensome, non-compliance can be costly. Perhaps the worst part, as the Donald J. Trump Foundation is learning, is the serious reputational harm that can result.
So what does all of this mean for the many charitable organizations not in the spotlight? We encourage all charitable organizations (in the broadest sense) to take this opportunity to: 1) evaluate their current fundraising practices and determine whether they are currently in compliance with all applicable state charitable solicitations laws; and 2) periodically re-evaluate their compliance, particularly when they seek to broaden, increase or diversify their fundraising activities.
For information about charitable solicitations registration in Colorado see: Colorado Charitable Solicitations Act Instructions.
For the Charleston Principles regarding internet solicitations see: The Charleston Principles: Guidelines on Charitable Solicitations Using the Internet.
For more information about the Donald J. Trump Foundation investigation see: The Washington Post Politics Section.