Dear Nonprofiteer,
I’m on the board of two smallish non-profit arts organizations, and a regular financial supporter of several others. I’ve noticed a trend in fundraising appeals- in letters that go out to previous funders, the dollar amount they contributed in previous years is named, with a request for a specific increase in the current campaign. (“Thank you for your generous contribution of $100 in 2011. Would you consider a gift of $125 in 2012?”)
Signed,
Possibly Pissy, But Really Very Generous At Heart
Dear Nonprofiteer, Who are they to tell me what to give?
February 6, 2012Dear Nonprofiteer, Does an alumni association chapter have to file tax returns?
January 5, 2012Dear Nonprofiteer,
I am the president of my local alumni chapter for a large university located in another state. The National Alumni Association is a 501(c)(3) organization with by-laws that state it can create various chapters around the country. When our local chapter was created, the founding president filed the paperwork for an EIN so we could open a checking account. That is all he did; we are not incorporated as a 501-anything. When he filled out the EIN paperwork, for “type of entity,” he clicked the “other” box and wrote “social club” in the blank. Our little chapter brings in less than $10,000 per year. We then funnel most of that back to the university’s scholarship fund.
My question is: are we supposed to be paying federal income taxes? State of Illinois income taxes?
My university is being remarkably unhelpful. They did definitively say that they strongly advise their chapters against incorporating as their own 501(c)(3).
I have done some research and seen that other universities structure their alumni associations so that the national association is a 501(c)(3) and the local chapters are 501(c)(4)s. The local chapters then file what is called a “IRS-990 postcard.” This seems a reasonable solution, but it also requires that my chapter incorporate as a 501(c)(4), and I am hesitant to do that without official word from my university. I have a fellow board member who is breathing down my neck, convinced we are breaking all kinds of laws. What should I do?
Signed, Clueless in Chicago
Dear Clueless:
The Nonprofiteer knows even less about tax law than you do, so she turned to her Association of Consultants to Nonprofits colleague Kathryn Vanden Berk, whose nonprofit law practice makes the Internal Revenue Code her constant companion. Kathryn characterized your question as “easy but in multiple parts,” and her answer appears below. Many thanks to her for her guidance, and for demonstrating that the author of Good Counsel isn’t the only nonprofit lawyer the Nonprofiteer knows!
There are four ways to handle this. (1) ask the national association to take you on as a fiscal agent, (2) ask the national to file as a group exemption so that each chapter may get its exemption from the central organization of the group; (3) incorporate and go through the exemption application; and (4) do nothing.
Of these, the easiest is to be sponsored by the national (or any other already-existing) 501(c)(3). The exempt entity confers the local chapter with its exempt status automatically and no paperwork needs to be filed. However, the fiscal agent must report to the IRS on what happens within the local chapter.
The easiest for the locals, but harder for the national, is for the national to seek a group exemption. It can then manage each of the local chapters as subsidiaries. As above, the national is responsible for reporting to the IRS.
If the local decides to incorporate and seek its own exemption, it should identify its purpose as “educational and charitable”. Generally, a scholarship organization must file a Schedule H with its exemption application, but it appears that this local forwards its funds to the national, and the national makes the selection. In that case, it is not necessary for the local to go through the scholarship preparation.
An organization that identifies itself as a “social club” is exempt under 501(c)(6) of the Code. However, I would not suggest that in this case. The money collected is used for scholarships, and that is clearly a charitable purpose. Since the national was able to get a 501(c)(3) ruling, it would be foolish for the locals to seek a different, less valuable exemption. If the IRS balks at the (c)(3) classification, I would suggest that the national seek a group exemption.
Doing nothing is maybe not a crazy approach, but it risks exposure and the protections of the IRS Code and IL law are not available to the chapter leadership and members. The reason I say it’s not crazy is the small amount of $$ that flows through the organization. No one is going to come after them unless (and this is the big risk) something happens. Then I can predict that there will be a great deal of embarrassment and perhaps even personal liability.
Bottom line: if you have not filed for a tax exemption, you must file as if you are a for-profit business, using Form 1120. If you give your funds to the national at year’s end, then it is unlikely you will have to pay taxes. However, your members cannot take deductions for the gifts they make to the local, even if they go to the national’s scholarship fund. Same with Illinois: if the chapter is not tax exempt, then it is taxable and must file as such.
I should note that if you collect charitable funds in Illinois, you really need to be registered with the IL Attorney General, even if you are not exempt via the IRS. The AG’s office is very strict about this. You will have to pay a late filing penalty because you have been soliciting without being registered. You might be exempt if you can convince the AG that $$ was raised only from members, but they are not as flexible on this as they once were.
I don’t know why the university advises against incorporation. It’s a fairly inexpensive thing to do, and it gives liability protection to every member. It’s a small price to pay for the protection it gives. You need to have someone agree to be your Registered Agent, and to have his/her office or residence registered as the Registered Office. You need to file annual reports (in Illinois and most states) to stay in good standing. In Illinois, this costs $10.00 per year.
I don’t know why the (c)(3) and (c)(4) approach is used. You would want every part of the organization to be classified as 501(c)(3) so that all gifts, grants and contributions are tax exempt and deductible to the donor. I’d want to explore this further before acting.
So, Clueless, the answer is that no good deed goes unpunished. Having investigated the question, you’ve now unearthed a series of obligations, decisions and tasks which I’m sure you’d rather not have known about. You’re not about to go to jail but to protect yourselves it seems that getting your university to agree to serve as your fiscal agent, and then registering to raise funds in the state of Illinois, is the bare minimum you should do.
“So many of the people who need charity don’t seem to deserve it” . . .
November 8, 2011. . . wrote Andy Rooney in this long-ago essay. This makes as much sense to the Nonprofiteer as anything else Andy Rooney ever said, which is to say, not much. What does it mean to “deserve” charity, beyond needing it? As George Bernard Shaw’s Alfred Doolittle memorably explained in Pygmalion,
If theres anything going, and I put in for a bit of it, it’s always the same story: “Youre undeserving; so you cant have it.” But my needs is as great as the most deserving widow’s that ever got money out of six different charities in one week for the death of the same husband. I dont need less than a deserving man: I need more. I dont eat less hearty than him; and I drink a lot more. I want a bit of amusement, cause I’m a thinking man. I want cheerfulness and a song and a band when I feel low. Well, they charge me just the same for everything as they charge the deserving. What is middle class morality? Just an excuse for never giving me anything.
Philosopher Matt Zwolinski made the same point in somewhat more formal terms.
T]he mere fact that there is a valid moral distinction to be made does not entail that we want our public policies to make it. It is, after all, difficult to discern between the deserving and the undeserving – maybe especially for governments, but for private charities too.
And Jewish folklore provides yet another version. The story is told of a rabbi who gave a beggar $100 and then faced the reproaches of his wife, who’d seen the beggar’s wife wearing fur. “He told me he needed it, and I had it, so I gave it to him,” replied the rabbi. “What he does with it after is none of my concern.” The point is that generosity is the process of separating yourself from your money, not the process of evaluating someone else’s virtues.
Does the Nonprofiteer tend to give her money to causes she judges worthwhile (and therefore deserving) and to agencies she believes are efficient (and therefore deserving)? Of course. But does she worry about whether the UN Population Fund is providing assistance only to women who became pregnant by an angel, or whether the ACLU vindicates the rights only of upright church-goers? Of course not. People who need help, deserve help. End of conversation.
The Joyce Foundation, the Independent Sector and the facts
November 2, 2011Ellen Alberding’s interview with the Chicago Tribune in advance of the Independent Sector‘s meeting in Chicago earlier this week pressed nearly every one of the Nonprofiteer’s buttons. Ms. Alberding, head of the Joyce Foundation, described the Foundation’s approach to what even she characterizes as a perfect storm of increased need and reduced resources in the nonprofit sector:
We do what any good business person would do when faced with reduced resources. We have become very focused on first maintaining support of our core grantees. Foundations are required to spend a minimum amount — 5 percent of our assets. On occasion, we will overspend that in order to keep our grantees whole.
In other words, business as usual. Most likely the Joyce Foundation’s governing documents prevent its Board from spending its assets down to zero, but there’s no reason why the Foundation shouldn’t use more than the statutory minimum 5% of its $800 million in assets to sustain the work it exists to support. Foundations are NOT businesses; they exist to give their money away, and only in some vague theoretical sense is an institution with $800 million facing constraints preventing it from giving away more than $40 million.
If Joyce gave only 6% instead, that would be another $8 million available to nonprofits in its areas of concern—a not-insubstantial 20% increase. What is stopping the Foundation from doing this, other than a misguided sense that preserving its capital is more important than doing its job?
And then the cherry on the sundae:
It’s the position of the Independent Sector that a cap [on charitable deductions] will reduce charitable contributions across the board and diminish support for nonprofit organizations. I believe it’s the administration’s view that the 28 percent cap might have some impact, but it wouldn’t have a dire impact. (But) I think we have to listen to the organizations themselves, who feel otherwise.
In other words, notwithstanding reality, the prejudices of self-interested parties will dictate the organization’s behavior. Their minds are made up—don’t confuse them with the facts. But as President of the organization, doesn’t it behoove Ms. Alberding to make sure her members don’t make their decisions based on fantasy?
Grrrr.
Dear Nonprofiteer, It’s all very well to say “call your donors,” but . . .
October 31, 2011Do you have any advice on getting phone numbers for donors not connected to board/staff/etc?
We’re finding it increasingly challenging, and people are understandably protective of personal info.
Signed, Waiting By The Phone
Dear Waiting:
I don’t, actually, though I’m a big user of WhitePages.com, where lots of people “protective of personal info” will find to their surprise that they’ve been listed. It’s worth checking, at least, because it’s much more comprehensive than the old phone book. You do risk having people say, “How did you get this number?” though relatively few will want to yell at you for saying thank you, and it doesn’t hurt to say, “Your number is published on WhitePages.com so we thought it was public information; if you’d rather it weren’t you might contact the site.”
Another thing: make sure your staff carefully examines the front of any check you receive (does anyone still send checks instead of credit card numbers?). It’s pretty standard to have phone numbers there, and that’s your first, last and only chance to copy down information you’ll need later.
Finally, modify your donor contribution card to ask for a phone number. Some people will refuse to complete the card, but many will fill it in just out of habit and then you’ve got them.
The power of thanks
October 28, 2011So here’s something the Nonprofiteer heard yesterday: if an agency’s response to every initial donation is to have a Board member pick up the phone and call the donor to thank him/her, the likelihood of a second donation increases by something like 80%.
What’s terrific about that (other than the obvious, donor retention) is that picking up the phone is often the biggest hurdle Board members need to clear to become effective fundraisers. So if they get used to picking up the phone in a completely non-threatening situation–when their only task is to say, “Hi, I’m a volunteer Board member of agency X and I just wanted to thank you for your gift–we really appreciate your support”–you’re halfway (well, maybe one-third-way) to getting them to pick up the phone and ask their friends to come to a benefit event or a fundraising lunch.
Sounds like the ultimate low-cost high-yield endeavor. Has anyone tried it? Is it as good as it sounds?
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