Vol. IV, No. 5
September - October 1996
New Hampshire Compels Speech; Micromanages
Nonprofits
Under recent statutory amendments (RSA
7:19, II), the State of New Hampshire requires nonprofits -
which engage in transactions with its directors, officers or
trustees involving more than $5,000 - to first publish
notice of the transaction in a "newspaper of general
circulation." This compelled speech requirement is the first
of its kind imposed by a state and more onerous than the
burden placed on for-profit businesses. The Free Speech
Coalition believes such compelled speech violates the First
Amendment.
Additionally, New Hampshire's revised
statute also contains the following new requirements on
nonprofits:
Prohibits loans by a charity to directors,
officers, or trustees.
Prohibits lending money or property to a board
member.
Prohibits the sell or lease of land to or from a
board member without court approval.
Prohibits board members from doing "unfair" business
with the nonprofit.
Requires board adoption of a government-approved
"conflict of interest" statement.
Mandates that transactions of more than $500 per year
with a director, officer or trustee be approved by a
two-thirds vote of the board of directors. These rules apply
not only to board members, but also to immediate family
members of board members.
Moreover, the state is attempting to
impose these requirements on all nonprofits that mail into
New Hampshire - not just nonprofits incorporated in New
Hampshire - even if their only contact with the state is by
mailing to New Hampshire residents. FSC is sending a letter
to New Hampshire's Attorney General outlining its
constitutional objections to the statute.
Hawaii Ends Nonprofit Registration
Hawaii has moved to the forefront in
regulatory reform by repealing all code sections governing
the registration of nonprofits. Sections 467B-2, 467B-11 and
467B-14 of the Hawaii Code were repealed effective July 1,
1996. These sections had required every nonprofit operating
in Hawaii to file extensive information with the state.
Under the statute as revised, nonprofits still are
prohibited from using unscrupulous methods to raise funds,
but the burden of filing time-consuming and redundant
paperwork is no longer imposed. FSC recently wrote Hawaii
Governor Benjamin J. Cayetano, noting that, "Hawaii now
leads the way in removing restrictions on the free exercise
of First Amendment rights by nonprofit
organizations."
FSC has reported widely on Hawaii's
Charitable Solicitation Act. The February 1995 edition of
FREE SPEECH detailed Hawaii's requirement that nonprofit
organizations must have the donor's permission, in advance,
to be solicited. To continue the reform in Hawaii, this
"positive-option" statute should be the next Hawaiian law to
be scrapped.
Delawares Harsh New Rules
While some states see the value of
repealing costly, ambiguous and unnecessary regulation,
Delaware is going in the opposite direction. The Delaware
Charitable Solicitation Act of 1996 (S.368) mandates, among
other things, that persons soliciting donations for
charities must give their name before asking for a donation.
Additionally, solicitors must also provide the name of the
charity, the purpose of the donation, and the
amount/percentage of the contribution that will be used for
programs and fundraising (or a "good faith" effort to make
such a calculation).
Violating any of these rules is
considered "deception, fraud, false pretense, false promise,
misrepresentation, or the concealment, suppression, or
omission in connection with a charitable solicitation,
whether or not any person has in fact been misled, deceived
or damaged thereby" (emphasis added).
The governor signed the bill on July 25,
1996, and the law became effective September 24, 1996.
Paradoxically, pushing for this new burden on nonprofits was
the Delaware Association of Nonprofit Organizations.
Double Sanctions Threaten Nonprofits Under TBOR2
The Taxpayer Bill of Rights 2 (TBOR2),
enacted last summer, permits the IRS to impose "excess
benefits taxes" on nonprofits in lieu of or in addition to
revoking their tax-exempt status. Such taxes, placed on
"disqualified persons," can be subject to a tax of up to a
225 per cent of the amount by which the benefit exceeds fair
market value. The exact definition and calculation of "fair
market value" is not defined. Nonprofits should consult
their attorneys and tax advisers to assure that they are in
compliance with the new act. CCH Legal Publishers reported
that "TBOR2 will clearly increase the need for adequate,
contemporaneous documentation of fair market value from
independent sources."
In January 1996, FSC wrote to Senator
William Roth (chairman of the Senate Finance Committee) and
Congressman Bill Archer (chairman of the House Ways and
Means Committee) advising them of the danger, and excessive
burden, that double sanctions could have on
nonprofits.
Unfortunately, only FSC vigorously
alerted Congress to this danger. One nonprofit recently
wrote that "the IRS is expected to act swiftly and with
force with this new weapon that it has been seeking for
years." Now, with the TBOR2 becoming law, double sanctions
are a new weapon in the IRS's arsenal.
Additional burdens in TBOR2 for
nonprofits include:
Requirement to provide copies of Form 990 to any
individual who asks (previously nonprofits only had to allow
for inspection).
Expanded reporting requirements on Form 990 of taxes
paid related to excess expenditures to influence
legislation, disqualified lobbying expenditures, political
expenditures and excess benefit transactions and other
transactions related to disqualified persons.
There is one piece of good news from
TBOR2. Volunteer board members now are exempt from
tax-related penalties. This section, known as the
congressional exemption, frees board members who receive no
financial remuneration from the prospect of liability for
tax penalties incurred by the nonprofit.
Due to the complexity of the new law,
various organizations have conducted information sessions on
compliance. Nonprofits unsure as to how to comply with the
new law can contact FSC at (703) 356-6912 for references to
technical information. FSC will be draft and file comments
with the IRS in November regarding the anticipated
regulations.
IRS Charged With Political Harassment
An October 23, 1996 op-ed piece in the
Wall Street Journal, written by the Western Journalism
Center's founder and executive director, Joseph Farah,
charges the IRS with harassment, saying that IRS officials
questioned the organization on its choice of investigative
journalism projects, selection of individual reporters,
selection criteria for articles, as well as individuals
selected for review committees. The Center says that it has
been singled out because of its critical expose of
government scandals.
FSC obtained copies of IRS Information
Document Request forms to the WJC requiring the nonprofit to
provide "copies of all correspondence files for 1995, copies
of all documents related to the selection of an
investigative reporter and how the topic was selected." As
with most nonprofits, WJC believes it is improper for the
government to require it to provide copies of every letter
it sent or received during the year.
WJC also says a government official
contacted at least one contributor to the nonprofit and told
him his company's government business would be in jeopardy
if he continued to support the nonprofit. More information
on the Center and its fight with the IRS can be viewed on
WJC's site, http://www.e-truth.com.
North Carolina: Nonprofits Responsible for
Contractors Actions
Changes to North Carolina's Charitable
Trusts Statutes apparently seem to allow that state to
deregister a nonprofit if their fundraising counsel is
unregistered with the state government. Article 3, Section
131F-15(a) of that code states that "a person shall not act
as a fundraising consultant in this State unless that person
has obtained a license from the Department." According to
Article 2, Section 131F-6(a)(13), nonprofits are required to
provide "[t]he names, street address, and telephone
numbers of any solicitor, fund-raising consultant...together
with a statement setting forth the specific terms of the
arrangement for salaries, bonuses, commission, expenses, or
other compensation."
Once state officials match lists of
nonprofits with registered fundraising counsel, some
nonprofits may be in for a surprise. A nonprofit's
registration in North Carolina could be jeopardized if even
one of its multiple fundraising counsel is not registered.
Although a fundraising counsel may only advise a nonprofit,
and their name never appears anywhere on a mail sent into
North Carolina, state law still apparently requires their
registration. A nonprofit could have their own license to
solicit contributions revoked if one of their counsel did
not register with North Carolina officials.
This "back-door" potential punishment for
nonprofits is outrageous. Nonprofits cannot and should not
be held responsible for the activities of their consultants.
Imagine if the same standard was applied to a nonprofits'
lawyers, accountants, plumbers, electricians, etc.
FSC Urges End to Oklahoma Bottleneck
The State of Oklahoma continues to
ignore applications for charitable solicitation licenses
(except to deposit the application fees). The Attorney
General's office says the backlog is now hundreds of
applications, and is growing daily. Current state law
criminalizes charitable solicitation without a license, with
penalties ranging from loss of tax-exempt status to a $1,000
fine and two years in prison, making it a felony. The
solution to Oklahoma's problem is clear: end this useless
and confiscatory registration requirement.
The lawyer retained by the Free Speech
Coalition to help on this project, former Oklahoma Attorney
General Susan Loving, recently met with an Assistant
Attorney General in Oklahoma City and explained FSC's
solution: focus on prosecuting fraud, rather than
investigating and registering every nonprofit that mails
into Oklahoma.
Even if the requirement for out-of-state
nonprofits is not dropped completely, current law allows for
the Attorney General's office to enter into reciprocal
agreements with other states to accept copies of forms filed
by nonprofits in those states (18 O.S. Supp. 1995, Section
552.13). Oklahoma has the opportunity administratively to
drop its archaic registration requirements for nonprofits,
allowing nonprofits to spend more of their contributions on
programs and less on meaningless (and expensive)
registration.
The Free Speech Coalition, Inc. is a
nonpartisan, nonprofit 501(c)(4) organization which
educates, lobbies, and litigates to defend the rights of
advocacy organizations and their members. FSC needs your
support to continue its fight to protect the rights of
citizens to associate together and exercise their First
Amendment right to petition their government for redress of
their grievances. Contributions to the Free Speech
Coalition, Inc. are not tax-deductible.
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