Philadelphia Nonprofit Law Blog

Raise the Volunteer Mileage Rate!

Legislation has been introduced by Pennsylvania congressmen to raise the volunteer mileage rate to 100% of the amount that for-profit businesses can deduct. The IRS recently raised the Standard Mileage Rate to 58.5 cents per mile (yes, those high gas prices motivated the IRS to act). But the deduction for charitable organizations remains a tiny 14 cents per mile. With gas prices at $4.00 a gallon, it can cost 50 cents or more to drive one mile.

The low mileage rate has a huge effect on nonprofits like Meals on Wheels, which depends on the cars of its volunteers.

Solutions have been proposed: The Charitable Mileage Deduction Equity Act, S.3421 was introduced by Senator Bob Casey (D-PA) and by Congressman Tod Platts (R-19-PA), H.R.2020, and would set the Volunteer Mileage Rate at the Business Mileage Rate of 58.5 cents per mile.

The Pennsylvania Association of Nonprofit Organizations (PANO) is leading a coalition to raise the rate with Senator Casey and Representative Platts. There are at least 8 additional bills that have been introduced on the same issue. So it looks like something good is going to happen on this even if we don't end up with a rate that is 100% of the Business Mileage Rate. One bill would raise the rate to about 41 cents per mile, which is still a significant improvement over 14 cents.

I am a member of PANO's public policy committee and I think David Ross, PANO's Public Policy Offier, is doing a great job on this. If you'd like to join the coalition, write to David at david@pano.org. There is more on this at the Nonprofit Congress blog.

Nonprofit Websites and Political Activity

On July 28 the IRS issued a field memo providing guidance regarding political activity on the internet. This is part of the IRS's Political Activity Compliance Initiative (PACI). OK, so what does the field memo offer in terms of guidance for nonprofits? Here is how I boil it down:

• A direct link from the nonprofit's website to another site opposing or favoring a candidate is highly suspect. The IRS will likely investigate if it finds out about it.

• A series of links from a nonprofit's website that ultimately leads a viewer to the site of an unrelated organization that favors or opposes a candidate for office could also get the nonprofit into hot water with the IRS. The most suspicious would be a series of links where it looks like the nonprofit urged or encouraged a viewer to click through to another site that favors or opposes a candidate for office. So, the nonprofit can't be sneaky. Stay away from any attempts to even subtly urge viewers to the site of a candidate -- even if it takes a few intermediate clicks to get there.

• What about innocent links to websites of unrelated organizations that ultimately lead, through a another series of clicks, to the site of a candidate? What constitutes "urging" or "encouraging"? Here, there is little useful guidance. The IRS has not said how aggressive it will be about this. The IRS says only that it will look at the context of the links and make then make a determination whether to pursue investigation. Therefore, it is unclear how diligent a prudent nonprofit must be regarding the forward "path" of its outgoing links.

• Watch your blogs:The riskiest sites will be those that include often-changing content where there is little control over content. A nonprofit with a blog is well-advised to provide training to its bloggers so there are no inadvertent links to a candidate's page within the blog post.

• Regarding a 501(c)(3) linking to a related 501(c)(4): The IRS advises that it will not pursue (at least at this time) cases involving a link between a website of a 501(c)(3) to the home page of a web site operated by a related 501(c)(4).

• Remember that the underlying political activity rules remain the same. If any activity, whether it is generated by a website or not, is seen to encourage viewers to read or view other materials or events that favor or oppose a political candidate, then this activity is ripe for investigation by the IRS.

Philadelphia Nonprofit Blog Resources

I wanted to let the nonprofit community know of some blogs I have found to be very helpful to learn about what is happening with respect to nonprofit law and nonprofit management. Some of my favorite blogs include:

LaSalle Nonprofit Center's Blog is www.nonprofituniversityblog.org

The Nonprofit Law Professor's Blog is a great resource. I read it every day. See,  lawprofessors.typepad.com/nonprofit/

Other People's Money - Fumo and Commentary in the Philadelphia Inquirer

An August 4 article in the Philadelphia Inquirer posed the question: Is it legal for a charity to spend money on lawyers defending its director against charges of misusing money? The article was with respect to the impending trial of State Senator Fumo and Ruth Arnao, among others, for allegedly using money from Citizens Alliance for Better Neighborhoods, a PA nonprofit and 501(c)(3), to pay for personal items, funding Senator Fumo's campaigns, and other things.

According to its 990, that charity spent more than $700,000 on legal fees while Ruth Arnao, its then executive director, was being investigated by the FBI and IRS for misuse of funds. It spent a mere $208,000 on programs during the same time. The trial of Senator Fumo and Ms. Arnao is scheduled to begin next month.

Back to this question: Is this legal? In her article, commentator Karen Heller quotes two legal specialists. First, she quoted Philadelphia nonprofit lawyer Don Kramer as saying that it is "absolutely" legal. On the other hand, she quoted Marcus S. Owens, lawyer, and former head of the IRS' tax-exempt division as saying "This sounds like another misappropriation."

Well, this doesn't make sense...So what is the answer? Turns out that Mr. Kramer and Mr. Owens are both right. But it remains to be seen what will actually happen in this case.

Pennsylvania law does allow for a charity to pay its director's legal fees, even in criminal cases. But this is not without some limits.

Title 15 section 5741 of the Pennsylvania code provides that:

Unless otherwise restricted in its bylaws, a nonprofit corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation), by reason of the fact that he is or was a representative of the corporation... against expenses (including attorneys' fees)... actually and reasonably incurred by him in connection with the action or proceeding if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the corporation and, with respect to any criminal proceeding, had no reasonable cause to believe his conduct was unlawful.

So, Mr. Kramer was right. It's legal. But if Ms. Arnao is convicted, she might have to give all the money back, right? Not so fast...

Section 5741 also provides: "The termination of any action or proceeding by judgment, order, settlement, or conviction...shall not of itself create a presumption that the person...with respect to any criminal proceeding, had reasonable cause to believe that her conduct was unlawful." This means that, even after a conviction, the burden is on the charity to prove that Ms. Arnao had no reasonable cause to believe her conduct was unlawful.

It's looking like Mr. Kramer is a bit more right than Mr. Owens, at least under Pennsylvania law.

Now, we don't know if Citizens Alliance's bylaws limit this in any way. However, based on allegations in the indictment, it appears that few corporate formalities were followed at the time when Ms. Arnao was executive director. If the allegations are true, it is likely that Citizens Alliance did not have bylaws that were given serious thought.

Nonprofits that are concerned about this can draft bylaws that by-pass the statute and specifically provide that no indemnification will lie in the event of a criminal conviction arising out of misuse of the charity's money.

Another practical question is how the legal fees are actually funded. I'll post another topic on how D&O policies can play into this question when it actually comes down to getting someone on the hook for the money (especially if that someone ends up not being Ms. Arnao).

And, to address the understandable outrage shown in Ms. Heller's article, by the comments to it, and as illustrated by the survey included in the article, I will post on the following: Can the public do anything about this? What are the public's rights, if any, to intervene?

As for the trial....I'll be watching this! Stay tuned for future posts on this topic.

Aknowledge Contributions Over $250 (In Writing)!

A recent tax court case, while questionable in terms of how fair it is, highlights why nonprofits should implement a reliable (if simple) system for promptly sending letters to donors who contribute $250 or more to the nonprofit. If the letter is not sent, the donor may lose the right to take a charitable contribution deduction!

In Daniel Gomez et ux. v. Commissioner, T.C. Summ. Op. 2008-93 (July 30, 2008), the U.S. Tax Court held that where a contemporaneous writing was not sent that 1) acknowledged the dollar amount of the donations and 2) stated that no goods or services were provided to the donor in exchange (or stating the value of items or services that were exchanged) -- then the donor is out of luck and cannot take the deduction. It made no difference that the nonprofit (a church) attempted to provide a letter during the donor's audit to help the donor out.  The court required a letter that was contemporaneous with the donation.

Under Section 170(f)(8)(C) a written aknowledgment is contemporaneous of it is obtained by the taxpayer on or before the earlier of (1) the date on which the taxpayer files a return for the taxable year in which the contribution was made, or (2) the due date (including extensions) for filing such return.

So, Philadelphia Nonprofits - it would be well worth instituting some type of almost automatic system to track contributions and send out acknowledgment letter before December 31 of each year. In the Gomez case, the church sent a letter almost three years after the end of the tax year at issues. If you have some type of administrative management of this issue, you will have happier donors who will give again. Not all donors are aware that these letters are necessary. As part of your donor marketing plan, being on top of these letters is good "customer service" for donors.

Regarding fairness....this is to me an extreme position taken by the Tax Court and puts form over substance in terms of compliance. Policy wise, this puts a huge burden on smaller charities, like churches, that rely on volume of small donations rather than on a few major grants. Often small nonprofits are not aware of detailed legal requirements until there is a tax issue. With less administrative resources available, small charities have a hard time tracking every donation over $250! A better course might ave been for the court to allow forgiveness when, as in this case, the donor can produce cancelled checks to verify the donation and the church provides a letter also verifying the donation. On the other hand, it is worth noting that the amount claimed as contributions on the return was not verified by either evidence of the canceled checks or the letter from the church. Perhaps the Tax Court was reacting (or over-reacting) to bad record-keeping. The total amount at issue for claimed contributions was only a bit over $6000.

Cultural Developments In Philadelphia

On July 18, 2008 Mayor Nutter issued an executive order that created the Office of Arts, Culture, and the Creative Economy in the City of Philadelphia. The Mayor named Gary Steuer as Philadelphia's new Chief Cultural Officer. Mr. Steuer will be a member of the Mayor's cabinet and will work from City Hall.

Mr. Steuer is currently a Vice President of Americans for the Arts and will begin his new position in October, 2008.

The Mayor also created the City's Cultural Advisory Council, a volunteer organization of arts experts who will advise the mayor on cultural issues. Joe Kluger, the former chief executive of the Philadelphia Orchestra, has been appointed to head the Council. Mr. Kluger is currently an Associate Principal at the nonprofit consulting firm WolfBrown.

It will be exciting to see how this develops in Philadelphia! I will keep you posted.
- Kathleen

Virtual Lawyers - I knew I was on to something!

About two weeks ago, a fascinating new type of law firm was launched in San Francisco called "Virtual Law Partners". Check out their website at www.virtuallawpartners.com.

I am so excited about this because I knew I was on to something last year when I created my law practice called "The Virtual Arts Law Center" www.virtualartslaw.com. I base my practice on a business model similar to Virtual Law Partners, but target my practice to nonprofit organizations with an emphasis on cultural organizations.

"Virtual lawyering" is an idea whose time has come -- with significant cost-savings for clients! With a virtual lawyer like myself, clients have much more control over their legal budget and know where their money is going. Virtual Lawyers are experienced attorneys who become intimately knowledgeable about your organization to better serve your day-to-day legal needs. In addition, "flat-fee" and flexible billing options let you have more control over where the dollars in your legal budget are going.

It is all based on mind-set: the virtual lawyer pictures herself as on-staff at your company. You no longer pay for an expensive memo that you never wanted and which doesn't answer your specific question anyway. Instead, when you ask a question, you get a targeted answer that can help you make business decisions quickly.

As a former in-house attorney, one of my gripes with outside law firms is that I was funding the training (at $250 per hours plus) of 1st and 2nd year attorneys that knew nothing about my business. I understand how that business model is good for the large law firm, but it did nothing to help me control legal costs and keep my client's business moving....

Non-profit institutions need to get the biggest bang for the legal buck. I believe the virtual in-house counsel model is an ideal solution.

Vermont Proposes the new "Low-Profit" Entity

Well, this convinces me I am a legal geek. New, creative, variations on legal entities, especially legal entities that could make doing business easier and less costly, are very interesting to me. Vermont has come up with the newest possibility: The "L3C", a "low-profit limited liability company" that is being created to support businesses with that generate low profits and with a mission largely devoted to social issues. The bill that creates this legal entity is expected to be signed into law by Vermont's governor by the end of this month. Access a copy of the bill here:Vermont L3C.

I will be watching this law and how it develops. I expect to see a lot of commentary upon its becoming law!

IRS Releases Draft Instructions for New Form 990

The IRS has released draft instructions to the new Form 990 for comment. Link directly to the IRS's announcement here: Draft Form 990 Instructions. The comment period is upon until June 1, 2008.

Pennsylvania Nonprofit Congress

Last week, I attended the Pennsylvania Nonprofit Congress in Harrisburg, organized by PANO. It was an excellent event. As a lawyer, I enjoy attending events such as the nonprofit congress because it helps, for me, to bring focus to the business challenges faced by nonprofit directors. The better I understand the business workings of nonprofits, the better I can hone the legal advice I can provide. 

To read more about the Pennsylvania congress, read the nonprofit congress blog here: nonprofitcongress.wordpress.com. The Pennsylvania congress was a precursor to the National Nonprofit Congress to take place in Washington, DC, June 1-4 2008. More information can be obtained at the National Nonprofit Congress Website.

I future posts I will highlight PANO more, but for an introduction to that organization, check the website at PANO