October 1, 2019

In July of 2018, the IRS issued Revenue Procedure 2018-38. This new procedure reduced donor disclosure requirements on all organizations exempt under Internal Revenue Code §501(a), other than §501(c)(3) charities; §501(c)(7), (8), and (10) organizations accepting gifts for charitable purposes; and §527 political action committees. Thus, for all other tax-exempt organizations, the contributors’ names and addresses on the Form 990, Schedule B, Schedule of Contributors may be redacted even when submitted to the IRS.

Although reportedly implemented to relieve burden, the relief was not universally well-received. Two states sued. Montana was the first to prevail winning in District Court (Bullock v. IRS, 2019 WL 3423485) – New Jersey was the other state. The states argued they had a right to the donor information under the consumer protection act laws. They also stated the IRS improperly rescinded the donor disclosure requirement on the Form 990, which is also utilized by the states, without first requesting public comment regarding the change.

In response, the IRS issued proposed regulations identical to Revenue Procedure 2018-38 in September of 2019 for comment. They also issued Notice 2019-47 providing relief to taxpayers who relied in good faith on Revenue Procedure 2018-38, which did not require donor disclosure for certain tax-exempt organizations.

State Disclosure Rules:

State public donor disclosure rules do not always perfectly align with federal rules. Two charities in California (Americans for Prosperity and Thomas More Law Center) have filed a petition for writ of certiorari with the Supreme Court appealing the requirement to disclose donor information to the state of California. There is a split in the circuits regarding donor disclosure requirements. The Federal disclosure requirements, as discussed above, do not agree with many state donor disclosure requirements and different courts have divided in their rulings on whether state or federal law should control.

In 2018, Washington State passed the Disclose Act. This legislation requires not-for-profits, who anticipate spending $25,000 or more on an election or ballot initiative, to disclose the top 10 contributors donating $10,000 or more in the same year. There is an exemption for contributions from private foundations restricted away from political or lobbying activities. The $10,000 includes any monetary transfers or in-kind value regardless of donative intent accepted by the organization. This results in the organization being classified as an incidental committee.

An incidental committee is any not-for-profit organization exempt under §501(c), which triggers the filing requirement in a given year. The status as an incidental committee expires at the end of the year unless the organization again meets the two triggers. If the organization triggers the status, it must register with the Washington Public Disclosure Committee within two weeks after the second event occurs[1].

The two events are:

  • the organization expects to expend $25,000 on a ballot measure or for a non-charitable exempt organization, a political election; and
  • the organization receives $10,000 from a single contributor.

The Disclose Act will effectively prevent Washington not-for-profits  planning to expend more than $25,000 on a ballot initiative in a year from accepting anonymous gifts over $10,000. At least until the top 10 are known, then lesser donors may be anonymous.

Federal Disclosure – Form 990

The result of the updated Federal Treasury Regulations on the Form 990, Schedule B is – no change. The Schedule B must still be completed by all filers with contributions from any donor greater than $5,000 if they are exempt under §501(c)(3) or §527; or greater than $1,000 if the organization is exempt under §501(c)(7), (8), and (10) and accepting gifts exclusively for charitable purposes. However, for organizations exempt under sections other than §501(c)(3) or §527, the names and addresses of the donors need not be disclosed on Schedule B. Previously the reason was because there was a Revenue Procedure in place. Now, however, updated Proposed Treasury Regulations have been issued which amend the reporting requirements, and therefore the reporting organizations may rely upon the Proposed Regulations.

Gift Acceptance Policy

Only private foundations and organizations exempt under §527 (Political Action Committees) must make the Form 990, Schedule B listing names, addresses, and donation details available for public inspection.  However, the information is usually provided to the board, often-times to the state charity officials, and many large donors will also request detailed donor information. It is not a required public inspection item, but the information does occasionally find its way into the public domain. As we have seen recently with the high profile case of Jeffrey Epstein, the results of accepting “tainted” donations can be devastating to an organization.

Charities are finding they are being judged by the company they keep, or from whom they have received support. With this in mind, here are questions for boards to ponder:

  • How should charities deal with anonymous donations? Should they accept anonymous gifts? Who decides?
  • What if the anonymous donation comes from a person who has engaged in bad behavior with which the charity does not want to be associated? Who are the ultimate decision-makers when accepting a gift? Should all gifts be accepted with a moral disassociation clause? In that case, if the donor engages in an activity which the board considers detrimental to the organization’s reputation, the charity can disassociate from the donor but keep the money. Another alternative allows the charity to remove the donor’s name from a building or other asset owned by the charity for similar reasons. Again, who decides?
  • Does the board have a gift acceptance policy and/or a gift acceptance committee? What gift acceptance decisions need to be elevated to the entire board?

This last point may be the most important. If the organization does not have a gift acceptance policy, it should consider adopting one to obtain a clear vision on accepting any gifts other than cash. It should also consider what, if any, restrictions on donations the organization will accept, even with cash gifts. The time to think about these issues is not when the board faces the emotional weight of a large gift and potentially year-end time constraints hanging on a “yes” or “no” decision. The reputational damage of accepting large gifts from donors involved in criminal or simply nefarious activity can be substantial.

The organization may want to create a standard large gift agreement, so the stipulations of the donation are clear to substantial contributors over a certain level. This is helpful for donor relations and to protect the organization if there is a need to disassociate, repurpose, or even remove naming rights. Usually, clarity is kind, and a sophisticated donor will appreciate this and respect the charitable organization for having thoughtfully considered these issues in advance by memorializing the clear understanding in a written gift agreement and acceptance letter.

Those charged with governance and management at a charity must know who the donors are or be aware if the charity is accepting anonymous donations. If it is, the not-for-profit should have a public relations response ready about why they accept anonymous donations. Similarly, consider if donations coming from certain associations might not reflect well on the charity. It is a good strategy to be prepared with a public relations response to any public disclosure of funding sources. The press release should focus on the use of funds and the mission accomplishments, rather than the sources. Charities may always refuse funds from any donor.

If you have questions about gift disclosures or structuring please contact your tax advisor. Gift agreements and policies are legal documents and will require legal counsel. We are happy to make a referral if you do not already have not-for-profit legal counsel.

[1] Applicable organizations should file an Incential Committee Registration (C-1ic report). The requirements are effective January 1, 2019.

© Clark Nuber PS, 2019. All Rights Reserved

This article contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.