001

Table of Contents
 
Title Page
Copyright Page
Preface
About the Author
 
Chapter 1 - INTRODUCTION TO THE LAW OF FUNDRAISING FOR CHARITY
 
DEFINITION OF CHARITABLE FUNDRAISING
CONCEPT OF CHARITABLE SALES
DEFINITION OF CHARITABLE CONTRIBUTION
METHODS OF FUNDRAISING
FUNDRAISING EXPENSES
COMMENSURATE TEST
FUNDRAISING COMPENSATION ISSUES
STEP TRANSACTION DOCTRINE
CHARITABLE PLEDGES
PUBLIC POLICY CONSIDERATIONS
SUMMARY
 
Chapter 2 - FUNDRAISERS’ LAW PRIMER
 
FORM OF ORGANIZATION
ORGANIZATIONAL TESTS
OPERATIONAL TEST
PRIMARY PURPOSE RULE
PRINCIPLES OF FIDUCIARY RESPONSIBILITY
CHARITABLE PURPOSES AND ACTIVITIES
RECOGNITION OF TAX EXEMPTION
PRIVATE INUREMENT DOCTRINE
PRIVATE BENEFIT DOCTRINE
INTERMEDIATE SANCTIONS
LEGISLATIVE ACTIVITIES
POLITICAL CAMPAIGN ACTIVITIES
PROHIBITED TAX SHELTER TRANSACTIONS
PERSONAL BENEFIT CONTRACTS
GOVERNANCE POLICIES
SUMMARY
 
Chapter 3 - STATE REGULATION OF CHARITABLE FUNDRAISING
 
FUNDRAISING REGULATION AT STATE LEVEL
CHARITABLE SOLICITATION ACTS
EXEMPTIONS FROM SOLICITATION ACTS
POWERS OF ATTORNEYS GENERAL
SANCTIONS
UNIFIED REGISTRATION
FUNDRAISING BY MEANS OF INTERNET
IMPACT ON FEDERAL REGULATION
SUMMARY
 
Chapter 4 - PUBLIC CHARITIES AND PRIVATE FOUNDATIONS
 
PRIVATE FOUNDATION DEFINED
PRIVATE OPERATING FOUNDATIONS
EXEMPT OPERATING FOUNDATIONS
CONDUIT FOUNDATIONS
NONEXEMPT CHARITABLE TRUSTS
PRIVATE FOUNDATION RULES
CONCEPT OF PUBLIC CHARITY
INSTITUTIONS
DONATIVE PUBLICLY SUPPORTED ORGANIZATIONS
SERVICE PROVIDER PUBLICLY SUPPORTED ORGANIZATIONS
COMPARATIVE ANALYSIS OF PUBLICLY SUPPORTED CHARITIES
SUPPORTING ORGANIZATIONS
PUBLIC SAFETY TESTING ORGANIZATIONS
IMPORT OF PUBLIC-PRIVATE DICHOTOMY
SOME STATISTICS
SUMMARY
 
Chapter 5 - FEDERAL ANNUAL REPORTING REQUIREMENTS
 
FEDERAL TAX LAW REPORTING BASICS
IMPORT OF REDESIGNED FORM 990
SUMMARY OF PARTS OF REDESIGNED FORM 990
ANNUAL RETURN SCHEDULES
FEDERAL AND STATE REGULATION OF GAMING
PREPARATION OF FORM 990 SCHEDULE M
PREPARATION OF SCHEDULE B
PREPARATION OF OTHER PARTS OF FORM 990
SUMMARY
 
Chapter 6 - CHARITABLE GIVING RULES
 
BASIC CONCEPTS
DEFINING CHARITABLE GIFT
QUALIFIED DONEES
GIFTS FOR THE USE OF CHARITY
CONDITIONAL GIFTS
GIFTS OF PROPERTY IN GENERAL
VALUATION OF PROPERTY
LIMITATIONS ON DEDUCTIBILITY
DEDUCTION REDUCTION RULES
QUALIFIED APPRECIATED STOCK
TWICE-BASIS DEDUCTIONS
GIFTS OF VEHICLES
GIFTS OF INTELLECTUAL PROPERTY
GIFTS OF CLOTHING AND HOUSEHOLD ITEMS
GIFTS OF TAXIDERMY
PARTIAL INTEREST GIFTS
GIFTS OF OR USING INSURANCE
PLANNED GIVING
ADMINISTRATIVE MATTERS
SUMMARY
 
Chapter 7 - UNRELATED BUSINESS RULES
 
UNRELATED BUSINESS LAW STATUTORY FRAMEWORK
AFFECTED TAX-EXEMPT ORGANIZATIONS
CONDUCT OF BUSINESS
REGULARLY CARRIED-ON BUSINESSES
RELATED OR UNRELATED?
UNRELATED BUSINESS TAXABLE INCOME
EXCEPTED ACTIVITIES
EXCEPTED INCOME
EXCEPTIONS TO EXCEPTIONS
EXCEPTIONS TO EXCEPTIONS TO EXCEPTIONS
FUNDRAISING AND UNRELATED BUSINESS RULES
DONOR RECOGNITION PROGRAMS
COMMERCIALITY DOCTRINE
PROVISION OF SERVICES
SUMMARY
 
Chapter 8 - OTHER FEDERAL TAX LAW REGULATION OF FUNDRAISING
 
GIFT SUBSTANTIATION REQUIREMENTS
QUID PRO QUO CONTRIBUTIONS RULES
DISCLOSURE REQUIREMENTS
APPLICATION FOR RECOGNITION OF EXEMPTION
PUBLIC CHARITY CLASSIFICATIONS
APPRAISAL RULES
RECORDKEEPING RULES
FORM 8283
UNIQUE REPORTING RULES
NONCHARITABLE FUNDRAISING RULES
SUMMARY
 
Chapter 9 - FUNDRAISING AND CONSTITUTIONAL LAW
 
FREE SPEECH BASICS
TYPES OF SPEECH
POLICE POWER
FUNDRAISING FREE SPEECH PRINCIPLES
SUPREME COURT OPINIONS
SUBSEQUENT COURT OPINIONS
AIRPORT TERMINAL SOLICITATIONS
DOOR-TO-DOOR ADVOCACY
REGISTRATION FEES
OUTER BOUNDARIES OF SPEECH RIGHTS
FUNDRAISING AND FRAUD
DUE PROCESS RIGHTS
EQUAL PROTECTION RIGHTS
DELEGATION OF LEGISLATIVE AUTHORITY
TREATMENT OF RELIGIOUS ORGANIZATIONS
OTHER CONSTITUTIONAL LAW ISSUES
SUMMARY
 
Chapter 10 - FUNDRAISING AND GOVERNANCE
 
GOVERNANCE PHILOSOPHY IN GENERAL
BOARD FUNDRAISING RESPONSIBILITIES
WATCHDOG AGENCIES AND FUNDRAISING
ORGANIZATION EFFECTIVENESS
BOARD EFFECTIVENESS
LAW COMPLIANCE
CATEGORIES OF EXPENDITURES
DISCLOSURES TO PUBLIC
MISSION STATEMENTS
FUNDRAISING PRACTICES
IRS AND GOVERNANCE
OFFICER AND EMPLOYEE TAX LIABILITY
PERSPECTIVES ON NONPROFIT GOVERNANCE
SUMMARY
 
Chapter 11 - FUNDRAISING AND IRS AUDITS
 
ORGANIZATION OF IRS
REASONS FOR IRS AUDITS
IRS AUDIT ISSUES
TYPES OF IRS AUDITS
COMPLIANCE CHECKS
COLLEGE AND UNIVERSITY COMPLIANCE CHECK PROJECT
HARDENING THE TARGET
WINNING AUDIT LOTTERY
COPING WITH EXAMINERS
TOURS
IRS AUDIT PROCESS
CLOSING AGREEMENTS
APPEALS PROCESS
FAST-TRACK SETTLEMENT PROGRAM
RETROACTIVE REVOCATIONS
CHURCH AUDIT RULES
LITIGATION
SUMMARY
 
Chapter 12 - PERSPECTIVES AND COMMENTARIES
 
CHARITABLE FUNDRAISING AND THE LAW
FUNDRAISERS AND SOLICITORS: THE DIFFERENCES
SCOPE OF STATE LAW
THE FUNDRAISER’S CONTRACT
CHARITY AUCTIONS AND FUNDRAISING LAW
FUNDRAISING REGULATION BENEFITS
FUNDRAISING AND PRIVATE INUREMENT
FUNDRAISING AND FRAUD
FUNDRAISING AND SUBSTANTIATION RULES
SOME PROPOSALS FOR RELIEF
SUMMARY
 
Index

001

Preface
This book exists principally because of your author’s belief that the federal and state law concerning the regulation of fundraising for charitable purposes is one of the most fascinating aspects of the panoply of nonprofit law, and I wanted to capture it in a nontechnical form. As to the latter motive, I wanted the subject to be in the format of its companions, the books Nonprofit Law Made Easy, Charitable Giving Law Made Easy, and Private Foundation Law Made Easy. In format, style, and length, it parallels its siblings. The hope is that these four books, in tandem, will be of assistance in guiding non-lawyers through the maze of law concerning charitable fundraising, private foundations, other types of nonprofit tax exempt organizations, and charitable giving.
This book also, however, blatantly mimics still another Wiley book (the one that started it all): Not-for-Profit Accounting Made Easy. Lawyers and accountants in the nonprofit realm populate overlapping universes, so these four companion volumes about nonprofit law are a natural fit with the book on nonprofit accounting rules.
As was noted in the preface to Nonprofit Law Made Easy, I have never had the opportunity to discuss this accounting book with its author, Warren Ruppel. I cannot imagine, nonetheless, that he extracted as much enjoyment from this writing process as I have. After years of writing technical (and long) books about various aspects of nonprofit law, writing the charitable fundraising, private foundation, nonprofit organizations, and charitable giving books with this approach was pure pleasure. The biggest challenges, not surprisingly, were the decisions as to what to include and what to leave out. This book thus reflects my take on what constitutes the fundamentals of the law concerning the charitable solicitation process.
In any event, I had a far easier time of it than Mr. Ruppel did. He had to create his book; I had merely to imitate it. The substance obviously is different but the format is unabashedly copied. Consequently, the four law books are about the same length as his, there are likewise a dozen chapters in each, every chapter of these books opens with an inventory of what is coming and ends with a chapter summary and there are no footnotes. (The lack of footnotes came the closest, to derogating from the pleasure of writing these books.) The four books also share a similar dust jacket. So Mr. Ruppel and Wiley designed the original vessel; I poured my descriptions of the law into it.
Now, back to this matter of what to include and what to exclude. I included in this book the absolute basics, namely:
• A discussion of the law’s definition of charitable fundraising (such as it is)
• Fundraising methods and costs
• Relevant nonprofit law in general (as a primer)
• The states’ charitable solicitation acts
• The differences between private foundations and public charities
• Federal annual reporting requirements
• Charitable giving rules
• Unrelated business rules
• Other aspects of federal regulation of fundraising
• Constitutional law principles
But, wanting to do more, I worked in two hot nonprofit law topics, specifically, governance and IRS (Internal Revenue Service) audits, and made them as relevant as I could to the law of charitable fundraising.
Nonprofit law continues to be as dynamic as law can get; consequently, trying to capture what appears to be the basics of elements of this law at any point in time can be tricky business. Congress, the Treasury Department, the IRS, the courts, and others in federal and state government are certain to contribute their share of new law. For the sake of the charitable community, I hope coming law changes are not too tough on fundraisers and those charitable organizations, they, which are a meaningful component of the nonprofit sector and our society in general; fundraising professionals are an important part of American philanthropy.
As a nonaccountant in the nonprofit field, I am glad to have Not-for-Profit Accounting Made Easy as a guide to the basics of the accounting rules and principles applicable to nonprofit organizations. I have once again tried to emulate Mr. Ruppel’s work, to provide an equally valuable volume for the nonlawyer who needs a grounding in the law of charitable fundraising.
I extend my thanks to Natasha Andrews-Noel, senior production editor, and to Susan McDermott, senior editor, for their support and assistance in creating this book.
Bruce R. Hopkins September 2009

About the Author
Bruce R. Hopkins is a senior partner in the law firm of Polsinelli Shughart PC, practicing in the firm’s Kansas City, Missouri, and Washington, D.C., offices. He specializes in the representation of charitable and other nonprofit organizations. His practice ranges over the entirety of law matters involving tax-exempt organizations, with emphasis on fundraising law issues, charitable giving (including planned giving), the formation of nonprofit organizations, acquisition of recognition of tax-exempt status for them, the private inurement and private benefit doctrines, the intermediate sanctions rules, legislative and political campaign activities issues, public charity and private foundation rules, unrelated business planning, use of exempt and for-profit subsidiaries, joint venture planning, tax shelter involvement, review of annual information returns, and Internet communications developments.
Mr. Hopkins served as chair of the Committee on Exempt Organizations, Tax Section, American Bar Association; chair, Section of Taxation, National Association of College and University Attorneys; and president, Planned Giving Study Group of Greater Washington, D.C.
Mr. Hopkins is the series editor of Wiley’s Nonprofit Law, Finance, and Management Series. In addition to Fundraising Law Made Easy, he is the author of The Law of Fundraising, Fourth Edition; The Tax Law of Charitable Giving, Third Edition; The Law of Tax-Exempt Organizations, Ninth Edition; Planning Guide for the Law of Tax-Exempt Organizations: Strategies and Commentaries; IRS Audits of Tax-Exempt Organizations: Policies, Practices, and Procedures; The Tax Law of Associations; The Tax Law of Unrelated Business for Nonprofit Organizations; The Nonprofits’ Guide to Internet Communications Law; The Law of Intermediate Sanctions: A Guide for Nonprofits; Starting and Managing a Nonprofit Organization: A Legal Guide, Fifth Edition; Nonprofit Law Made Easy; Charitable Giving Law Made Easy; Private Foundation Law Made Easy; 650 Essential Nonprofit Law Questions Answered; The First Legal Answer Book for Fund-Raisers; The Second Legal Answer Book for Fund-Raisers; The Legal Answer Book for Nonprofit Organizations; The Second Legal Answer Book for Nonprofit Organizations; and The Nonprofit Law Dictionary; and is the coauthor, with Jody Blazek, of Private Foundations: Tax Law and Compliance, Third Edition; also with Ms. Blazek, The Legal Answer Book for Private Foundations; with Thomas K. Hyatt, of The Law of Tax-Exempt Healthcare Organizations, Third Edition ; with David O. Middlebrook, of Nonprofit Law for Religious Organizations: Essential Questions and Answers; with Douglas K. Anning, Virginia C. Gross, and Thomas J. Schenkelberg, of The New Form 990: Law, Policy and Preparation; and also with Ms. Gross, Nonprofit Governance: Law, Practice, and Trends. He also writes Bruce R. Hopkins’ Nonprofit Counsel, a monthly newsletter, published by John Wiley & Sons.
Mr. Hopkins earned his JD and LLM degrees at George Washington University National Law Center, and his BA at the University of Michigan. He is a member of the bars of the District of Columbia and the state of Missouri.
Mr. Hopkins received the 2007 Outstanding Nonprofit Lawyer Award (Vanguard Lifetime Achievement Award) from the American Bar Association, Section of Business Law, Committee on Nonprofit Corporations. He is listed in The Best Lawyers in America, Nonprofit Organizations/Charities Law, 2007-2009.

1
INTRODUCTION TO THE LAW OF FUNDRAISING FOR CHARITY
The purpose of this chapter is to provide a framework consisting of the fundamental elements in federal and state law that shape the rules concerning fundraising for charitable organizations. Thus, this chapter will:
• Provide a definition of the phrase charitable fundraising.
• Address the concept of charitable sales.
• Explore the definition of the phrase charitable contribution.
• Describe the various methods of fundraising.
• Discuss the controversial matter of fundraising costs.
• Summarize the commensurate test.
• Enumerate the several issues pertaining to fundraising compensation.
• Explain the trap that lurks in the step transaction doctrine.
• Summarize the law concerning the enforceability of charitable pledges.
• Correlate the applicability of the public policy doctrine to the charitable giving setting.

DEFINITION OF CHARITABLE FUNDRAISING

A common perception is that there is a single type of activity termed fundraising , just as there is a prevailing view that all charitable gifts are made in cash. Most state and local, as well as some federal, regulatory approaches seem founded on this perception. An assumption is made that the law amply defines fundraising, when in fact it does not. Yet, to raise funds in this setting is to solicit gifts.

State Law

State charitable solicitation acts (see Chapter 3) usually define the word solicitation . These definitions generally are encompassing. This fact is evidenced not only by the express language of the definition but also by an expansive definition of the term charitable and application of these acts to charitable solicitations conducted, in common parlance, “by any means whatsoever.” A solicitation can be oral or written. It can take place by means of a variety of methods of communication (discussed ahead). Debate over the legal consequences of charitable solicitation over the Internet (discussed ahead) highlights the importance and scope of the word solicitation.
A most expansive, yet typical, definition of the term solicit states that it means any request, directly or indirectly, for money, credit, property, financial assistance, or other thing of any kind or value on the plea or representation that the subject of the gift is to be used to benefit a charitable organization or otherwise be used for a charitable purpose. Usually, the word solicitation is used in tandem with the word contribution (or gift) (discussed ahead). The term may, however, encompass the pursuit of a grant from a private foundation, other nonprofit organization, or a government department or agency. (About a dozen states exclude the process of applying for a government grant from the term solicitation; a few similarly exclude the seeking of private foundation grants.) There is no requirement that a solicitation be successful; a solicitation is a solicitation irrespective of whether the request actually results in the making of a gift.
A court created its own definition of the term solicit in this setting, writing that the “theme running through all the cases is that to solicit means to ‘appeal for something,’ ‘to ask earnestly,’ ‘to make petition to,’ ‘to plead for,’ ‘to endeavor to obtain by asking,’ and other similar expressions.” (The court ruled that a state’s charitable solicitation act did not apply to gambling activities held to generate funds destined for charitable purposes.)

Federal Lobbying Rules

At the federal level, the definition of fundraising that is most relevant (and accurate) in the charitable setting is found in an odd place: the tax laws restricting legislative activities by public charities. One of the law requirements is that these activities may not be substantial; an elective test provides allowable lobbying expenditures in terms of declining percentages of aggregate program (charitable purpose) expenditures. Exempt purpose expenditures, however, do not include amounts paid to or incurred for (1) a separate fundraising unit of the organization or (2) one or more other organizations, if the amounts are paid or incurred primarily for fundraising. Nonetheless, program expenditures include all other types of fundraising outlays.
An organization’s first task in this context is to determine its direct fundraising costs. These costs include such items as payments to fundraising consultants, salaries to employees principally involved in fundraising, and fundraising expenses concerning travel, telephone, postage, and supplies. With respect to these direct items, there may have to be allocations, such as between the educational (program) aspects and the fundraising aspects, of the expenses of creating and delivering printed material. Then, an organization must ascertain its indirect costs, to be apportioned to fundraising, lobbying, and other factors. These costs include items such as salaries of supportive personnel, rent, and utilities.
For the purpose of these rules, the term fundraising includes the solicitation of (1) dues or contributions from members of the organization, persons whose dues are in arrears, or the public; (2) grants from businesses or other organizations, including charitable entities; and (3) grants from a governmental unit, or any agency or instrumentality of a governmental unit. (This is a strange definition of fundraising, in two respects: (1) normally, the solicitation of dues (including those in arrears) is not considered fundraising (dues not being gifts) and (2) businesses make gifts, not grants.)

Internal Revenue Service Reporting Rules

The Internal Revenue Service (IRS) has devised extensive requirements for the reporting of fundraising activities by tax-exempt, primarily charitable organizations (see Chapter 5). In this connection, the agency has defined the term fundraising activities. The fundraising profession has long differentiated among gifts of time, treasure, and talent (with only the solicitation of gifts of treasure constituting fundraising). The IRS, however, in its formulation of a sweeping definition of fundraising, has encompassed them all; according to the IRS, fundraising entails “activities undertaken to induce potential donors to contribute money, securities, services, materials, facilities, other assets, or time.”
This definition of fundraising activities is far too broad (at least from a law standpoint). It is nonsensical to include the solicitation of services or time in a definition of fundraising. Fundraising pertains to the solicitation of money and/or other property; it does not relate to solicitations of services or time. If a charitable organization’s president asks an individual to serve on the charity’s board of trustees, the president has not engaged in fundraising. If a charitable organization’s executive director asks an individual to volunteer to assist with a particular project (even a fundraising event), the executive director likewise has not undertaken a form of fundraising. The IRS has overlooked the fact that the concept underlying and the word fundraising not only contain the word fund but are predicated on it.

CONCEPT OF CHARITABLE SALES

A few state charitable solicitation acts include a definition of the term sale (or sell or sold). A statute may provide that a sale means the transfer of any property or the rendition of any service to any person in exchange for consideration. The word consideration is the critical element of this definition, inasmuch as it represents the principal dividing line between a sale and a contribution.
Consideration is the core component of a bona fide contract: Both parties to the bargain must, for the contract to be enforceable, receive approximately equal value in exchange for the participation of the other. Consideration is the reason one person enters into a contract with another; the contracting party is motivated or impelled by the benefit to be derived from the contract (goods or services), while the compensation to be received by the other contracting person is that person’s inducement to the contract. A transaction that is not supported by adequate consideration cannot be a sale.
Correspondingly, a transaction that is completely supported by consideration cannot be a gift. Some transactions partake of both elements, where the consideration is less than the amount transferred, in which case only the portion in excess of the consideration is a gift. The most common types of these dual character transactions are quid pro quo contributions (see Chapter 8), and transfers by means of charitable remainder trusts and in the form of charitable gift annuities (see Chapter 6).

DEFINITION OF CHARITABLE CONTRIBUTION

A contribution (or gift or donation) basically is a transfer of money or property in the absence of consideration (discussed previously). The term may be defined in a charitable solicitation act as including a gift, bequest, devise, or other grant of money, credit, financial assistance, or property of any kind or value. The statutory definition may embrace promises to contribute (pledges).
The law on this point is the most developed in, not surprisingly, the federal income tax charitable giving setting. Many years ago, the U.S. Supreme Court observed that a contribution is a transfer motivated by “detached or disinterested generosity.” Another observation from the Court was that a “payment of money [or transfer of other property] generally cannot constitute a charitable contribution if the contributor expects a substantial benefit in return.” The Court has also referred to a contribution as a transfer made out of “affection, respect, admiration, charity or like impulses.”
The Court has adopted use of the reference to consideration in determining what a contribution is. Thus, it wrote: “The sine qua non of a charitable contribution is a transfer of money or property without adequate consideration. The taxpayer, therefore, must at a minimum demonstrate that he purposefully contributed money or property in excess of the value of any benefit he received in return.” The Court subsequently articulated essentially the same rule, when it ruled that an exchange having an “inherently reciprocal nature” is not a contribution.
Dues, being payments for services, are not contributions. The term dues embraces payments by members of an organization in the form of membership dues, fees, assessments, or fines, as well as fees for services rendered to individual members. A loan is not a contribution, including a loan to a charitable organization. If a person makes a loan to a charity and the amount of the loan, or a portion of it, is thereafter forgiven, the amount forgiven becomes a charitable contribution as of the date of the forgiveness.
Essentially, the concept in this context is that a contribution is a payment to a charitable organization where the donor receives nothing of material value in return. Thus, a court ruled that a state’s charitable solicitation act did not apply to the solicitation of corporate sponsors for a marathon, stating that the transaction was a “commercial” one, was “not a gift,” was a “corporate opportunity,” and it had “nothing to do with philanthropy.”

METHODS OF FUNDRAISING

Fundraising for charitable ends is a unique form of communication that simultaneously “promotes” and “sells” the product (the charitable cause) and “asks for the order” (the gift). Charitable organizations employ several methods and techniques to solicit contributions. Gifts can be in many forms—money, securities, tangible personal property, real property, and interests in property—all of which are embraced by the word fundraising. The one feature shared equally by all the ways to generate gifts is the objective—to ask for a gift that benefits someone else.
The asking part can entail many ways: in person, and by regular (old-fashioned) mail, facsimile, email, telephone, radio, television (and cable), and Web site. Organizing charitable entities to engage in fundraising is complex and requires the careful application and orchestration of many methods of solicitation by volunteers and employees. Each method of fundraising has its characteristics regarding suitability for use, public acceptance, potential or capacity for success, and cost-effectiveness. Likewise, the reporting and enforcement aspects of regulatory systems should, to be fair, distinguish between the varieties of fundraising techniques and their performance. The methods of asking are best understood by dividing them into three areas: annual giving, special-purpose, and estate planning.

Annual Giving Programs

The basic concept underlying charitable annual giving programs is to recruit new donors and renew (and perhaps upgrade) prior donors, whose gifts provide for annual operations. Some programs require a staff professional to manage; most programs require both staff and a volume of volunteer leaders and workers. Charities frequently conduct two or more forms of annual solicitation within a 12-month period; the net effect is to contact the same audience with multiple requests within the year. Some donors prefer one method of giving over the others. Multiple gift requests to present donors will increase net revenues faster than efforts to acquire new donors, inasmuch as present donors are the best prospects for added gifts and donor acquisition can be costly. An organization cannot use every fundraising method (chiefly because of donor resistance or saturation); rational selections are required.
Direct mail/donor acquisition fundraising uses direct mail response advertising (usually third class, bulk rate) in the form of letters to individuals who are not presently donors to the organization, inviting them to participate at modest levels. A small rate of return is likely. This type of “customer development” may require an investment of $1.25 to $1.50 to raise $1.00. The value of new donors is their potential for repeat gifts, and perhaps future leaders, volunteers, and even benefactors.
Direct mail/donor renewal is used to ask previous donors to give again. If there has been some contact since the prior gift, such as a report on the use of gifts, about 50 percent of these donors will give another time. Upgrading, that is, a request for a gift slightly higher than the last gift, works about 15 percent of the time, and has the added value of helping preserve the current giving level.
Telephone calls to prospects and donors permit dialogue and are more successful than direct mail. Response is not high, due in part to the intrusive nature of these calls. Television solicitation is, of course, more distant but is the best visual medium to convey the message. Both methods are expensive to initiate and require the instant response of donors.
Special and benefit events are social occasions that use ticket sales and underwriting to generate revenue but incur direct costs for production. While generally popular, these events are typically among the most expensive and least profitable methods of fundraising. Fundraising staff may deplore the energy and hours required to support an event; their great value, however, is in public relations visibility (which is why they are also termed “friend-raisers”).
Support groups are used to organize donors in a quasi-independent entity affiliated with the charitable organization. Membership dues and event sponsorship are revenue sources. Valuable for their ability to develop committed annual donors, organize and train volunteers, and promote the charity in the community, support groups also require professional staff management.
Donor clubs and associations are donor-relations vehicles (similar to support groups) that are designed to enhance the link between donor and charity, thereby helping to preserve annual gift support. The clubs’ selectivity and privileges (with imaginatively named gift levels) help justify the higher gifts, which are rewarded by access to top officials and other benefits.
Campaign committees are volunteer groups of peers using in-person solicitation methods to recruit the most important annual gifts. These committees are structured as a true campaign, with a chair and division leaders for individual and corporate prospects. Other annual giving methods involve:
Commemorative gifts
Gifts in kind
Advertisements (such as in newspapers and magazines)
Door-to-door solicitations
On-street solicitations
Sweepstakes and lotteries (where legal)
Las Vegas and Monte Carlo Nights
Mailings of unsolicited merchandise
In-plant solicitations
Federated campaigns

Special-Purpose Programs

A successful base of annual giving support permits the charitable organization to conduct more selective programs of fundraising that will secure major gifts, grants, and capital campaigns toward larger and more significant projects. A request for large gifts differs from annual gift solicitation because the request is for a one-time gift, allows for a multiyear pledge, and is directed toward a specific project or urgent need. Likely donors in this context are skillful “investors” who will respond to a major gift request only after researching the organization and determining whether the project justifies their commitment.
It takes courage to ask someone for a major gift (such as one million dollars). Current and committed donors are the best prospects. Before the request is made, the charity should engage in careful research to ascertain the prospect’s financial capability, enthusiasm for the organization, preparedness to accept this special project, and likely response to the team assembled to make the call. Also important is early resolution of the donor recognition to be offered (such as a seat on the board or name on a building).
Separate skills and tools are required to succeed at grant-seeking. Grants are institutional decisions to provide support based on published policy and guidelines that demand careful observance of application procedures and deadlines. Usually, for a grant proposal to be accepted, the charitable organization and its project must perfectly match the goals of the grantor.
A capital campaign is clearly the most successful, cost-effective and enjoyable method of fundraising. Everyone is working together toward the same goal, the objective is significant to the future of the organization, major gifts are required, start and end dates are goal markers, and activities and excitement exist. A capital campaign is the culmination of years of effort, both in design and consensus surrounding the organization’s master plan for its future, which depends on experienced volunteers and enthusiastic donors.

Planned Gift Programs

An increasingly active area of fundraising involves gifts made in the present, to be realized by the charitable organization in the future. The term gift planning best describes this concept. These gifts entail either transfers of assets to the charity at the time of the gift, in exchange for the donor’s retention of income for life, or transfers (usually in trust) where the charity receives the remaining assets at the donor’s death (or perhaps expiration of a period of time). This planning allows donors to remember their favorite charities in their estate and to plan gifts of their assets, in the present or at death. The four broad areas of planned giving are, from a law perspective, guided by income, gift, and estate tax considerations.
Donors may leave charitable gifts by means of bequests and devises made in their wills and/or trusts. These gifts may be outright transfers from an estate to one or more charitable organizations or may involve funding by means of a charitable trust. Trusts and similar arrangements can be utilized during lifetime or as part of an estate plan. Popular techniques are the use of charitable remainder trusts, charitable gift annuities, and perhaps charitable lead trusts (see Chapter 6).
An individual may name his or her favorite charity as a beneficiary, in whole or in part, of a life insurance policy. A charitable deduction is available for the surrender value of a policy contributed; in appropriate instances, the payments of premiums on a life insurance policy contributed to a charity are deductible gifts. Insurance is also used in the wealth replacement context; the donor uses annual income from a charitable remainder trust (and/or other tax savings induced by the charitable deduction) to purchase a life insurance policy, usually for the value of the asset(s) placed in trust, and names his or her heirs as beneficiaries, thus transferring to heirs the same value on the donor’s death.

FUNDRAISING EXPENSES

One of the most important issues arising out of regulation of charitable solicitations, and an intense focus of the regulators’ attention, is the matter of fundraising costs incurred by charities—internal expenses, and fees paid to fundraising consultants, professional fundraisers, professional solicitors, and/or other advisers in the realm of fundraising. The general standard is that fundraising expenses must be reasonable. Yet there is not much of a consensus as to how to evaluate, or measure, the reasonableness of fundraising costs. Many misstatements of the law are articulated in this context.

Disclosure Dilemma

One of the essential functions of most of the state charitable solicitation acts (see Chapter 3) is to promote disclosure of information to the public. A matter of principal concern among charitable groups, and thoughtful legislators and regulators, is the appropriate mode by which to achieve public disclosure by organizations soliciting financial support for charitable purposes. This issue basically has evolved around two conflicting positions, represented by the catch phrases point-of-solicitation disclosure and disclosure-on-demand.
Under the point-of-solicitation disclosure concept, certain information must be provided as part of the solicitation process, that is, in the solicitation materials. The solicitation-on-demand approach generally requires that a soliciting charitable organization provide information to the public on request; in some instances, the solicitation materials must bear notice of the availability of this information.
Proponents of the point-of-solicitation disclosure approach insist that it is the only effective way to ensure that the public has at least minimal information about a charitable organization at the time (or around the time) the decision as to whether to contribute is made. They assert that most people will not bother to seek information from charities, with the result being little, if any, meaningful disclosure. (This view, of course, is becoming anachronistic as considerable information about charitable organizations and fundraising by them is readily available by means of the Internet.) These advocates view this matter as one akin to consumer protection, with analogy made to labeling requirements on containers of food, medicine, and the like.
Opponents of the point-of-solicitation disclosure approach (including proponents of the disclosure-on-demand approach) insist that substantive information about a charitable organization (particularly financial data) cannot be presented, in a meaningful and balanced manner, as part of the solicitation process. They note that the purpose of a solicitation is to raise funds; they contend that cluttering a solicitation mailing, broadcast, and the like with statistical and other information only makes the fundraising confusing and less appealing, and hence generates fewer dollars, while simultaneously making the solicitation more expensive. They further assert that useful disclosure cannot be achieved by the mere provision of snippets of data and that this type of a requirement is counterproductive to the intent of the law by enhancing the likelihood that misleading information will be transmitted.
Thus, in designing or evaluating a charitable solicitation law, the mode of disclosure is a threshold issue. In part, the dispute over the two basic disclosure regimes can be resolved or mitigated by the outcome of the decision as to the items of information to be disclosed at the point of solicitation (if any). For example, even the most vehement opponents of general point-of-solicitation disclosure do not object to a requirement that the solicitation literature include a statement about the purpose of the soliciting charitable organization and the intended use of the contributions solicited. By contrast, any requirement that the solicitation materials state the organization’s fundraising costs, and perhaps require that these costs be expressed as a percentage of contributions or other receipts, generates considerable controversy and opposition.

Fundraising Cost Percentages

Over 35 years ago, an expert on charitable fundraising observed that, “in the field today, there is no agreed-upon base for determining fundraising cost percentages.” Nothing has changed in this regard in the interim. Nonetheless, a most common practice is to try to capture the essence of a charitable organization’s fundraising costs in terms of a single percentage. (While it is illegal for a government to forbid a charity to fundraise because of its fundraising cost percentage (see Chapter 9), the watchdog groups whole-heartedly apply these percentages, touting them every chance they get (see Chapter 10).) These costs are usually expressed in relation to total receipts or charitable contributions, using the prior year’s financial data.
This approach is popular because it is simple. It is frequently the basis of comparison of charitable groups. For example, an individual reviewing financial data might see one charitable organization’s annual gifts of $100,000 and fundraising costs of $15,000, and another charity’s annual gifts of $100,000 and fundraising costs of $20,000, and conclude that the organization with fundraising costs of 15 percent is more qualified for gift support, or more efficient , or better-managed than the organization with fundraising costs at 20 percent. (This is the message sent, often quite successfully, by the watchdog groups and others who thrive on this percentage approach.) Moreover, this use of percentages readily lends itself to the disclosure-at-point-of-solicitation approach, inasmuch as a percentage can be easily displayed on solicitation material.
The percentage approach, however, is deficient on two fundamental bases: (1) there is no universal standard for computing fundraising costs, thereby precluding the creation of fair percentages and meaningful comparisons of charitable organizations, and (2) a single percentage is a misleading factor to use in evaluating a charitable organization’s fundraising practices and overall eligibility for contributions. For example, in the previous illustration, the organization with a 15 percent fundraising cost percentage may not be including in the base some allocable shares of indirect costs, while the 20 percent organization is doing so. Thus, were the same reporting system being followed, the first organization may have higher fundraising costs than the second. This is not a matter of fraud or cheating but rather a lack of uniformity and understanding about the expense elements to take into account in constructing the ratio.
There may be valid reasons, even assuming identical means of determining the fundraising cost percentages, as to why one organization’s solicitation expenses exceed another’s—reasons that have nothing to do with efficiency, cost effectiveness, or program merit. Fundraising practices are diverse and unique to various types of charitable organizations. An institution with an established donor base and a range of fundraising methods, including annual giving, planned giving, and a bequest program, will have a lower fundraising cost percentage than a new charity with heavy dependence on direct mail. Another type of organization may be spending most of its money in building a donor base (called donor acquisition), relying considerably on special-event fundraising, or championing an unpopular cause; these elements contribute to higher fundraising cost percentages.
An organization that is poorly managed and/or expending excessive sums on fundraising can nonetheless have a low fundraising cost percentage, attributable perhaps to one or more large charitable bequests or unexpected lifetime gifts, or low fundraising costs in one area that offset excessive costs in another area. Also, the fundraising costs for a multiyear capital campaign, which are normally largely incurred in the initial months of the campaign, or in relation to the establishment of a planned giving program, will introduce additional distortions relative to a single fundraising cost percentage based on a lone year’s experience.
The realities of the costs of fundraising for charitable purposes are poorly understood by the public and in some instances by government regulators and legislators. The maxim that “it takes money to raise money” is frequently incompatible with the typical individual’s view as to how a charitable dollar should be spent. Many charitable organizations understandably fear that the public uses the fundraising cost percentage approach as a ranking system by which to evaluate charities for giving purposes. Those holding this view insist that, at least until a uniform and equitable method for calculating the fundraising cost percentage is in place, such a “batting average” methodology is an inappropriate way to assess the relative worth of charitable entities.

Fundraising Cost Line Item Approach

Opponents of the fundraising cost percentage approach generally contend that the only suitable manner by which to present a charitable organization’s fundraising costs is as part of its financial statements. This approach thus envisions an income and expense statement that displays fundraising costs as a line item, treated no differently from any other category of expenses. Proponents of line item treatment of charitable fundraising costs assert that mere fairness dictates this approach: (1) it enables an organization to present its fundraising costs in the context of its overall range of costs, and thus does not place undue emphasis on fundraising expenses by causing them to be evaluated in isolation, as is the case with the percentage approach, and (2) it avoids the unfair and misleading aspects of the percentage regime.
Again, this matter of the proper method of fundraising costs reporting and disclosure is inextricably entwined with the point-of-solicitation disclosure versus disclosure-on-demand conflict. It is much more difficult to graphically convey the amount of an organization’s fundraising costs using the line-item approach rather than the percentage-approach, even if a meaningful financial statement is provided at the point of solicitation (which is likely to prove impractical in any event). It is also more difficult to make easy comparisons of organizations’ fundraising costs when readers of financial statements have only aggregate sums to consider (although readers can, of course, construct their own fractions and percentages).
Advocates of the line-item approach say that this is as it should be, because fundraising costs computations are a complex and intricate matter, also that fast and easy fundraising expense calculations are not appropriate, and that fundraising cost disclosure cannot meaningfully be achieved at the point of solicitation.

Floating Average Approach

Those who understand the deficiencies of the fundraising cost percentage approach, yet believe that its virtues (principally, its usage in conjunction with point-of-solicitation disclosure) outweigh those of the fundraising cost line item approach, often seek to mitigate the excesses of the annual percentage approach by proposing a floating (or moving) average. This average might reflect fundraising expense performance over a three- or four-year period. Thus, for example, an organization that raised $100,000 in contributions in each of four consecutive years, and incurred fundraising costs of $70,000 in the first year, $50,000 in the second year, $30,000 in the third year, and $10,000 in the fourth year, would, when disclosing its fundraising costs in the fifth year, report that its costs during its previous four years averaged 40 percent rather than having to disclose in year two that its fundraising costs for the prior year were 70 percent.
In this fashion, the same essential facts would be disclosed but in a manner that eliminates (absent consistently “high” fundraising costs) the adverse consequences (such as a fall-off in giving, which exacerbates the problem) of disclosing only the initial months’ cost. This approach would smooth out the distortions that can appear in a year-by-year evaluation, such as high start-up costs, unexpected and/or large gifts, and unanticipated gains or failures in the solicitation that can be unique to a single year. There is precedent for this approach in the federal tax law, such as the averaging period for calculating public support (discussed ahead) and the manner of calculating the threshold for the annual information return filing requirement (see Chapter 5).
A fundamental deficiency, however, separates the moving average idea from actual usage: a rule that does not require an organization to report fundraising costs until after, for example, two or three years of existence would be an open invitation for abuse by those who would simply create a new soliciting organization every few years and thus never report fundraising performance. Moreover, a rule that required annual percentage reporting until a floating average period was attained would likely defeat its purpose, particularly for new organizations.

Pluralization Approach

Much thinking has been devoted to the question of the proper method of measuring and reporting charitable fundraising costs. Among the more intriguing of the concepts to emerge is the idea that fundraising costs should be pluralized to be meaningful. This approach does not find fault so much with the idea of utilizing a percentage to display fundraising costs as it does with the idea that a true measure of fundraising costs can be captured in a single percentage. Blending in the moving average feature, the pluralization approach is based on the precept that a fair and productive understanding of a charity’s fundraising costs, where more than one form of fundraising is used, can be achieved only by looking at the costs for each fundraising activity over a multiyear period (rather than the lumping of all costs over a measuring period).
In truth, there is no such thing as a single expense for something termed fundraising because there is, as noted, no lone activity that constitutes fundraising . There are many types of fundraising methods (discussed previously) and, while the precise parameters have yet to be documented, each effort carries with it a range of costs expressed as a percentage that may be considered reasonable. Thus, a fundraising cost that is considered reasonable for one fundraising method is not necessarily reasonable for another. The pluralization doctrine calls for a fundraising cost percentage to be assigned to each of an organization’s fundraising methods and for abandonment of reliance on a bottom-line ratio.
The pluralization approach is predicated on the fact that there are fundamental categories of fundraising methods: donor acquisition by direct mail, donor renewal by direct mail, capital campaigns, special events, as well as planned giving and bequest programs. (Pluralization models have yet to incorporate website fundraising; those costs are quite low.) This approach postulates that these fundraising methods involve associated costs expressed (as illustrations) in the following reasonable percentages: donor acquisition, about 120 percent; donor renewal, about 10 percent; special events, about 50 percent; capital programs, about 15 percent; and planned giving and bequests programs, about 15 percent.
The singular contribution of the pluralization method of stating charitable fundraising costs is that it exposes the fundamental fallacy of the bottom-line ratio or single percentage approach. That is, the sole percentage disclosure mode can make the fundraising costs of certain organizations appear unreasonable when in fact they are reasonable and—in an outcome perversely counterproductive to the objective of disclosure—can make the fundraising costs of some organizations appear reasonable when in fact they are unreasonable.