ADVOCACY, PUBLIC POLICY, REGULATORY AND LEGAL ISSUES AFFECTING NONPROFIT ORGANIZATIONS
Prepared for Texas Association of Nonprofit Organizations
By Richard W. Meyer, Attorney at Law, Austin, Texas
TANO MONITORING OF PUBLIC POLICY, REGULATORY AND LEGAL DEVELOPMENTS:
TANO draws on its board, members, staff and stakeholders to monitor, analyze and develop positions on a range of issues that affect nonprofit organizations. On the national level, TANO is the state affiliate of the National Council of Nonprofit Organizations (NCNA). TANO’s representative participates in regular telephone conference meetings with NCNA Washington staff and public policy coordinators from the various states. See Part I and Part II following.
On the state level, TANO monitors developments before the Texas legislature and various regulatory agencies. The 81st Texas Legislature begins in January 2009, and TANO is monitoring interim legislative committee hearings in preparation for activity in 2009. Watch the TANO website for notice of evolving issues that promise to be discussed the next legislative session. For a sample of issues and review of activity in the 2007 Texas Legislature, go to “Public Policy and Advocacy”, then “80th Legislature 2007” on the TANO website. See Part III following.
Advocacy activities by nonprofit organizations require special caution and an understanding of the legal limitations of participation in the public forum. See Part V following. In examining government or regulatory issues being raised, the following factors are considered: Whether a proposal strengthens nonprofit organization viability under state or federal law or unduly burdens or threatens their status; whether the legal liability of nonprofit board members, officers, staff or volunteers is increased; whether current “charitable immunity” and “good faith” legal protections remain in place; whether laws governing nonprofits are necessary, understandable and based on reasonable public policy concerns; whether nonprofit advocacy is protected; whether ongoing nonprofit organization operations and finances are complicated by new governmental regulations; and whether nonprofit organization disclosure and accountability requirements remain reasonable and balanced.
I. Federal / U.S. Government / Congressional Issues
• NEW IRS FORM 990, NEW e-FILING, AND IRS “BEST PRACTICES”:
Year 2009 will require more comprehensive reporting by nonprofit organizations (NPOs) on the Form 990, including details about board governance. Small NPOs not required to file in the past must file the “e-postcard” online. The IRS has proposed its own idea of board “best practices” and appears to be getting into non-financial reporting and uncharted regulatory territory.
• U.S. SENATE FINANCE COMMITTEE CONTINUES NPO INVESTIGATIONS:
Hearings hostile to the NPO sector begun in 2004 continue under the new Democratic chair, Sen. Baucus, with Sen. Grassley still pushing new inquiries. Much negative publicity would be neutralized by cooperating with NPO stakeholders; senators promise legislative reforms with benefits for NPOs. Always looming is the prospect that NPOs will be burdened with the same management standards, reporting requirements and legal liability that public corporations must satisfy under the Sarbanes-Oxley Act reforms. NPO auditing standards already scrutinize NPO management in more detail.
• CONGRESSIONAL APPROPRIATION PROPOSED FOR NONPROFIT “CAPACITY BUILDING”: Senate Finance Committee staff proposes a federal fund to support NPO growth and improved governance through state networks aimed at underserved and rural areas. As government looks to NPOs to meet challenging societal needs, a new generation of sustainable NPOs and their managers must be nurtured.
More: The National Council of Nonprofit Associations has taken the lead in these discussions. www.ncna.org
• INCREASE AUTO MILEAGE RATE DEDUCTION FOR NPO ACTIVITIES:
The IRS-permitted deduction for NPO-related or volunteer auto mileage is now $0.14/mile. H.R. 2020 (Rep. Platts) and S. 3032 (Sen. Schumer) would increase the deduction to the standard $0.505/mile and give a boost to volunteerism and NPO programs.
• LEGISLATION TO GENERATE CAPITAL MARKETS FOR GROWING NPOs:
Amendments to federal law would create a social investment fund network with public/private funding, permit foundations to expand program-related investment (PRI) funding to NPOs, “invest” in NPO ventures, and grow the private capital market players (banks) to better serve growing NPOs. Another proposal would permit NPOs to access the loan funds and advisory services of the Small Business Administration or similar new agency. Community Development Financial Institutions (CDFIs) are prepared to provide more investment and growth capital to NPOs.
• PROPOSED FEDERAL TRADE COMMISSION (FTC) AUTHORITY OVER NPOs:
Some think NPOs escape tough enforcement by the FTC when the public interest is not served and consumers are harmed. S. 2831 (Sen. Dorgan) would give the FTC such investigative and prosecutorial authority.
Stakeholders in the NPO sector can be expected to oppose this bill, which would alter the regulatory landscape of the NPO sector. The IRS is currently the enforcer of NPO misconduct along with the states’ attorney generals.
• FIND A FEDERAL REGULATORY “HOME” FOR NONPROFITS:
Should the IRS remain the primary home of regulatory authority over NPO activity, or should NPOs have a more appropriate place in the federal bureaucracy, like private business, the professions, educators, veterans, farmers, workers, and other groups? Alternatives proposed include a reconfigured Small Business Administration, the Corporation for National and Community Service, Commerce Department, or new federal agency.
• ADVOCACY RIGHTS OF NPOs CHILLED BY FEDERAL LOBBY REFORM LEGISLATION: A barrage of lobby reform legislation and internal ethics rules enacted by the House and Senate inadvertently limit (and criminalize) traditional benign activities by NPOs in local communities and relations with elected federal officials and their staffs. Misperceptions of the permissible extent of advocacy rights of NPOs are common as they become more involved in public policy discussions.
A popular condition imposed on federal grants is to prohibit funding to any NPO that engages directly or indirectly in any voter registration, education or mobilization activities, even with non-public funds. More: www.clpi.org, www.afj.org (go to nonprofits-charities)
• FORMALIZE ROLE OF NPOs IN DISASTER-RESPONSE PLANNING AND PROGRAMS: High marks received by locally-based NPOs and faith-based groups have not eliminated the ad hoc nature of their relationship to government agencies such as FEMA, in disaster scenarios. California and Louisiana have created cabinet-level agencies to institutionalize NPO roles and strengthen ties for future emergencies; beneficial funding may be available to NPOs through Homeland Security programs.
• REPEAL OR REAUTHORIZATION OF FEDERAL ESTATE (DEATH) TAX:
The federal estate (death) tax expires in 2010, but returns with a vengeance in 2011 unless Congress enacts new tax rates or eliminates the tax. Much NPO income depends on the estate planning environment and the tax benefits to donors and their estates. Related to this is Congressional reauthorization of the IRA charitable rollover donation option.
• “L3C” – THE NEW LEGAL ENTITY FOR SOCIAL BENEFIT ENTERPRISES:
Federal law will need to be amended to permit innovative business-type operations and investments by nonprofit social enterprises organized under state law as low-profit limited liability companies, or L3Cs.
Definition of a SOCIAL ENTERPRISE—An innovative NPO that invests its resources to engage market opportunities, generate earned income, and become self-sustaining to fulfill its mission. More: see next item.
II. State Government Issues Affecting Nonprofits:
• STATES READY TO AUTHORIZE CREATION OF “L3C” CORPORATIONS:
After much discussion on the national level, Vermont became to the first state to authorize doing business as a low-profit limited liability company (11 Vermont Statutes Annotated, §3001(23) and §3005(a)). Called a “L3C”, the new kind of corporation preserves its nonprofit status despite its ability to generate limited profits from mission-related programs and operations, engage investors, share “profits” with investors or foundation PRI funders, and compete in the marketplace.
Other states (NC, MT, CA) seem ready to enact similar legislation. The L3C permits expansion of investment capital available from foundation-funded PRIs under IRC §§4943, 4944, and 4945. Commercial lenders are expected to become more active in a growing NPO realm of business, possibly joined by government-backed loan programs on the SBA model.
• PRESSURE ON NPO EXEMPTIONS FROM STATE AND LOCAL TAXES:
With tight budgets, state and local government taxing authorities everywhere are aggressively challenging traditional and unquestioned exemptions from state and local property taxes, sales taxes, and other laws that benefit NPOs. Tax agencies are finding creative ways to end tax exemption or tax NPOs indirectly by requiring annual renewal of all exemptions, collecting a fee for exemption applications, enacting periodic “sunset” of all tax exemptions, monitoring NPOs’ operations and use of their property or facilities and imposing user fees. State tax exemptions often vary from long-accepted IRS definitions of exempt charitable activity and resources.
A recent Minnesota Supreme Court decision is shocking but typical: the court held that a nonprofit day-care center should lose its longstanding tax-exempt status because its rates charged to working families for child care were in line with those of similar commercial services in the community, despite its charitable mission to serve.
• MULTI-STATE REGISTRATION AND REGULATION OF CHARITIES:
Operations of NPOs that drift across state lines, or solicitation of charitable contributions on the Internet from citizens of other states, are the subjects of the current reciprocal multi-state regulatory alliance that some enforcers say is not working, primarily because a score of states have no central licensing or registration of charities that solicit funds from the public. Unless every state buys into a viable interstate enforcement scheme, charity regulators and state attorney generals maysuggest a nationalized (federal) solution to this issue.
• DISASTER RESPONSE PLANNING TO FORMALLY INCLUDE NPOs:
State officials in California, Louisiana and elsewhere acknowledge the central role played by NPOs, volunteers, and faith-based organizations in recent disaster relief efforts. NPOs will be recognized with cabinet-level agencies in state government, formalized roles in response planning, and hopefully rewarded with funding for their participation.
• DIVERSITY AND TRANSPARENCY REPORTING:
The California State Assembly (house) has passed a bill to require larger foundations to provide the state with diversity reporting (race, ethnicity, national origin, gender orientation) of foundation boards and staffs, and also similar data on the boards and staffs of the charities a foundation supports and funds.
• ABA REWRITE OF THE MODEL NONPROFIT CORPORATIONS ACT:
Many states use the “Model Nonprofit Corporation Act” as the basis of their state enabling legislation that governs all nonprofits created or registered in the state, creating uniform nationwide corporate structures and terminology. An American Bar Association task force of attorneys has undertaken revisions to the model act with minimal consultations from NPO stakeholders. Basic changes in ABA thinking reflected in the new draft can affect NPOs in every state in the long run.
In an effort related to the Model Act revisions, the ABA is discussing a proposed “Model Uniform Regulation of Charities Act” to deal with interstate regulatory and enforcement issues between the states.
More: www.abanet.org, go to Business Law Section-Nonprofit Corporations
III. Texas Legislative Issues Affecting Nonprofits:
The 81st Texas Legislature begins in January 2009, and the same issues that have appeared before can be expected to return. At present, no significant issues affecting nonprofits have surfaced in the interim committee hearings underway in preparation for the 2009 regular session. Issues from past sessions that deserve close attention include:
• Any proposed amendments to the Texas Nonprofit Corporation Law (Chapter 22, Business Organizations Code), which is Texas’ user-friendly and flexible enabling statute governing nonprofit organization formation and operation
• Any proposals that increase the legal liability or diminish the legal immunity of nonprofit board members, officers, staff or volunteers under the nonprofit laws or the charitable immunity statutes in Chapter 84, Civil Practices and Remedies Code
• Challenges to the exemptions from the business margins tax, property tax, or sales tax enjoyed by nonprofits
• Proposed limitations to the fundraising or solicitation rights of charitable organizations
• Proposed requirements mandating CPA audits of nonprofits with revenues exceeding certain amounts, with formalized board review of audits (and legal penalties for non-compliance
• Extension of Texas’ broad “open meetings” and “open records” statutes to cover nonprofit organization activities and operations
• Limitation on advocacy activities of nonprofits or tighter lobbyist registration and reporting laws for advocacy activity
IV. Ever-Growing “Best Practices”:
“Best practices” are models for conduct and management prevalent in a field that others look to in evaluating an organization’s status. These include internal policies, voluntarily-adopted standards, professional practice and ethical standards, conditions in funding grants (government and private), auditing standards, trade association standards, insurers’ and lenders’ underwriting standards, media perceptions of right and wrong, and other commonly-recognized guidelines. Not always clear or binding, best practices when ignored can have the same negative impact on a NPO as a violation of law, negligent act, or other culpable conduct.
© 2008, Richard W. Meyer, All Rights Reserved.