Fundraising, Ethics, Planned Giving, and the Law

Date: June 24, 2005

I. Introduction

A. Law – a rule or mode of conduct or action that is prescribed or formally recognized as binding or is made obligatory by a sanction (statute, ordinance, regulation, rule, judicial decision, edict, decree) made, recognized, or enforced by the controlling authority.

B. Ethics standards – a discipline dealing with what is good and bad or right and wrong or principles embodying moral duties and obligations; principles of conduct governing an individual or a profession.

C. Ethics in general (close to morality).

D. Moral – of or relating to principles or considerations of right and wrong action or good and bad character.

E. Religious beliefs.

F. Irresponsible, obnoxious, impolite behavior.

G. Conflicts:

1. Ethics may conflict with law.
2. Ethics may conflict with ethics.
3. Ethics may conflict with moral and/or religious principles.
4. Ethics may conflict with common sense.
5. Gray areas.


H. Flaws in ethical standards:

1. Standard(s) too vague.
2. Standard(s) poorly written.
3. Approach too mechanical.
4. Standard(s) not reflective of modern era.
5. Lack of fairness/due process.
6. Standard(s) arbitrary.
7. Worst offender: BBB (see VII).


I. Ideal for fundraisers for charity – comply fully with relevant laws and act according to the highest standards and vision of their charitable institutions, their profession, and their consciences.

II. Relevant Law Concepts

A. Self-dealing (Internal Revenue Code section ("IRC §") 4941.

B. Private inurement (IRC § 501(c)(3)).

C. Private benefit.

D. Excess benefit transactions (IRC § 4958).

E. Conflicts of interest.

F. Property valuation.

G. Payments cast as gifts (when they are not).

H. Adherence to spirit of law, rather than technicalities.

III. Selected (Non-Fundraising) Current Developments

A. Pharmacists.

B. Federal sentencing guidelines, with emphasis on adoption and use of compliance plan (creation of culture of compliance).

C. Emerging concepts of role of lawyer (shift away from client representation only and to finding and ending wrongdoing).

D. IRS Circular 230.

E. Tax shelter developments.

F. Arthur Anderson case.

G. Glass v. Commissioner (conservation easement case, decided by U.S. Tax Court on May 25, 2005), 124 T.C. No. 16 (2005).

H. Senate Finance Committee's report on The Nature Conservancy.

I. Comment of SFC Chairman Charles Grassley: This report "provides the Committee and the public a window into the workings of . . . large charities in general" and evidences a concern that "complex transactions can shift a charity's focus far away from their [sic] areas of competency while potentially wasting contributors' dollars."

IV. General Ethics Areas Involving Fundraising

A. Motives for charitable giving:

1. Committee on Planned Giving ("CPG"): "The principal basis for making a charitable gift should be a desire on the part of the donor to support the work of charitable institutions."
2. Donative intent.
3. Charitable contribution deduction(s).
4. Enhancement of reputation, prestige; ego.
5. Immortality.
6. Employment for children.
7. Economic return, advantage.
8. Record-building (e.g., college admission).

B. Compensation in general:

1. Law – fundraising staff/consultants can be compensated (including by commission or other percentage methodology) as long as amount is reasonable (e.g., IRC § 4958).
2. Ethics – fundraising compensation based on percentage of funds/property raised is unethical.
a. Association of Fundraising Professionals ("AFP"): "Members shall not accept compensation that is based on a percentage of contributions"
b. CPG: "[C]ommission-based compensation for Gift Planners who are employed by a charitable institution is never appropriate"
3. Note distinction between employees and consultants.
4. Query – is this principle of ethics lawful?

C. Finder's fees:

1. Law – finder's fees generally are lawful (exceptions for lawyers' referral fees, kickbacks, bribes).
2. Ethics – finder's fees are unethical.
a. AFP: "Members shall not . . . accept finder's fees."
b. AFP: "Members shall not pay finder's fees, or commissions or percentage compensation based on contributions, and shall take care to discourage their organizations from making such payments."
c. CPG: "Payment of finders fees, commissions or other fees by a donee organization to an independent Gift Planner as a condition for the delivery of a gift is never appropriate."
3. Same query.

D. Competence:

1. Law – no particular rule (except for license requirements).
2. Ethics – fundraiser is expected to be competent.

a. AFP: "Members shall not engage in activities that harm the member's organization, clients, or profession."
b. AFP: "Members shall not engage in activities that conflict with their fiduciary, ethical and legal obligations to their organizations and their clients."
c. AFP: "Members recognize their individual boundaries of competence and are forthcoming and truthful about their professional experience and qualifications."
d. CPG: "The Gift Planner. . . shall advise donors only in areas in which he or she is professionally qualified."
e. CPG: "It is a hallmark of professionalism for Gift Planners that they realize when they have reached the limits of their knowledge and expertise, and as a result, should include other professionals in the process."

3. Unauthorized practice of law.


E. Representation:

1. Law – some state charitable solicitation acts.
2. Ethics – CPG: "A Gift Planner shall not act or purport to act as a representative of any charity without the express knowledge and approval of the charity, and shall not, while employed by the charity, act or purport to act as a representative of the donor, without the express consent of both the charity and the donor."
3. Disclosure of charitable giving rule(s) by representative of charity to donor.


F. Law compliance:

1. Law – persons are expected to comply with the law.
2. Ethics – same:

a. AFP: "Members shall comply with all applicable local, state, provincial, federal, civil and criminal laws."
b. CPG: "A Gift Planner shall fully comply with and shall encourage other parties in the gift planning process to fully comply with both the letter and the spirit of all applicable federal and state laws and regulations."
c. Violations of inapplicable law.
d. Gift planner can ethically violate local and provincial laws.
e. State and local fundraising statutes and ordinances.
f. E.g., Pennsylvania charitable solicitation act and Pinellas County charitable solicitation ordinance.
g. Traffic tickets, involuntary manslaughter.
h. Ascertaining spirit.
i. Encouraging behavior of others.


G. Conflicts of interest:

1. Law – conflicts of interest are not unlawful; federal tax law may require conflict-of-interest policy.
2. Ethics:

a. AFP: "Members shall effectively disclose all potential and actual conflicts of interest; such disclosure does not preclude or imply ethical impropriety."
b. AFP: "Members shall not exploit any relationship with a donor, prospect, volunteer or employee for the benefit of the member or the member's organization."

3. Concept of exploitation.
4. New Form 1023 [attached] – is IRS unethical?


H. Inappropriate gifts:

1. Lawful (unless able to argue duress or incompetence) – prospect encouraged to make large gift to charity by means of charitable remainder trust or similar vehicle.
2. Unethical – giving officer knows that making of this gift leaves donor and family destitute.


I. Restricted gifts:

1. Lawful – accept gift encumbered by condition or restriction.
2. Unethical – use gift (in whole or in part) for purposes that may technically or literally be in compliance with restriction but in fact are not.


J. Gift timing I:

1. Lawful (unless can argue duress or incompetence) – solicitation of gift when prospect is in emotional or physical distress.
2. Unethical – solicitation of memorial gift from grieving spouse before he or she has recovered sufficiently from the loss.


K. Gift timing II:

1. Lawful – solicitation of gift to a college.
2. Unethical – solicitation of such a gift when prospect's child is potential entrant to that college.


L. Inappropriate gift:

1. Lawful – solicitation of gift of appreciated property, intellectual property, conservation easement, and the like.
2. Unethical – charitable donee ends up with property it cannot use or sell, and/or is unduly costly to maintain.


M. Job shift:

1. Lawful – fundraising professional can change employment/consulting arrangement.
2. Unethical – fundraiser takes list of donors (or perhaps just relationships) from one charity to another.
3. Note – theft/fraud is unlawful.


N. Fundraising consultant:

1. Lawful -- to retain them.
2. Unethical – to fail to oversee what is said/done by them in name of the charity.


O. Privacy considerations:

1. Donor profiles – content of.
2. Access to donor file.
3. Information to development committee.
4. Confidentiality.


P. Corporate sponsorships:

1. Law – e.g., safe harbor rule of IRC § 513(i).
2. Planning for whom – donor or donee?


Q. Private foundations:

1. Lawful – multiple grant submissions to private foundations.
2. Unethical – failure to notify other foundations if a foundation agrees to make the requested grant.
3. Note – this may partake more of etiquette.


R. Gambling/gaming.

S. Reverse philanthropy.

V. Ethics and Planned Giving

A. Scope of advice:

1. Lawful – planned giving officer has extensive expertise in field of planned giving (probably knows more than prospective donor's lawyer).
2. Unlawful – unauthorized practice of law.
3. Unethical – planned giving officer acts as advisor to, and unduly influences, donor.
4. Note – this dilemma can be remedied through cautious proceeding and written waiver(s).


B. Marketing of planned gifts:

1. Lawful – planned giving vehicles can be marketed.
2. Unethical – packaging of planned giving as an investment or tax shelter, as if charitable gift not involved.


C. Insurance:

1. Primary motive of gift planner: selling it.
2. Charitable split-dollar plans.


D. Property valuation (reprise).

E. Scrivener's errors

VI. Other Fundraising Ethics Circumstances

A. Charitable gift substantiation requirements:

1. Lawful – gift substantiation letter required for charitable contribution deduction (IRC § 170(f)(8)).

2. Unethical – refusal to issue letter (particularly when donor is unaware of requirement) because fundraiser knows payment is not a gift.


B. Addis v. Commissioner, 118 T.C. 528 (2002), aff'd, 374 F.3d 881 (9th Cir. 2004) (import of understanding); cf. IRS Private Letter Ruling 200443045 (concerning private foundation grant to pay disqualified person's debt); IRC § 170(f)(8) and (10); IRS, consistency, and ethics.

C. Mandatory gifts.

D. Tax advice.

VII. Standards for Excellence Institute Ethics and Accountability Code


A. Scope:

1. Mission and program.
2. Governing body.
3. Conflicts of interest.
4. Human resources.
5. Financial and legal compliance.
6. Openness.
7. Fundraising.
8. Public affairs and public policy.


B. Fundraising:

1. Over 5-year period, fundraising revenue/expense ratio should be 3:1.
2. Solicitation and promotional materials should be accurate and truthful, and correctly identify the organization, mission, its and intended use of funds.
3. All representations in fundraising appeals should be honored.
4. Charity must honor donor's intent.


C. Donor relationships and privacy:

1. Respect privacy of donors and safeguard confidentiality of private information.
2. Provide donors with option of anonymity.
3. Provide donors opportunity to have names removed from mailing lists that are sold, rented, or exchanged.
4. Honor donor requests to curtail repeated mailings or telephone solicitations.
5. Avoid undue influence or pressure in solicitations.


D. Acceptance of gifts policy:

1. Limits on entities from whom gifts accepted.
2. Limits on purpose restrictions.
3. Types of property that will be accepted.


E. Fundraisers:
1. No commission-based compensation.
2. Only use registered consultants.
3. Maintain quality control over all fundraisers, whether employees or independent contractors.


VIII. Law and Ethics Overlaps

A. Concept of best practices.

B. Accuracy in fundraising.

C. Restricted gifts.

D. Privacy and confidentiality.

E. Intermediate sanctions.

F. Form 1023:

1. Focus on fundraising (page 6).
2. Is it lawful?
3. Is it unethical?
4. Behavior modification through shaming.


G. Principles of fiduciary responsibility.


H. Charitable giving rules enacted in 2004:

1. Contributions of vehicles (IRC § 170(f)(12); IRS Notice 2005-44).
2. Contributions of intellectual property (IRC §§ 170(e)(1)(B)(iii), 170(m); IRS Notice 2005-41).


I. Sarbanes-Oxley Act principles.

VII. Wise Giving Alliance Standards

A. Purpose of standards: "encourage fair and honest solicitation practices" and "promote ethical conduct by charitable organizations."

B. Standards that are useful:

1. Board of directors provides adequate oversight of charity's operations and staff [outdated].
2. Board policy of assessing, at least every two years, organization's performance and effectiveness.
3. Report to board outlining results of performance and effectiveness assessment, and recommendations for future action.
4. Availability to annual financial statements.
5. Financial statements show allocation of expenses to program, fundraising, and administration.
6. Accurate reporting of charity's expenses.
7. Board-approved annual budget.
8. Solicitation materials that are accurate, truthful, and not misleading (redundant).
9. Public annual report.
10. Information on website.
11. Address privacy concerns of donors.
12. Disclose cause-related marketing details.


C. Standards that are province of law and/or that are nonsensical:

1. Board of directors with at least 5 voting members.
2. Three evenly spaced annual meetings.
3. No more than 10 percent of board is compensated; chair or treasurer cannot be compensated.
4. No transaction with board that amount to material conflict of interest.
5. 65 percent for program; 35 percent for fundraising.
6. Avoid accumulation of funds that could be used for current program activities.
7. Obey BBB.


D. Is BBB acting:

1. Ethically?
2. Lawfully?:
a. Due process.
b. Fraud ("voluntary standards").


VIII. Ethics and Emerging Legislation

A. Thoughts on competing philosophies.

B. Valuation.

C. Conflicts of interest.

D. Code of ethics.

E. Tax shelter involvement (exemption loss or suspension; penalties).

F. Supporting organizations (emphasis on Type III entities).

G. Donor-advised funds.

H. Travel policies.

I. Compensation arrangements:

1. Executives.
2. Board.


J. Compensation committee.

K. Audit committee.

L. Use of auditors.

M. Mandatory independent financial audits.

N. CEO certifications.

O. Law compliance certification

P. Charities' enforcement of charitable easements.

Q. Insurance proposal.

R. Board of directors:

1. Number.
2. Composition.


S. Board compensation.

T. Removal of directors by:

1. IRS
2. U.S. Tax court.


U. Form 990 penalties.

V. Status of legislation:

1. Senate Finance Committee.
2. House Ways and Means Committee.
3. Panel on the Nonprofit Sector report (issued June 22, 2005)


W. Prospects of legislation.

IX. Concluding Philosophical Thoughts