The Law of Fundraising. Bruce R. Hopkins
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returns with the IRS. The professional fundraising community certainly had a vested interest in the outcome of that decision-making. The decision not only would have had an impact on donor relations efforts but, as the Association of Fundraising Professionals noted in its October 28, 2015, eWire, the proposal raised problems regarding donor confidentiality and privacy. The fundraising community, however, sidestepped these dilemmas when the IRS, overwhelmed and frustrated by the controversy, summarily, on January 7, 2016, withdrew the proposed regulations. Indeed, the underlying statute was repealed on enactment of the Tax Cuts and Jobs Act.
A section has been added to the book, addressing the matter as to when an organization can be considered a tax-exempt charitable entity where its sole functions are fundraising and grantmaking. As we discuss, it has been IRS policy since 1924 that a nonprofit organization that only carries on operations that involve generation and receipt of contributions (and perhaps investment income) and distribution of its income to public charities is eligible to receive recognition of tax exemption as a public charity. This point has often been restated over the years. The IRS caused a major shift in thinking concerning this topic when, in 1964, the agency introduced the commensurate test. As applied to fundraising and grantmaking charities, this test requires that the amounts distributed to one or more charities must be “significant.” (This aspect of the topic was raised to a much higher level of concern when, a few years ago, the IRS launched its “charitable spending initiative.” This could have been a major development for the fundraising community; the initiative, however, collapsed and disappeared in the aftermath of the chaos surrounding the brouhaha over the IRS's mishandling of certain applications for recognition of exemption.)
In recent months, however, largely by means of private letter rulings, the IRS has taken a harder line as to fundraising charities, principally by adversely applying the doctrines of private benefit and commerciality. There has been an unusually large number of IRS private letter rulings concerning nonprofit organizations established to engage in forms of online fundraising for charity. The IRS has denied recognition of tax exemption as a charitable entity in every one of these cases. Some of these rulings are inconsistent with law that has been in existence for over 90 years, concerning exemption for entities whose functions are solely fundraising and grantmaking. The IRS's fixation on the commerciality doctrine has spilled over into this area, causing policy shifts, with the agency resting its denial positions on that doctrine and, in some instances, as noted, also the private benefit doctrine. We added this section to explore this aspect of the IRS's recent ruling policy.
Recent years have brought many court cases concerning the matter of disclosure of donor information. This issue has arisen in the fundraising setting but, as recent cases illustrate, this issue is ballooning beyond the fundraising context. The extent to which donor disclosure is permissible and when it violates fundamental principles of free speech and privacy may be considered by the U.S. Supreme Court. This litigation is summarized in this supplement.
The IRS's focus in this area notwithstanding, online fundraising by charities that are tax-exempt continues to grow, and thus we expanded our portrait of charitable giving to include a look at this phenomenon.
Other topics we have covered include a study of state-level oversight and regulation of charitable organizations, discussion of a troubling IRS technical advice memorandum finding a charitable organization's fundraising program to be an unrelated business, the import of the IRS's streamlined application for recognition of exemption, fundraisers' compensation, and more law concerning raffles conducted by charities.
We appreciate the assistance we have received from John Wiley & Sons in the preparation of this supplement. Our thanks are extended, in particular, to our development editor, Brian T. Neill, and Deborah Schindler, managing editor, for their assistance and support in connection with this cumulative supplement.
Bruce R. Hopkins
Alicia M. Beck
March 2021
CHAPTER ONE Government Regulation of Fundraising for Charity
§ 1.2 Charitable Fundraising: A Portrait *(a) Scope of Charitable Giving in General (b) Online Charitable Fundraising
*§ 1.3 Evolution of Government Regulation of Fundraising
§ 1.4 Contemporary Regulatory Climate
§ 1.2 CHARITABLE FUNDRAISING: A PORTRAIT
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From the standpoint of the law of charitable fundraising, two aspects of the portrait of charitable giving in the United States are important: the extent of charitable giving in general and the increasing use of the Internet for the purpose of soliciting charitable contributions.
(a) Scope of Charitable Giving in General
Charitable giving in the United States in 2019 is estimated to have totaled $449.64 billion.24 Giving by individuals in 2019 amounted to an estimated $309.66 billion; this level of giving constituted 69 percent of all charitable giving for the year. Grantmaking by private foundations was an estimated $75.69 billion (17 percent of total funding). Gifts in the form of bequests in 2019 were estimated to be $43.21 billion (10 percent of total giving). Gifts from corporations in 2019 totaled $21.09 billion (5 percent of total giving for that year).
Contributions to religious organizations in 2019 totaled $128.17 billion (29 percent of giving that year). Gifts to educational organizations amounted to $64.11 billion (14 percent); to human service entities, $55.99 billion (12 percent); to foundations, $53.51 billion (12 percent); to health care institutions, $41.46 billion (9 percent); to public/society benefit organizations, $37.16 billion (8 percent); to international affairs entities, $28.99 billion (6 percent); to arts, culture, and humanities entities, $21.64 billion (5 percent); and to environment/animals groups, $14.16 billion (3 percent).
(b) Online Charitable Fundraising
Not that many years ago, use of the Internet for charitable fundraising was only nascent. One analysis of online fundraising, in its beginnings, did not have statistics on this approach to gift solicitation.25.1 But it was clearly coming, and was expected to someday be a major force in charitable fundraising. Now that “someday” has arrived.
In mid-2014, The Chronicle of Philanthropy gave a special report on online fundraising, with the theme being “Digital Giving Goes Mainstream.”25.2 Among the findings in this report was that Internet gifts climbed 13 percent in 2013 in relation to 2012, although online fundraising “still accounts for a very small portion of the money charities rely on.”25.3 Nonetheless, in 2013, the Leukemia & Lymphoma Society raised more than $98 million online, the California Community Foundation raised more than $95 million online, and the American Heart Association raised $59 million in that manner; other totals were more than $45 million (World Vision), about $40 million (Campus Crusade for Christ International, Cystic Fibrosis Foundation, National Christian Foundation, Salvation Army), about $30 million (March of Dimes Foundation, Young Life), and about $20 million