Our esteemed contributors, Gene Takagi and Amy Sample Ward, reveal what they’re thinking about for the New Year. We’re talking about Twitter, donor advised funds, fiscal sponsorship, and illegal activities. Gene comes to us from NEO Law Group, and Amy is CEO of NTEN.
Amy started us off with the timely topic of nonprofits and Twitter. Should nonprofits stay on or leave? What are some of the risks now that Elon Musk has generally exercised control of Twitter at his sole discretion with no accountability to a true board of directors or other shareholders, and with apparent disregard for safety and disinformation campaigns that lead to hate, violence, inequities, and threats to our democracy? Why might nonprofits want to stay on Twitter even if they disagree with how it is managed and the content allowed on the platform? What are some alternative social media platforms that might be used to replace Twitter? Why is it important not to be overly reliant on any single social media platform?
Donor Advised Funds
We then turned to the controversies related to donor advised funds (DAFs) partly influenced by the broader controversy about a tax system that allows for a handful of billionaires to have more wealth than 160 million Americans (i.e., half of the country) and corresponding power over the government, the law (including laws pertaining to how the wealthy are taxed and how this is enforced or unenforced), domestic and foreign policy, and philanthropy and the nonprofit sector. Currently, DAFs provide for substantial tax advantages to donors without a requirement for their donations to be distributed to fund current charitable activities. It is not surprising then that DAF sponsoring organizations, including several associated with the world’s biggest financial institutions (e.g., Fidelity Schwab, Vanguard), make up many of the biggest charities and collectively may be the fastest growing segment of the nonprofit sector.
What federal tax laws are being proposed to address the issues many find with DAFs (e.g., ACE Act)? What state laws? What is the likelihood that we will see DAF reforms and how soon might those reforms take effect? What is happening with long overdue DAF regulations from Treasury and the IRS?
Fiscal sponsorship continues to grow in popularity from our experience working with many well-known fiscal sponsors and what we hear from our peers. But fiscal sponsorship is not defined in the law and partly for that reason, there are many charities that serve as fiscal sponsors without a sufficient understanding of how fiscal sponsorship relationships must be structured (and there are a few acceptable options). I raised this topic with the group as I believe education and self-regulation are going to be necessary to prevent some high profile scandals involving the misuse of fiscal sponsorship and laws that are more focused on preventing abuses than supporting proper application for the benefit of charitable projects and their beneficiaries.
We discussed on a high level who may be at risk when fiscal sponsorship is done wrong and noted some good resources for fiscal sponsors and project leaders seeking fiscal sponsorship. The National Network of Fiscal Sponsors has a good set of guidelines for proper construction and implementation of fiscal sponsorship; Fiscal Sponsorship: Six Ways to Do It Right remains a valuable book that was fairly recently updated; and the Nonprofit Law Blog posts regularly on this specific area of the sector.
Our last topic was on illegal activities and nonprofits. At first consideration, it’s easy to conclude that nonprofits simply cannot engage in or support illegal activities. However, there are some trending issues that reveal such conclusion doesn’t apply universally.
For example, with cannabis and certain other drugs or substances, there may be differences between federal law and state law. We know that, generally, cannabis is still prohibited for even medical uses under federal law but is lawfully used under the laws of several states. Nevertheless, the IRS still follows federal law compliance and will not provide an organization with recognition of 501(c)(3) tax-exempt status if its purpose is to provide cannabis to individuals for medical purposes.
But what if there were no federal law on the subject matter and there are differing state laws? This is the case with respect to abortion and its legality. While I don’t expect the IRS to lead an effort to revoke an organization’s 501(c)(3) status because it provides access to abortion in violation of state law, it’s possible that could occur under the illegality doctrine, but probably only if there is a state court decision that there actually was a violation of state law. Even if there were obvious noncompliance with a particular state law, the IRS’s role is not to make conclusions on state law compliance and would likely only act once the appropriate authority made a determinative decision.
I encourage readers to listen in to the full discussion if these trending topics are of interest.