In September 2016, a study, conducted by the Charities Regulation and Oversight Project at Columbia Law School and the Center on Nonprofits and Philanthropy at the Urban Institute, was released. This is the first organized analysis of state-level oversight and regulation of charitable organizations. The study has three components: (1) a legal analysis of laws pertaining to charities in 56 U.S. jurisdictions; (2) a survey of state and territory offices with oversight, regulatory, and enforcement authority over charitable organizations; and (3) interviews in most of those offices. Major findings of this study included the following:
There is no single state law of charities oversight; rather, this oversight entails a complex mix of substantive areas, including charitable trust law, governance, criminal law, solicitation and registration requirements, and compliance, corporate transaction review, and conservation easements.
Organization and staffing of state charity offices vary greatly; in 41 percent of the states, one office has primary responsibility, while in the other states, responsibility is shared with other agencies or offices.
Within an attorney general's office, 13 jurisdictions have a charities bureau; 14 jurisdictions house charities oversight within a consumer protection division.
Most registration oversight is lodged in state attorney generals' offices (21 states), followed by offices of the secretary of state (15 states), and other state-level charity offices, usually consumer affairs or business/financial regulation (8 states).
Lawyers and nonlegal staff who oversee charities number approximately 355 in the 48 reporting jurisdictions.
Thirty-one percent of jurisdictions have less than one full-time-equivalent staff in this area, 51 percent of jurisdictions have between 1 and 9.9 full-time-equivalent staff, and 19 percent have 10 or more full-time-equivalent staff.
Training of state charities regulation staff is a mix of internal and external provision, with the smaller offices less likely to provide any training and the largest offices providing in-house training.
States have different requirements for reporting by charities. Some rely on reporting on IRS annual information returns, some require registration information, and some require independent audits and notification of certain transactions.
In the 47 responding jurisdictions, 68 percent require fundraisers for charitable organizations to register, and 60 percent require charities to register.
Twenty-two states require charities to file independently audited financial statements; most of the jurisdictions requiring these audits have a $500,000 threshold before an audit is required.
Where charities must inform the attorney general's office of major transactions, the top three triggers of this notice requirement are mergers (43 percent), voluntary dissolution (41 percent), and sale of assets (33 percent).
The three most common areas of enforcement by charity offices are fundraising abuses (62 percent), trust enforcement (36 percent), and governance (36 percent).
Of the fundraising methods overseen by state charities officials, the most common areas of oversight are telephone solicitations (82 percent), direct mail (80 percent), special events (80 percent), in-person solicitations (80 percent), Internet-based fundraising (76 percent), and social media–based solicitations (70 percent).
State-level enforcement actions are more likely to be informal resolutions (85 percent), involve correspondence with organizations (98 percent), settlements (88 percent), fines and penalties (80 percent), or formal litigation (e.g., injunctions) (79 percent).
Offices vary in their efforts to provide education and outreach to the fundraising community, ranging from press releases (82 percent) to donor advisories (77 percent), training (32 percent), and webinars (7 percent).
Unlike the torrents of alleged scandals that preceded the revolution in the federal tax laws pertaining to private foundations, which culminated in a major portion of the Tax Reform Act of 1969, there has been no parade of ostensible abuses warranting strict supervision of public charities. Rather, it appears that this is a last frontier for reformers in the field of charitable organizations and that most of the reforms are being advocated because the statutory basis for the rules is already in place;73 furthermore, the imposition of these rules on public charities strikes many as the thing to do as a logical extension of existing regulation. In this context, the recent attention to the matter of government supervision or regulation of solicitations for charitable contributions may bring some new federally enforced rules to govern the fundraising activities of public charities, that is, as part of a comprehensive effort to regulate public charities to the same degree as is at present the case for private foundations.74
Whatever happens, one aspect of the matter is clear: both state and federal regulation are on the rise. The former is not likely to be preempted by the latter, at least not any time soon. Students of this regulatory scene have astutely observed that “[a]s legislators continue efforts to devise schemes which comply with the [Supreme Court] decision [finding a state charitable solicitation act unconstitutional as violating free speech rights], they will certainly not renounce long-standing views on the important role of state regulation of charitable solicitation.”75
Probably the most difficult issue to cope with is what all of this regulation is and will be doing to the philanthropic sector. Will fundraising regulation improve the solicitation picture for legitimate charitable groups or will it unduly burden legitimate charitable fundraising efforts? Is there actually sufficient abuse taking place in this area to warrant the massive costs of compliance?
Although no one knows the answers to these questions, the march of government regulation of fundraising for charity continues inexorably. This form of regulation, arising from humble origins only a few decades ago, is now one of philanthropy's major concerns. How and whether these new governmental policies and philanthropy can coexist will say much about the nature of the charitable sector in the coming years.
NOTES
1 1. Throughout this book, the Internal Revenue Service is referred to as the IRS.
2 2. These are the organizations described in section (§) 501(c)(3) of the Internal Revenue Code of 1986, as amended, Title 26, United States Code (IRC).
3 3. These are the organizations described in IRC § 501(c)(4).
4 4. 38 Stat. 166. The income tax exemption for charitable organizations originated in the 1894 statute (28 Stat. 556, § 32), which was declared unconstitutional in Pollock v. Farmers' Loan and Trust Co., 157 U.S. 429 (1895). In general, see McGovern, “The Exemption Provisions of Subchapter F,” 29 Tax Law 523 (1976); Bittker and Rahdert, “The Exemption of Nonprofit Organizations from Federal Income Taxation,” 85 Yale L. J. 299 (1976).A companion book by Bruce R. Hopkins describes the federal tax law as it applies to nonprofit organizations. Tax-Exempt Organizations, Chapter 1, contains a fuller analysis of this aspect of public policy and of the independent sector.
5 5. Income Tax Regulations (Reg.) § 1.501(c)(3)-1(d)(2).
6 6.