Moral Leadership or Special Interest Supplicants?

A recent talk by Robert Greenstein, founder and CEO of the Center for Budget and Policy Priorities and a MacArthur Fellow, questioned the impact on the less fortunate and a social compact decimated by current federal and state budget and political battles.  He highlighted public policy challenges and choices arising at the intersection of  current federal and state fiscal and tax  policies; the worst overall level of poverty in decades; and sharply increased income inequality and wealth distribution.  Most, if not all, facilitated and exacerbated by fiscal and tax policy choices.  Greenstein argues the path forward will need substantive action on both budget and tax policy.

Reflecting on his exploding graphs showing future economic devastation given current trends, leaves one to question whether public numbness to these dire pictorial displays will be overcome by substantive action.  If so, what might be philanthropy’s role? 

First, Greenstein stated philanthropy should do no harm.  Yet to take no action in the face of decreasing charitable giving and decreased program spending by governments represents increasing risks to those adversely affected by these policy choices and for whom much of charity seeks to ameliorate, if not remove, their detrimental impacts.  These policy choices ignore fundamental realities.  Over time charitable giving fluctuates within a small range as a constant percentage of GDP and therefore subject to  overall economic fluctuations.  Government tax revenues provide funding streams which private charitable gifting will never offset and ongoing payment for services which government has sought to outsource and contract on behalf of the less fortunate.

Second, what is the role for foundations whose pools of capital were generated and accumulated through private wealth and now sustained through tax exemption?  Greenstein argues foundations should advocate for a balanced approach recognizing that neither draconian budget cuts nor increased taxes alone provide meaningful solutions.  For many foundations this may require reconsidering their role in public policy and advocacy in light of the Citizens vs. United States Supreme Court decision and current tax law constraints.

Finally, he suggests philanthropy should draw a “circle of protection” around programs and services to protect the least fortunate among us.   In drawing this “circle” the core question for him is “What is to be the moral character of this country?”  The answer to his question will always be a work in progress. 

Since his talk “Occupy Wall Street” (or perhaps “Occupy Main Street” as this fledgling social movement expands) raises this question to a visceral level, though still in somewhat inchoate form.  Simplistically, this movement argues something is fundamentally amiss when multinational, multibillion dollar corporations pay little or no taxes and their senior management paid at levels not commensurate with the risk of individual ownership, while people struggle to make ends meet and pay taxes.  

Does this message resonate in the nonprofit sector?  In the face of significant basic human needs, the Occupy movement’s analysis and criticisms of corporate America may apply equally to many nonprofit organizations currently enjoying tax exempt status.  Thus, when the nonprofit sector seeks only to protect its charitable deduction in this debate,  the sector loses its moral grounding.  The sector becomes merely another special interest group seeking to protect its own interest and not serving a greater good–behavior which is part of the problem!  

In our history these are not new issues nor is any movement the bearer of the absolute truth. Whether or not the “Occupy” movement will translate into substantive political and economic changes, as its counterpart the Tea Party seeks to do, remains to be seen.  At a minimum philanthropy’s role must be to advocate and to protect on behalf of the least fortunate while as a nation we seek to answer these policy questions for this generation.  

Much of the nonprofit sector is founded on morals, principles, and beliefs that for generations never depended on tax deductibility as a motivation for helping others.  If the best argument the sector can muster is these motivations will go away by removing the charitable tax deductible, then the sector already has lost its way.  The human motivations prompting charitable acts and support for those less fortunate will survive and adapt even if the charitable tax deduction is written out of the tax code. 

What remains is whether the nonprofit sector will act as a special interest supplicant or serve as moral leadership seeking a higher common good?

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Fundraising – Harmon’s Four Trends

Jocelyn Harmon, Director of Nonprofit Services at Care2 and author of the blog Marketing for Nonprofits, recently gave the 2011 North Carolina Philanthropy Conference’s keynote address  .  Sponsored by North Carolina’s Association of Fundraising Professionals chapters,  she highlighted four trends for North Carolina’s fundraising professionals and encouraged them to embrace these trends to improve their effectiveness.


America’s demographics are changing.  By 2042 Harmon stated the U.S. diversity will be analogous to the UN with people of color being in the majority.  There will be a corresponding need for the sector to reflect and incorporate these changes.  She talked about the millennial generation.  Described as “native in their use of technology”, millennials will require nonprofits to integrate social media and other technology channels to engage them in philanthropy.  Finally, she recognized the growth and influence of women’s philanthropy.  According to Harmon women now control approximately 51% of the world’s wealth.


Harmon encouraged the conference  participants to “embrace technology and to leverage it strategically”.   Responding to her inquiry with raised hands, nearly all were connected to the Internet while at the conference.  Mobile technology is here.

With increasing online giving including major gifts, nonprofits face two challenges. First, there may be the counterintuitive need to create disincentives for offline giving represented by the traditional, but more expensive means like direct mail appeals.

Secondly, nonprofits must structure and enhance their online capacity for fundraising to take advantage of the Internet’s efficiencies and reach.  For Harmon, a nonprofit should create a landing page on their website that guides donors to the organization’s needs.  By growing their email lists and integrating them with other media, a nonprofit can drive traffic to their website’s landing page.  Using social networks and technology they will also connect with younger donors for whom the Internet and now mobile technology is ubiquitous.

Despite encouraging the use of technology, she cautioned that no one has truly cracked the nut for online giving.  Fundraisers will still have to make  “The Ask”. 


Through websites like CrowdriseSix Degrees, and Your Cause, Harmon noted technology now empowers an individual working through their personal networks to raise funds for the nonprofit(s) or cause(s) of their choice without working directly with an organization  In return the nonprofit recipient must find reciprocal means to identify and support these individuals and their networks or risk losing their support.


Because donors want to know their gifts make a difference, Harmon believes restricted gifts will increase.  She cited Donors Choose as the “gold standard” by the means through which it seeks restricted gifts.  Harmon argued nonprofits could similarly “merchandise” their nonprofit’s needs and then direct donors to them.  She cited two other examples in Global Giving and Oxfam Unwrapped.


Demographic changes are generally predictable and seemingly inexorable.  They arrive slowly unaffected by a single nonprofit.  On the other hand, technology, social giving, and personalization require continuous nimbleness in thought and action.  Jocelyn Harmon’s trends are four of the many influences buffeting today’s nonprofits.

Nonprofit boards of directors must identify those trends most affecting them and then address them through their strategic thinking and management. What this suggests, however, may be the most significant unspoken trend confronting nonprofits.  To succeed nonprofit leadership must improve and accelerate their capacity to learn continuously if they are to adapt and survive in their rapidly evolving funding and operating environment.  In short, nonprofit boards are going to have to step up their game.

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Books – Nonprofit Financial Management

Many nonprofit board members lack financial literacy and are criticized for failing to comprehend the nonprofit accounting and related financial management needed to manage their nonprofit effectively.  Their lack of understanding often is to the detriment of their nonprofit’s mission and effectiveness.   

Professor Charles Coe’s Nonprofit Financial Management: A Practical Guide   (John Wiley & Sons, Inc. 2011) provides an antidote.   This straight forward and easy to read text is a useful resource for nonprofit board members who need to know more about nonprofit financial management and accounting.  The Nonprofit Financial Management: A Practical Guide reader benefits from Professor Coe’s years of classroom experience teaching these subjects. 

Every board member must have a basic understanding of their nonprofit’s accounting and financial management.  Given the increasing level of financial transparency and scrutiny, this text should be required reading for all board members.  The book addresses practical areas of financial oversight which a nonprofit board must understand to fulfill their legal and fiduciary duties in managing their corporation.  It provides a concise and quick reference for both the experienced and neophyte board member.     

While applicable to nonprofits of all sizes, Nonprofit Financial Management: A Practical Guide  will be an especially useful guide for smaller nonprofit organizations for which their board’s understanding of financial management is even more critical.  The book provides an excellent teaching tool for any board intent upon improving its members’ overall financial literacy and management effectiveness.      

Professor Charles Coe teaches in the Department of Public Administration at North Carolina State University and serves on the North Carolina State University’s Institute for Nonprofits‘ Academic Advisory Council.

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Exempt Organizations – What Do You Call Your Organization?

Following my recent AFP webinar “When Raising Money, 10 Legal Things to Avoid” several participants wrote to ask what is the difference among the following:   

Nonprofit corporation:  This corporate entity is generally defined by state law.  The definition may characterize a nonprofit corporation as having no income and/or precluding distribution of any income to its members, directors and officers, and their family members or businesses, except when permitted by law.  A third characteristic is generally the absence of stock shares or other manifestations of an individual having an ownership interest in this corporate entity.  However, nonprofits do generate income which can be significant.  The question is whether this income is taxable or tax exempt income. 

Tax exempt or exempt organization:  If recognized as qualifying under applicable federal and/or state tax law, an entity’s income, including a nonprofit corporation’s, may be exempt from payment of corporate income tax.  If the organization’s corporate income qualifies for the corporate income tax exemption, then the IRS characterizes it as an “exempt organization (EO)”.   An exempt organization may still be required to pay other federal or state taxes, e.g. sales, unemployment, social security, property, or  “PILOTS” ( “Payments in Lieu of Taxes” are emerging as an alternative revenue source for municipal and county governments.).  For purposes of Federal law, when an exempt organization generates taxable income it is generally known as unrelated business income and the corresponding tax as the “unrelated business income tax or “UBIT”.   Too much of it and a nonprofit may lose its tax exempt status. 

Public Charity:  Exempt organizations fall into one of two broad categories: public charities or a private foundation.  A public charity is a charitable organization which is not a private foundation as defined by the IRS code.   The IRS makes this determination as part of the 1023 “Application for Recognition of Exemption under Section 501(c)(3)”process.   IRS code section 501 (c)(3) classifies eight different types of organizations eligible to qualify for tax exempt status as a public charity.  One specific classification is a “charitable” organization.  However, the other seven types are generally included as operating within the broadly defined “charitable sector”.   Donations to any exempt organization within these eight broad categories is a “charitable contribution” and a gift to them deductible by a donor as a “charitable donation”.

Given the preceding, perhaps another way for a reader to describe their organization more accurately is “a corporation recognized as qualifying for exemption from federal and/or state corporate income tax that serves a public purpose.”

As for me, I’ll stick with the generic “nonprofit” unless I need to define an entity based on  other distinguishing characteristics or a different classification by which exemption from corporate income tax is recognized.  By the way, the IRS code has nearly 30 different such classifications.

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AFP- Social Enterprise: New Face of Philanthropy

On August 11, 2011, the 7th Annual North Carolina Philanthropy Conference will be held at the Sheraton Hotel in the Research Triangle Park.  Sponsored by the Association of Fundraising Professional’s North Carolina chapters this year’s conference theme is “The New Face of Philanthropy: Building for the Future.”  The conference will host two days of pre-conference workshops on “CFRE Review Course” and “Fundamentals of Fundraising” on August 9-10.

Dan Moore,  Chief Marketing Officer  for The Redwoods Group , and Jeff Stern, Director of Special Projects with TROSA will join me in a panel discussion titled “Social Enterprise: New Forms of Philanthropy.”   We will discuss legal, operating, and practical considerations for organizations and individuals interested in working in these emerging organizations that seek to combine charitable purposes with business means. 

Click here for more information or to register for the conference.

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Boards – Three Hard and Fast Rules for a Board’s Fundraising Policy

When speaking about boards and fundraising, one audience question often is:  

“What is an individual board member’s responsibilities for fundraising?” 

A board of directors is legally responsible for managing a nonprofit organization.  Their responsibility includes securing enough “resources” to insure their nonprofit’s continued existence and ability to fulfill its mission and exempt purposes.  The term “resources” is broadly defined and not just limited to money.  Indeed, a nonprofit’s “other resources” generally provide the base for successful fundraising efforts.

Often board members do not or will not engage in fundraising and seek to delegate this responsibility solely to their executive director and staff.  When this occurs a board lose moral authority by ignoring a fundamental tenet of their leadership role.  Leaders first lead by their example!

The nonprofit sector speaks wistfully about 100% board participation in fundraising.  This is a best practice and unquestionably should be common place among boards.  Sadly, more often than not, boards do not meet this goal citing innumerable self-serving rationales. 

Fortunately, there is a simple antidote!  A board first can enforce three simple hard and fast rules for its members:

    • Rule Number 1:  Every board member personally contributes every year they serve on the board.
    • Rule Number 2:  Every board member personally participates in fundraising activities every year they serve on the board.
    • Rule Number 3:  There are no exceptions to Rules 1 and 2.

It is that simple! 

Is this your board’s policy?

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Social Enterprise – A quick look at the L3C

Several states, including North Carolina, and Indian tribal governments are early adopters in establishing the low profit limited liability company. Known by its initials, an “L3C” is a hybrid organization considered a for-profit, taxable entity which combines business with charitable or educational purposes in a single organization.   Built on the framework of a traditional limited liability company (“LLC”), the L3C offers the potential for a corporation’s liability protections combined with an LLC’s flexibility.  But an L3C’s   primary purpose is to attract foundation program related investments (“PRI”) as an alternative source of capital for the social entrepreneur. 

Unlike the traditional LLC, embedded in the L3C’s legal structure are three key constraints designed to address IRS requirements for a PRI.  An L3C must: 1) advance the foundation’s exempt purposes; 2) address the L3C’s income and capital appreciation; and 3) limit legislative and political activity.  While the L3C may offer an additional source of capital, a social entrepreneur remains free to seek capital from other traditional sources.  For a foundation the L3C provides an alternative vehicle to advance its exempt purposes and meet its annual distribution requirements.  At a minimum an L3C offers the potential to create a market brand identity as a social enterprise.

As a new organizational form, L3Cs may offer significant potential, but not without risk. Structuring its ownership, management, and governance will be key considerations, especially when operated in connection with a tax exempt entity.  Whether the L3C form will gain traction in the market place remains to be determined.

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Advocacy- Summertime and the lobbying is easy

Summer began with yesterday’s solstice and marks the end of the fiscal year accompanied by the General Assembly’s passage of  next year’s budget.   The legislature likely will complete its work and adjourn in mid July.

For nonprofits affected by legislative and executive action or inaction–and who wasn’t–the summer marks their start for the upcoming legislative session.  Here are some suggestions for summertime action:

    • Review what just happened and how it impacted your nonprofit. Known by the military as “an after action report”, this no-nonsense, no holds barred look at the session’s “good, bad, and ugly” seeks to answer the questions of “what worked;  what didn’t”; “what’s next”; and “how do we improve” 
    • Map the terrain and scout the players in light of what’s happened.
    • Revamp your strategy and tactics for next year’s short session.
    • Meet with legislators at home in their districts to discuss the legislature’s impact.
    • Meet with legislator’s key staff to educate them in-depth on your issues.
    •  Redistricting will affect the 2012 elections.  Learn its impact to your organization.

Nonprofits often must serve their stakeholders and advocate for their needs.  To serve as effective advocates requires a nonprofit to understand and apply a myriad of IRS, state, and federal laws that affect how nonprofits can advocate lawfully.   Take some time to train the board, staff, and volunteers.

Oh yes, and don’t forget to take time to enjoy the summer.  Balmy beach or cool mountain breezes are a great antidote for the city’s hot air.

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IRS – ACT Report

The Advisory Committee on Tax Exempt and Government Entities (ACT) presented its annual “Report of Recommendations” to the IRS at its public meeting on June 15, 2011. 

The committee’s recommendations covered topics related to:

  • Tax exempt bonds and conduit issuers;
  • Social security administration for state and local government employees;
  • Evaluation of the IRS federal, state, and local government website;
  • Indian Tribal Economic Development Bonds;
  • Indian tribal government employee benefit plans;
  • IRS outreach regarding small business retirement plans; and
  • Exempt organization group filings and returns
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IRS and States- Registered agents, revocations, and responsibility

In the wake of the IRS’ initial announcement that more than 275,000 nonprofits had their exempt status revoked, the IRS noted new revocations will published monthly.  These revocations occur as a matter of law because a nonprofit didn’t file their  IRS 990 forms for three consecutive years and are not a discretionary act by the IRS.   

Lost in this discussion is the related impact to the states’ oversight of nonprofits and their database information.  When and how quickly will states begin to update their databases for nonprofit and exempt organizations in light of the IRS’ actions? Typically, states maintain a listing of a nonprofit corporation’s registered agent, its charitable solicitation license, and state tax-exempt status spread across two or more state agencies.  

Maintaining a current and up to date database is an ongoing challenge as anyone knows who tries to keep their Outlook information or friends’ email addresses current. The IRS sent notices to the last known address for these nonprofits which often came from a nonprofit’s 1023 application form.  These addresses often are several years old and no longer current. Because small nonprofits were not required to file an annual 990 form before 2007, this was the only available addresses.   

Many of the nonprofits are believed to be defunct.  However, some operating nonprofits  find their exempt status now revoked.  How is it their boards of directors and/or executive directors missed or ignored more than three years of IRS outreach, communication throughout the nonprofit sector, and both mainstream and nonprofit related media?

A nonprofit’s board and senior management have an ongoing responsibility to provide accurate information to both state and federal agencies to maintain their exempt status.   Similarly, once they receive a nonprofit’s current information, state and federal agencies must keep their database information accurate and up to date with their last contact with the nonprofit.   

While the number of revocations may diminish overtime as both the nonprofits and government officials work to maintain accurate information, the problem of keeping current and accurate information will be on going.  Requiring nonprofits to provide their information electronically through the use of web-based  systems appropriately places the burden on the nonprofit to provide their information accurately.  Doing so electronically should decrease the financial burden on state and federal agencies and increase their ability to include accurate information into their databases. Contact information should include the nonprofit’s email and web-based contact information, e.g. website and social media.

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