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From the President's Office, September 2006

Dear Friend:

What obligations do we as leaders in the nonprofit sector have to society?

I am constantly amazed at the enormous amount of money Americans contribute to nonprofit organizations every year and the extraordinary number of hours they volunteer to help those organizations provide services. What do we owe them for this generosity and the trust that they place in us?

What got me thinking about this was a speech by Bernadine Joselyn from the Blandin Foundation at this year's Council on Foundations conference. Although she was speaking to the foundation leaders in the room, her comments apply to all nonprofit organizations:


Don't Be Bedeviled by These Fundraising Mistakes


Excerpt from Fundraising Mistakes That Bedevil All Boards (and Staff Too)

In my decades of work with nonprofit organizations, I've addressed many recurring mistakes that staff, board members, and other volunteers make when raising money. In this article, let me share three of them.

1. We Can't Raise Big Money—We Don't Know Any Rich People

I once oversaw a church campaign for $12 million in a woefully impoverished area. It was clear from the outset that none of the people involved knew anyone wealthy.

But we didn't let that stop us.

Through a carefully developed plan that engaged the board as well as a community committee, we identified people who cared about the church's work, its pastor, and the parishioners. And they responded generously—one individual gave $1 million—because they shared our values.

We limit ourselves when we think that because we're a small organization, or serve a limited population, few will be interested.

It isn't the size of the organization that matters, it's the importance of the mission. When Project Open Hand, an organization that brings meals to homebound people with HIV/AIDS, was launched, it was from the kitchen of the founder, and the meals were delivered in friends' cars.

Although the group was tiny and the founder didn't know many wealthy individuals, support poured in. Why? The need was great, and Project Open Hand was meeting it. The word got out, and people invested.

You don't need wealthy people in your database to raise money. But without them, there are two imperatives facing you:

  1. You must get your message out and relate the impact of what you're doing to the broader needs of the community, and
  2. You must be willing to think of ways to identify and approach those who do have money.
In the case of the church, their work with the poor and indigent as well as the large ethnic communities in the neighborhood was attractive to the million-dollar donor whose own family, decades ago, had been a struggling immigrant family attending the church. The community had changed as had the origin of the immigrants, but the donor saw that the church and its mission and people were worthy of his investment.

If you don't know wealthy people, make no mistake: raising money is much harder and demands more imagination. But it is not impossible. With dedication—and tenacity—on the part of the board and the staff it can be done.

2. Wealth Is Mostly What Determines a Person's Willingness to Give

When an individual makes a philanthropic gift, at least three factors come into play. He or she has:

  • A connection to the organization
  • Concern for the cause
  • The financial capacity to give
It may surprise you that the first two far outweigh the third. A person can have incalculable wealth, but if she's not connected to the people or services of your organization or doesn't display interest in what you're doing, she's not likely to give.

I know of one organization that wined and dined a man with huge financial resources, hoping for a lead gift. He had a known interest in the kind of work the group did, and he had assets.

But he didn't have a connection to the organization, nor was there much evidence he placed a value on philanthropy.

After months of negotiations the wooing came to an end. "No dice," the man finally said. Time was wasted and, even worse, the person who ultimately did step forward with the lead gift felt ignored during the process.

I probably see this mistake more than any other. Someone will excitedly hand me a list—of potential donors, of people to interview for a feasibility study, of individuals to invite to a particular function. When I ask how these are connected to the organization, more often than not the answer is "they aren't."

Too often, as a starting point, board and staff members will scribble down the names of wealthy people in the community. Give that up. Instead, list only the people you know who share your organization's values. Not only will they be more responsive they'll also be willing to link you to others (perhaps with more money) who care about what you do.

3. You Need a Powerful Board to Have a Successful Campaign

There are organizations across America—particularly universities, hospitals, and large arts and cultural organizations—whose boards are the envy of all.

The people on these boards are leaders in commerce, industry, and education and possess wealth and connections in abundance.

Annually they provide leadership gifts of six and even seven figures. And during times of a capital campaign, their gifts often constitute as much as 80 percent of the total goal.

If this doesn't sound like your board, well ... join the club. For every organization so blessed, there are thousands upon thousands with boards more like yours.

These organizations are governed by people who care deeply about the mission, share what wealth and connections they have, and are willing to work to fulfill the vision. And many excel.

Even if yours isn't a "power" board, you can still have a successful campaign.

Probably the most common alternative is to form a campaign cabinet or steering committee that engages a few members of the board as well as high-profile leaders from the community.

I've found that while many "movers and shakers" may not care to join the board or be involved on a sustained basis, they will participate in a time-limited campaign, assuming they have some passion for the project.

A food bank I know of used this model for its capital campaign and surpassed its goal. Religious organizations have used the same approach with great success. And social service organizations often form campaign leadership organizations that involve both board and non-board volunteers.

Power is a relative concept. Enlist the right people, even if they're not on your board, and suddenly your organization too has the power to mount a successful campaign.

Kay Sprinkel Grace
© 2004. Excerpted from Fundraising Mistakes That Bedevil All Boards (and Staff Too). Excerpted with permission of Emerson & Church, Publishers.

Kay Sprinkel Grace is author of The Ultimate Board Member's Book, Over Goal! and Fundraising Mistakes That Bedevil All Boards (and Staff Too).

Voicing Our Values: A Survey of the Guiding Principles of the Nonprofit Sector


Take the Nonprofit Congress survey on the nonprofit sector.


GuideStar Releases Sixth Annual Nonprofit Compensation Report


We are proud to announce the release of the 2006 GuideStar Nonprofit Compensation Report. This year's report, the sixth in our annual series, is derived from information on more than 108,600 individual positions at more than 63,000 tax-exempt organizations that filed Form 990 with the IRS for fiscal year 2004 and had incomes of $1 million or greater.

The GuideStar Nonprofit Compensation Report remains the only analysis of its kind based entirely on data reported to the IRS. It also continues to be the most comprehensive nonprofit compensation study available. The 2006 report includes three new features:

  • Data on non-charitable organizations as well as public charities
  • An executive summary based not only on this report but also on data for previous years
  • Information on incumbent compensation
Accurate, complete, and authoritative information on the nonprofit sector is more important than ever. Two years ago, Congress began looking closely at the nation's tax-exempt organizations, leading to the inclusion of charity-reform provisions in the Pension Protection Act of 2006. Although President Bush signed the bill into law on August 17, 2006, Congressional scrutiny of exempt organizations continues, and more changes are probably forthcoming.

At the Internal Revenue Service, Commissioner Mark Everson has made strengthening oversight of exempt organizations one of the IRS's top four priorities. This focus has already led to examinations of nonprofits' political activities, nonprofit credit counseling organizations—and nonprofit compensation. Last December, Commissioner Everson told the Greater Washington Society of CPAs that the IRS compensation inquiry had "uncovered a variety of troubling practices." The IRS plans to issue a report on its findings and to continue conducting compliance checks based on those results.

The general public is also paying more attention to nonprofits. Last year's natural disasters led to unprecedented support for relief activities and focused donors' attention on the organizations that provide them. Like government, donors have begun asking more of the nonprofits they support. They want to know that their gifts are going to legitimate organizations, and they want to know that that their contributions are being used wisely.

Nonprofits must demonstrate to oversight agencies, grantmakers of all types (government, corporations, and private foundations), and individual donors that the salaries and benefits they offer are justified. They must document their compensation practices and be prepared to help their supporters understand why these practices are appropriate. The 2006 GuideStar Nonprofit Compensation Report is a valuable tool for navigating through compensation and benchmarking complexities.


The Patriot Act and the Nonprofit Sector: Charitable Organizations after 9/11


Note: The following discussion is provided for informational purposes only and is not intended to serve as legal advice. For specific information about the Patriot Act and its implementation, consult an attorney.

What happens to tax-exempt organizations that the federal government identifies as being linked to terrorism? What does GuideStar do when the U.S. government takes action against a charity under the provisions of the Patriot Act?

Just six weeks after the events of September 11, 2001, President Bush signed the USA Patriot Act into effect. The act was designed to "Unite and Strengthen America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism." Its many sections and provisions, some controversial among lawmakers and civil libertarians alike, give federal officers greater authority for surveillance, closely monitoring financial activities, and enforcing old and new immigration laws.

Because the act stipulates that financial contributions to questionable organizations are a punishable crime, the nonprofit sector now pays close attention to the publications of the Office of Foreign Assets Control (OFAC), part of the U.S. Department of the Treasury. OFAC lists individuals and organizations that the government suspects have ties to terrorism and whose assets have therefore been frozen. The list, an alphabetical compilation that currently totals 98 pages, gets updated whenever OFAC takes action.

OFAC actions range from blocking assets temporarily to declaring a person or company a Specially Designated National (SDN) or Specially Designated Global Terrorist (SDGT), thereby freezing all assets permanently. As soon as OFAC announces its most recent decisions, we at GuideStar check the newly published organizations against our database. The vast majority of offenders are for-profit companies, such as banks, travel agencies, or shipping businesses, but a few charities have appeared on the list.

Enterprises such as Kindhearts for Charitable Humanitarian Development were flagged on our Web site immediately after the OFAC made its decisions about them public; search Kindhearts to see an example of a flagged charity. Our policy is to inform our users of such organizations' exact status on both the search results page and their GuideStar Report pages. We update that information with any new action taken by the OFAC. We also remove the organizations' listings from our partner sites (e.g., JustGive.org and Network for Good) to avoid accidental contributions to charities with frozen assets.

Typically, the IRS quickly follows up by revoking the organization's 501(c)(3) status. When that happens, the revocation is published in the IRS Bulletin, which is also monitored by GuideStar. We add that information to the search results and each organization's GuideStar Report pages. The listings remain searchable, however. To see an example of a charity that was flagged and then lost its tax exemption, search Al Haramain Islamic Foundation, Inc. or Rabbi Meir Kahana Memorial Fund; a list of all six charities whose exemptions have been revoked is at the end of this article.

Although everybody in the sector is worried about funding terrorism under the guise of charity, grantmakers are especially anxious about giving money to organizations that would misuse the grants. Not only is the funding of organizations with terrorist ties obviously illegal but large international grantmakers have a lot to lose if their monies are blocked by the U.S. Treasury. Consequently, foundations are keeping a very close watch on what happens at OFAC and GuideStar.

To help with the concerns of nonprofits and donors, the Treasury Department developed recommendations for "Voluntary Best Practice for U.S.-based Charities." They advocate more transparency about nonprofit governance and visibility and accountability in all financial practices, including the compensation of officers and employees.

Many in the sector, however, are concerned about the impact of the guidelines. A group of 40 nonprofits and foundations led by the Council on Foundations has formed the Treasury Guidelines Working Group. They have raised concerns that the guidelines impose a costly and unfair burden on foundations and charities. The working group has asked the Treasury Department to withdraw their guidelines and instead support principles for international activity. See the working group's full report >

To date, OFAC has named only seven U.S. charities as having suspected links to terrorism; these organizations are listed below. Each of these organizations is clearly identified on GuideStar as a nonprofit whose assets have been frozen; six are clearly identified as organizations whose tax-exempt status was been revoked after their assets were frozen.

U.S. Charities Named Specially Designated National (SDN) or Specially Designated Global Terrorist (SDGT)

  • Al Haramain Islamic Foundation Inc.–SDGT; tax exemption has been revoked
  • Benevolence International Foundation–SDGT; tax exemption has been revoked
  • Global Relief Foundation–SDGT; tax exemption has been revoked
  • Holy Land Foundation for Relief and Development–SDGT; tax exemption has been revoked
  • Islamic American Relief Agency–USA–SDGT; tax exemption has been revoked
  • Kindhearts for Charitable Humanitarian Development–SDN; remains tax exempt, but assets are frozen
  • The Rabbi Meir Kahana Memorial Fund–SDGT; tax exemption has been revoked
Christine Aube, September 2006
© 2006, Philanthropic Research, Inc.

Christine Aube is GuideStar's director of data management.

New Requirements for Some Form 990 Filers


Note: The following discussion is provided for informational purposes only and is not intended to serve as legal or tax advice. For specific information about unrelated business income tax or disclosures for parent organizations that control subsidiary corporations, consult your attorney or tax adviser.

This month we begin a series of articles to help explain and highlight the regulatory changes for the nonprofit sector enacted by Congress as part of the Pension Protection Act of 2006. In this article, we look at new requirements for 501(c)(3) organizations that report unrelated business income and that control for-profit or nonprofit subsidiaries.

Congress enacted two important changes that went into effect August 17. They are:

  1. Form 990-T, used to report unrelated business income tax, has been designated a public record and
  2. Parent organizations that control subsidiary corporations have new disclosure requirements on IRS Form 990.

Public Disclosure of Form 990-T

Form 990-T is used by nonprofits to report unrelated business income tax. In 2002, the IRS reported that some 32,000 tax-exempt organizations filed Form 990-T. About 13,000 of these organizations were 501(c)(3) organizations. The new public disclosure rules for Form 990-T filers only affect 501(c)(3) organizations.

The current tax code requires nonprofit organizations to report and pay taxes on unrelated business income. Unrelated business income comes from any activity that is regularly carried on if that activity is not substantially related to the organization's exempt purpose. The organization's need for income to conduct its program and further its mission does not affect the tax or the reporting obligations for unrelated business income.

Important facts and circumstances help determine whether a business is "regularly carried on" and whether or not that business is "substantially related" to the organization's exempt purpose. If you have questions about whether your organization should file Form 990-T, consult your attorney or tax adviser.

New Form 990 Public Disclosure Requirements for Nonprofits with Subsidiaries

In certain cases nonprofits do not engage in business directly but do so through subsidiary corporations. These subsidiary corporations may be nonprofit or for-profit entities. The subsidiary often pays interest, annuities, rents, or royalties to the nonprofit parent corporation. The tax treatment of these payments to the nonprofit parent corporation by its subsidiaries is generally excluded from unrelated business income tax. Certain facts and circumstances in this parent-subsidiary relationship, however, are subject to complex statutory provisions found in section 512(b)(13) of the Internal Revenue Code.

Activities between nonprofit parent corporations and their subsidiaries, particularly loans from nonprofits to their subsidiaries, have raised concerns in Congress that have led to greater transparency and increased reporting on these activities. New reporting requirements seek to track all funds transferred between nonprofit parents and their subsidiaries.

As of August 17, 2006, nonprofits with subsidiary corporations, as defined by IRS section 512(b)(13), that file Form 990, 990-EZ, or 990-PF are required to met the following IRC Section 6033(h) reporting requirements:

  • List the amount of any interest, annuities, royalties, or rents received from each controlled entity;
  • List any loans made to each controlled entity; and
  • List any transfer of funds between the controlling organization and each controlled entity.
For more information, consult the IRS Web site. If you have questions about whether your organization must comply with these new requirements, consult your attorney or tax adviser.

Dan Moore, September 2006
© 2006, Philanthropic Research, Inc. (GuideStar)

Dan Moore is GuideStar's vice president for public affairs.

Disaster Giving = On-line Giving: Highlights of a New Study


Network for Good, which processed $24.5 million in contributions for disaster relief last year, has just released an analysis of on-line disaster giving. "Impulse on the Internet: How Crisis Compels Donors to Give Online," examines why donors give on-line, on-line giving behaviors, and the implications for nonprofits that wish to raise funds on-line. The study's major findings are excerpted below; click here to read the full report.

This study is based on analysis of $24.5 million in charitable giving on-line through Network for Good in response to three major crises: the December 2004 tsunamis, Hurricane Katrina in August 2005, and the Pakistan earthquake of October 2005.

  • Tsunami relief: 82,000 donations totaling $11 million for 124 charities
  • Katrina relief: 107,000 donations totaling $13 million for 344 charities
  • Pakistan relief: 3,100 donations totaling $500,000 for 75 charities
Finding #1: The Internet is ideally matched to charitable giving at times of disaster, when technology can turn the impulse to help into a donation within seconds. This "impulse effect" is evinced in increased traffic, donations, and conversion rates.

The State of Confidence in the Sector, 2006: August Question of the Month Results


The August 2006 Question of the Month asked, "Do you believe that the public has more or less confidence in the nonprofit sector than it did five years ago?" We compared last month's responses to those from August 2004, when we asked, "Do you believe that the public has more or less confidence in the nonprofit sector today than in the past?"

  August 2004 August 2006
Less 58% 51%
More 19% 35%
About the same 18% 12%
Don't know 5% 2%

Why Confidence Has Decreased

Participants who said that confidence has decreased identified the following reasons (respondents could select more than one reason):

Why Confidence Has Decreased
Scandals in the sector 73%
People don't understand the complexity of the sector 48%
Nonprofit executives' salaries 45%
Low program ratios 12%
It's much easier to get information on nonprofits today 9%
Other 6%


Two anonymous participants suggested additional causes: "Departure of founders and those with passion for the mission, with replacements more interested in power of running a business, and taking advantage of naive boards," and "People believe that there are too many organizations addressing the same broad issues and that there is duplication of effort as a result."

Why Confidence Has Increased

Respondents who said that confidence has increased identified the following reasons (respondents could select more than one reason):

Why Confidence Has Increased
It's much easier to get information on nonprofits today 61%
Nonprofits are more transparent 43%
People understand the sector better today 39%
People trust other sectors less today, so they trust the nonprofit sector more 35%
Donors have a better idea of how to evaluate nonprofits today 26%
Other 17%


Mark Cole of the Aspen Valley Ski/Snowboard Club suggested, "Competition within the sector has forced us to do a better job of communicating our stories to our constituencies." Carol Painter of the University of Auckland pointed to higher standards of nonprofit management. Randy Turner of the Smith County Chapter of the American Red Cross agreed: "Successful track records & better efficiency." An anonymous participant mused, "I think big disasters such as tsunami & katrina have increased information about nonprofit work."

Recommendations for Increasing Confidence in the Sector

Two years ago, participants suggested several ways to improve confidence in the sector. So last month, we asked, "What can be done to increase the public's confidence in the nonprofit sector?" We listed the eight ideas mentioned most often in August 2004 as well "Other"; participants could select more than one response:

Ways to Increase Confidence in the Sector
Every nonprofit must be transparent 62%
Every nonprofit should adopt a code of ethics 54%
Every nonprofit should help educate the public about the sector 54%
Every nonprofit should have a self-evaluation program 43%
The laws we already have should be enforced better  40%
A ratings system or seal of approval should be created 37%
New laws governing the sector should be passed 19%
More resources should be given to federal, state, and local regulators 17%
Other 11%


Participants also offered other ideas. Randy Turner of the Smith County Chapter of the American Red Cross called for "increased accountability to donors." Nancy Nehr of Silver Spring Dance stated, "Non-profits should communicate clearly with the community in which they serve." Miami Beach, Florida, grants consultant Karen L. Oleet suggested, "Increase in media relations/communications proportionate to fin. size of org."

One anonymous participant advocated not allowing nonprofits to be established as tax shelters. Another unidentified respondent urged, "Run them [nonprofits] more like a business and demand accountability." A third wrote, "Organizations should seek out partnerships & coalitions to minimize duplication."

Conclusions

Diane Menio of the Center for Advocacy for the Rights and Interests of the Elderly (CARIE) pointed out that this issue reflects the complexity of the sector itself: "Unfortunately or fortunately, the sector is large and diverse. This leads to many misunderstandings about operations, salaries of CEOs, etc. As a director of a smallish nonprofit we struggle to respect our staff and respond to the demands of our funders."

An anonymous participant asserted that the problem requires a new approach: "Nonprofits will be successful only if they balance the 'mission' with the generation of revenue which is directed to the attainment of the 'mission.' It is a paradigm shift that requires a rethinking that business, revenue/money is evil and capitalism and individual achievement is bad. Executive compensation and transparency is a smokescreen for a lack of efficiency, success and accountability."

Finally, another unidentified respondent suggested, "Education and ethical behavior are key to improving public confidence."

Suzanne E. Coffman, September 2006
© 2006, Philanthropic Research, Inc. (GuideStar)

Suzanne Coffman is GuideStar's director of communications and editor of the Newsletter.