8 Legal Decisions and  Government Affairs Affecting  the Nonprofit Sector Right Now

By Sean Norris

On June 25, 2015, the Associated Press reported that Paul LePage, the Republican governor of Maine, had been accused of pressuring the Good Will-Hinckley school, a nonprofit charter school for at-risk youth, into removing Mark Eves from his position as president. According to the report, LePage threatened to withhold from the school $500,000 in yearly funds if it kept Eves on board, which, in turn, could have led the school to miss out on  another $2 million in private funds—a potentially devastating blow to the small nonprofit.

Eves, as it happens, is Maine’s Democratic House Speaker. He also has a track record of opposing legislation favoring charter schools—a fact that apparently didn’t sit well with LePage, who called Eves’ appointment as president of a charter school “the height of hypocrisy” and “absolutely unacceptable.” The full extent of LePage’s alleged strong-arming was unclear, but it set off alarm bells on both sides of the party line. “The governor is taking partisan politics to a new, dark level,” said Republican Sen. Tom Saviello in an email to the Associated Press.

Lost in the middle of all this  posturing was Good Will-Hinckley, now an unwitting player in a game of political he-said-she-said. While politicians argued about precedents and lawsuits and investigations, the school quietly terminated Eves’  appointment. And while it wouldn’t say why—in a statement, the school said only that it sought to avoid “political controversy”—it’s easy to connect the dots. Even if LePage hadn’t made an explicit threat, it was enough to spook Good Will-Hinckley  into changing course.

It’s an extreme example, of course, but the situation highlights the extent to which nonprofits remain at the mercy of the legal system. Typically, the proceedings happen in more  organized, less shady fashion, with rules and laws handed down by the government after measured discourse and a checks-and-balances fueled  trip through the legislative branch. Either way, the end-result is the same: In the middle of it all is your nonprofit.  And each legal decision has the  potential to directly and greatly  affect your day-to-day operations,  your hiring practices, your development programs and everything else.

Good Will-Hinckley was a passive observer, a casualty in the political crossfire—but you don’t have to be. You can be prepared. Here, Gene Takagi, managing attorney, and Erin Bradrick, senior counsel—both of NEO Law Group, a San Francisco-based firm that counsels nonprofits—and Jamie Ray-Leonetti, staff attorney for the Disability Rights Network of Pennsylvania in Philadelphia, discuss eight legal decisions that could impact your nonprofit now and in the future.

1. Form 990 Mandatory  Electronic Filing
The Form 990 is the annual information return most tax-exempt organizations must file with the IRS. Currently, only the Form 990-N (e-postcard) is required to be filed electronically. By requiring electronic filing of the Form 990, nonprofits along with researchers and government agencies will be better able to use and share data for insight and analysis about the sector and various subsectors. In addition, donors will be able to better analyze the organizations they are supporting or considering supporting.

The advisory panel to the IRS found that less than 2 percent of respondents to its survey stated that electronic filing of the Form 990 would be burdensome. But, as  was the case when the Form 990-N was released, there  is concern that a significant number of nonprofits, particularly smaller volunteer-driven nonprofits in rural areas, may have difficulty complying with an electronic filing requirement.
— Gene Takagi

2. Zubik v. Buwell (and the “Obama  Compromise”)
In this case, the United States Court of Appeals for the Third Circuit upheld the mandate in the Affordable Care Act that is sometimes called the “Obama Compromise.” This mandate allows religious-based nonprofit organizations that qualify to be exempt from providing contraception under their health plans for employees. Some religious nonprofit organizations requested that the United States Supreme Court issue a stay of the Third Circuit ruling, because they said that the mandate did not go far enough to protect their religious freedoms. On June 30, 2015, the United States Supreme Court issued an order denying a further stay of the mandate. The Court did not rule on the merits of this mandate, but noted that a petition for writ of certiorari on the merits remains pending. For now, the Third Circuit ruling stands.
— Jamie Ray-Leonetti

Controversy and Regulation

By now, you’re probably familiar with the cancer-charity scam that rocked the nonprofit sector earlier this year. If not, here’s a primer. The Federal Trade Commission (FTC) found that four cancer charities—the Cancer Fund of America, Children’s Cancer Fund of America, Cancer Support Services, and the Breast Cancer Society—had bilked donors out of $187 million between 2008 and 2012, spending little on cancer  research or support. The sham charities were run by members of the same extended family, who spent funds on “cars, travel, college tuition and even dating-site memberships for family, friends and employees,” according to the FTC complaint.

It was a major setback for legitimate, law-abiding charities everywhere, and not just in the way it threatened to damage public trust—it’s the latest in a string of controversies driving calls for increased regulation in the sector.

“While the nonprofit sector remains by far the most trusted of the sectors, high-profile scandals and media focus on such scandals have eroded this trust and led to proposals of increasing regulation of nonprofits,” said Gene Takagi, managing attorney for NEO Law Group. “The IRS division responsible for tax-exempt organizations has also been rocked by recent controversy involving inappropriate screening  of exemption applications, and has faced investigations and budget cuts, reducing its ability to step up its enforcement of violations. This is unfortunate because the sector needs improved enforcement, not more regulation, to better serve the public.”

3. China’s Pending NGO Regulations
China’s draft Foreign NGO Management Law, released in May 2015, would, according to the New York Times, require foreign nonprofits to be vetted by China’s security police before conducting activities in China, and to face penalties for broadly defined offenses such as subverting state power, destroying ethnic harmony, and damaging the national interest, regardless of whether such activities occurred in or outside of China.

Accordingly, if this law passes, the Chinese authorities could penalize a nonprofit and its agents operating in China for any criticism of the Chinese government or Chinese policy, even if such criticism was made in the United States. American nonprofits will need to be very  cautious about operating in China, particularly  if they are involved in any type of human rights or social justice advocacy efforts. And it will  be particularly important for such nonprofits to make their employees and volunteers aware of the additional personal risks they may face and to mitigate such risks to the extent possible.  It is unfortunate that such a law will very likely result in much less charitable support going  to the residents of China, and significantly  more corruption.
— Gene Takagi

4. Election Lobbying: Private Charities
It depends on what section of Internal Revenue Code Section 501(c) the organization is exempt under and how it is classified. Organizations that are recognized as exempt under Section 501(c)(3) may not engage in any electioneering activities, which means that they may not directly or indirectly participate or intervene in any political campaign on behalf of or in opposition to any candidate for elective public office. This prohibition applies to federal, state and local offices that are filled by vote of the people, and a candidate includes any individual who offers herself or himself or is proposed by others as a contestant for elective public office.

The prohibition on such activities means, among other things, that Section 501(c)(3) exempt organizations may not make contributions (cash or in-kind) to a political campaign on behalf of a candidate, may not make endorsements and may not coordinate activities with a candidate’s political campaign. Certain election-related activities are permitted, but are subject to additional rules and limitations that a Section 501(c)(3) exempt organization should ensure it clearly understands before engaging in such activities, including voter education, voter registration and candidate education activities.

Lobbying includes contacting, or urging the public to contact, legislators for the purpose of proposing, supporting or opposing legislation, or advocating the adoption or rejection of legislation. Section 501(c)(3) exempt organizations that are classified as private foundations will incur an excise tax on any expenditure on lobbying activities and, because the excise tax is so significant, it is generally considered to be a prohibition on lobbying expenditures by private foundations.
— Erin Bradrick