Who Can Regulate Fraudulent Charitable Solicitatio

Volume 13 (2015) | ISSN 1932-1821 (print) 1932-1996 (online)
DOI 10.5195/taxreview.2015.39 | http://taxreview.law.pitt.edu
SYMPOSIUM
AALS Section on Nonprofit and

Philanthropy Law
January 2015 Meeting
WHO CAN REGULATE FRAUDULENT

CHARITABLE SOLICITATION?
James J. Fishman
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 3.0
United States License.
This journal is published by the University Library System of the University of Pittsburgh as part of its
D-Scribe Digital Publishing Program, and is cosponsored by the University of Pittsburgh Press.
SYMPOSIUM
AALS Section on Nonprofit and

Philanthropy Law
January 2015 Meeting
WHO CAN REGULATE FRAUDULENT

CHARITABLE SOLICITATION?
James J. Fishman*
I. INTRODUCTION
The scenario is common: a charity, typically with a name including an

emotional word like “cancer,” “children,” “veterans,” “police,” or
“firefighters,” signs a contract with a professional fundraiser to organize
and run a campaign to solicit charitable contributions. The charity may be
legitimate or a sham. The directors of the charity may be allied or co-
conspirators with the fundraiser, or just as likely, well-meaning but naïve
individuals. The fundraiser raises millions of dollars through telemarketing,
Internet, or direct mail solicitation. The charity receives but a small
percentage of the amount. In some cases, at the close of the campaign, the
organization owes the solicitor more than the amount raised for the charity.1
*
© James J. Fishman 2015, Professor of Law Emeritus, Pace University School of Law.
1
Out of 573 telemarketing campaigns conducted in New York State in 2013, expenses exceeded
contributions, so the charity suffered an overall loss, in 17.6% or 101 of them. Charities Bureau, N.Y.
State Law Dep’t, Office of the Att’y Gen., Pennies for Charity Where Your Money Goes: Telemarketing
by Professional Fundraisers 8 (2014), http://www.charitiesnys.com/pdfs/2014_Pennies.pdf. This can
Pitt Tax Review | ISSN 1932-1821 (print) 1932-1996 (online)

1
2 | Pittsburgh Tax Review | Vol. 13 2015
Thereafter, the state attorney general investigates the charity and finds
fraud in the solicitation or an improper use of the funds raised. As part of
the settlement, the professional solicitor agrees to be barred from operating
in that particular state. Thereafter, the fundraiser moves to a neighboring
jurisdiction, opens business (perhaps under a different name), and
commences the same cycle of fraudulent fundraising using another charity.2
Deception in solicitation and misuse of monies raised for charitable
purposes is not only a fraud on the donor; it also can be a diversion of tax
dollars from state or federal treasuries.
This article examines several approaches for regulating unscrupulous
professional fundraisers and preventing carpetbagging, moving from
jurisdiction to jurisdiction, committing fraud, or willfully violating
regulatory requirements. It examines limitations in the existing regulatory
framework to prevent charity fraud and offers possible solutions to the
problem. As a first solution, the Internal Revenue Service (IRS) should
revitalize and extend the “private benefit doctrine” as a tool of enforcement.
Second, Congress and the Service should amend § 4958 to address excess
benefit transactions to more clearly include unscrupulous solicitors.
A third possible resolution to the problem outlined would be the
expansion of the Federal Trade Commission’s (FTC) enforcement authority
to cover charitable solicitation generally. Currently, the FTC has authority
over telemarketing by for-profit fundraisers.3 The legislation proposed
occur when the fundraising contract does not guarantee the charity a specific dollar amount or specific
percentage of the gross receipts, including when fundraising is incidental to the telemarketing campaign,
or when the contract does not hold the charity harmless for expenses/fees that exceed the gross amount
contributed. Id. Some of these losing campaigns were not intended to raise money, but focused on
funding new and promising donors or educating individuals unaware of the organization and its mission.
2
According to a series of articles by the Center for Investigative Journalism and the Tampa Bay
Times, this is a depressingly common occurrence. See Kris Hundley & Kendall Taggart, America’s 50
Worst Charities Rake in Nearly $1 Billion for Corporate Fundraisers, TAMPA BAY TIMES & CTR. FOR
INVESTIGATIVE REPORTING (June 6, 2013), http://www.tampabay.com/topics/specials/worst-charities1
.page. Even after a lifetime ban from New York, a fundraiser remained active in the state brokering
fundraising agreements for charities. See Kris Hundley & Kendall Taggart, Telemarketing Consultant
for Questionable Charities Fined $50,000, CTR. FOR INVESTIGATIVE REPORTING (Apr. 2014), http://
cironline.org/blog/post/telemarketing-consultant-questionable-charities-fined-50000-6294.
3
The FTC regulates nonprofit organizations only indirectly. See infra note 116 for a description
of the FTC’s jurisdiction over nonprofit organizations. A recent solution to the problem posed occurred
when the FTC and the attorneys general of the fifty states and the District of Columbia jointly filed a
complaint against four sham cancer charities that had raised $187 million from 2008 to 2012. The

Vol. 13 2015 | Fraudulent Solicitation| 3
would enable the creation of a self-regulatory organization under FTC aegis

that fundraisers would be required to join. This new organization would
enforce norms and rules for professional fundraisers, have the authority to
discipline and, if necessary, to bar dishonest fundraisers from the
fundraising industry.
A final recommendation is the creation of an online, readily accessible
database containing records of violations of professional fundraising
companies and the individuals who own and work for them, the contracts
between professional solicitors and the charities they work for, the results
of fundraising campaigns listing the percentage of dollars raised that goes
to the charity, and the texts of settlement agreements between state charity
officials and fundraisers and the charities involved. An important issue not
addressed in detail is the fiduciary responsibility of charity boards to
carefully select the firms that manage their solicitation campaigns.
II. EXAMPLES OF THE PROBLEM
A. Quadriga Art
In June 2014, the New York State Attorney General reached a $25
million settlement with Quadriga Art, one of the nation’s largest direct mail
companies that for seven years conducted misleading fundraising for the
Disabled Veterans National Foundation (DVNF).4 From the formation of
DVNF in 2007 to 2013, Quadriga raised $116 million. More than 90% went
toward the cost of the direct-mail solicitations. Despite all of this
fundraising, DVNF was indebted to Quadriga for $14 million! Under the
terms of the settlement, Quadriga was forced to pay $10 million in damages
individuals involved will be barred from engaging in charitable solicitation and charity work. See Fed.
Trade Comm’n v. Cancer Fund of America, Inc., No. 2:15-cv-00884-NVW (D. Ariz. May 18, 2015).
This is an extraordinary action and obviously does not involve an efficient solution to the problem. Most
of the money is long gone.
4
See Suzanne Perry, N.Y. Wins $25-Million in Fundraising Abuse Case, THE CHRON. OF
PHILANTHROPY (June 30, 2014), http://philanthropy.com/article/NY-Wins-25-Million-in/147445/;
David Fitzpatrick & Drew Griffin, Charity Marketing Group Investigated by Two States for Possible
Fraud, CNN (July 1, 2014), http://www.cnn.com/2012/09/26/us/senate-charities-investigation/
index.html. See 2014 N.Y. Op. Att’y Gen. 145 (June 11, 2014), www.ag.ny.gov/pdfs/DVNF-Quadriga-
Convergence-AOD_14-145.PDF, for the full settlement agreement.

and to forgive the debt, and the founding board members of the charity had
to resign.5 Quadriga also agreed to refrain from engaging in a “funded
model,” by which it would pay all of the startup costs and fundraising costs
for its clients in the hope of profiting down the road.6
The New York investigation found that the charity was a front for
Quadriga, whose lawyer incorporated and obtained tax-exempt status for
the organization and drafted the agreement between the fundraiser and
DVNF. It also concluded the parties were guilty of misleading solicitations.
For example, the mailings highlighted a story about a wounded veteran that
the DVNF never helped. The organization falsely claimed it had a robust
national network of veterans’ advocates and benefit coordinators.7 There
was also a conflict of interest. A sales agent commissioned by Quadriga Art
also served as a consultant to the veterans’ charity, which then hired his
daughter as chief administrative officer. As for any assistance to disabled
veterans, it consisted of hand sanitizers, M&M’S candies, chefs’ hats, coats,
and leftover shoes.8 Quadriga remains in business, and DVNF is still tax
exempt.9
5
In addition, DVNF could no longer do business with Quadriga for three years unless the
company was a legitimate low bidder and the attorney general permitted.
6
The settlement calls for both Quadriga Art and Convergence Direct Marketing, of Bethesda,
Maryland, to take the following actions: to fully disclose all potential conflicts of interest, refrain from
dealing with a start-up charity that does not have its own legal counsel, and perform “due diligence” to
ensure fundraising appeals are accurate. The companies must also provide more information to charities
about the costs involved in fundraising campaigns when they cover the up-front expenses of such
efforts. See 2014 N.Y. Op. Att’y Gen. 145, supra note 4.
7
Quadriga had been the subject of ongoing investigations by CNN and the Senate Finance
Committee since 2010. The Committee’s focus was also on DVNF and whether it should be tax exempt.
CNN reported on a fundraising contract signed with the St. Bonaventure Indian Mission School of
Gallup, New Mexico after which nine million dollars was contributed but almost nothing went to the
school, which ended up owing more than five million to Quadriga. At least eleven other Quadriga
clients were in the same financial situation. Fitzpatrick & Griffin, supra note 4.
8
Why if DVNF was giving veterans anything, would it be the items listed in the text? The answer
is another important and growing disreputable practice—gifts-in-kind. A new or shell charity may not
be doing anything because it has insufficient cash to maintain real programs. It can dress up its balance
sheet and programs through gifts-in-kind, thereby impressing donors. The charity might receive goods
that are outdated, hard to value, or worthless, such as pharmaceuticals that are outdated or illegal to sell
in the United States. A middleman, for example Charity Services International (CSI), will receive goods
from a corporate donor, who will receive a charitable deduction if they are passed on to a charity.
Assume the corporation values the goods at $20 million. The corporation will take a $20 million
deduction. Upon receipt the charity dresses up its balance sheet to reflect $20 million in donations and
will allocated the contribution to program revenue. The goods are disposed of, perhaps given to

B. Coalition Against Breast Cancer
The Coalition Against Breast Cancer (CABC) was a New York charity
whose stated mission was to help women survive. CABC claimed to do this
by providing research relating to breast cancer, a mammography van where
women could get free mammograms, “constant” [sic] seminars and forums
for women, and a mammography fund that would provide free
mammograms for women who had no insurance. None of these statements
was true.10 In 1995, Andrew Smith, a director of CABC and Garrett
Morgan, commenced a fundraising campaign for the organization.11 From
the inception of the charity, Morgan, CABC’s sole outside fundraiser,
played an active and central part in CABC’s fundraising expenditures.
Beginning in 2005, CABC outsourced all of its fundraising business to the
Campaign Center, a fundraising solicitation firm owned by Morgan.
Campaign Center managed CABC’s campaigns either directly or through
the use of additional firms. Morgan received an additional broker’s fee from
CABC. The CABC contract with the Campaign Center and Morgan chose
recipients, or if outdated pharmaceuticals are involved, sent to a foreign country, where they are given to
another charity or disposed of. The middleman takes care of the paperwork. Another synonym for this
practice is accounting fraud. See Charity Watch, The Alice in Wonderland World of Charity Valuation
(Aug. 1, 2011), https://www.charitywatch.org/charitywatch-articles/the-alice-in-wonderland-world-of-
charity-valuation/13.
For a description of the work of Charity Services International, see David Fitzpatrick & Drew
Griffin, No Sign of $40 Million in Donations, CNN (Feb. 10, 2014), http://www.cnn.com/2014/02/10/
world/americas/guatemala-charities-missing-donations/; see also Kendall Taggart & Kris Hundley, No
Accounting for What Charities Ship Overseas, TAMPA BAY TIMES & CTR. FOR INVESTIGATIVE
REPORTING (Jan. 24, 2014), http://cironline.org/reports/no-accounting-what-charities-ship-overseas-
5817?utm_source=CIR&utm_medium=social_media&utm_campaign=twitter.
9
As often happens after a publicized settlement, Quadriga, along with eight affiliates, has been
folded into a new company called Innovairre Communications, which refers to itself as a “sophisticated,
more-efficient fundraising powerhouse.” See Suzanne Perry, Quadriga, Accused of Misleading Donors,
Reorganizes Under New Name, THE CHRON. OF PHILANTHROPY (Dec. 17, 2014), http://
philanthropy.com/article/Quadriga-Accused-of/150915/?cid=pw&utm_source=pw&utm_medium=en.
10
At best the statements were extremely misleading. “[B]etween 2008 and 2011[,] despite raising
over $4 million, CABC funded mammograms for only eleven women.” People v. Coalition Against
Breast Cancer, Inc., No. 20432-2011, 2013 N.Y. Misc. LEXIS 3583, at *8 (N.Y. Sup. Ct. May 2, 2013).
11
“[A]t approximately the same time as Morgan was working as a fundraiser for another sham
charity on Long Island, ‘Meals on Wheels,’ which the State shut down after requiring Morgan and
others to comply with measures to protect the public against fraudulent fundraising practices.” Id. at *2.

the firms and the latter two received a minimum of 80–85% of the funds
raised.12
Campaign Center and the other fundraising firms were successful.
From 2005 through 2011, the Campaign Center generated $4,861,224 in
contributions for CABC through its own direct fundraising activities, and
CABC paid the Campaign Center $3,908,262 for such services (80% of the
Campaign Center generated contributions). Of the amount CABC retained,
85% was spent ($1,474,688) to pay compensation to its Directors
($918,951) and for overhead expenses. Less than 4.4% of the nearly $10
million raised was expended for charity related to breast cancer.13
The New York Attorney General charged that the Campaign Center
utilized fraudulent fundraising tactics to maximize donations,14 falsely filed
with the state the amounts that CABC paid for brokerage services
($130,685), and utilized a fundraiser who was banned from such activity in
12
While alarming, this figure alone isn’t a violation of law. The Attorney General alleged that
CABC was in violation of several provisions in Article 7A of N.Y. Executive Law, forbidding
fraudulent solicitation. “In 2010, CABC made Morgan’s broker agreement exclusive.” Id. at *5.
13
[C]haritable activities between 2005 and 2011, while the Campaign Center was its official
fundraiser, were limited to the following:
1) a scholarship program for students with a relative with breast cancer (3.4 percent of
total expenditures); 2) funding mammograms and treatment for approximately 40 women
(.49 percent of total expenditures); and 3) donations to women’s health events (.22 percent
of total expenditures).
Id. at *3.
14
CABC, through the Campaign Center, utilized the following fraudulent fundraising tactics to
maximize donations collected:
1) the Campaign Center sent donors an “official invoice” claiming the donor agreed to
make a pledge when such donor declined to do so; 2) some “pledge donors” never even
received a solicitation call; 3) the Campaign Center sent out repeated invoices, even after
the pledge had been paid; 4) the Campaign Center stated that it was calling for a local
charity, and the telemarketers changed the town of their script so that it matched that of the
potential donor to convey the false impression that donations would stay in the
community; 5) the solicitors used false names, varying their last name in an attempt to
identify the perceived racial, religious, or ethnic group of the potential donor; 6) the
solicitors routinely stressed that CABC gave free mammograms, when virtually no funds
were utilized for such purpose; and 7) the solicitors for the Campaign Center never stated
that they were paid professional solicitors employed by a professional fundraiser.
Id.

New York state.15 The court granted judgment against defendant board
members and fundraisers in a combined amount of $1,555,000, ordered
CABC to be dissolved, barred individual board members from serving in
any manner for any entity or person that held or solicited charitable
contributions in New York, or from receiving any benefits derived from
solicitation of contributions for charitable organizations in New York.
Campaign Center and its owner Morgan had to pay restitution for the fraud
and were barred from any further charitable solicitation in New York. The
settlement required the Campaign Center to be dissolved.
C. U.S. Navy Veterans
In other scenarios, the charity is a complete sham: such was the

situation with the U.S. Navy Veterans. Although some Americans may
object to the political justifications for going to war, almost all appreciate
the sacrifices made by veterans and eagerly support charities that assist
them. Fraudulent organizations preying on these good intentions,
purportedly raising funds to help veterans, have proliferated in recent years.
The U.S. Navy Veterans Association in 2009 at its peak raised $27.6
million and an estimated $100 million in all. It boasted of a membership of
66,000 and offices in 41 states, none of which existed. The offices were
actually rented mailboxes, and of the 84 purported officers, the only one
who could be traced was an individual calling himself Bobby Thompson,
whose identity had been stolen from a civilian in Washington State.
Thompson claimed he was a retired Navy lieutenant commander and ran
the organization from St. Petersburg, Florida. He donated substantial sums
in his own name to conservative causes and funded a successful lobbying
effort in Virginia that led to legislation exempting veterans groups from
registration requirements. The professional solicitors received 90% of the
funds raised, but were not part of the conspiracy.
The gaps in oversight in this area are demonstrated by the fact that
U.S. Navy Veterans were unmasked not by federal or state charity
oversight, but through investigative reporting by the Tampa Bay Times.
15
The individual was Mark Gelvan, who in 2004 had agreed had agreed to a lifetime ban on
raising funds for charities in New York. He was fined $50,000 by the attorney general. See Hundley &
Taggart, supra note 2.

The Ohio Attorney General brought a criminal prosecution. U.S. Navy

Veterans received recognition of tax-exempt status in 2002 and filed annual
information returns. In 2008 the IRS audited the Connecticut “chapter.”
After reviewing documents and speaking to “Commander” Thompson and
his tax counsel, a law professor, the Service issued a no action finding.16
The three examples differ. DVNF was a charity run by naïve people,
clueless about their fiduciary responsibilities, which allowed the
organization to become a vehicle for the fundraiser. The board breached its
duty of care in the selection of the solicitor.17 There were connections
between the fundraiser and DVNF’s administrators, though not the board
members. The charity provided no assistance to its beneficiaries beyond the
worthless gifts-in-kind.18
CABC operated as a charity that provided minimal resources to
achieve its mission, though the funds were not used as the solicitation
scripts promised—for research on breast cancer or a mammogram van. Less
than 4.4% of funds raised were expended for charity related to breast
cancer. U.S. Navy Veterans was a sham. There was no separate existence
between the fraudster and the organization beyond forged documents and
16
The individual posing as Thompson “disappeared shortly after being indicted in Ohio on
federal charges of identity theft, fraud and money laundering. Ohio’s Attorney General took the lead in
pursuing Thompson because Navy Veterans had a chapter in that state.” Kris Hundley, Bobby
Thompson, Fugitive from Navy Vets Charity, Caught on West Coast, TAMPA BAY TIMES, May 1, 2012,
http://www.tampabay.com/news/business/article1227828.ece; see also Jeff Testerman & John Martin, In
2008, IRS Audited Navy Veterans and Gave the Phony Charity a Clean Bill of Health, ST. PETERSBURG
TIMES, Nov. 19, 2010, http://www.tampabay.com/news/politics/national/article1135104.ece. The
Florida Attorney General, the jurisdiction where the sham charity was based, initiated legal action but
dropped it when Thompson became a fugitive. Thereafter, the Service opened a criminal investigation
and other attorneys general became involved.
After a cross-country search, U.S. Marshals apprehended Thompson in Portland, Oregon.
Thompson’s true identity was revealed to be John Donald Cody, a 1972 graduate of Harvard Law
School! A jury ultimately found Cody guilty of 23 counts of fraud, money laundering, and theft. An
Ohio judge then sentenced him to 28 years in prison. Kris Hundley, U.S. Navy Veterans Association
Charity Fraud Trial Ends with Bobby Thompson Guilty on All Counts, TAMPA BAY TIMES, Nov. 14,
2013, http://www.tampabay.com/news/courts/criminal/us-navy-veterans-association-charity-fraud-trial-
ends-with-bobby-thompson/2152382; Brian Ross et al., Navy Vet Scammer ‘Bobby Thompson’ Gets 28
Years, ABC NEWS (Dec. 16, 2013), http://abcnews.go.com/Blotter/navy-vet-scammer-bobby-thompson-
28-years/story?id=21232519.
17
See infra pp. 24–25, 28, 42 for discussions of the duty of care.
18
See supra note 7.

shell organizations. Quadriga and CABC involved consent agreements with

the charity and the fundraiser. U.S. Navy Veterans was a successful
criminal prosecution.
While the three examples are egregious, they are depressingly
common scenarios. Why do often well-meaning charities get involved with
fundraisers that take such a large percentage of the amount raised? How
could U.S. Navy Veterans fool so many regulators? The supposed
advantage to charities of using a contingent fee professional solicitor is that
the charity feels it bears no financial risk, and every dollar received, even if
it is only five or ten percent of the total take, is a dollar more than it
otherwise would have had.19 This is usually true; small or unpopular
charities must pay substantial percentages to fundraisers because of the
difficulty of attracting donors.20 In 2013, the Tampa Bay Times and the
Center for Investigative Reporting published a report entitled “The Worst
Charities in America”21 that examined 6,000 charities which used
professional fundraisers to garner donations. It focused on the fifty worst,
determined by the ratio of funds raised to the amount received by the
charity. The fifty raised a total of $1.3 billion from contributors over the
past decade, and only $300 million reached the charities. Most of the
charities’ shares were used for salaries, overhead, and consulting
arrangements with related parties.
The report found that the fifty nonprofits devoted less than four
percent of the monies raised to direct financial assistance. Many charities
had costs of fundraising over 90% year after year. As in the Quadriga
example, many were more indebted to the fundraisers every year, no matter
how much had been raised. There were numerous instances of self-dealing,
excessive compensation, misleading and fraudulent representations to
donors, related party transactions, and the use of satellite charities, often run
by family members of the individuals behind the original organization.
19
Ellen Harris et al., Fundraising into the 1990s: State Regulation of Charitable Solicitation After
Riley, 24 U.S.F. L. REV. 571, 578 (1990).
20
Riley v. Nat’l Fed’n of the Blind, 487 U.S. 781, 793 (1988).
21
Hundley & Taggart, supra note 2.

Similar to CABC, several nonprofits were fronts for their fundraisers.22

Many used similar names to well-known legitimate nonprofits with the
words “cancer,” “kids,” “children,” and “veterans” in the name.23 There
were omissions or deceptions in the Form 990, the annual information
return filed with the IRS, or in the state filings. When some of the charities
were shuttered by a state regulator, they would merely relocate to another
jurisdiction.
III. COST OF FUNDRAISING AS AN EVALUATIVE MEASURE
“The Worst Charities in America” deservedly raised awareness of the

extent of charitable fraud or deception, but its conclusions were based on
the organizations’ cost of fundraising (CFR), which is not necessarily an
indication of wrongdoing. Attorneys general (AG) have an interest in CFR
and are aware of its strengths and weaknesses as a measure of efficiency.
Because of their other responsibilities and finite resources, CFR is used as a
public education tool in several jurisdictions, through the publication of an
annual report on the offices’ websites, often titled “Pennies for Charity.”
This report shows the percentage amount that goes to the charity compared
to the professional solicitor.24 The investigations and prosecutions of
solicitors who engage in misleading or fraudulent fundraising tend to be
22
See discussion infra Part V.
23
Of the 53 charities CharityWatch[, a nonprofit rating organization,] currently rates in its

Veterans & Military category, [] about half (26 of the 53) receive an ‘F’ grade, including
some of the largest and most famous groups such as AMVETS, Military Order of the
Purple Heart Service Foundation, Paralyzed Veterans of America, and Veterans of Foreign
Wars of the U.S.
A Donor’s Guide to Serving the Needs of Veterans and the Military, CHARITYWATCH (Jan. 26, 2015),
https://www.charitywatch.org/charitywatch-articles/a-donor-39-s-guide-to-serving-the-needs-of-
veterans-and-the-military/150. The ratings reflect financial efficiency. See id.
24
See, e.g., Charities Bureau, N.Y. State Law Dep’t, Office of the Att’y Gen., Pennies for
Charity: Where Your Money Goes: Telemarketing by Professional Fundraisers (2014),
http://www.charitiesnys .com/pennies_report_new.jsp; see also Charities Bureau, Cal. Dep’t of Justice,
Office of the Att’y Gen., Summary of Results of Charitable Solicitation Campaigns Conducted by
Commercial Fundraisers in Calendar Year 2013 (Nov. 2013), http://oag.ca.gov/sites/all/files/agweb/
pdfs/charities/publications/ 2013cfr/cfr2013.pdf.

episodic, and AG intervention may not originate or be driven by the office

in the jurisdiction where the fraud was based.25
Despite the common wisdom that a high cost of fundraising results in
few pennies on the dollar actually going to support the charitable mission, it
does not mean the organization is engaged in fraud. There is no proven,
direct correlation between the cost of fundraising and charitable outcomes.
It takes money to raise money or to educate the public, particularly if the
cause or organization is new or unpopular.
A high ratio of expenses to CFR, though controversial, does not
necessarily indicate that a nonprofit is mismanaged, corrupt, or inefficient.
CFR is but one piece of data used to evaluate a charity.26 A nonprofit’s CFR
may be high because: it is a nascent organization with an unfamiliar
mission; the campaign is an attempt to recruit new supporters or donors; the
solicitation’s primary purpose is educational; or the average contribution
received is small. Other factors beside the CFR, such as salaries and
administrative costs, quantitative and qualitative measures of mission
attainment, and the number of people actually served by the charity
compared to other organizations in the same field, are equally important.
Nor does a low CFR in and of itself indicate an ethical high ground.
Fundraising costs can be hidden through allocating such expenses into
categories such as public education, program services, general expenses, or
administration or gift-in-kind accounting schemes instead of fundraising.27
Some organizations such as major universities have low fundraising costs
because of economies of scale or advantageous connections with potential
donors. Charities, even well-known ones, often cheat willfully by failing to
report or under-reporting fundraising expenses, so as not to offend donors
25
In U.S. Navy Veterans, the scheme was based in Florida, but the Ohio attorney general led the
prosecution. While the Florida AG opened an investigation after the Tampa Bay Times exposé, it
dropped the matter when Thompson disappeared. Eight other AG offices in states where donors resided
joined the litigation, but were in a subordinate role. See Hundley, supra note 16. Quadriga was a
Louisiana corporation but that state’s attorney general was not involved.
26
JAMES J. FISHMAN ET AL., NONPROFIT ORGANIZATIONS: CASES AND MATERIALS 247 (5th ed.
2015); Richard Steinberg & Deborah Morris, Ratio Discrimination in Charity Fundraising: The
Inappropriate Use of Cost Ratios Has Harmful Side-Effects, 1 VOLUNTARY SECTOR REV. 77, 77–95
(2010).
27
See supra note 6.

and to foster an image of efficiency.28 Assume a charity signs a contract

with a professional fundraiser providing that any funds received by the
charity will be after expenses and the fundraiser has taken out costs. Can
the charity validly claim that it has no fundraising costs?
Several studies have found a substantial percentage of charities report
on their Form 990 annual informational tax return that they incurred no
fundraising costs, while state filing records revealed that in fact the
organization spent substantial amounts on fundraising.29 A 2012 analysis by
the Scripps Howard News Service of the most recent Form 990 returns of
37,987 charities and other nonprofits that raised at least one million dollars
through fundraising reaffirmed the conclusions of an earlier study by the
Urban Institute that a substantial number of charities report no fundraising
expenses. Forty-one percent of the charities (15,389) that raised a total of
$116.7 billion stated they spent nothing for advertising, telephone
solicitations, mailed appeals, professionally prepared grant applications or
staff time for face-to-face solicitations. For example, 48 of Goodwill
Industries’ 127 major affiliates reported raising $387 million at no cost. Of
the 22,598 organizations that did report fundraising expenses, the cost of
fundraising was but seven cents for every dollar raised.30
28
According to an investigation by ProPublica and NPR, the American Red Cross has
misrepresented to donors how their dollars are used, claiming that it spends less on fundraising and
other overhead costs than it does. On its website and in public comments by top executives, the Red
Cross said that 91 cents of each dollar donated goes directly to services. But a review of financial
statements shows that fundraising costs averaged 17 cents per donated dollar during the last five years.
One year, the fundraising expenses alone were 26 cents of every donated dollar. See Jesse Eisinger et
al., The Red Cross CEO Has Been Serially Misleading About Where Donors’ Dollars Are Going,
PROPUBLICA & NPR (Dec. 4, 2014), http://www.propublica.org/article/red-cross-ceo-has-been-
misleading-about-donations.
29
A 2003 study examining the Urban Institute’s Center on Nonprofit and Philanthropy and the
Center on Philanthropy at Indiana University examined 2000 tax year data and reviewed the tax returns
of more than 125,000 nonprofit groups, and conducted surveys of overhead costs and accounting
practices at 1,500 of them. The study found that more than a third of nonprofit groups that reported on
their Form 990 that they raised $50,000 or more claimed that they spent nothing on fundraising, even
though that was often not true. The researchers concluded that many groups that receive the best ratings
from watchdog groups were not as efficient as they seemed, and that many charities lack the capacity to
track such costs accurately. See CTR. ON NONPROFIT AND PHILANTHROPY, URBAN INST., NONPROFIT
OVERHEAD COST PROJECT (Feb. 2004), http://nccsdataweb.urban.org/kbfiles/313/Brief%201.pdf.
30
Thomas Hargrove & Waqas Naeem, Thousands of Nonprofits Misreport Fundraising Costs,
SCRIPPS HOWARD NEWS SERVICE (May 21, 2012), http://www.kitsapsun.com/news/local-news/many-
charitable-nonprofits-misreport-fundraising. Robert Ottenhoff, former CEO of GuideStar and COO of

Normally, nonprofit organizations allocate expenditures functionally

into three categories: program service expenses, management and general
administrative expenses, and fundraising expenses. These programmatic
allocations reflect general accounting principles.31 They are also desired by
donors and required by governmental agencies such as the IRS in the Form
990 Annual Information Return, one part of which demands that any
501(c)(3) and 501(c)(4) organization present a statement of functional
expenses. Failing to have such a standard is at best a soft-core sort of fraud
or misrepresentation.
Watchdogs have criticized the emphasis on overhead ratios or CFR,
and suggest donors should focus on the charity’s effectiveness, measured
by impact of the organization on its beneficiaries.32 Furthermore, there is
concern that the emphasis on CFR and overhead damages legitimate
charitable activity. Recently, Independent Sector, which represents major
the Public Broadcasting Service, said, “It is ridiculous to think an organization could raise significant
amounts of money without spending money to do it. . . . I must be doing something wrong. I’ve never
seen it growing on trees.” Non-Reporting of Fundraising Expenses Widespread—US Report, PRO BONO
AUSTRALIA (May 22, 2012), http://www.probonoaustralia.com.au/news/2012/05/non-reporting-
fundraising-expenses-widespread-us-report#.
31
See Am. Inst. of Certified Pub. Accountants, Statement of Position 98-2: Accounting for Costs
of Activities of Not-for-Profit Organizations and State and Local Governmental Entities that Include
Fundraising, 20,456 (Mar. 11, 1998), http://www.fasb.org/cs/BlobServer?blobkey=id&blobnocache=
true&blobwhere=1175820927486&blobheader=application/pdf&blobcol=urldata&blobtable=MungoBl
obs. SOP 98-2 establishes accounting standards to assure nonprofit organizations accurately state the
amount of fundraising and other costs. This requires allocation of fundraising costs even if they are a
joint activity with a programmatic or administrative function. If the fundraising cannot be reasonably
allocated in part to another functional classification, it should be reported as fundraising costs. Id.
32
See Press Release, Tim Ogden, Philanthropy Action, The Worst (and Best) Way to Pick a
Charity This Year (Dec. 1, 2009), http://philanthropyaction.com/nc/the_worst_and_best_way_to_pick_
a_charity_this_year/. Less than two weeks after the publication of the “America’s Worst Charities”
report, BBB Wise Giving Alliance, Charity Navigator, and Guidestar, three charity rating organizations,
commenced a campaign to persuade donors to look beyond overhead costs when deciding which groups
to support because overhead is a poor measure of a charity’s performance. The statement concedes “at
the extreme” high spending on overhead can tip off donors to fraud or poor financial management. The
three organizations did not invite a fourth watchdog, CharityWatch, to participate, because it rates
charities exclusively on their financial performance. See Suzanne Perry, 3 Major Charity Groups Ask
Donors to Stop Focusing on Overhead Costs, THE CHRON. OF PHILANTHROPY (June 17, 2013),
http://philanthropy.com/article/3-Major-Charity-Groups-Ask/139881/?cid=pt&utm_source=pt&utm_
medium=en; see also Suzanne Perry, Overhead Costs Pose Dilemma for Charities, THE CHRON. OF
PHILANTHROPY (May 19, 2013), http://philanthropy.com/article/Overhead-Costs-Pose-Dilemma/
139329/.

charities, loosened its guidelines for overhead expenses.33 Charity

Navigator, which rates charities, has deemphasized overhead in its rating
system. State AGs ignore these developments. There is a large gap between
the views of organizations calling for downplaying overhead costs and the
reality of extensive abuse by charities and their fundraisers, not to speak of
the difficulties of donors in determining how effective a charity is in
achieving its mission.
At some point, does a high CFR over many years indicate the charity
is serving a private purpose, which would make the organization ineligible
for tax exemption? Though every fundraising campaign tries to include
educational speech, which is protected, after years of high CFR and little
expenditure on mission, should this indicate the speech component is
merely formulaic, or even deceptive rather than meaningful, and that no one
is listening?
IV. THE APPROPRIATE LOCUS OF REGULATION
In the first instance, charitable regulation is a state responsibility. State

regulatory schemes typically provide for mandatory disclosure through state
and local registration and licensing requirements that make financial and
operational information available to the public. Fraudulent solicitation
activities are unlawful, and perpetrators are subject to fines and criminal
prosecution, but the latter remedy is infrequent, save in egregious situations
such as U.S. Navy Veterans, where the charity is a sham.
Most states have an elaborate registration system that requires charities
and fundraisers to register with the state if the charity or the fundraiser will
solicit funds in that jurisdiction. Compliance reporting under solicitation
laws is divided into two pieces: 1) registration, which provides an initial
base of data and information about an organization’s finances and
governance; and 2) annual financial reporting, which keeps the state
apprised about the organization’s operations with an emphasis on
33
The Revised Principles for Good Governance and Ethical Practice provide more flexibility for
overhead costs. Previously, the Principles stated that charities should spend a significant amount of their
expenses on programs with a target of 65% of expenses. The revision says spending 65% of expenses on
program activities and more on overhead is sometimes necessary. Alex Daniels, New Charity Guidelines
Deal with Online Fraud, Overhead, and Executive Pay, THE CHRON. OF PHILANTHROPY (Feb. 25,
2015), https://philanthropy.com/article/New-Charity-Guidelines-Deal/227877.

fundraising results and practices.34 Typically, states require both

registration (at least an initial registration) and annual financial reporting.
Thirty-six states and the District of Columbia use the Unified Registration
statement, a standardized form that requires charities that are engaged in
fundraising and professional fundraisers to register with the appropriate
state agency.35 Other states have their own registration requirements, and
five have no registration mandates. Commercial fundraisers must register in
forty-three states, and all contracts between a charity and fundraiser must be
filed with the particular state where the fundraising takes place.36 The fact
that a charity registers to solicit contributors and to file fundraising
contracts does not necessarily prevent fraud.37
There are a number of difficulties in effectively overseeing
solicitation. First, there are many charities; in New York alone, there are an
estimated 65,000, and nationally, there are 1,117,941.38 Well-established
constitutional precedents protect charities and their fundraisers.39
34
NAT’L ASS’N OF ATTORNEYS GEN. & NAT’L ASS’N OF STATE CHARITIES OFFICIALS,
STANDARDIZED REGISTRATION FOR NONPROFIT ORGANIZATIONS UNDER STATE CHARITABLE
SOLICITATION LAWS 1 (4th ed. 2010). State regulators also make use of the Form 990, Annual
Information Return a public document filed with the Internal Revenue Service.
35
See id. at 1. The Unified Registration Statement (URS) represents an effort to consolidate the
information and data requirements of all states that require registration of nonprofit organizations
performing charitable solicitations within their jurisdictions. The effort is organized by the National
Association of State Charities Officials and the National Association of Attorneys General, and is one
part of the Standardized Reporting Project, whose aim is to standardize, simplify, and economize
compliance under the states’ solicitation laws. See generally THE UNIFIED REGISTRATION STATEMENT
(Mar. 2014), http://multistatefiling.org/index.html.
36
See N.Y. EXEC. LAW § 173-a(1) (Consol. 2015).
37
For a critique of the effectiveness of mandated disclosure, see Omri Ben-Shahar & Carl E.
Schneider, The Failure of Mandated Disclosure, 159 U. PA. L. REV. 647 (2011).
38
These are organizations exempt under § 501(c)(3) of the Code. This figure does not include an
estimated 300,000 religious organizations that are not required to register with the Internal Revenue
Service. DEP’T OF THE TREASURY, I.R.S., CATALOG NO. 21567I, INTERNAL REVENUE SERVICE DATA
BOOK (2014).
39
The Supreme Court has established in a surprising number of cases that solicitation though
subject to reasonable regulation involves a variety of speech interests that are within the protection of
the First and Fourteenth Amendments. Riley v. Nat’l Fed’n of the Blind, 487 U.S. 781 (1988) (state’s
definition of reasonable fee, using percentages, was not narrowly tailored to state’s interest in preventing
fraud; requirement that professional fund raisers disclose a potential donor’s percentage of charitable
contributions collected during previous year which were actually turned over to charity was unduly
burdensome and unconstitutional); id. at 795–96 (requirement of professional solicitor to disclose to

Professional solicitation is a form of speech, and such appeals are cast, in

part, as transmitting educational information. As such, the First Amendment
protects them.
Registration is not synonymous with enforcement of the law, oversight
by the attorney general or prevention of fraud. Forms, once filed, are not
reviewed in most jurisdictions until and unless there are complaints about a
particular charity. Thus, if false information is filed, it is unlikely to be
discovered. Other reasons why state enforcement is episodic, save in a few
jurisdictions, is that prosecuting charity fraud is time-consuming and
expensive.40 Effective oversight is beyond the resources of state attorneys
general.41 It also may be the result of staffing choices. Charity enforcement
may not be a highly visible issue in some states. There may not be a
constituency of aggrieved voters who have been harmed and demanding
potential donors average percentage of gross receipts turned over to charity by fundraiser
unconstitutionally infringed on speech; commercial speech doesn’t retain commercial character when
intertwined with otherwise protected speech); Sec’y of Md. v. Munson, 467 U.S. 947 (1984) (statute that
forbade contracts if fundraiser retained more than 25% after deduction of costs was a direct restriction
on protected First Amendment activity and unconstitutional); Schaumburg v. Citizens for a Better Env’t,
444 U.S. 620, 632 (1980) (ordinance that did not use at least 75% of receipts for charitable purposes
unconstitutionally overbroad in violation of First and Fourteenth Amendments); Bates v. State Bar of
Ariz., 433 U.S. 350, 363 (1977) (Cantwell implied solicitation of funds involves interests protected by
First Amendment’s guarantee of freedom of speech); Va. Pharmacy Bd. v. Va. Citizens Consumer
Council, 425 U.S. 748, 761 (1976); Jamison v. Texas, 318 U.S. 413, 417 (1943) (although purely
commercial leaflets could be banned from the streets, state could not prohibit or unreasonably obstruct
or delay distribution of handbills of a clearly religious activity merely because they invite purchase of
books for improved understanding of religion or because handbills seek in lawful fashion to promote
raising of funds for religious purpose); Cantwell v. Connecticut, 310 U.S. 296 (1940) (condition
solicitation of aid for perpetuation of religious views or systems upon a license, grant of which rests on
perpetuation of religious views or systems, the grant of which rests with in exercise of determination by
official as to what was a “religious cause” invalid prior restraint on free exercise of religion); Schneider
v. State, 308 U.S. 147 (1939) (ordinance that prohibited door to door soliciting, canvassing or
distribution of circulars from house to house without permit, issuance of which rested in discretion of
public officials overbroad as it applied to anyone who wished to present views on political, social and
economic questions); see Lovell v. Griffin, 303 U.S. 444 (1938) (ordinance criminalizing distribution of
any handbill at any time or place without permit invalid on face and First Amendment grounds).
40
There is some low-hanging fruit where if the attorney general becomes involved, settlement is
swift.
41
A survey by Professor Gary W. Jenkins of the Ohio State School of Law found that states have
dedicated a median of one full-time equivalent attorney to charity oversight. Seventy-four percent of the
states responding had one or fewer full-time equivalent attorneys working on nonprofit oversight, with
seventeen states reporting no such lawyers at all. Garry W. Jenkins, Incorporation Choice, Uniformity,
and the Reform of Nonprofit State Law, 41 GA. L. REV. 1113, 1128–29 (2007).

action. Legitimate charities and reputable fundraisers may feel the bad press
affects all fundraising. As presently conducted, state regulation clearly is
not the solution to the problem posed.42 While a few attorneys general may
join an action against a fraudulent fundraiser, it is not a national effort with
national results. Penalties, when imposed, are meager, usually around
$500.43
The regulatory system is bifurcated. The IRS grants tax-exempt status,
audits financial filings and can revoke tax-exempt status, but incorporation
is a state function and state regulators handle oversight. Despite recent
efforts to improve the sharing of information, much work remains to render
such coordination effective.44 There are efforts to digitalize state filings, but
paper remains the norm. State regulators do not communicate effectively
among themselves, and they have no database of charities or fundraisers
that have been disciplined.45
V. THE INTERNAL REVENUE SERVICE AS PRIMARY REGULATOR
A logical place to situate regulation is within the IRS, which regulates

the nonprofit sector through setting the criteria for recognition of tax-
exempt organizations. One of the Service’s functions has become the
regulation of the fiduciary behavior of trustees, directors, managers, and
donors, a police function. Traditionally, this was the role of state law, since
nonprofits were creatures of state corporate law and state fiduciary
standards. In recent years, the Service has preempted state law in regulation
42
For a proposal to dramatically improve the state’s role, see Putnam Barber & Megan Farwell,
Charitable Solicitations Regulation and the Principles of Regulatory Disclosure 29–34 (Feb. 20, 2015)
(unpublished manuscript) (on file with author).
43
Cole Goins, Finding a Path to Better Charity Oversight, CTR. FOR INVESTIGATIVE REPORTING
(July 17, 2013), http://cironline.org/blog/post/finding-path-better-charity-oversight-4951.
44
State regulators can request tax information to assist them to prosecute wrongdoing without
undertaking time consuming initial investigations, but the Service has been less than helpful. See I.R.C.
§ 6103(p)(4); see also Barry Meier & Rebecca R. Ruiz, Patchwork Oversight Allows Dubious Charities
to Operate, N.Y. TIMES, May 21, 2015, at B1 (stating that the IRS has been “little help” in the efforts to
monitor potential fraud at charities).
45
The Center for Investigative Reporting established such a database, which is a beginning but
incomplete. Goins, supra note 43.

of charities in certain areas.46 The Service has three approaches to deal with
excessive payments to charities or fundraisers: the prohibitions against
private inurement and private benefit, and intermediate sanctions on excess
benefit transactions under § 4958.
A. Private Inurement
Under § 501(c)(3), organizations are prohibited from engaging in

activities that result in “inurement” of the organization’s net earnings to
insiders, such as founders, directors, and officers. The inurement
prohibition states that no part of the “net earnings” may inure to the benefit
of any private shareholder or individual.47 The term “no part” is absolute.
The organization loses tax-exempt status if even a small percentage of
income inures to a private individual. The sole beneficiary of a charity’s
activities must be the public at large.48 The essence of inurement is that a
person in a position to influence the decisions of an organization receives
disproportionate benefits, such as excessive compensation or rent, a below-
market rate loan, or improper economic gain from sales or exchanges of
property with the tax-exempt organization.49
B. The Private Benefit Doctrine
The inurement limitation only extends to excess economic benefits

received by insiders. The related private benefit prohibition denies
exemption when persons other than insiders receive more than an incidental
“private benefit.” The IRS and the courts view inurement and private
benefit as distinct requirements. Private benefit is the broader concept
46
See James J. Fishman, Stealth Preemption: The I.R.S.’s Nonprofit Corporate Governance
Initiative, 29 VA. TAX REV. 545 (2010).
47
I.R.C. § 501(c)(3); see also Treas. Reg. § 1.501(c)(3)-1(c)(2) (as amended in 2014).
48
Church of Scientology of Cal. v. Comm’r, 823 F.2d 1310, 1316 (9th Cir. 1987).
49
FISHMAN ET AL., supra note 26, at 417 (“Historically, the Service has invoked the inurement
limitation only in the most egregious cases of insider misconduct. Since the only sanction was the
ultimate death sentence—revocation of exemption—enforcement was lax. Congress gave the Service a
new and more effective weapon in 1996 when it enacted the § 4958 intermediate sanctions regime.
Insiders who receive excess economic benefits now are subject to monetary penalties, as are
organization managers who approve of such transactions.”).

because it extends beyond insiders, but the inurement proscription is

unforgiving (there is no de minimis exception) while “incidental” private
benefit, viewed in a qualitative and quantitative sense, is not fatal.50 The
“private benefit” doctrine prohibits a § 501(c)(3) organization from
providing a substantial economic benefit to individuals who do not exercise
any substantial formal control over the organization. One could argue that
the DVNF existed for the private benefit of Quadriga Art.
The private benefit limitation is a product of the Treasury Regulations,
which require a § 501(c)(3) organization to serve “a public rather than a
private interest” and “establish that it is not organized or operated for the
benefit of private interests such as designated individuals, the creator or his
family, shareholders of the organization, or persons controlled, directly or
indirectly, by such private interests.”51 Professor John Colombo has
criticized the private benefit proscription for lack of doctrinal content and
inconsistent interpretation by the Service.52 The concept of private benefit
has deep roots in the common law through the idea that a charitable trust
must benefit a sufficiently large and indefinite class rather than specific
individuals.53 Thus, a trust to benefit a town’s cemetery would be
charitable, but one to maintain an individual’s tomb would not.54
Unlike private inurement, which rests on a statutory basis in
§ 501(c)(3) and has been defined as the siphoning off of a charity’s
50
Id. at 429.
51
Treas. Reg. § 1.501(c)(3)-1(d)(1)(ii) (as amended in 2014).
52
See John D. Colombo, Private Benefit: What Is It—And What Do We Want It To Be? 1 (2011),
SSRN: http://ssrn.com/abstract=2350470 or http://dx.doi.org/10.2139/ssrn.2350470 (The private benefit
doctrine “literally has no doctrinal content . . . [and] no statutory basis in § 501(c)(3). Though the IRS
claims the doctrine flows from the 1959 Treasury Regulation, it is . . . questionable given the language
used, and in any event, this interpretation of the regulations appears not to have been ‘discovered’ until
at least a decade after the regulations were promulgated.”). This history “illustrates a doctrine in
disarray. From its beginnings as a restatement of the requirement of a broad charitable class, private
benefit has morphed into a phrase used as cover to deny tax exemption in a variety of circumstances that
have no doctrinal link.” Id. at 16.
53
RESTATEMENT (THIRD) OF TRUSTS § 28 cmt. a (2013).
54
Colombo, supra note 52, at 4; see 6 AUSTIN W. SCOTT, WILLIAM F. FRATCHER & MARK L.
ASCHER, SCOTT & ASCHER ON TRUSTS § 38.7.10 (5th ed. 2013) (“By statute . . . a trust for perpetual
care of an individual grave is now valid in most states.”). Some statutes treat such trusts as charitable.
Others do not. Id.

earnings to its founder, members of its board, or anyone else who is an

insider,55 the meaning of private benefit appears not in the Code, but as
previously mentioned, in the Treasury Regulations, and its meaning has
varied over the years.56 The early private benefit cases and rulings were
consistent with the more limited common law concept. In Ginsberg v.
Commissioner,57 an organization formed to dredge a navigable waterway
fronting the homes of its member-donors did not qualify for exemption,
because the waterway was rarely used by the general public and dredging
greatly benefited the property owners.58
The common law private benefit concept was gradually expanded by
the IRS, primarily as a weapon in its response to changes in the health care
sector, which resulted in complex corporate structures, incentive-based
compensation plans for physicians and other key personnel, and joint
ventures with for-profit firms. The new economics of nonprofit health care
often were driven by a desire to maximize profit, while minimizing or
eliminating charity care other than the obligatory open emergency room.59
Some of the arrangements involved staff physicians, who did not neatly fit
in the “insider” category because they were not in any position to influence
the hospital’s finances. Initially, the IRS attempted to elevate their status so
as to use the inurement hook, but in many situations, such as with a large
55
United Cancer Council v. Comm’r, 165 F.3d 1173, 1176 (7th Cir. 1999).
56
Treas. Reg. § 1.501(c)(3)-1(d)(1)(ii) (as amended in 2014) (noting that the first effort to clearly
distinguish private benefit from private inurement was in a 1987 General Counsel Memorandum). See
I.R.S. Gen. Couns. Mem. 39,598 (Jan. 23, 1987) (“An organization is not described in § 501(c)(3) if it
serves a private interest more than incidentally. . . . A private benefit is considered incidental only if it is
incidental in both a qualitative and quantitative sense. In order to be incidental in a qualitative sense, the
benefit must be a necessary concomitant of the activity which benefits the public at large, i.e., the
activity can be accomplished only by benefiting certain private individuals. . . . To be incidental in a
quantitative sense, the private benefit must not be substantial after considering the overall public benefit
conferred by the activity.”). The Treasury Regulation, published in 1959, does not clearly separate
private benefit from private inurement. See Treas. Reg. § 1.501(c)(3)-1(d)(1)(ii) (as amended in 2014).
57
46 T.C. 47 (1966).
58
However, in Rev. Rul. 70-186, 1970-1 C.B. 129, an organization formed to preserve and
improve a lake used extensively as a public recreation facility qualified for exemption even though
property owners derived an incidental private benefit.
59
See Rev. Rul. 69-545, 1969-2 C.B. 117.

hospital, revocation of exemption based on inurement would be

unsuccessful. The fallback argument became private benefit.60
The Service used private benefit to focus on the economic benefits that
flowed to a for-profit entity or individuals as a result of serving a charitable
class, which met the size requirement.61 In the healthcare area, the Service
alternated in its interpretations of private benefit. In looking at joint venture
agreements, the Service focused on the balance between the claimed
advancement in charitable purpose from the venture and the private benefits
conferred on individual investors.62
In areas other than health care, the IRS revoked or denied exemptions
on grounds of private benefit in situations far removed from the doctrine’s
common law roots. This expanded notion of private benefit received
judicial endorsement in American Campaign Academy v. Commissioner,63
where the Tax Court held that a nonprofit school operated to train
individuals for careers as political campaign professionals did not qualify
for the 501(c)(3) exemption because it conferred more than an incidental
benefit on the Republican Party. The academy under scrutiny was created
and funded by the National Republican Congressional Committee.
Applicants were not required to disclose their party affiliation, but the clear
implication from the record was that virtually all students were Republicans
and most graduates worked for Republican candidates.
The Tax Court held that even though the school provided primary
benefits to a charitable class (its students, Republicans in general, the
60
See I.R.S. Gen. Couns. Mem. 39,862 (Nov. 22, 1991) (involving an arrangement, where a
hospital and a group of surgeons formed a limited partnership to purchase from the hospital the right to
the net revenues from a surgery clinic. The agenda was to give the surgeons a sufficient financial stake
in the clinic so they would be motivated to refer patients. After first finding that the arrangement
constituted inurement because the surgeons were insiders, the IRS contended in the alternative that the
hospital’s exemption still should be revoked because of the presence of more-than-incidental private
benefit to the surgeons.). This was the first use of private benefit as a distinct doctrine. A general
counsel memorandum only reflects the Service’s view of the law. Subsequently in the healthcare area,
the Service has backed away from the use of private benefit in certain situations. See FISHMAN ET AL.,
supra note 26, at 430.
61
Colombo, supra note 52, at 6.
62
I.R.S. Gen. Couns. Mem. 39,005 (June 28, 1983).
63
92 T.C. 1053 (1989).

political system, or all of the above) and did not violate the inurement
proscription, nonetheless it conferred more than incidental “secondary”
benefits to private interests (the Republican Party) and thus did not qualify
for exemption.64
In a more recent case with an unusual fact pattern, a software engineer
incorporated a California nonprofit public benefit corporation and sought
recognition of tax exemption, which was denied by the Service. The
organization’s purpose was to provide sperm free of charge to women
seeking to become pregnant. The petitioner was the only sperm donor, and
he and his father were the sole board members and officers of the
organization. The Tax Court upheld the IRS’s denial of the § 501(c)(3)
exemption. The court acknowledged that the free provision of sperm might
qualify as “charitable,” but in this case the class of beneficiaries was not
sufficiently large to benefit the community as a whole. The “smoking
pistol” was that the petitioner was the only donor and his personal
preferences (women “from families whose members have a track record of
contributing to their communities” and who had “better education”)
narrowed the class of eligible recipients.65 Therefore, the organization
served the private benefit of the sperm donor.66
C. The Use of Private Benefit to Regulate Charitable Fundraising: United

Cancer Council v. Commissioner67
In United Cancer Council v. Commissioner, a decision by Judge

Richard Posner, the Service sought to extend the private inurement and
64
FISHMAN ET AL., supra note 26, at 459–60.
65
Free Fertility Found. v. Comm’r, 135 T.C. 21, 23 (2010) (“Women seeking to receive sperm
from petitioner are required to submit answers to a questionnaire created by Naylor [the petitioner] and
his father . . . . The questions related to the woman’s family background, living environment, age,
history of fertility treatment, educational attainment, personal achievements, and desire to have a child.
Preference is given to women ‘with better education’ and no record of divorce, domestic violence, or
‘difficult fertility histories’ and are from families ‘whose members have a track record of contributing to
their communities’; who are in ‘a traditional marriage situation’; who are under age 37; who are ethnic
minorities; and who are ‘from locations where * * * [petitioner has] not previously accepted recipients.’
Naylor scores the questionnaires by hand, transfers the information to a computer-readable form, and
enters the information into a computer program which assigns a score to each woman.”).
66
Query whether the donor hoped to take a tax deduction for contributing his sperm to the bank?
67
165 F.3d 1173 (7th Cir. 1999).

private benefit doctrines to charitable fundraising. The United Cancer

Council (UCC) was a charity that sought, through affiliated local cancer
societies, to encourage preventive and ameliorative approaches to cancer, as
distinct from searching for a cure, the emphasis of the better-known
American Cancer Society. UCC entered into an agreement with a
fundraising firm, Watson & Hughey (W & H).68
Because of UCC’s perilous financial condition, a board committee
wanted W & H to “front” all the expenses of the fundraising campaign,
though it would be reimbursed by UCC as soon as the campaign generated
sufficient donations to cover those expenses. W & H agreed, but it
demanded in return that it be UCC’s exclusive fundraiser during the five-
year term of the contract, that it be given co-ownership of the list of
prospective donors generated by its fundraising efforts, and that UCC be
forbidden, both during the term of the contract and after it expired, to sell or
lease the list, although it would be free to use it to solicit repeat donations.
There were no restrictions on W & H.69
Over the five-year term of the contract, W & H mailed 80 million
letters soliciting contributions to UCC. Each letter contained advice about
preventing cancer, as well as a pitch for donations; 70% of the letters also
offered the recipient a chance to win a sweepstakes. As a result of these
mailings, UCC raised $28.8 million, but its expenses, the costs borne by
W & H for postage, printing, and mailing the letters soliciting donations
(costs reimbursed by UCC according to the terms of the contract), were
$26.5 million. The balance of $2.3 million, the net proceeds of the direct-
mail campaign, was spent by UCC for services to cancer patients and on
research for the prevention and treatment of cancer.70
68
W & H had a long history of conflict with state regulators. See Commonwealth v. Watson &
Hughey Co., 563 A.2d 1276 (Pa. Commw. Ct. 1989). Over a two year period from 1989 to 1991,
W & H was found guilty of violations of charitable solicitation laws in fourteen states and paid fines and
restitution of $2.1 million. See America’s Worst Charities, TAMPA BAY TIMES & CTR. FOR
INVESTIGATIVE REPORTING (2013), http://charitysearch.apps.cironline.org/detail/watson-hughey-12448.
Today, Watson & Hughey is known as Direct Response Consulting Services. The McLean, Virginia-
based fundraising firm changed its name in 1992.
69
United Cancer Council, 165 F.3d at 1175.
70
UCC did not renew the contract when it expired by its terms in 1989. Instead, it hired another
fundraising organization with disastrous results. The following year, UCC declared bankruptcy, and
within months the IRS revoked its tax exemption retroactively to the date on which UCC had signed the

The IRS revoked UCC’s charitable exemption. The Service alleged

that UCC was not operated exclusively for charitable purposes, but also for
the private benefit of the fundraising company, and also claimed that part of
the charity’s net earnings inured to the benefit of a private shareholder or
individual, W & H. UCC appealed to the Tax Court, which upheld the
revocation on the ground of private inurement, but did not reach the private
benefit issue. There followed an appeal to the Seventh Circuit Court of
Appeals.
Judge Posner found no private inurement.71 The Service had not
contended that any part of UCC’s earnings found its way into the pockets of
any members of the charity’s board, or that any members of the board were
owners, managers, or employees of W & H, or relatives or even friends of
any of W & H’s owners, managers, or employees. It conceded that the
contract between charity and fundraiser was negotiated at an arm’s length
basis.72 However, the contract was so advantageous to W & H and so
disadvantageous to UCC that the charity must be deemed to have
surrendered the control of its operations and earnings to its professional
solicitor.
As far as the high fundraising costs, the Seventh Circuit found that
W & H got a “charitable bang” from the mailings, which contained some
educational materials in support of its educational goals. Importantly, it said
that the cost of fundraising (that is, the ratio of expenses to net charitable
receipts), is unrelated to the issue of inurement.73 W & H’s favorable
contract was due to the desperation of UCC, rather than disloyalty by the
board. Nor was there any diversion of assets to insiders. Judge Posner then
suggested that the private benefit doctrine, in certain situations, could be
used to deal with particularly harsh agreements:
Suppose that UCC was so irresponsibly managed that it paid W & H twice as
much for fundraising services as W & H would have been happy to accept for
contract with W & H. The effect was to make the IRS a major creditor of UCC in the bankruptcy
proceeding. Id. at 1176.
71
Id. at 1178–79.
72
A committee of the board picked W & H, and another committee of the board was created to
negotiate the contract between the charity and the professional solicitor. Id. at 1175.
73
Id. at 1178.

those services, so that of UCC’s $26 million in fundraising expense $13 million
was the equivalent of a gift to the fundraiser. Then it could be argued that UCC
was in fact being operated to a significant degree for the private benefit of
W & H, though not because it was the latter’s creature. That then would be a
route for using tax law to deal with the problem of improvident or extravagant
expenditures by a charitable organization that do not, however, inure to the
benefit of insiders.74
The improvident or extravagant expenditures would be a dissipation of

the charity’s assets and a violation of the duty of care by the board of
directors. The Court remanded the private benefit issue to the Tax Court.75
A problem with using the breach of the duty of care as a hook for private
benefit is that in many state jurisdictions, the concept has eroded. In
Delaware, an organization can amend its governing rules to shield the
directors from damages for most duty of care violations.76
D. Private Benefit as a Failure to Preserve Charitable Assets
Professor John Colombo has offered a definition of private benefit,

which is more coherent than the case law and consistent as a principle than
the Service’s positions. Additionally, it is distinguishable from private
inurement and provides a useful tool when applied to situations of
excessive fundraising costs or fraud.77 He builds upon Judge Posner’s
comment in United Cancer Council v. Commissioner that private benefit
could occur in a situation where the charity was operated to a significant
degree for the advantage of the fundraising firm, rather than for the benefit
74
Id. at 1179.
75
Id. at 1179; see also Lisa A. Runquist, How to Keep Your Nonprofit out of Trouble with the
IRS, NONPROFIT RESOURCES (Oct. 1, 2015), http://runquist.com/how-to-keep-your-nonprofit-out-of-
trouble-with-the-irs (On remand the private benefit issue was never reached, for the case was settled.
UCC, which had filed for bankruptcy, conceded it was not entitled to exemption for the years 1986–
1989, and the IRS restored UCC’s exemption for 1990 forward. As a condition of the settlement, UCC
agreed to cease raising funds from the general public and to limit its activities to accepting charitable
bequests and transmitting them to local cancer counsels for direct care of patients.).
76
DEL. CODE ANN. tit. 8, § 102(b)(7) (2015). There is still liability for breaches of the duty of
loyalty, actions or omissions not in good faith or knowing violations of the law or transactions where the
director received an improper benefit. The real danger to nonprofit directors, derelict in their duties, is
not money damages, but “shame risk,” the fear that one’s name will appear in the local paper as a
director of a nonprofit that is in the midst of some scandal.
77
Colombo, supra note 52, at 24–25.

of the charity.78 This becomes a breach of the governing board’s duty of

care. Essentially, private benefit is a kind of corporate waste, a dissipation
of the charity’s assets because it is paying so much for the fundraising
services that the board negligently diverts the charity’s resources, even
though the transaction is arms-length. Professor Colombo calls this a
“failure to conserve charitable assets for the benefit of the charitable class.”
Entering into unfavorable contracts causes an outflow of those assets.79
Overly high fundraising costs are an economic waste of assets that
otherwise should be used to further the organization’s mission. The monies
raised go to the fundraiser rather than to the beneficiaries served by the
nonprofit organization.80 In the charitable solicitation context, such a
diversion of assets might occur where the nonprofit is forced to share with
the fundraiser donors’ names it has attracted in support of its mission. The
ownership lists are property that should belong exclusively to the charity.81
Professor Colombo limits the use of this interpretation of the private
benefit doctrine to transactions between the charity and a for-profit
provider, where the charitable entity enters into an economic arrangement
involving core services that grants a competitive advantage to the for-profit
and results in a negligent failure to conserve assets on the part of the
charity.82 If a charity enters into a contract to lease office equipment or to
purchase electricity for its offices, the doctrine would not apply, because it
does not relate to a core service or mission of the charity. However, if the
charity outsources the delivery of core services to a for-profit entity, in this
case the core service being the educational message in the solicitation, the
failure to conserve asset test would apply.
One of the problems with this approach is proving that the transaction
consists of a waste of assets. Professor Colombo suggests using the same
strategy used under § 4958, which imposes a tax on excess benefit
78
United Cancer Council, 165 F.3d at 1179.
79
80
Id. at 21.
81
See 2014 N.Y. Op. Att’y Gen. 145, supra note 4, at 11–12 (stating that Quadriga’s funded
model controlled the ownership lists).
82

transactions to certain disqualified persons.83 The Treasury Regulations

provide a safe harbor in determining whether salaries escape the excess
benefit tax by requiring the board of a charity to use comparable salary data
and to document the basis of the decision.84 If this procedure is followed,
there is a presumption that a transaction is not an excess benefit transaction.
In the private benefit context, jumping through similar hoops could create a
presumption that the agreement with the professional solicitor was not a
failure to conserve assets.
Another solution might be to utilize the technique recently introduced
in New York’s Nonprofit Revitalization Act (Revitalization Act) for
“related party transactions,” a synonym for conflicts of interest.85 Under the
Revitalization Act, no corporation can enter into a related party transaction
unless the transaction is determined by the board to be fair, reasonable and
in the corporation’s best interest at the time of such determination. Any
director or “key employee”86 who has an interest in a related party
83
Id. at 31. Section 4958 is known as the Intermediate Sanctions legislation because it imposes a
tax rather than requiring revocation of the charity. Some have suggested that the failure of the IRS’s lead
arguments in UCC led to the enactment of § 4958. See Mark Hrywna, 10 Years Later, THE NONPROFIT
TIMES (July 1, 2009), http://www.thenonprofittimes.com/news-articles/10-years-later/.
84
Treas. Reg. § 53.4958-6(a) (2001); see also id. § 53.4958-6(c)(C)(iii)(E)(2)(iv) (2002)
(exploring the unintended consequence of using comparables, such as the upward movement of
compensation).
85
N.Y. NOT-FOR-PROFIT CORP. LAW § 715 (McKinney 2014). A related party transaction is “any
transaction, agreement or any other arrangement in which a related party has a financial interest and in
which the corporation or any affiliate of the corporation is a participant.” Id. § 102(a)(24). The Act
defines a related party as:
(i) any director, officer or key employee of the corporation or any affiliate of the
corporation; (ii) any relative [defined as such person’s “(i) spouse, ancestors, brothers and
sisters (whether whole or half blood), children (whether natural or adopted), grandchildren,
great-grandchildren, and spouses of brothers, sisters, children, grandchildren, and great-
grandchildren; or (ii) domestic partner as defined in section twenty-nine hundred ninety-
four-a of the public health law.”] or (iii) any entity in which any individual described in
clauses (i) and (ii) . . . has a thirty-five percent or greater ownership or beneficial interest
or, in the case of a partnership or professional corporation, a direct or indirect ownership
interest in excess of five percent.
Id. § 102(a)(22)–(23).
86
A “key employee” means
any person who is in a position to exercise substantial influence over the affairs of the
corporation, as referenced in 26 U.S.C. § 4958(f)(1)(A) [“any person who was, at any time

transaction must disclose in good faith to the board or an authorized

committee of the board the material facts concerning such an interest.87 In
considering a related party transaction involving a charitable corporation
and in which a related party has a substantial financial interest, the board or
an authorized committee shall: 1) prior to entering the transaction, consider
alternative transactions; 2) approve the transaction by not less than a
majority vote of the directors or committee members present at the meeting;
and 3) contemporaneously document in writing the basis for the approval,
including its consideration of alternative transactions.88 The requirement of
seeking alternative transactions and documenting that fact would provide a
reasonable justification for the board’s action and protect itself from
second-guessing and claims of a breach of the duty of care.
The essence of Professor Colombo’s theory is that the law of tax
exemption should frown on transactions where boards do not diligently
conserve assets for the benefit of the organization’s charitable class.89
Applying his theory to the United Cancer Council facts, Professor Colombo
would require in such situations that the charity have a reasonable
justification for why it entered into a contract that gave the fundraiser over
90% of the gross amount raised. He concludes under this theory: “it is not
unreasonable to presume UCC could have done better (and thus conserved
more assets for its charitable purpose) either by taking fundraising in-house
or by contracting with a different outside fundraiser.”90 By converting the
private benefit concept to mean a failure to conserve charitable assets, tax
law could deal with problems of fraudulent or excessive fundraising costs.
during the 5-year period ending on the date of such transaction, in a position to exercise
substantial influence over the affairs of the organization”] and further specified in 26
C.F.R. § 53.4958-3(c), (d) and (e), or succeeding provisions.
Id. § 102(a)(25).
87
Id. § 715(a).
88
Id. § 715(b).
89
Colombo, supra note 52, at 42.
90
Id. at 42–43.

E. The Use of § 4958, the Intermediate Sanctions Legislation
Another approach to an IRS focus on the regulation of charitable

solicitation could be through the application of § 4958, the so-called
intermediate sanctions legislation.91 Section 4958 applies to “excess benefit
transactions”; that is, transactions in which an economic benefit is provided
by a tax-exempt organization to or for the use of any insider, or in the
jargon of the legislation, a “disqualified person”92 if the value of the
economic benefit provided directly or indirectly exceeds the value of the
consideration received for providing such benefit.93 Under the legislation, a
tax is imposed where the consideration exchanged is in excess of the value
received between a 501(c)(3) or 501(c)(4) organization and the disqualified
person at any time during the preceding five year period ending on the date
of the transaction.94
VI. DOES THE INTERMEDIATE SANCTIONS FRAMEWORK APPLY TO THE

PROFESSIONAL SOLICITOR?
An argument can be made that the problems discussed in this paper

could be dealt with through the intermediate sanctions framework, though
the fit may be tenuous at this time. The starting point is whether the
professional solicitor is a “disqualified person.” If the solicitor is not a
founder of the organization, a substantial contributor, or someone whose
91
The intermediate sanction refers to an excise tax imposed for excess benefit transactions by
insiders. The tax is an intermediate sanction compared to revocation of exemption, previously the only
available sanction, which was so draconian that it was rarely imposed.
92
A disqualified person, is any person who was, at any time during the five-year period preceding
the excess benefit transaction in a position to exercise substantial influence over the affairs of the
organization. I.R.C. § 4958(f)(1)(A); Treas. Reg. § 53.4958-3(a)(1) (2002).
93
I.R.C. § 4958(c)(1)(A); Treas. Reg. § 53.4958-4(a)(1) (2002). This includes the direct or
indirect provision of services. Id.
94
I.R.C. § 4958(e)(1), (2). It does not include private foundations as defined in I.R.C. § 509(a).
An initial tax of 25% of the excess benefit amount is imposed on the disqualified person that receives
the excess benefit. An additional tax on the disqualified person of 200% of the excess benefit applies if
the violated is uncorrected. A tax of ten percent of the excess benefit, not to exceed $20,000 with respect
to any excess benefit transaction, is imposed on an organization manager who knowingly participated in
the excess benefit transaction. Id. § 4958(d)(2). There are rules for abatement of the taxes under certain
conditions. Id. §§ 4961, 4962.

revenues are not based on revenues from the activities of the organization,
the Treasury Regulations present several situations where persons are
defined to be disqualified persons under the statute.95
Where a professional solicitor is not within the statutory categories of
disqualified persons,96 the test is one of facts and circumstances.97 The facts
and circumstances test also applies to a person in position to exercise
substantial influence by virtue of their powers and responsibilities, such as
officers or voting members of the governing body, or persons who have
ultimate responsibility for managing the finances of the organization, or
certain persons with a material financial interest in a provider-sponsored
organization.98 Under certain circumstances, a professional solicitor and her
firm could be considered disqualified persons under § 4958.
Among the facts and circumstances that would show a professional
solicitor’s substantial influence: the person has or shares authority to
control or determine a substantial portion of the organization’s capital
expenditures, operating budget, or compensation for employees;99 the
person manages a discrete segment or activity of the organization that
represents a substantial portion of the activities, assets, income, or expenses
of the organization, as compared to the organization as a whole;100 or the
person owns a controlling interest (measured by either vote or value) in a
corporation, partnership, or trust that is a disqualified person.101
These sections of the Treasury Regulations can apply to professional
fundraisers. In many fundraising campaigns, the charity surrenders the
control of its operations and resources for the campaign to the fundraiser. A
fundraising operation often can be a major portion of the charity’s assets,
income, and expenses, and is under the control of the solicitor. Aside from
the fundraising campaign, the assets and activities of the charity may be
95
Treas. Reg. § 53.4958-3 (2002).
96
Id. § 53.4958-3(b)(1)–(2).
97
Id. § 53.4958-3(e).
98
Id. § 53.4958-3(c).
99
Id. § 53.4958-3(e)(2)(iv).
100
Id. § 53.4958-3(e)(2)(v).
101
Id. § 53.4958-3(e)(2)(vi).

very small, and the fundraiser controls substantial assets of value of the
organization.
Examples (5) and (6) of Treasury Regulation § 53.4958-3 could apply
to a professional fundraiser. Example (5) deals with an organization that
enters into a contract with a company that operates bingo games and does
everything in return for a percentage of the revenue generated. The charity
only provides a venue for the bingo activity. The gross bingo revenues
represent more than half of the organization’s total annual revenue. The
bingo operator is in a position to exercise substantial influence over the
affairs of the organization and is a disqualified person with respect to the
organization. Example (6) adds the additional fact that an individual owns a
controlling interest in the bingo company. That individual is also a
disqualified person with respect to the organization.102 Change the bingo
operator and owner of the firm to solicitor, and there is a situation similar to
many of the egregious fund raising campaigns.
VII. THE INITIAL CONTRACT EXCEPTION103
The tax on excess benefit transactions does not apply to an initial

written agreement with fixed payments between an organization and an
individual, who will become a disqualified person upon signing the
contract. In other words, there is an initial contract exception.104 This
removes from the intermediate sanctions regime the initial contract between
the fundraiser and the tax-exempt organization. Neither the statute, the
legislative history, nor the proposed regulations to § 4958 contained an
initial contract exception. It emerged in the fallout from the Service’s defeat
in United Cancer Council, where the court held that private inurement
could not result from a contractual relationship negotiated at arms-length
with a party having no prior relationship with the exempt organization,
regardless of the relative bargaining strengths of the parties. The initial
102
Id. § 53.4958-3(g), exs. (5)–(6).
103
Initial contract means a binding written contract between an applicable tax-exempt
organization and a person, who was not a disqualified person within the meaning of I.R.C. § 4958 and
Treas. Reg. § 53.4958-3 prior to entering the contract.
104
Treas. Reg. § 53.4958-4(a)(3) (2002).

contract exemption removed certain fixed payments made pursuant to an

initial contract between an organization and the third party.105
However, there may be a loophole in the initial contract exemption
that allows such contracts to come under § 4958. A fixed payment does not
include any amount paid to a person under a reimbursement or similar
arrangement where any person with respect to the amount of expenses
incurred or reimbursed exercises discretion.106 The standard fundraising
agreement contains a percentage of receipts from the campaign that belong
to the solicitor. Nevertheless, the solicitor also has the right of
reimbursement of expenses and manages the campaign. It can control the
amount of expenses incurred, the primary reason that many fundraising
campaigns wind up with the charity not only failing to obtain additional
resources, but still owing the solicitor for expenses beyond the amount
raised. In the course of running the campaign, the solicitor controls the
expenses. This would seem to be a non-fixed liability and one could argue
not subject to the initial contract exception.
The regulations reinforce this interpretation, though it is far from a
sure thing. In Example (7), a nonprofit hospital enters into a contract with a
company that will provide a wide range of hospital management services to
the hospital. Upon entering the contract, the company becomes a
disqualified person with respect to the hospital. The hospital pays the
management company a fixed fee of X percent of adjusted gross revenue
determined by a fixed formula specified in the contract. The cost
accounting system objectively defines the direct and indirect costs of all
health care goods and services provided as charity care. Section 4958 does
not apply because of the initial contract exception.107
Example (8) deals with a situation similar to the typical fundraising
contract. The facts are the same as Example (7), except that the
management services contract also provides that the hospital reimburse the
management company on a monthly basis for certain expenses incurred that
are attributed to services provided to the hospital. Although the
105
STAFF OF J. COMM. ON TAX’N, 109TH CONG., REPORT ON OPTIONS TO IMPROVE TAX
COMPLIANCE AND REFORM TAX EXPENDITURES 268 (Comm. Print 2005).
106
Treas. Reg. § 53.4958-4(a)(3)(ii)(A) (2002).
107
Id. § 53.4958-4(a)(3)(vii), ex. (7).

management fee itself is a fixed payment not subject to § 4958, the

reimbursements are not fixed payments, because the management company
exercises discretion with respect to the amount of expenses incurred.
Therefore, any reimbursement payments are evaluated under § 4958.108
Change the facts from a hospital management company to a professional
solicitor entering into a contract with a tax-exempt organization, and
Example (8) seems to be a common situation of contracts with fundraisers.
The fundraiser is in charge of the campaign and its expenses; that is why so
many campaigns owe money to the fundraiser beyond amounts raised when
it is over. It is not rational that a charity would plan to lose money, unless it
was a sham organization serving the private benefit of the fundraiser, or the
charity did not mind because the sole purpose of the telemarketing was
education about the organization’s mission.
Unfortunately, the regulations do not provide a definitive answer to the
arguments made herein. The cleanest way to bring fundraising
arrangements under § 4958 would be to eliminate the original contract
exception. The Joint Committee on Taxation in 2005 recommended this, as
part of several changes in § 4958, because of the continued reports of
abuses by insiders, managers of public charities, and private foundations.109
The questionable activities raised questions about the extent to which
excess benefits were still provided to insiders and the effectiveness of
§ 4958.
The Joint Committee’s Report doubted that in cases where the
organization contracts with an individual (who will have the capacity to
exercise control or substantial influence over the organization upon entering
into the contract), the organization can conduct negotiations entirely at
arm’s length and free of the influence of the third party.110 The nonprofit
may fear that it might lose the individual or entity if bargaining is too hard
or it will provide an initial contract with an excess benefit to the
counterparty. The initial contract exemption encourages fixed payments
108
Id. § 53.4958-4(a)(3)(vii), ex. (8).
109
STAFF OF J. COMM. ON TAX’N, supra note 105, at 261, 268–69.
110
Id. at 268.

rather than performance-based compensation.111 The best way to clear up

the ambiguity in the regulations would be for Congress to just eliminate the
initial contract exception, or for the Service to amend the applicable
Treasury Regulation.
As result of the uproar from the Congress and other politicians over
the targeting of certain 501(c)(4)’s on a political basis, the IRS is in a
situation which can be described as “agency post-traumatic stress disorder.”
It is in disarray, and the Tax Exempt and Government Entities Division is
marginalized and filled with inexperienced people.112 Given the turmoil
enveloping the Service at this particular time, there is little chance that it
will use the tools available or begin an investigation of these problems.
Even absent the political issues, the resources of the Service are so limited
and the size of the nonprofit sector so great, one must turn elsewhere for a
solution to the problem raised in this article.113
A. A Solution to the Problem: Creation of a Self-Regulating Organization

Under FTC Aegis
The FTC does not have direct authority to regulate nonprofit

organizations.114 Federal Trade Commission Act § 4 defines a corporation
111
Id. at 269. Fundraising contracts are protected somewhat from excess benefit situations by the
requirement in over forty states that such contracts are terminable at will by the tax exempt organization.
Exercise of that right, however, is asking for litigation from the solicitor to obtain reimbursement of
expenses.
112
See MARCUS S. OWENS, N.Y.C. BAR ASS’N, CITY BAR CTR. FOR CONTINUING LEGAL EDUC.,
I.R.S. PRIORITIES AND ACTIONS REGARDING CHARITIES (2014), Westlaw 20140424A NYCBAR 18.
113
U.S. GOV’T ACCOUNTABILITY OFFICE, GAO-15-164, TAX-EXEMPT ORGANIZATIONS: BETTER
COMPLIANCE INDICATORS AND DATA, AND MORE COLLABORATION WITH STATE REGULATORS WOULD
STRENGTHEN OVERSIGHT OF CHARITABLE ORGANIZATIONS 20 (2014) (“[The] IRS examines only a
small percentage of charitable organizations that file returns, including private foundations . . . .
[Exempt Organization] examination rates were lower, relative to other IRS divisions. For charitable
organizations, the examination rate was about 0.7 percent in 2013, while for individual and corporate tax
returns it was 1 percent and 1.4 percent, respectively. . . . [T]he number of employees performing exams
has declined while the number of returns filed has increased. From fiscal year 2011 to 2013, the exam
rate decreased from .81 percent to .71 percent (by about 12 percent).”) (footnotes omitted).
114
See Statutes Enforced or Administered by the Commission, FED. TRADE COMM’N, https://
www.ftc.gov/enforcement/statutes/federal-trade-commission-act (last visited Sept. 24, 2015) (citing 15
U.S.C. §§ 41–58 (2012)) (“[T]he Commission is empowered, among other things, to (a) prevent unfair
methods of competition, and unfair or deceptive acts or practices in or affecting commerce; (b) seek
monetary redress and other relief for conduct injurious to consumers; (c) prescribe trade regulation rules

covered by the FTC’s jurisdictional mandate to prevent unfair methods of

competition as one “which is organized to carry on business for its own
profit or that of its members, and has shares of capital or capital stock or
certificates of interest.”115 If a purported charity is a sham, it is not a
nonprofit, and therefore is organized for profit and would come under the
FTC’s jurisdiction. The FTC does have authority to regulate deceptive
telemarketing acts or practices by professional solicitors, which are for-
profit business that come under FTC jurisdiction. Through the
Telemarketing and Consumer Fraud Abuse Prevention Act of 1994, the
FTC has the power to promulgate rules prohibiting deceptive telemarketing
soliciting or practices, including charitable telephonic solicitations by for-
profit solicitors.116
The statute also empowers state attorneys general to bring action in
federal district court to enforce the rules of the FTC if residents of their
defining with specificity acts or practices that are unfair or deceptive, and establishing requirements
designed to prevent such acts or practices; (d) conduct investigations relating to the organization,
business, practices, and management of entities engaged in commerce; and (e) make reports and
legislative recommendations to Congress.”).
115
15 U.S.C. § 44 (2006).
116
The Telemarketing and Consumer Fraud Abuse Prevention Act of 1994, Pub. L. No. 103-297,
108 Stat. 1545 (codified in titles 7 & 15 U.S.C.), which became effective in 1995, authorizes the FTC to
prescribe rules prohibiting deceptive telemarketing acts or practices and can be used to regulate
charitable solicitation. The statute also empowers state attorneys general to bring action in federal
district court to enforce the rules of the FTC, if residents of their state have been affected by deceptive
telemarketing but does not supersede existing authority of state officials from action under state laws.
In October 2001, Congress enacted the USA PATRIOT Act, which contained a section (section
1011) entitled “Crimes Against Charitable Americans.” Pub. L. No. 107-56, 115 Stat. 396 (2001). This
section amended the Telemarketing Act in three significant ways: 1) Congress inserted the phrase
“fraudulent charitable solicitations” in its general description of what “deceptive telemarketing acts or
practices” the FTC should regulate, 15 U.S.C. § 6102(a)(2); 2) Congress added a new subsection
specifically directing the FTC to include a requirement that any person engaged in telemarketing for the
solicitation of charitable contributions, donations, or gifts of money or any other thing of value, shall
promptly and clearly disclose to the person receiving the call that the purpose of the call is to solicit
charitable contributions, donations, or gifts, and make such other disclosures as the Commission
considers appropriate. Id. § 6102(a)(3)(D); and 3) Congress altered the Act’s definition of
“telemarketing” to include a reference to charitable solicitations. Id. § 6106(4). The USA PATRIOT Act
did not purport to alter the FTC’s jurisdiction, which is still governed by the jurisdictional provisions in
the Federal Trade Commission Act, which do not cover non-profit organizations. The USA PATRIOT
Act, therefore, expanded what “acts and practices” could be regulated by the FTC under the
Telemarketing Act, but it did not change what type of entity was subject to the FTC’s control. See Nat’l
Fed’n of the Blind v. FTC, 420 F.3d 331, 338 (4th Cir. 2005).

state have been affected by deceptive telemarketing, but it does not

supersede existing authority of state officials from action under state laws.
In fact, the FTC’s regulatory activity in this area has been very modest,
which is unsurprising given the scope of the commission’s responsibilities,
particularly in consumer protection and the relative lack of donor
complaints over deceptive fundraising. There have been a few enforcement
efforts against fundraisers, which have been undertaken with state attorneys
general or charity officials.117
A resolution to the problem of fundraisers that repeatedly violate state
solicitation requirements is to federalize fundraisers’ registration and
oversight through legislation empowering the FTC to have authority over
charitable solicitation beyond telemarketing. In 1990, a bill was introduced
in the House of Representatives, the Fair Fund Raising Act of 1990,118 to
amend the Federal Trade Commission Act so as to permit the FTC to
regulate fundraising activities of § 501(c)(3) and 501(c)(4) charities. The
legislation would have prohibited charities from having officers or directors
who were also officers, directors or agents of a professional fundraising
organization employed by the charity.119 Such conflicts have been dealt
with under § 4958120 and by conflict of interest statutes in most states.
The bill also required notification of the professional status of the
fundraiser, the name of the individual receiving funds for the charity, and
uniform accounting principles governing the cost of fundraising and annual
reports to state agencies. It preempted any state or local requirements
inconsistent with the requirements in the bill, though state and political
subdivisions could seek an exemption if the jurisdiction afforded a greater
level of protection to the public. The bill never passed. Similar legislation
117
The FTC joined with 61 attorneys general and secretaries of state in 49 states to bring 76
enforcement actions against 32 fundraising companies and 22 nonprofits or purported nonprofits and 31
individuals for fraudulent telemarketing to help police, firefighters or veterans. The cases were settled
with final judgments and orders for permanent injunctions. See, e.g., FTC v. Marleau, No. C09-
5289BHS (W.D. Wash. 2009), https://www.ftc.gov/sites/default/files/documents/cases/2009/05/
090618marleaujdgmt.pdf; FTC v. Am. Veterans Relief Found., No. CV09-3533-AHM (RNBx) (C.D.
Ca. 2009), https://www.ftc.gov/sites/default/files/documents/cases/2009/05/090520avrfjdgmt.pdf.
118
H.R. 3964, 101st Cong. (1990).
119
Id.
120
I.R.C. § 4958.

would need to be enacted. The legislation proposed below would also

require fundraisers to join a self-regulatory organization under FTC aegis.
To solve the problem of recidivist wrongdoers and itinerant fundraisers
who move from jurisdiction to jurisdiction, there should be created a self-
regulating organization, the Charitable Professional Fundraisers’
Regulatory Association (“CHAPFRA”) under the aegis or supervision of
the FTC. This new organization would have the responsibility of enforcing
norms and rules for professional fundraisers, and the authority to discipline,
and, if necessary, bar dishonest fundraisers from their profession. The
strengths and weaknesses of this approach will be discussed.
The framework of a self-regulatory organization that comes to mind is
FINRA, the Financial Industry Regulatory Authority (“FINRA”), a private
corporation that acts as a self-regulatory organization for market entities
such as the New York Stock Exchange. FINRA has been granted authority
through Congressional authorization in connection with securities
exchanges.121 This authority allows FINRA to promulgate rules, license
securities participants, investigate violations, and discipline violators of
those rules in tribunals formed by FINRA.122 These disciplinary
proceedings act as a deterrent against and remedy for unfair and illegitimate
business practices.
VIII. ADVANTAGES AND DISADVANTAGES OF THE SRO MODEL
Self-regulation can be more effective than government regulation

because of industry or professional expertise. Industry representatives will
want to weed out the “bad apples” because they tarnish the reputation of the
profession as a whole. There is greater acceptance of regulation if it is done
by ones’ peers. Additionally, industry regulators may be able to enforce
121
15 U.S.C. § 78o-3(a) (2012).
122
See id. § 78o-3. FINRA received its ability to carry on its activities through Congress enacting
the Maloney Act, which allows the Securities and Exchange Commission (“SEC”) to approve
registration of securities associations in order to assist in regulation of activities related to securities
exchanges. Id. The Securities and Exchange Commission has supervisory authority over such securities
organizations as FINRA through provisions providing the SEC with approval measures for FINRA
rulemaking, licensing, disciplinary proceedings, and administration. Id.; see, e.g., 17 C.F.R. § 201.420
(2013).

ethical standards loftier than mere legal compliance.123 The threat of

expulsion from a mandatory membership organization, which also happens
to be a monopoly in the profession, incentivizes members to obey its
rules.124
Self-regulatory organizations are financed directly by the industries
they regulate, independent of government budgets and the politics that
surround regulatory budget making. Government regulators thereby can
focus on their agenda.125 Standards are established through a largely
consensual process. SROs are a counterpart for negotiations with
government agencies seeking to introduce regulatory initiatives. Self-
regulation can also strike the correct balance between overregulation and
under-regulation of an industry. It will be more flexible than governmental
rules and is driven by the needs of the industry. The regulated industry
bears the cost. Self-regulation extends beyond governmental regulation
with respect to the rules by its ability to establish ethical and best practices
principles.126 According to the theory of self-regulation, the administrative
agency overseeing an SRO in an industry should counter and alleviate the
self-protective and anti-competitive elements.127
Unfortunately, the history of self-regulation has often been self-
protection of the industry self-regulated.128 Viewing the nearly eighty year
123
Barbara Black, Punishing Bad Brokers: Self-Regulation and FINRA Sanctions, 8 BROOK. J.
CORP. FIN. & COM. L. 23, 26 (2013); see also Paul G. Mahoney, The Exchange as Regulator, 83 VA. L.
REV. 1453, 1459 (1997) (asserting that SROs can adopt higher standards based on just and equitable
principles than those set by federal or state law).
124
Jonathan Macey & Caroline Novogrod, Enforcing Self-Regulatory Organization’s Penalties
and the Nature of Self-Regulation, 40 HOFSTRA L. REV. 963, 967 (2012) (arguing that the effective
enforcement powers of an SRO are a function of its market power).
125
Stavros Gadinis & Howell E. Jackson, Markets as Regulators: A Survey, 80 S. CAL. L. REV.
1239, 1250–51 (2007).
126
Id. at 1252 (citing Self-Regulatory Organizations: Hearing Before the Subcomm. on Banking,
Housing and Urban Affairs, 109th Cong. (2006) (statement of Robert Glauber, Chairman and CEO,
National Association of Securities Dealers), http://www.banking.senate.gov/public/index.cfm?Fuse
Action=Files.View&FileStore_id=5ae67766-cec8-440c-93e9-d39d2a3b7bf1).
127
Id. at 1256.
128
According to a 1973 report of the Senate Subcommittee on Securities:
The inherent limitations in allowing an industry to regulate itself are well known: the
natural lack of enthusiasm for regulation on the part of the group to be regulated, the

history of self-regulation in the securities industry, one finds that Congress

repeatedly had to give the Securities Exchange Commission increased
authority over the rules and practices of the self-regulating organizations to
make the process work. There is a natural lack of enthusiasm for regulation
by people who will be regulated.129 Larger firms in the industry tend to
dominate the SRO and attempt to advance their interests through anti-
competitive restraints on less powerful and newer members. There is a
temptation to use the softer touch of self-regulation to ward off more
rigorous rules imposed by government.
Despite these reservations, if an appropriate balance is achieved, self-
regulation can be a satisfactory and effective means of raising business
practices. In the case of charitable solicitation, self-regulation can protect
charities and donors from dishonest and unfair practices by outliers in the
fundraising profession.
IX. HOW CHAPFRA WOULD WORK
CHAPFRA would be less proactive than FINRA in terms of

undertaking investigations on its own.130 It would not involve itself, at least
initially, in dispute resolution such as arbitration or mediation. Its
disciplinary and sanctioning activity would occur after FTC investigations
temptation to use a facade of industry regulation as a shield to ward off more meaningful
regulation, the tendency for businessmen to use collective action to advance their interests
through the imposition of purely anticompetitive restraints as opposed to those justified by
regulatory needs, and a resistance to changes in the regulatory pattern because of vested
economic interests in its preservation.
S. DOC. NO. 93-13, at 145 (1973).
129
Black, supra note 123, at 25–26 (quoting the SEC stating that “[i]nherent in self-regulation is
the conflict of interest that exists when an organization serves both the commercial interests of and
regulates its members or users,” and citing S. DOC. 93-13, at 145 (1973)).
130
The financial services industry is far larger than the fundraising profession. In 2012, FINRA
brought approximately 1,500 disciplinary actions against broker-dealer firms and associated persons,
imposed fines of more than $68 million, and ordered restitution of $34 million to injured investors.
FINRA expelled thirty firms, barred 294 individuals, and suspended another 549 individuals. FINRA,
FINRA 2012 Year in Review and Annual Financial Report, at 8 (2013), https://www.finra.org/file/finra-
2012-year-review-and-annual-financial-report. Most of FINRA’s disciplinary proceedings are mundane
and do not grab headlines. Consisting of a single broker accused of simple fraud, the proceedings are
frequently uncontested, or if contested, the broker appears pro se. Black, supra note 123, at 24.

followed by discipline, or more frequently, after state jurisdictions have

found fraud or violations of state solicitation statutes after litigation or
settlement by the wrongdoer. Another contrast with FINRA would be that
while a central location facilitates the ability of markets to monitor breaches
of fiduciary duty that reduce improper behavior, fraudulent fundraising can
be more effectively monitored at the state level because not every campaign
is national in scope, and despite the weaknesses of state enforcement, it is
still more effective than the FTC, which has many other responsibilities and
has been less proactive in this area.
A primary purpose of CHAPFRA would be to create a registration or
membership requirement in the SRO for professional fundraisers and
fundraising counsel131 as a condition of entering the fundraising profession,
131
There are four kinds of fundraising personnel: professional fundraisers, commercial co-
venturers, fundraising counsel, and professional solicitors. N.Y. EXEC. LAW § 172-a(4) to (6), (9)
(Consol. 2015). Volunteer solicitation generally is not regulated other than through the anti-fraud
provisions of the statute. See id. § 172-d.
A professional fundraiser is defined as:
Any person who directly or indirectly, by contract, including but not limited to sub-
contract, letter or other agreement or other engagement on any basis, for compensation or
other consideration (a) plans, manages, conducts, carries on, or assists in connection with a
charitable solicitation or who employs or otherwise engages on any basis another person to
solicit from persons in this state for or on behalf of any charitable organization or any
other person, or who engages in the business of, or holds himself out to persons in this
state as independently engaged in the business of soliciting for such purpose; (b) solicits
on behalf of a charitable organization or any other person; or (c) who advertises that the
purchase or use of goods, services, entertainment or any other thing of value will benefit a
charitable organization but is not a commercial co-venturer.
Id. § 171-a(4) (footnotes omitted).
A “professional solicitor” is a person employed or paid by a professional fundraiser to solicit
contributions. Id. § 171-a(5).
A “fundraising counsel” is a person who is paid to consult with a charitable organization or
to plan, manage, advise, or assist with solicitation of contributions but does not herself
solicit and does not have access to contributions or authority to pay expenses. Id. § 171-
a(9). Fundraising counsel, usually work for a flat fee, have established charities as clients,
and perform little or no in-person or telephone solicitation.
Renee Jones, Developments in the Law—Nonprofit Corporations, 105 HARV. L. REV. 1578, 1639
(1992).
A “commercial co-venturer” is someone who regularly and primarily engages in profit-making
trade or commerce and advertises that the purchase or use of goods, services, entertainment, or anything
else of value will benefit a charitable organization. She does not raise funds. N.Y. EXEC. LAW § 172-

a $335 billion dollar business in 2013.132 Volunteer fundraisers (those who

receive no compensation for their efforts), would be exempt from
registration, as is the practice in many state jurisdictions. Another important
purpose of the SRO would be to create a public database of fundraisers who
have violated state or federal requirements. De minimis violations would
not be on the database unless there are a specified number of repetitions.
This database would be useful to state regulators, who now have little
knowledge of what is happening in other jurisdictions, and to charities
considering retention of a professional fundraiser. Professional solicitors
would be required to file a list of client charities that would be updated
every six months. This would not be public information for competitive
reasons.
CHAPFRA would also create professional standards and offer
educational programs and resources to the public. After a due process
hearing, the SRO could impose a variety of sanctions, if appropriate,
ranging from censure, limitation of activities, fines, and suspensions to
expulsion. Sanctions, except for expulsion, would not be punitive (that is,
retribution for wrongdoing), but remedial. SROs are private bodies and the
disciplinary hearing is a civil matter. CHAPFRA’s rules could be reviewed,
abrogated, or deleted by the FTC, but hopefully, this would be infrequent.
CHAPFRA disciplinary procedures would involve a hearing before a
panel of three, consisting of two professional hearing officers and one
industry representative. The SRO’s investigatory and disciplinary powers
would be subject to FTC review. After the CHAPFRA hearing, the FTC
could impose additional or lesser sanctions. The FTC could institute a de
novo review, but this would likely be infrequent. The SRO decision would
a(6). Unlike a professional fundraiser, a co-venturer is not acting directly on behalf of the charity but is
engaged in a commercial venture that will ultimately benefit a charitable organization, among others.
The strategy employed here is sometimes referred to as charitable sales promotion or cause-related
marketing. Commercial co-venturers do not have to register, but are required to provide the charitable
organization with a copy of the contract. See generally VICTORIA B. BJORKLUND ET AL., NEW YORK
NONPROFIT LAW AND PRACTICE § 6.03[1] (2d ed. 2013).
132
According to “Giving USA,” a report compiled by the Indiana University Lilly Family School
of Philanthropy, contributions from individuals, corporations and foundations totaled $335-billion in
2013, a three percent increase from 2012, when adjusted for inflation. See Alex Daniels, Charities Try
New Strategies as Fundraising Rebounds, THE CHRON. OF PHILANTHROPY (June 17, 2014), http://
philanthropy.com/article/Charities-Try-New-Strategies/147167/.

be affirmed unless there was an abuse of discretion. The solicitor could

ultimately appeal to a federal Court of Appeals, but CHAPFRA could not
appeal an FTC reversal of its sanction. Settlements would not be subject to
review. The extended due process suggested is necessary, because banning
someone from a profession should not be done lightly.
X. CONCLUSION
Perhaps the most important recommendation is the creation of a

national online readily-accessible database that would contain a
comprehensive record of violations of state and FTC fundraising rules and
requirements by solicitation firms and the individuals who own or work for
such firm. The database would include contracts between fundraisers and
charities, results of fundraising campaigns as well as settlement agreements
between state and federal officials and professional fundraisers. CHAPFRA
and the database would be funded through members’ dues. The database of
fundraiser violations will place a duty of care burden upon nonprofit boards
to access the information, so as to make a reasoned decision before signing
a contract with a professional fundraiser, and will ease cooperation between
state charity officials and attorneys general.
A self-regulatory model that includes required professional
membership, a due process procedure to sanction or permanently ban those
who engage in fraudulent solicitation, and a national database of violators
of state solicitation laws and those who are permanently banned will
provide the most cost effective way of ensuring that a maximum of
charitable contributions will go toward an organization’s mission. It will
also remove a blight that affects the reputation of the whole nonprofit
sector.


Who Can Regulate Fraudulent Charitable Solicitatio

Uploaded by

Document Informationclick to expand document informationWho Can Regulate Fraudulent Charitable

Document Informationclick to expand document information

Copyright:

Available Formats

Who Can Regulate Fraudulent Charitable Solicitatio

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Who Can Regulate Fraudulent Charitable Solicitatio

Uploaded by

Copyright:

Available Formats

Volume 13 (2015) | ISSN 1932-1821 (print) 1932-1996 (online)

DOI 10.5195/taxreview.2015.39 | http://taxreview.law.pitt.edu

AALS Section on Nonprofit and

January 2015 Meeting

WHO CAN REGULATE FRAUDULENT

AALS Section on Nonprofit and

January 2015 Meeting

WHO CAN REGULATE FRAUDULENT

The scenario is common: a charity, typically with a name including an

Pitt Tax Review | ISSN 1932-1821 (print) 1932-1996 (online)

Pitt Tax Review | ISSN 1932-1821 (print) 1932-1996 (online)

would enable the creation of a self-regulatory organization under FTC aegis

II. EXAMPLES OF THE PROBLEM

Pitt Tax Review | ISSN 1932-1821 (print) 1932-1996 (online)

Pitt Tax Review | ISSN 1932-1821 (print) 1932-1996 (online)

B. Coalition Against Breast Cancer

Pitt Tax Review | ISSN 1932-1821 (print) 1932-1996 (online)

Pitt Tax Review | ISSN 1932-1821 (print) 1932-1996 (online)

C. U.S. Navy Veterans

In other scenarios, the charity is a complete sham: such was the

Pitt Tax Review | ISSN 1932-1821 (print) 1932-1996 (online)

The Ohio Attorney General brought a criminal prosecution. U.S. Navy

Pitt Tax Review | ISSN 1932-1821 (print) 1932-1996 (online)

shell organizations. Quadriga and CABC involved consent agreements with

Pitt Tax Review | ISSN 1932-1821 (print) 1932-1996 (online)

Similar to CABC, several nonprofits were fronts for their fundraisers.22

III. COST OF FUNDRAISING AS AN EVALUATIVE MEASURE

“The Worst Charities in America” deservedly raised awareness of the

Of the 53 charities CharityWatch[, a nonprofit rating organization,] currently rates in its

Pitt Tax Review | ISSN 1932-1821 (print) 1932-1996 (online)

episodic, and AG intervention may not originate or be driven by the office

Pitt Tax Review | ISSN 1932-1821 (print) 1932-1996 (online)

and to foster an image of efficiency.28 Assume a charity signs a contract

Pitt Tax Review | ISSN 1932-1821 (print) 1932-1996 (online)

Normally, nonprofit organizations allocate expenditures functionally

Pitt Tax Review | ISSN 1932-1821 (print) 1932-1996 (online)

charities, loosened its guidelines for overhead expenses.33 Charity

IV. THE APPROPRIATE LOCUS OF REGULATION

In the first instance, charitable regulation is a state responsibility. State

Pitt Tax Review | ISSN 1932-1821 (print) 1932-1996 (online)

fundraising results and practices.34 Typically, states require both

Pitt Tax Review | ISSN 1932-1821 (print) 1932-1996 (online)

Professional solicitation is a form of speech, and such appeals are cast, in

Pitt Tax Review | ISSN 1932-1821 (print) 1932-1996 (online)

V. THE INTERNAL REVENUE SERVICE AS PRIMARY REGULATOR

A logical place to situate regulation is within the IRS, which regulates

Pitt Tax Review | ISSN 1932-1821 (print) 1932-1996 (online)

Under § 501(c)(3), organizations are prohibited from engaging in

B. The Private Benefit Doctrine

The inurement limitation only extends to excess economic benefits

Pitt Tax Review | ISSN 1932-1821 (print) 1932-1996 (online)

because it extends beyond insiders, but the inurement proscription is

Pitt Tax Review | ISSN 1932-1821 (print) 1932-1996 (online)

earnings to its founder, members of its board, or anyone else who is an

Pitt Tax Review | ISSN 1932-1821 (print) 1932-1996 (online)

hospital, revocation of exemption based on inurement would be

Pitt Tax Review | ISSN 1932-1821 (print) 1932-1996 (online)

C. The Use of Private Benefit to Regulate Charitable Fundraising: United