Fundraisers Seek More Ethical Guidance

Ahead of its “Ethics Awareness Month” events last October, the Association of Fundraising Professionals (AFP) polled its members, online, for reasons including identifying “which ethical issues were of most concern” to them. 

The survey results should be of interest to the entire nonprofit sector.   

[Note: This post was written just before the COVID-19 pandemic swept the nation.]

  Ethics in Fundraising

The Association of Fundraising Professionals, created in 1960, describes its mission as “empower[ing] individuals and organizations to practice ethical fundraising through professional education, networking, research and advocacy.” 

Its Code of Ethical Standards comprises the AFP Code of Ethical Principles (1964) and the ETHICAL STANDARDS (1964, amended 2014). Together these documents are aspirational statements as well as lists of acceptable and unacceptable behavior for fundraising professionals. 

The organization’s president & CEO, Mike Geiger, MBA, CPA, explains in his letter to the AFP membership to kick off “Ethics Awareness Month” that these codes were adopted because the initial AFP leadership “knew there would be moments where fundraisers felt pressure from others to cut corners or ignore ethical principles. Or situations where there might be competing interests, and the fundraiser would have to determine what’s best for the donor, the organization and the profession.”

   Survey Results: Frequency of Problems

In Donor Control, Conflict of Interest and Tainted Money: Key Ethical Concerns for Fundraisers (October 23, 2019), AFP describes generally the findings of the survey of over 550 of its members. 

It begins with a decidedly “glass-half-full” observation: “Most members don’t have to address challenging ethical situations or dilemmas very often.” What is “very often”? Apparently, that means just once a year. But AFP acknowledges that the survey hadn’t specifically defined “challenging” or “dilemmas” so those fundraisers answering these questions “may have different views of the situations they face.” 

But almost 17 percent of responding fundraisers say they have troublesome encounters about six times a year; 8 percent deal with them once a month. No wonder the burnout rate among fundraising professionals is skyrocketing and almost half of them report they will leave their current positions within two years. That level of talented, experienced professionals wanting to jump ship is a worrisome development for the nonprofit sector as a whole.

    Ethics Survey Findings

The “top ethical concerns” of the responding fundraisers mirror some of the major issues in philanthropy today. 

Almost half of those who were asked to select items from a proffered list of such concerns selected “donor control and restrictions on how gifts can be used” as a leading ethical issue in our sector. About 41 percent checked off “conflicts of interest” and 40 percent designated “tainted” donor money.

In the deluge of information and opinion on these thorny topics, they are typically portrayed as matters of concern for top leadership in nonprofit organizations. Too little attention is paid to the reality that fundraisers are frequently on the front lines of these difficult decisions; often, they must face them with little or no useful guidance from their organizations.  (One of AFP’s stated reasons for conducting its mid-2019 survey was to identify those topics that fundraisers most urgently need guidance and resources.) 

  Additional Concerns

Notably, when survey respondents tackled the question of identifying their “top ethical concerns,” they also listed “workplace issues, including sexual harassment and working with top executive staff.” 

The Association of Fundraising Professionals has been a leading voice on the serious problem of sexual harassment of fundraisers by powerful nonprofit organization board members, top executive staff, and donors. In Harassment of Fundraisers: A New Report (June 6, 2018), we reported on a first-of-its kind study and survey of sexual harassment of fundraisers conducted by AFP and the Chronicle of Philanthropy earlier in 2018. “The results,” we wrote, “are dramatic but not necessarily surprising to fundraising professionals who – over many years – have silently suffered from this kind of abuse.”

Respondents to AFP’s ethics survey from summer 2019 suggested that “fundraising needs a code of ethics or behavior policy for donors.” There are documents like AFP’s ethics codes and its Donor Bill of Rights but they deal with “what donors should expect and receive during the stewardship and giving processes.” But “there is nothing about the donor’s responsibilities.” 


AFP’s Mike Geiger believes that fundraisers and their organizations should “think more expansively about ethics” beyond the usual lists of do’s or don’t’s.  It’s a “way of thinking—how can we not only just prevent harm, but actually help everyone achieve and flourish in a just and equitable way?”

The Charitable Deduction: Then and Now


There are two intriguing and important recent articles about the history of the U.S. charitable deduction and how it can – and should – evolve in the future. 

The first paper is by Dr. Nicolas J. Duquette: Founders’ Fortunes and Philanthropy: A History of the U.S. Charitable-Contribution Deduction (August 27, 2019), Cambridge University Press.  Professor Duquette argues that, despite significant changes in the philosophical underpinnings and textual provisions over the 100 years of the federal charitable deduction, it remains now – as it began – a benefit for the rich. 

The second article is Charitable Tax Reform for the 21st Century (September 16, 2019) by noted tax-exemption scholars, Professors Ray Madoff and Roger Colinvaux.  They argue that the current – generous – tax incentives for charitable giving are “woefully out of step with their purpose and the realities of charitable fundraising today, resulting in a system that is incoherent, ineffective, and on the verge of failure.”

Charitable Deduction History

Nic Duquette is an assistant professor at the USC Sol Price School of Public Policy with expertise in nonprofit economics, public finance, and economic history. His research “uses the tools of economics, politics and history to trace the development and behavior of nonprofit organizations, and he teaches courses in nonprofit management informed by an interdisciplinary perspective.” 

In Founders’ Fortunes and Philanthropy, Dr. Duquette presents 32 pages of text and charts that trace the 100-year history of the federal charitable tax deduction and, more broadly in time and scope the origins and development of philanthropy in the United States.  This is a deep-in-the-weeds scholarly tome, important especially for those interested in shaping the next 100 years of charity tax policy. 

He describes his objectives as contributing “… to two bodies of literature.” The paper “… incorporates the importance of the U.S. tax system into the literature on the history of philanthropy, and it provides the literature on the economics of tax policy and charitable giving with the historical context it currently lacks.” 

Happily, there are reviews and summaries, the most helpful of which is The charitable deduction is mostly for the rich (September 3, 2019) by Kelsey Piper writing for Vox. See also Why the Rich Get Charitable Deductions and Everyone Else Can Suck Eggs (September 4, 2019) by Ruth McCambridge of The Nonprofit Quarterly and Tax History: Charity Deductions Are for the Rich — and That Was Always the Plan (September 19, 2019) by Professor Nicholas Mirkay of the William S. Richardson  School of Law at the University of Hawaii at Manoa.  

But the takeaway of Dr. Duquette’s work should not a simplistic conclusion that the charitable deduction has been, and continues to be, for the very rich. It’s more nuanced and complicated. 

    Charitable Deduction Future 

Professors Roger Colinvaux (Catholic University) and Ray Madoff (Boston University) are well known to the nonprofit community for their insightful commentary. They published Charitable Tax Reform For the 21st Century (September 16, 2019) at 164 Tax Notes 1867 (paywall). It is now available online, free-of-charge from the Stanford Social Innovation Review at

In this 10-page article, they argue that the Tax Cut and Jobs Act of 2017’s expansion of the standard deduction as well as the dramatic jump in popularity of donor-advised funds in recent years have combined to compromise what they assert should be the legitimate policy goals of charity tax incentives. 

What are these twin “overarching policy” aims? First, to promote “actual charitable work.” Second, to foster “a strong culture of charitable giving with broad participation.” Compare these goals with the actual historical record as shown in Professor Duquette’s paper. Professors Colinvaux and Madoff explain that charities “play a fundamental role in American society,” doing the job that otherwise would fall to the government. Moreover, they perform this function with “creative solutions to society’s most pressing problems, and serving our highest ideals.” 

But the design of the federal government’s current tax scheme is inconsistent with these goals and badly broken and unfair. They recommend several reform proposals including: 

  • Expanding the “giving incentive” in the form of credit and with a “giving floor”
  • Changing the timing of tax benefits to DAF donors; and
  • Closing foundation loopholes and fostering more spending.


For anyone who plans to spout off in the coming weeks and months about what should be done with the charitable deduction – and more so for policymakers who will be directly involved in decision-making – these two articles are critical reading.

Disclosure of Donors: Latest Update

If you aren’t clear about whether a tax-exempt organization must disclose its donors or not, the rest of us say: “Welcome to the club.”  

It’s been a roller coaster ride of twists and turns for the past 18 months or so; confusion is the new normal on this issue. But now’s a good time to sum up what’s been going on, particularly because the federal government has just issued proposed new regulations that need comment and input by the public on or before December 9, 2019.

  Donor Disclosure: The Simple Rules – Until Recently

Most (but not all) of the current action is focused on the rules under section 501(c)(4) of the Internal Revenue Code. That’s the murky “social welfare organization” category:  Mucked up by significant infusions of “dark money” since the controversial  Citizens United decision by the Supreme Court in 2010, then made worse by an abrupt switch from fifty years of precedent by the current Administration in 2018.

Historically, the rules has been clear-cut: 

  • 501(c)(3) charitable organizations: The Internal Revenue Code expressly requires these groups to disclose their donors to the IRS on the annual Form 990. (With the exception of random unsuccessful litigation including a recent case taking aim at a corresponding California disclosure rules), this mandatory requirement of the modern federal tax system has held up for some 75 years or so.  
  • Other organizations: Several decades ago, the Department of the Treasury extended the 501(c)(3) disclosure mandate to groups with tax exemptions under different subsections of 501(c) – including 501(c)(4) social welfare groups, 501(c)(5) labor unions and 501(c)(6) chambers of commerce and trade and professional associations. 

But in May 2018, the Treasury Department (and its agency, the IRS) turned this long-established mandate on its head by issuing a “revenue procedure” which is guidance short of a federal “regulation.” Revenue Procedure (“Rev. Proc.” pronounced “rev prock”) 2018-38 caused confusion and opposition from many quarters including from some state governments who have relied on the mandatory disclosure rules to monitor infusions of “dark money” coming into their jurisdictions. 

Under Rev. Proc. 2018-38, 501(c)(4) organizations “… are no longer required to report the names and addresses of their contributors on the Schedule B of their Forms 990 or 990-EZ. These organizations, however, must continue to collect and keep this information in their books and records and to make it available to the IRS upon request, when needed for tax administration.”

  Challenges to Changed Disclosure Rules

There were howls of protest against Rev. Proc. 2018-38 from many quarters including the non-dark-money community and several state governments. 

Led by Gov. Steve Bullock (D-MT), that state filed a federal lawsuit – joined by New Jersey – challenging the substance of this change as well as the procedure by which it happened; that is, by a revenue procedure instead of by formal regulation (or better yet, by statute) and without any of the usual and mandated public-notice period allowing for comment by anyone and everyone including the general public. 

These states argued that they need the disclosure of the identity of donors pouring in huge amounts of money in order to conduct oversight activities and monitor corrupting influences in state and local elections and lawmaking. 

By July, 2019, a federal district judge in Montana issued a key ruling in favor of Plaintiffs Montana and New Jersey. Long story short: The states asked for “the opportunity to submit written data and opposing views or arguments as required … [by the federal Administrative Procedure Act and cases interpreting that statute] … before …  [the federal government] … “changes the the long-established reporting requirements. A proper notice-and-comment procedure will provide the IRS with the opportunity to review and consider information submitted by the public and interested parties. Then, and only then, may the IRS act on a fully-informed basis when making potentially significant changes to federal tax law.” 

    The Latest: Comments Now Allowed

The Treasury/IRS had three choices available:

  1. Cave
  2. Appeal
  3. Try Again – this time with the required public-comment period.

The feds chose door number three.  The Internal Revenue Service announced proposed regulations would be issued in the Federal Register on September 10, 2019. 

It’s a do-over, per the instructions by the federal court. Again, the goal is to upend the long-standing rule requiring disclosure of donors – but this time by regulation and dotting all the required “i’s” and crossing all the required “t’s” for public notice and input. 


The specifics of how to submit written or electronic comments and requests for a public hearing are in the proposed regulations. The deadline is December 9, 2019. 

Keep in mind, though, that the donor-disclosure change affects only what needs to be included in the Form 990. The underlying statutory requirement, to keep necessary records of donations and identities of donors, and make them available to the IRS, in appropriate circumstances, was not changed by the earlier (doomed) Rev. Proc. 2018-32. That stays the same as in many decades past.

Charity Naming Rights: A Provocative Idea

Philanthropic naming rights “…are the charitable cousin of corporate – commercial – naming rights.” In Naming Rights: It’s a Philanthropic Jungle Out There, we explained that “…huge amounts of money – donated, of course, instead of invested – swirl around the rights to have one’s name catapulted into philanthropic super-stardom. Billionaires jostle for the privilege of contributing to society and being publicly recognized for it.”

It’s not unusual for naming rights to a building of a major cultural institution to fetch over $100 million.  As the tax law currently stands, the billionaire philanthropist making the gift is entitled to claim the full amount as a charitable deduction.

In late 2017, Professor William A. Drennan of Southern Illinois University School of Law published a provocative law review article suggesting a change. In Conspiculous Philanthropy: Reconciling Contract and Tax Law, 66 Am. U. L. Rev. 1323 (December 2017), Prof. Drennan proposes acknowledging that the gift provides a major benefit to the donor as well as to the donee, and reduce the tax deduction by the value of that benefit.  

In the following months, two more law professors – Wake Forest’s Joel S. Newman and Fordham’s Linda Sugin – have chimed in on this interesting proposal with their own critiques and suggestions.

This reading is not for the faint of heart: These are “deep-in-the-weeds” scholarly treatises. Happily, there are helpful abstracts for those not inclined to get mud on their footwear.

   Naming Rights Under Contract Law

Professor Drennan uses the well-publicized case of the controversial and difficult renaming, a few years, of the Avery Fisher Hall at New York’s Lincoln Center to illustrate his point that naming rights are valuable assets and should be treated that way. (That’s the example we, too, used in our March 2015 post.)

In 1973, Avery Fisher, an industrialist who was deeply immersed in classical music, gave $15 million to renovate an existing symphony hall. In return, he was honored with naming rights in perpetuity. Of course, this building that had needed updating in 1973 was bound to again need major improvements decades later. But with inflation and the soaring popularity of charity naming rights, it was inevitable that Lincoln Center would have to offer the new benefactor this type of recognition. Mr. Fisher’s heirs balked; only after protracted litigation and negotiations, the heirs relinquished the naming rights in return for the $15 million back as well as new perks for the Fisher family.

Here’s the conundrum: The naming rights “sold for $15 million;” but the “IRS treats these publicity rights as worthless when charities grant them, and this generates substantial tax benefits for the donor and the donor’s family.”  

In many other situations, the IRS requires donors to subtract the fair market value of benefits when calculating what percentage of a charitable “donation” is tax deductible.

Professor Drennan examines how and why – historically – the naming-rights donors are treated differently than the ordinary donor who must take into account the value of the benefit received. He labels this the “tax approach” and posits that it is “outdated and inconsistent with U.S. Supreme Court precedents.”

He then explains that the “common law can treat these publicity rights as valuable consideration supporting an enforceable contract, and a charity may be liable for damages if it renames a building.” There are questions, though: ”Why the contradiction?  What are the consequences? Should we reconcile these positions? How?”

Professor Drennan concludes that the “common law contract approach is well-suited for today’s mega-million dollar charitable building naming rights deals” and should be seriously considered and adopted.  

 Thoughtful Responses

In  Conspicuous Philanthropy: A Response, American University Law Review Forum, Vol. 67, No. 1, 2018 (March 13, 2018), Professor Joel S. Newman offers his thoughts.

To make Professor Drennan’s proposal work, “there must be a way to determine (1) which categories of naming rights might be significant benefits; and how such benefits can be valued.” Drennan had tried to distinguish between “significant” naming rights and more minor ones – for instance, naming a donor among many others in an event publication. “However,” writes Professor Newman, “there are a lot of rights in between that should be addressed.”

While Drennan suggests that donors and donees agree, up front, on the naming rights’ value, Newman points out that “such agreed valuations will also serve as liquidated damages, making it easier for donees to renege. As a result, donors will probably limit the duration of their naming rights.” But, he adds, “that would be a step forward.”

In Competitive Philanthropy: Charitable Naming Rights, Inequality, and Social Norms, 79 Ohio St. L. J. (forthcoming 2018), Professor Linda Sugin of Fordham University School of Law approaches this proposal from a sociological perspective that can address rampant “income inequality” in today’s America. Major gifts of $100 million or more are not unusual, and “in return for their mega-gifts, the biggest donors get their names on buildings, an astonishingly valuable benefit that the tax law ignores. The law makes no distinction between a gift of $100 and a gift of $100 million.”

She suggests that the “tax law of charity” should encourage and celebrate what this Article calls ‘competitive philanthropy,’ which defines philanthropic success as inspiring others to exceed your generosity.”  She proposes – to this end – a “legal regime that includes both more and less generous elements for donors than current law.”


With the surge in naming-rights popularity showing no indication of waning, it is perhaps long overdue for the philanthropic community, along with academics, legal experts, and lawmakers, to embark on this discussion.

The Charity Raffle in CA: An Update

Around the United States, raffles are among the most popular fundraising methods for charitable organizations. Many groups, though, are unaware that raffles are governed by strict rules on a state-by-state basis.

A few years ago, in June 2015, we tackled the key misconception; that is, the payout to the winner can be whatever the organization wants it to be. It’s Just a Little Raffle: What’s the Big Deal?  Each jurisdiction has rules on the allowable percentage to be paid to charity vs. to be paid to the winner. In many jurisdictions, a 50/50 payout is allowed. In California, the rules are more stringent. As of that June 2015 post, the payout limit was 90/10; that is, the winner can be awarded no more than 10% of the proceeds.

A few months later, In Surprise Change to Charity Raffle Rules in California, we posted news of a limited change approved by the California legislature that benefits just a handful of organizations that hold raffles. There was opposition, but it was a touted as a temporary change only, scheduled to sunset on December 31, 2018, if lawmakers did not make it permanent by then.

Now, with the sunset provision in the recent past, proponents were able to pass a bill late in last year’s California legislative session, making it permanent. Now, certain nonprofits affiliated with major-league sports team may continue to hold 50/50 raffles in this state.

With this limited change now in place indefinitely, it’s a good time to review the ground rules about raffles in California and – in particular – how much a sponsoring organization is permitted to pay out to a raffle winner.

The 90/10 Raffle Rule

California’s raffle rules emerged two decades ago when “California’s gambling industry was essentially unregulated.” The Legislature tackled this Wild-West problem first in 1984 with weak legislation; this was changed in 1997 with the passage of the much-tougher “Gambling Control Act.”

There was pushback, though, on this hardline approach; a consensus agreed there should be exceptions for tribal gaming and for some charitable activities and events including bingo. The revised raffle rules were then made via constitutional amendment. As we explained in It’s Just a Little Raffle: What’s the Big Deal?:

(Without going into a big rigamarole about how complex lawmaking can be in California, and why items you’d think could be accomplished by a regular amendment in the Legislature, can’t be done that way), suffice it to say that the matter had to be approved by the voters in a March 2000 ballot initiative.

So, the voters amended the State Constitution (Art IV, Sec. 19) granting the legislature authority to permit certain nonprofit organizations to hold certain types of raffles. To do that, legislators amended Penal Code sec. 320.5, effective July 1, 2001, to authorize certain types of raffles under narrow conditions. There were additional requirements and restrictions added as well.

That’s how the 90/10 payout rule came to be the law in California, notwithstanding the huge popularity of 50/50 raffles elsewhere in the United States. We pointed that out in How Your 50/50 Raffle is Like Drinking a Beer When You Were in High School. It’s done a lot, but here in California, it’s illegal. “What’s legal now is akin to drinking non-alcoholic beer, which has been described by some as only just a bit ‘better than being left empty-handed at a party.’”

Here’s the bottom line: The Golden State allows only 90/10 or better raffles. At least 90% of a raffle’s gross receipts must be paid directly to beneficial or charitable purposes in California. This works best, of course, when most or all of the raffled items are donated.

There are more rules and regulations that California organizations need to know about raffles; we’ve covered them earlier, here. Since the newest developments involve the 90/10 rule and the 50/50 narrow carve-out in 2015, we’re focused on that aspect of the law in this post.

The 50/50 Narrow Raffle Exception

In the midst of the usual mountain of bills (including high-profile measures) awaiting California lawmakers each September trying to beat the clock before the 2015 Regular Session was adjourned, there was a small proposal to tweak the charity raffle rules just a bit to benefit major sports franchises and their associated nonprofits.

The tough 90/10 payout rule for California charity raffles was modified so that at major sporting events, Californians can enjoy a 50/50 raffle, like those held at other locations around the nation. Although the payout is lower than for raffles held by all other California organizations, the large number of attendees at sporting events creates a windfall for all concerned.

Though there was organized opposition from nonprofit organization associations, SB 549 passed both houses of the legislature by September 5th, with significant bipartisan votes.  Along with many other newly enacted bills, the measure sat on the Governor’s desk for almost the entire 30 days allotted to him to sign or veto it.

The California Association of Nonprofits, on behalf of a coalition of some 100 charity leaders, stepped up lobbying efforts to persuade Governor Brown to exercise his veto. Their key arguments were: (1)  the charitable community was a key participant in the “multi-stakeholder process” that resulted in enactment of the 90/10 raffle law in 2000; (2) SB 549 would unfairly create an exception for “an exclusive set” of nonprofits; (3) a 50/50 split is contrary to the “intent” of the original law “that the primary purpose of any charitable raffle is to benefit a charity.”  

Despite this plea that “…laws governing charitable raffles should be tightly crafted with input from stakeholders throughout the sector and should treat charities equally,” the California governor signed the bill on October 5, 2015.

There were important conditions, though: first, the law was temporary with a scheduled sunset at the end of 2018; second, there was to be an audit and report.  

In the 2018 Regular Session, the California Association of Nonprofits and other opponents put their weight against Assembly Bill 888 which would make the 50/50 national sports league carve-out permanent.

Despite legislators’ promises in 2015 of a progress report on if and how California communities would benefit from the 50/50 raffles, “there has been no audit or review to see if this program is working or where the money is going.” The first draft of this bill would have permitted these raffles to go on indefinitely without any oversight at all.

The final bill includes another sunset on these big raffles in 2024 and authorizes more money for auditing and compliance by the California Department of Justice. This measure passed the legislature and was signed into law by the governor.


CalNonprofits will continue this fight by coordinating with the Attorney General to make sure that there is meaningful oversight.” They will also renew their efforts to “make raffle rules simpler for smaller authentic charitable raffles.”

Thanks, but No Thanks (For the Donation)

Long gone are the days when a nonprofit couldn’t imagine turning down a donation – particularly a large one. In recent years, though, more and more organizations are rejecting contributions for a wide variety of legitimate reasons.

Two of the most frequently cited rationales for rejecting a charitable gift are: (1) too many restrictions on how the money is to be spent; and (2) ethical issues about how the donor gained the wealth from which the donation will be made. We’ve previously covered instances of each. Here are two more – current – examples.

  Small Library Turns Away $3 Million Donation

A decision to accept or reject a charitable gift is best evaluated within the context of each situation. A contribution of – say – $X million would be considered routine and fairly inconsequential if made to a large organization with a huge budget and a deep and loyal donor base. But if the same $X million donation was proposed to a much smaller group, it would be reviewed and considered as a possibly “course-changing offer.” The decision to accept or reject the contribution is much more difficult in the latter case.

Recently, the board of the Barry-Lawrence Library system in Missouri was faced with such a critical decision. They gratefully acknowledged and carefully considered a $3-million donation offer but – in the end – politely turned it down. These directors did everything right, including having a gift acceptance policy already in place that helped guide a difficult decision.

The Library system has needed a new location for its branch in Monett, Missouri. Any new facility must serve not only as the Monett area’s library but also have space for the system’s regional offices to conduct their business. The current building has leaks – the repairs for which would cost less than $4,000 – but the space is not big enough for these multiple purposes and is badly designed.

Last December, when bad weather compounded the leak problem, the Library system board learned of an offer by an anonymous donor interested in helping to build a new facility. This sounded like a perfect solution because the organization already had available a donated location – although not in downtown Monett – where it could build a new structure. They just needed the money.

Through an intermediary, the Community Foundation of the Ozarks, the Library system board asked for $2.5 million. The donor, however, wanted a downtown Monett location. The only available building there was a site needing complete renovation for the purpose.

This board faced a wrenching choice, but they (prudently) had an existing gift acceptance policy which wisely anticipated this kind of dilemma.  The Library system’s policy is to not accept gifts which are restricted. The Library director, Gina Milburn, explains the nuances: They don’t accept donations when “… someone says, ‘I’ll give you money, but you have to renovate this specific building [with it]’.”

We do let people say, ‘We want [you] to spend our donation on this and that, but we don’t let them pick out the items we purchase. For instance, late Sen. Emory Melton gave $25,000 for a specific purpose […use it for children and teens…] but he didn’t say, ‘You have to use it on books and furniture.’

Notwithstanding this gift acceptance policy, and recognizing that the anonymous donor had made an important and generous offer, they “continued to explore and negotiate.” But when they toured the downtown site, they saw two additional obstacles: It was in the floodplain and flood insurance costs would have been prohibitively expensive, and there was insufficient parking space. This site visit confirmed that they had no choice but to decline the gift.

“Some large gifts are philanthropic versions of Trojan horses, and the wise nonprofit measures this possibility carefully.” That’s the lesson to be learned from this story. “Ultimately, the board made the decision to value its own assessment of the situation over the temptation of a large, restricted, gift.”

   “Tainted” Contributions

Anyone unaware of the prescription-opioid crisis devastating communities around the United States must be living under a rock.

The Sackler Family – specifically descendants of Mortimer and Raymond Sackler – have become billionaires from the sale of the drug OxyContin from the family-owned Purdue Pharma company. An important aspect of this story is that the medication has been notoriously over-prescribed by physicians nationwide as a result of a relentless marketing campaign and questionable promotional practices from the drugmaker.

For two decades, foundations formed and run by Mortimer and Raymond and their families have become “major philanthropists in the arts,” donating “enormous amounts of money” to many institutions, including New York’s Metropolitan Museum of Art and the Guggenheim, as well as London’s Victoria and Albert Museum.  

Earlier this year, activists – including some who became addicted to OxyContin after medical procedures – began a protest movement demanding not only that the Sackler family fund treatment for victims but also that major nonprofits refuse to accept any more money from their charitable foundations. In mid-March, demonstrators  unfurled banners and scattered pill bottles…inside the Sackler Wing at the Metropolitan Museum of Art in New York.”  

The Met was chosen as the protest site because of its high profile in the art world and “because [the protestors] see it as symbolic of the fact that Sackler family members are often viewed primarily as art patrons rather than as owners of a pharmaceutical company.” The Sackler wing at the Met is “named after Arthur, Mortimer, and Raymond Sackler, brothers who in the 1970s donated $3.5 million toward its construction.” Of course, that gift was made well ahead of the time that the family was involved in pharmaceuticals and the manufacturer and distribution of Oxycontin.

In the current climate of rising political activism, it’s no surprise that protests are springing up against the use of this “tainted money” to enhance the family “brand” through their philanthropic activities.  A key question for nonprofits is whether they should allow themselves to be complicit, so to speak, in rehabilitating those who became rich through “acts that violate the public good.”

Or as the New York Times’s Ginia Bellafante observes in When Should Cultural Institutions Say No to Tainted Funding?: “Having facilitated one of the biggest public health crises in modern American history, [the Sacklers] need a new profile. The art world should not help them achieve it.”


In earlier posts, we’ve discussed a variety of instances including “tainted” donors or donations as well as when it’s prudent to decline a contribution. See, for instance:


Behested Payments: Critics Take Aim

Behest:  (first known use: 12th century England) 1. An authoritative order, command   2. An urgent prompting

One imagines Sir Guy of Gisborne galloping through the Nottinghamshire countryside announcing the Sheriff’s latest behest that lord and serf alike hand over their valuables forthwith; a behested payment, so to speak.
Alas, this is not a relic of the distant past.
Behested payments are alive, well, and perfectly legal in 21st century California. But some of the peasants in the Golden State are grumbling. There are small changes afoot – where else? – in San Francisco.

   Behested Payments: What Are They?

Back in 1997, a “number of legislators were seeking advice” on how – or if – to report certain types of contributions. What if an “official asks a person or business to make a donation to the official’s favorite charity or to contribute to an agency project; for example, a skate park?” That year, the legislature responded by amending California Government Code section 82015, the state’s political campaign disclosure law.  
According to guidance from the California Fair Political Practices Commission (FPPC), a “payment is considered ‘behested’ and subject to reporting if:

  • it is made at the request, suggestion, or solicitation of, or made in cooperation, consultation, coordination or concert with the public official;
  • it is made for a legislative, governmental or charitable purpose; and
  • it does not qualify as a gift (made for personal purposes), or a contribution (made for election-related activity) to the elected official.”

The Institute for Local Government has issued a helpful publication, Understanding the “Behested Payments” Issue (2012), that explains in plain English everything that a conscientious public servant should know about asking for help with community causes. “Ask and Ye Shall Report” is the key takeaway.

  Behested Payments Move Center Stage

“The amounts were a drop in the bucket 20 years ago when the requirements were instituted, but they’ve become big political business in recent years.”
In 1997, payments “behested by state lawmakers” totaled just $243,533. By 2005, that figure jumped to almost $3 million. By 2007, the amount spiraled to and “generally stayed in the $8 million to $9 million range” for a number of years. In a 2014 analysis by a San Francisco public TV and radio station, there was an estimate of some $120 million raised “for charity and other groups by legislators and top state officials since the behested payment law took effect.” That’s a lot of skate parks.
Gathering reliable numbers is cumbersome because the behested payment report forms for local elected officials are filed with hundreds of different offices around the state. Apparently, no comprehensive study has been done of the total amounts involved.  But, from news stories over the past year or so, it looks like the practice is growing in popularity, with some “eye-popping sums” reported.
For example, in Los Angeles, Democratic Mayor Eric Garcetti, a “longtime critic of big money in local politics” – has been setting records for behested payments. He has raised almost $32 million “in large donations to his favored causes from individuals, businesses, and foundations, some of which have won sizable contracts and crucial approvals from the city in recent years.” Angelenos have read headlines like A tricky area of philanthropy’: LA mayor solicits millions for his favored causes.  Garcetti’s success has been almost twice as much as the California pol generally thought of as the king of the behested payments, Democratic Governor Jerry Brown.
Just a bit down the road in San Diego, citizens read headlines like Charitable giving at [San Diego] mayor’s behest tops $2 million. Republican Mayor Kevin Faulconer is no slouch: He “continues to solicit donations for his favorite charities at a pace that far exceeds other local elected officials, and many of the contributions support a nonprofit formed to benefit his office….One San Diego, the nonprofit that Mayor Faulconer created after his 2014 election, has received more than $800,000″ some of which was for “furniture, polling, receptions and other functions for the Mayor’s Office.”
“These days in statewide and (…local…) politics ‘behested payments’ have taken on a larger meaning, as they increasingly are part of the money and influence game played by office holders and their supporters.” It is a bipartisan matter at all levels of state and local government, in the legislative as well as the executive branches.

   Reining In Excesses

The media glare has thrown some light on this practice that previously had been conducted mostly under-the-radar. From the standpoint of government watchdogs, behested payments are a “thorny fundraising practice”; a form of influence buying.
In January 2017, the San Francisco Board of Supervisors took action, voting 11-0 to approve a new ordinance on behested payments that goes beyond the requirements of existing state law. Effective January 1, 2018, “members of boards and members of boards and commissions who are required to file a Statement of Economic Interest (Form 700) [must] disclose if they directly or indirectly request or solicit charitable contributions of $1,000 from parties or participants (or their agents) while certain matters are pending before that commissioner’s board.”
This disclosure duty applies to monetary as well as non-monetary contributions to a “government agency, educational institution, and both 501c and Section 527 tax-exempt organizations.”  


This step by San Francisco officials may be a harbinger of other action around the state. In any event, it may not be the end of the story, even in that locale.
With the new ordinance set to take effect at the beginning of the new  year, the San Francisco Ethics Commission proposed, late in 2017, a more dramatic change; that is, to restrict public officials from asking for charitable or civic donations from a person or group that has business before that official.”
That proposal was unsuccessful. But having failed to get the Board of Supervisors to approve such a severe limit on their own fundraising, Ethics Commission members have floated the possibility of putting the matter on the ballot sometime this year.

Donor-Advised Funds: IRS Asks for Public Comment

Donor-advised funds (DAFs) have been available for decades, but it’s only in recent years that DAFs have surged in popularity in the United States to become the “fastest-growing charitable giving vehicle.”
With that growth has come scrutiny. For wealthy people, a donor-advised fund is certainly an attractive alternative to creating a private family foundation. DAFs involve less time and money; they offer more control and privacy as well. Critics worry, though, that there may not be enough benefit to society as a whole to warrant the generous tax advantages.

The discussion in 2017 has moved from the policy-wonk world of academics and philanthropy experts to federal officials and legislators. The current tax-legislation reconciliation talks involve consideration of DAF-related provisions along with a huge number of other issues with significant public impact. Most of the action is happening behind tightly closed doors beyond public reach; it will be dealt with in up-or-down votes on the entire package.

But the Internal Revenue Service has entered the DAF debate fray, too, with a notice of proposed rule-making and request for public comments issued just recently on December 4, 2017.

The Donor-Advised Funds Debate

Before we get to the specifics of IRS Notice 2017-73, a brief review of earlier developments should be helpful.

In the summer of 2016, what had been relatively quiet rumblings in certain quarters about the runaway growth of donor-advised funds – particularly the large, commercial ones including Fidelity Charitable – burst out into the open. In the New York Review of Books, law professor Ray Madoff and philanthropist Lewis B. Cullman published a provocative article titled The Undermining of American Charity.

Following up a year later, Professor Madoff, now joined by fellow law professor Roger Colinvaux, took these biting criticisms to the next level. They penned a letter dated July 17, 2017, to Senate Finance Committee Chairman Orrin Hatch (R-UT), “deftly making use of the opportunity to respond to his ‘request to stakeholders for input on tax reform, specifically with respect to the tax treatment of 501(c)(3) charitable organizations.’”

The 4-page letter from Madoff and Colinvaux was comprehensive and detailed, requesting Congressional action to impose significant new requirements and restrictions on donor-advised funds. There were two key recommendations: first, mandating payout periods for all funds sitting in DAF accounts; and second, prohibiting private foundations from satisfying their own payout requirements by distributing funds to DAFs.

These two proposals were based on research they cited suggesting that DAF donors stockpile too much money in the DAF accounts for too long, instead of releasing them to good use in the charitable community.

Since the donors receive an immediate, highly valuable, charitable deduction, it’s only fair, they argue, to require charitable use of the money within a reasonable period of time.
Donor-advised funds and other “stakeholders” were invited by Chairman Hatch to respond. Some 100 community foundations, along with the Council on Foundations, Independent Sector, and the Alliance for

Charitable Reform created a 12-page rebuttal dated September 6, 2017. In this response addressed to Senator Hatch and Ranking Member Ron Wyden (D-OR), these proponents did not hold back; they characterized the law professors’ July letter as “misguided and misleading.” In particular, they argued that the mandatory payout proposal along with the suggestion to block private foundation payouts to DAFs are based on “erroneous statistics and claims.”

Their purpose was to (1) dispel these unfounded assertions, and (2) explain how the law professors’ proposals “would actually be harmful to philanthropy, rather than increase charitable giving or curb abusive practices.”

These community foundations and their allies took particular aim at the claim that donor-advised funds “stockpile” money at all or in excessive amounts. They argue that there is “no evidence” at all of stockpiling; moreover, there is “little incentive to donors” to stockpile, because they are given a tax benefit upfront. They explain as well that there is an accreditation procedure under the National Standards for U.S. Community Foundations. Many community foundations seek this certification which requires them to have a policy that addresses “inactive funds.”  

Proponents explain also about the process of making DAF distributions; in some cases, there are legitimate reasons that some payouts don’t get started right away, or why they may be halted for a while.

Federal Action on Donor-Advised Funds

While the ink was hardly dry on these provocative, pro and con, letters, Congressional attention turned to the matter of drafting comprehensive tax legislation. Because we are still in the behind-closed-doors, sausage-making phase of the conference’s deliberations, it’s anyone’s guess if donor-advised funds will be affected directly or indirectly.  

In the meantime, the Internal Revenue Service has chosen this moment to dip its administrative toes into the waters. In Notice 2017-73, issued on December 4, 2017, the federal tax agency “describes approaches” that Treasury and the IRS “are considering to address certain issues regarding donor-advised funds (DAFs) of sponsoring organizations.”  If adopted, they propose administrative action including future new regulations under Internal Revenue Code section 4967.

This would be a limited intervention only –  way short of the more comprehensive changes proposed last July by Professors Madoff and Colinvaux.

There are two proposals discussed:

  • Purchase of Tickets by DAF for Charity Event Attendance. The Treasury wants to add a regulation that, if a donor-advised fund pays for tickets for its donor or certain (related) others to attend a charity event, that payment would be considered more than an “incident benefit” to that person within the meaning of IRC section 4967.
  • Fulfillment of Pledges by Donor. The Treasury wants to make clear that if a donor-advised fund makes payments to fulfill a pledge made by a donor or certain (related) others, that payment would not be considered more than an “incidental benefit” to that person within the meaning of IRC section 4947 – if certain conditions are met.

A third possible proposal is listed, too:

  • Change to Public Support Computation. “The Treasury Department and the IRS are considering developing proposed regulations” about the effect of donor-advised funds’ grants to certain public charities in connection with their public support calculations and in a way that will stop DAFs from avoiding excise tax rules that apply to private foundations.


As required by law, Notice 2017-73 includes a request for public comments for a period of 90 days that ends on March 5, 2018. Even though this Notice involves only preliminary ideas under consideration by the Treasury Department and the IRS, those directly affected or otherwise interested should take this opportunity to submit information and reaction to these tentative proposals.  

Think You’ve Heard Everything?:  The Faux Donor

In the nonprofit world, donors are the VIPs. As a nonprofit leader, you’re thrilled whenever a major prospect appears: It can mean great news for the success of your mission.  There have been a “few recent incidents,” though, where it’s “just too good to be true.”

A major gift arrives out of the blue from an unknown source. The donor isn’t in your database or your paper files, and no one on staff has heard of them. Maybe they have a moving story about an experience with your nonprofit or hospital or university, or a promise made to a dying aunt.

Sounds great so far, right? But that person with the big promises may turn out to be a dud. Or worse than a dud – someone who takes your group for a ride that drains your time, energy, reputation, or money, or all of them.
Welcome to the “faux donor”: a weird duck who promises the world without any intention of following through. No one, except the weird duck himself (or herself), knows why.
Sometimes, a faux donor pulls off a “small scam with a discernible purpose; others, not so much.”
Sometimes a faux donor is just plain weird; your time is wasted and you look ridiculous after you are drawn into the nuttiness.
Sometimes a faux donor is scary and presents a danger other than to your money or reputation. That’s no laughing matter.

  Faux Donor Sightings

In “You’re Just Too Good To Be True”: The Many Odd Faces of the Faux Donor,” the Nonprofit Quarterly columnist tells of tales contributed by colleagues from online discussions of how people try to “scam colleges, schools, and nonprofits.” Here are a few from the not-too-distant past, ranging from the greedy to the truly odd.

  The Grifter

Years before the internet (with its quick online searches), a hospital was scammed by a couple claiming to be big philanthropists from out-of-town, with stories about rich and famous friends.
The wife’s surgery meant a stay of at least a month. The “devoted” husband was so pleased with her care that he talked about donating “millions of dollars.”  He also asked to stay in her room to be close to her 24/7. “[H]e set up shop right in her hospital room – complete with a pullout bed, table for a desk, phone, even meals, all free of charge.” An alert employee sensed something was amiss, and her sleuthing eventually exposed the husband as a wanted fugitive, a career con artist.

  The Grad

A university graduate contacted his alma mater with a story about plans to donate his art collection to the institution. After stringing the college along for a while, he posted an article online that included email exchanges that made the college personnel look like ridiculous suckers.  

  The Stalker

A man visited the offices of local nonprofit, telling the receptionist he was opening a business in town and was looking to contribute philanthropically to the charity. He requested a tour. Accompanied by a major gift officer, the man again talked about making a major gift.
After further contacts, it became clear that he was not a donor, but a stalker. The organization’s IT department was able to track the email servers he used, eventually uncovering his creepy past of using aliases and being wanted by out-of-state officials. The police instructed the gift officer to set up an appointment; when he arrived, law enforcement arrested him.

  The Classic

Despite scattered publicity about cases like these, they continue. In August 2016, the Nonprofit Quarter reported on yet another classic faux donor scam, involving “lies to a veterans service organization that caused deep disappointment and embarrassment.”

It’s an odd tale that NPQ has seen time and again. A wealthy donor comes out of nowhere and promises a nonprofit oodles of money. It all seems too good to be true, and unfortunately for the nonprofit, that’s just the case. A Portland, Oregon nonprofit, Lift for the 22, is the latest victim of such a faux donor scam.

Lift for the 22 gives memberships in its gym to veterans who need help in the transition back to civilian life and may be at risk of suicide. There is a long waiting list.
A young businessman walks in and begins participating in the workout program with other veterans. He claims to be wealthy and successful, had “…business cards, … emails that worked, ….” and, after several workout sessions, pledges a $425,000 gift to the organization along with promises of a matching gift from supplement retailer GNC.
Thrilled with this news, the “organization did not feel the need to dig into [his] credibility….It was believable. He had a good game.” They arranged an elaborate check presentation live-streamed on Facebook and praised him to the community.
Of course, the check never came. The group’s suspicion that “something was wrong” was confirmed when a participant’s wallet went missing, and this faux donor – caught on tape using the veteran’s stolen credit card – was exposed as a con artist.  

  Faux Donor Precautions

The “faux donor” scam presents a classic dilemma for a nonprofit:

On the one hand, there’s a feeling that donors are doing the nonprofit a favor by donating funds so asking too many questions can perhaps seem ungrateful. On the other, the nonprofit depends on those funds, so if they don’t come through, … important services the nonprofit provides are impacted. Moreover, it is the nonprofit that often loses credibility in the public eye after these scams, adding further insult to injury.

Certain steps can be taken to fend off disappointment and losses.  

  • With as-yet-unsecured-pledges, a nonprofit can reasonably ask for certain information before the gift is announced or celebrated. Blame it on your lawyer: “I didn’t want to insult you by asking any of these questions, but our lawyer insisted. You understand, of course?”
  • Even in preliminary discussions about significant donations, a gift officer can do some online sleuthing which – if everything is on the up-and-up – will yield a goldmine of information, including what a background check would generally yield.
  • There are wealth-screening and research tools (e.g., WealthEngine, Target Analytics, DonorSearch or LexisNexis for Development Professionals) you can use in appropriate cases of significant gift promises.
  • Your board can adopt a formal, written gift-acceptance policy that requires donor information. “[I]nclude doing background checks on donors as well as taking the time to vet donors before publicly broadcasting large gifts.” You “can also mitigate risk by implementing a cash-on-hand policy for these unexpected large gifts, in which pledged dollars from new donors are not earmarked for expenses until the funds are received. Once a donor has proved their credibility, this policy can be waived.”

Some healthy skepticism and at least minimal precautions can often prevent a “faux donor” scam.

Charity Issues of Concern to CA Attorney General

Around the nation, state attorneys general have the key oversight responsibility for charitable organizations and property held in charitable trust in their jurisdictions. Historically, the most high-profile ones are from the biggest states. California’s Javier Becerra and New York’s Eric Schneiderman are carrying on this tradition of aggressive investigation and enforcement.

This, of course, is in addition to federal tax-exempt oversight authority of the Internal Revenue Service.

    Charity Probe Focus

The attorneys and auditors of the Charitable Trusts Section of the California Attorney General’s Office “investigate and bring legal actions against charities and fundraising professionals that misuse charitable assets or engage in fraudulent fundraising practices.”

At a July conference in Northern California, nonprofit leaders and professional advisers listened as Elizabeth Kim, the Supervising Deputy Attorney General, described the key areas of concern that are currently on the radar of officials. She highlighted two specific enforcement issues of interest to watch: (1) Gifts in Kind (misleading donors in ways including over-valuing gifts, or acting only as a pass-through); and (2) Joint Cost Allocation (misleading donors by artificially reducing or mischaracterizing fundraising expenses).

   What’s The Issue About Gifts-In-Kind?

While most charities request and receive cash donations, others “hold events to raise donations of food, property, clothing, equipment, home goods, supplies” and other “gifts-in-kind.”
These organizations may distribute these products directly to recipients or give the items over to other charities for redistribution through – for example – thrift stores or relief organizations.
Sometimes, a “soliciting organization acts as an intermediary between a business having property to donate and … 501(c)(3) organizations whose charitable programs involve assisting needy individuals.”
While most groups involved in these activities are legitimate and follow all rules, some organizations “take advantage of donors’ good intentions and tax provisions designed to provide an incentive for in-kind donations.”
Specifically, Internal Revenue Code section 170(e)(3) was enacted as an incentive for donation of gifts-in-kind to help people in need.

When used as intended gifts-in-kind can benefit everyone.  The charity’s purpose gets fulfilled, donors may be able to get a tax deduction, and items that may have otherwise been discarded can be used to satisfy the needs of others in unfortunate situations.

Of course, in the hands of unscrupulous individuals and groups, this incentive can be abused “for fraudulent purposes.” Problems arise in “two areas: the valuation of donated goods, and the actual use of the donated goods in programs that serve the needy.”
On Form 990, the 501(c)(3) organization must report “how money was spent, and what its assets and liabilities are.”

A charity’s spending is divided into three categories: program service expenses, management and general expenses, and fundraising expenses.  A charity can report the fair value of a gifts-in-kind received as donated revenue, and the value of the gifts-in-kind it distributes as a program service expense if certain IRS set criteria is met.  

If an organization incorrectly reports these donations, it can be made to “look more successful than it really is, and can also serve to hide any wasting of useful resources.

Reporting false numbers can also inflate a charity’s donation and program expense numbers to make them more attractive to donors, grantors, and other public support. Inflating program expenses can serve to minimize excessive fundraising and administrative costs, making them appear to be a smaller percentage of expenses than they really are.

This might inflate a charity’s rating on a watchdog site like GuideStar or CharityWatch.

False reporting can occur in a few different ways.  A charity can mark up the value of goods, they can assign some value to goods that are worthless (a machine that has missing parts), or they can take credit for the value of a gift-in-kind that was simply redistributed to another organization, in which case they would have never had ownership of the gifts but merely posed as a middleman.


In a later post, we’ll discuss the second areas of interest: joint cost allocation.