United States: Can A Nonprofit Fundraise For Another Nonprofit? Legal And Tax Considerations.

Can a Nonprofit Fundraise for Another Nonprofit?

I've served as outside general counsel for nonprofit organizations across the nation for over 15 years. This question is re-occurring. So, I thought I would blog a little about it. Not legal or tax advice; just legal and tax information, unless you paid for it...

General Overview.

Entity A-501(c)(3) may, generally speaking, engage in fundraising for Entity B-501(c)(3). Ideally, and it is recommended that B's exempt purposes (and purposes for the funds raised) align with A's exempt purposes. The core requirements of section 501(c)(3) and related Treasury Regulations provide that A's assets must be used primarily for the exempt purposes for which A is organized and exempt. Thus, the fundraising activity should contribute importantly to A's exempt purposes, which can include offering support to other similarly-purposed exempt organizations.

If Entity B-501(c)(3)'s purposes, or the designated purposes for the funds raised is not substantially related to Entity A-501(c)(3)'s exempt purposes, the income received by A for fundraising for B could be deemed to be unrelated business income to A. Whether that income would be taxable to A is governed by a whole other set of rules and exceptions and exceptions to those rules. See Three-Part Series of Unrelated Business Income Tax rules here – Tax Exemption and Unrelated Business Income Rules (UBIT): "Substantially Related" (Part 3 of 3) – Freeman Law

Each fundraising organization should review and consider its articles of organization, internal rules, and any representations to the contrary that may have been made to the IRS. From a business-decision perspective, the organization should also consider if it might be petitioned to do similar fundraising work for other organizations, which may not be a political or community position that the organization wants to step into.

Primary Purpose and Examples.

Fundraising, per se, for other organizations (i.e., without retaining discretion on how to use or distribute funds raised) should not be a primary business purpose of Entity A-501(c)(3); otherwise, A's exemption could be put at risk due to "trade or business" principles. See 26 U.S.C. § 502(a) ("An organization operated for the primary purpose of carrying on a trade or business for profit shall not be exempt from taxation under section 501 on the ground that all of its profits are payable to one or more organizations exempt from taxation under section 501."); 26 C.F.R. § 1.503(c)(3)-1(e). On page 4 of 1982 Exempt Organization CPE guidance—Fund Raising—it is noted, "Although there are no revenue rulings directly touching on the exempt status of an annual or intermittent event charitable fund raising organization and there are no examples provided in the regulations on the issue, a few revenue rulings indirectly touch upon the Service position with regard to these organizations." The CPE gives an array of examples that may be relevant to any particular situation or organization.

Form 1023 / Form 990.

Presumably to inquire as to Code section 502 matters, the current Form 1023 Application for Tax-Exemption under Section 501(c)(3) asks this question: "Do you or will you engage in fundraising activities for other organizations? If "Yes," describe these arrangements, including the names or descriptions of the organizations for which you raise funds." So, if an organization might engage in fundraising for other qualified organizations, it is advisable to not check the "No" box to that questions. Rather, check "Yes" and provide a qualified answer or reservation of rights to engage in fundraising that is substantially related to the applying organization's exempt purposes. The IRS Form 990 has various questions about fundraising income in a reported year, but nothing as on-point as the Form 1023.

Fundraising Considerations.

Entity A-501(c)(3)'s fundraising tactics are subject to appropriate disclosure and solicitation rules and laws. This includes applicable state laws governing deceptive trade practices and charitable solicitation requirements. For example, if A will receive compensation for the fundraising services, or if a portion of the proceeds over and above reasonable compensation to A will be distributed to A, the arrangement should be disclosed to potential donors and in solicitation materials so that there is no deception to the donor as to what entity will receive the benefit of the charitable contribution. A and B must also consider how to manage charitable acknowledgements for split-donations. A written fundraising or collaboration agreement is strongly encouraged for A and B so that the expectations of each entity are confirmed and honored.

Commission-Based Pay for Fundraising.

Under most ethical fundraising rules, it is not appropriate to engage in a commission-based compensation arrangement with a fundraising professional. From a tax perspective, commission-based pay to a fundraising professional or non-exempt entity or person constitutes (arguably, if not likely) a prohibited private benefit, unreasonable compensation, and, in some cases, an excess benefit transaction that is subject to excise tax (also a subject for another blog). A commission-based pay arrangement to a tax-exempt fundraising entity may be acceptable, subject to the above-noted disclosure, solicitation, and acknowledgement considerations to avoid deceptive trade practices in the fundraising effort and ultimate beneficiary of funds received.

Insights.

In closing, these arrangements can be full of opportunity. This type of collaboration among charitable organizations to "do good together" is a reason I so enjoy representing nonprofit organizations. But, for those desiring to collaborate with other similarly-purposed organizations in a fundraising effort, the who, what, where, when, how, and why as to the fundraising are each extremely important. A written agreement between the organizations is important and recommended to set, understand, and honor expectations to each other and to the donating public at large. See 1982 Exempt Organization CPE guidance—Fund Raising—at pg. 35-36 (noting, "The performance of a particular activity that is not inherently charitable may nonetheless further a charitable purpose. The overall result in any given case is dependent on why and how that activity is actually being conducted.").

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.