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Tax-Exempt Organizations in New York: Funding Issues

» Articles » Nonprofit Articles » Article

August 21, 2018
Author: Michael A. de Freitas, Esq.
Organization: William C. Moran & Associates, P.C.


A. Corporate Sponsorships.
1. General rule:
a. The term “unrelated trade or business” does not include the activity of soliciting and receiving “qualified sponsorship payments.” Code Section 513(i).
b. This means that if a payment from a corporate sponsor is a “qualified sponsorship payment” under this rule, it is not necessary for the exempt organization to analyze the activities that generated the payment under the cumbersome unrelated business rules discussed elsewhere in this material.

2. “Qualified sponsorship payment”:
a. Any payment made by any person engaged in a trade or business with respect to which there is no arrangement or expectation that such person will receive any substantial return benefit.
b. A substantial return benefit is any benefit other (a) an acknowledgment or (b) a benefit within certain limits, both of which are discussed further below.

3. “Acknowledgment”:
a. Use or acknowledgment of the name or logo (or product lines) of such person's trade or business in connection with the activities of the organization that receives such payment is not a “substantial return benefit.”
b. Acknowledgment MAY include the following:
(1) logos and slogans that do not contain qualitative or comparative descriptions of the payor's products, services, facilities or company;
(2) a list of the payor's locations, telephone numbers, or Internet address;
(3) value-neutral descriptions, including displays or visual depictions, of the payor's product-line or services;
(4) the payor's brand or trade names;
(5) product or service listings.
c. Acknowledgment may NOT include advertising such person's products or services, specifically including:
(1) qualitative or comparative language;
(2) price information;
(3) other indications of savings or value;
(4) an endorsement, or
(5) an inducement to purchase, sell, or use such products or services.

4. Certain minimum benefits are not “substantial return benefits”:
a. Benefits given by an exempt organization to a corporate sponsor will NOT count as a “substantial return benefit” if the fair market value of the benefits does not exceed 2% of the sponsorship payment. Those benefits are simply disregarded in determining whether a substantial return benefit exists.
b. If those benefits exceed the 2% limit, then the entire fair market value of the benefits constitutes a “substantial return benefit,” which means that the benefits are not entitled to the safe-harbor protection of the corporate sponsorship rule and must be evaluated under the general unrelated business rules discussed elsewhere in this material.
c. If sponsor’s payment exceeds the fair market value of the substantial return benefit, that excess can still be treated as a qualified sponsorship payment. The burden is on the exempt organization to establish the fair market value of the return benefits.

5. Other limitations on scope of “qualified sponsorship payment”:
a. Contingent payments. A payment from a corporate sponsor cannot be treated as “qualified sponsorship payment” if the amount of such payment is contingent upon the level of attendance at one or more events, broadcast ratings, or other factors indicating the degree of public exposure to one or more events.
b. Periodicals. Payments are not qualified sponsorship if the payment entitles the payor to acknowledgments in regularly scheduled and printed periodicals of the exempt organization, other than printed material distributed in connection with a specific event.
c. Conventions and trade shows. No payment made in connection with convention or trade show activity can be treated as a qualified sponsorship payment.

6. Particular issues:
a. Exclusive sponsor arrangements generally do not constitute substantial return benefit.
b. Exclusive provider arrangements may constitute substantial return benefit.
c. Internet activities not addressed in the IRS rules.

B. CONTRIBUTIONS AND DEDUCTIONS
1. Deductibility and definitions.
a. Generally.
(1) The term “charitable contribution” is defined in Section 170(c) of the Internal Revenue Code. As discussed below, charitable contributions are gifts given to or for the use of a qualified or permissible donees. Internal Revenue Code (“Code”) § 170(c).
(2) Such donees are listed in Section 170(c) and include, for example, tax-exempt organizations as defined in Section 501(c)(3) of the Code, states, possessions or other political subdivisions, posts and organizations of war veterans, certain fraternal and benevolent orders, and certain cemetery companies. See Code § 170(c).
b. Deductibility of Charitable Contributions.
(1) To be deductible as a charitable contribution, a payment to a Section 501(c)(3) organization must be a gift.
(2) A gift is a contribution that is given voluntarily and is made without getting, or expecting to get, anything of equal value. See IRS Pub. 526.
(a) In Revenue Ruling 67-246, the Internal Revenue Service provides that,
“To be deductible as a charitable contribution for Federal Income tax purposes under Section 170 of the Code, a payment must be a gift. To be a gift . . . there must be . . . a payment of money or transfer of property without adequate consideration.” Rev. Rul. 67-246. See also, Burwell v. Commissioner, 89 T.C. 41 quoting Commissioner v. Duberstein, 363 U.S. 278, 285-286 (1960) (“A gift is the by-product of a ‘detached and disinterested generosity’ given ‘out of affection, respect, admiration, charity or like impulses.’ A gift lacks legal or moral obligation and the inducement of anticipated benefit.”).
(b) A donor who retains excessive control over the transferred contribution has not made a gift and the contribution is not deductible. See Burwell v. Commissioner, supra.; Rev. Rul. 78-232 (A self-proclaimed minister who organizes a church, deposits money into a church bank account, and then uses the money for his personal expenses is not entitled to a charitable deduction.)

2. Token Benefits.
a. In response to questions from charities on how to value token or inconsequential benefits given to donors in exchange for a contribution, the IRS issued Revenue Procedure 90-12, as amplified by Rev. Proc. 92-49 and modified by Rev. Proc. 92-102, and Rev. Proc. 2012-41.14.
b. Charities are allowed to advise donors that contributions are deductible in full if benefits given in exchange for the contribution have “insubstantial value.” c. Benefits are considered to have “insubstantial value” if the following two requirements are met:
(1) Payment is made in the context of a fundraising campaign in which the charity informs patrons how much of their payment is deductible AND either:
(a) The fair market value of all the benefits received in connection with the payment is not more than the lesser of 2% of the payment or $50.001; OR
(b) The payment is $25.00 or more and:
i) the only benefits received in connection with the payment are “token items” (bookmarks, calendars, etc.) bearing the organization’s name or logo; OR
ii) The fundraising campaign meets the following two requirements:

1. the charity mails or otherwise distributes free, unordered items to patrons. Any item received by a patron must not have been distributed at the patron’s request or with the express consent of the patron. Any item distributed must be accompanied by a request for a charitable contribution and a statement that the patron may retain the item whether or not the patron makes a contribution, AND

2. the cost of all such items, in the aggregate, distributed by or on behalf of the charity to a single patron in a calendar year is within the limit for “low cost articles.”
d. Newsletters or program guides (other than commercial quality publications) will be treated as not having measurable value if their primary purpose is to inform members about activities of an organization and if they are not available to nonmembers by paid subscription or newsstand sales. Rev. Proc. 90-12. The IRS provides that generally a commercial quality publication is a “publication that contains articles written for compensation and that accept advertising . . .” However, this determination will be based on the facts and circumstances of each case. Id.

e. If a charity is providing only “insubstantial benefits” in return for a payment, fund-raising material may include a statement that: “Under [these] guidelines, charities offering certain small items or other benefits of token value may treat the benefits as having insubstantial value so that they may advise contributors that contributions are fully deductible under section 170.” Rev. Proc. 90-12. f. The IRS has provided examples such as the following to illustrate these concepts in Rev. Proc. 90-12:

(1) Example 1. A zoo gives its patrons lapel pins reading \"Friends of the Small City Zoo\" in return for payments of $35. The fair market value of the lapel pin is $1.25. Since the lapel pin bears the organization's name and the fair market value of the pin is less than 2 percent of the payment (and the fair market value of the pin is less than $102), the zoo may advise its patrons that the full amount of the payment is a deductible contribution.
(2) Example 2. For a payment of $15, a museum sends its patrons a bulletin the primary purpose of which is to inform members about coming events at the museum. The bulletin is not available to nonmembers by paid subscription or through newsstand sales. The bulletin is written by a salaried staff member at the museum, but it accepts no advertising. It is printed on magazine quality paper and it is distributed on a quarterly basis. Under the facts and circumstances, the bulletin is not a \"commercial quality publication\" as described in section 3.04, above. Since the bulletin has no fair market value for purposes of paragraph 2 the museum may advise its patrons that the full amount of the payment is a deductible contribution.

3. Membership Benefits:
a. An annual membership benefit is considered insubstantial if it is provided in exchange for an annual payment of $75 or less and consists of annual recurring rights or privileges. See Treas. Reg. 1.170A-13(f)(8)(i)(B)(1).
b. One example given by IRS in the rules: In December of each year, K, an individual, gives each of her six grandchildren a junior membership in Dinosaur Museum, an organization described in section 170(c). Each junior membership costs $50, and K makes a single payment of $300 for all six memberships. A junior member is entitled to free admission to the museum and to weekly films, slide shows, and lectures about dinosaurs. In addition, each junior member receives a bi-monthly, non-commercial quality newsletter with information about dinosaurs and upcoming events. K's contemporaneous written acknowledgment from Dinosaur Museum may state that no goods or services were provided in exchange for K's payment.

4. Intangible Religious Benefits:
a. Religious organizations that provide “intangible religious benefits” to a contributor, the acknowledgment need not provide a value of these benefits. I.R.C. § 170(f)(8)(B) and § 6115(b); See also, Rev. Rul. 93-73.
b. For example, if the a contributor gave $1,000 in exchange for a mass to be said for their deceased wife, the acknowledgment should state that the religious organization provided “intangible religious benefits” to the contributor.

5. Fraternal Organizations:
a. Section 501(c)(8) of the Code defines Fraternal Beneficiary Societies and 501(c)(10) of the Code defines Fraternal Lodge Societies. These are essentially benevolent orders or fraternal organizations that operate under a Lodge system, such as Free Masons, Elks, and Moose.
b. Under §170(c)(4), contributions by an individual to such organizations are deductible as charitable contributions, but only if the contribution or gift is to be used exclusively for charitable purposes.

6. Earmarking.
a. In order to be deductible, the contribution must be a gift to a Section 501(c)(3) organization. Gifts to a Section 501(c)(3) organization that are earmarked for the benefit of another organization or individual may not be deductible.
c. In other words, if an outright gift to the ultimate donee organization or individual would not be deductible, the gift does not necessarily become deductible simply by first passing through the hands of a tax exempt organization.
d. As discussed elsewhere in this material, all 501(c)(3) organization must operate in furtherance of their exempt purposes. Receiving a gift that is earmarked for another organization or individual could mean that the 501(c)(3) organization is not following its duty to determine its participation in this gift transaction in fact furthers its mission.
(1) Example: A local Presbyterian Church receives a special Easter offering for the “Presbyterian Disaster Assistance Fund.” The Fund is a 501(c)(3) foundation organized by national office of the Presbyterian Church The offering envelope states: “Your contribution is earmarked for Presbyterian Disaster Assistance Fund.” These contributions are fully deductible, even though they are earmarked for a specific purpose, because the purpose itself is charitable and within the exempt purposes of this religious organization because it is part of the Presbyterian Church hierarchy. See IRS Publication 526.
(2) Example: The same Presbyterian Church receives an offering. However, this time the pastor states that the offering is being made to benefit the daughter of Deacon Jones who lost her home due to flooding in North Carolina. This contribution is not deductible, as it is earmarked for an individual.
(3) Example: A representative from a Fraternal Organization speaks at a meeting of a Lodge. At the end of his speech, he asks the brothers to donate to the Fraternal 9-11 Foundation, Inc., a 501(c)(3) incorporated to assist the families of victims of the World Trade Center and Pentagon bombings. Such donations would be deductible as charitable contributions, even though they are earmarked for these victims’ families.

7. Disclosure of non-deductibility. See IRS Notice 88-120.
a. Section 6113 of the Code requires that tax exempt organizations which are ineligible to receive tax deductible charitable contributions disclose, “in an express statement (in a conspicuous and easily recognizable format) the nondeductibility of contributions” during fund-raising solicitations.
b. A fund-raising solicitation includes solicitations for voluntary contributions as well as solicitations for attendance at “testimonials” and other fund-raising events.
c. Section 6710 of the Code provides penalties for failure to comply. Organizations whose annual gross receipts do not normally exceed $100,000 are exempted from this disclosure requirement.

B. ACKNOWLEDGMENTS AND SUBSTANTIATION.
1. “Quid Pro Quo” Contributions (Code Section 6115).
a. Definition of \"Quid Pro Quo.\"
(1) A \"quid pro quo\" contribution is one made partly as a contribution and partly in exchange for goods or services provided by the donee charity. Code Section 6115(b).
(2) For example, if a charity holds an annual fund-raising dinner and charges $100 per person for the dinner, only part of the $100 is a charitable contribution; the other part is a payment for the dinner and is NOT deductible.
(3) Charitable organizations, therefore, must be careful, when charging for admissions to their events or activities, not to mislead patrons into thinking that they are making a “gift.”
(a) See, e.g., T.A.M. 9027003 (Tax-exempt organizations are subject to penalties under I.R.C. §§ 6700-6701 if the exempt organization knowingly “aids or assists” a taxpayer in an understatement of tax liability in matters of deductibility of money given in exchange for such admission fees or other such benefits for service).
(b) The IRS has stated explicitly that, “where consideration in the form of admissions or other privileges or benefits is received in connection with payments by patrons of fund-raising affairs . . . the presumption is that the payments are not gifts.” Rev. Rul. 67-246.
(4) Where payments made to a charity in exchange for a benefit or privilege do not exceed $75.00, the charity has no legal obligation to make a statement regarding the deductibility of the payment. Code § 6115.
(a) Therefore, where benefits are received in connection with a payment to a charity and a charitable contribution deduction is claimed, the burden is on the taxpayer to prove that the amount claimed as a deduction is not the purchase price of the benefits received and that the payment does qualify as a gift to a Section 501(c)(3) organization.
(b) However, as noted above the IRS stated that if a charity chooses to make such a statement, it may apply the penalty for “aiding and abetting the understatement of tax liability” if the statement is misleading. T.A.M. 9027003 (Note: the IRS used both “aid and abet” and “aid and assist.” See above.)
b. Required Statement.
(1) A charity that receives a quid pro quo contribution is REQUIRED, when soliciting or receiving the contribution, to provide a WRITTEN statement to the donor regarding the amount deductible.
(2) The statement must provide the amount of the contribution that is deductible as a charitable contribution for federal tax purposes, which is limited to the excess of the amount contributed over the value of the goods or services provided to the donor.
(3) The statement must contain an estimate of the value of the goods or services provided to the donor. The estimate of the value of goods and services must be made in good faith. Code Section 6115(a)(2).
(4) The IRS illustrates the term “good faith” in a Treasury Regulation§ 1.6115-1:
(a) Celebrity presence. Charity U is an organization described in section 170(c). In return for the first payment of $1000 or more that it receives, U will provide a dinner for two followed by an evening tour of Museum V conducted by Artist W, whose most recent works are on display at V. W does not provide tours of V on a commercial basis. Typically, tours of V are free to the public. Taxpayer pays $1000 to U and in return receives a dinner valued at $100 and an evening tour of V conducted by W. Because tours of V are typically free to the public, a good faith estimate of the value of the evening tour conducted by W is $0. In this example, the fact that Taxpayer's tour of V is conducted by W rather than V's regular tour guides does not render the tours dissimilar or incomparable for valuation purposes.
(b) As noted above, this disclosure requirement does NOT apply if the donor receives only token items (items like bookmarks, pens, or calendars with the organization’s name or logo) in exchange for a contribution. Further, this disclosure requirement does NOT apply to sales of items, since no part of these receipts are contributions.
(5) A penalty of $10 per contribution, up to $5,000 per fund-raising event or mailing may be imposed on a charity for failing to make the required disclosure noted above. Code § 6714(a).

2. Cash and Non-Cash Contribution Substantiation.
a. Statutory Background.
(1) A taxpayer who makes any separate charitable contribution of $250 or more is not allowed to deduct the contribution on a federal return unless the taxpayer obtains a contemporaneous written acknowledgment from the charitable donee. See Code §170(f)(8).
(2) Although this law puts the responsibility on the donor to obtain written substantiation, charitable organizations, as a courtesy to their donors, should be aware of the law and able to provide the proper kind of charitable gift acknowledgment. The law does not specify the format of the disclosure. Therefore, recipient charities may make their acknowledgments, for example, by letter, postcard, or computer-generated forms. In order to provide donors with proper substantiation for their contributions, the following rules should be observed.

b. CASH Contributions of $250 or More. Code § 170(f)(8)(A).
(1) A canceled check is no longer adequate substantiation for cash gifts of $250 or more.
(2) Donors must obtain a written acknowledgment from the donee containing:
(a) The amount contributed;
(b) The date on which the contribution was received;
(c) A statement as to whether the donee recipient charity gave the donor anything in exchange for the contribution; and
(d) A description and estimate of the value of any goods or services provided by the recipient charity in exchange for the contribution (see “quid pro quo” rules above).
(3) If donations are made through payroll deductions, the deduction from each paycheck is regarded as a separate payment. See, §170(f)(8) apply and Treas. Reg. § 1.170A-13(f)(11)(ii).

c. NON-CASH Contributions of $250 or More.
(1) For contributions of property other than cash, donors must obtain a written acknowledgment from the donee containing:
(a) A description (but not value) of the property contributed;
(b) The date on which the contribution was received;
(c) A statement as to whether the donee recipient charity gave the donor anything in exchange for the property contributed; and
(d) A description and estimate of the value of any goods or services provided by the recipient charity in exchange for the property contributed. Code Section 170(f)(8)(B).
(2) NON-CASH Contributions of $500 or More.
(a) Donors must attach IRS Form 8283 to their tax returns if they claim a charitable contribution deduction for non-cash gifts of more than $500 in a year.
(b) Where the deduction claimed exceeds $5,000, the donor must have the recipient charity sign Form 8283 in acknowledgment of receipt of the gift AND have a qualified appraiser also sign Form 8283.
i) IRS Regulations specify who may serve as a qualified appraiser. See IRS Treas. Reg. §170A-13(c)(5); see also, Hewitt v. Commissioner, 109 T.C. 258 (1997), aff'd in unpublished opinion, 166 F.3d 332 (4th Cir.1998) (holding that taxpayers who donated appreciated stock to qualified charities could deduct only their basis where they failed to comply with the appraisal requirement).
ii) The person who signs Form 8283 for the recipient charity must be an official authorized to sign the tax or information returns of the charity (e.g., an officer).
iii) The signature of the recipient charity on the Appraisal Summary represents acknowledgment of receipt of the property and agreement that the charity will file IRS Form 8282 if it sells the donated property within two years of the date the property was contributed. See IRS Forms 8283 and 8282.
d. Definition of “Contemporaneous.” The Code provides that in order to be considered “contemporaneous” the written acknowledgment the taxpayer must obtain the acknowledgment on or before the earlier of: (1) the date on which the taxpayer files a return for the taxable year in which the contribution was made, or (2) the due date (including extensions) for filing such return. Code § 170(f)(8)(C)(ii).

3. Other Issues:
a. Payroll Deductions: When charitable contributions are deducted as part of a payroll deduction program, acknowledgment can be in the form of a Wage or Tax Statement or a Pledge card that includes the required statement, noted above. See Treas, Reg. § 170A-13(f)(11)(i).
b. Unreimbursed Expenses. The IRS provides aN example of this in IRS Publication 1771: “A chosen representative to an annual convention of a charitable organization purchases an airline ticket to travel to the convention. The organization does not reimburse the delegate for the $500 ticket. The representative should keep a record of the expenditure, such as a copy of the ticket. The representative should obtain from the organization a description of the services that the representative provided and a statement that the representative received no goods or services from the organization.” See also, Treas. Reg. § 1.170A-1(g).

C. FUNDING INTERNATIONAL ACTIVITIES
1. Generally.
a. Conducting charitable activities in foreign countries is not necessarily inconsistent with the charitable purposes of a U.S. domestic charitable organization. See, e.g., Rev. Rul. 68-117 (advice in farming methods provided to subsistence-level farmers in foreign countries). See also Rev. Rul. 71-460.
b. As discussed elsewhere in this material, charitable contributions are deductible only if made to a Section 501(c)(3) organization. Contributions to a 501(c)(3) organization that are “earmarked” to a non-501(c)(3) organization are not deductible.
c. Thus, if a charity is soliciting funds for overseas activities, it must be careful how it makes the solicitation and how it uses the funds obtained.

2. “Conduit” issues.
a. Similar to the earmarking problem, a charity may not operate as a mere conduit of funds to a foreign organization.
b. Five examples indicating conduit issues in relationships between US charities and foreign organizations were laid out in Rev. Rul. 63-252:
(1) Foreign organization forms a US organization to raise funds for it.
(2) Same, except US organization is a charity and its charter says it is to send funds to the foreign organization at convenient intervals.
(3) Foreign organization contracts with existing US 501(c)(3) organization, which represents to prospective contributors that the raised funds will go to the foreign organization.
(4) US charity conducts charitable activities in other countries and, in connection with such activities, occasionally makes grants to foreign organizations for purposes it reviews and approves.
(5) US charity conducts charitable activities in foreign countries and forms a subsidiary to take over those activities. US charity funds the subsidiary.
c. In the above ruling, the first three examples indicate an inappropriate conduit relationship. In the last two examples, the US charity exercises sufficient “discretion and control” over the funds to avoid “conduit” problems.

3. “Friends of” organizations.
a. The “conduit” issues above are central to the formation of domestic charities that work with foreign organizations. Sometimes foreign organizations understandably desire to have a genuine United States presence for education and fundraising, so this is not an unusual problem.
b. In practice, the IRS applies principles such as the conduit rulings to determine whether the domestic charity is unduly controlled by a foreign organization. It is advisable that the domestic charity either controls the foreign organization (example 5 in the above ruling) or has a genuine arm’s-length relationship (example 4). In the latter case, a board of directors composed of persons who are unrelated to the foreign corporation is also advisable.

4. US Treasury voluntary anti-terrorism guidelines (2006).
a. Available at: http://www.treasury.gov/resource-center/terrorist-illicitfinance/ Documents/guidelines_charities.pdf
b. The Guidelines discuss various practices and procedures for charities engaged in activities, particularly funding, in foreign countries. Much of the discussion covers matters that fundamentally are part of sound organization, governance, and financial controls, which are not unique to the international funding arena.
c. Regarding international funding specifically, a few key points in the Guidelines:
(1) Checking the OFAC list (Office of Foreign Asset Control) for persons not permitted to deal with US entities.
(2) Vetting of grantees.
(3) Vetting own employees who supervise foreign activities or funding.
(4) Procedures and documentation for reporting, accounting, and verification of use of funds by grantees

D. GAMES OF CHANCE.
1. Federal Requirements.
a. General rule. The Federal Government prohibits lotteries, raffles, bingo, or other games of chance. 18 U.S.C. §§ 1301-1304; see also 18 U.S.C. 1955.
b. Exception. However, these provisions do not apply to tax-exempt organizations. Further, the IRS imposes an excise tax on wagering. 26 U.S.C. § 4421.
c. UBIT. Unrelated business income tax may be imposed on revenue from games of chance if they are deemed to be unrelated business.
(1) The three-part UBIT analysis discussed elsewhere in this material will apply to all games of chance. For example:
(a) Is this event being operated as a trade or business? Chances are that a raffle or lottery will be seen as being operated largely out of a profit motivation strengthening the argument that this is a trade or business.
(b) Is the event regularly carried on? How many times per year does the organization conduct a raffle?
(c) Is the event substantially related to the exempt purpose? The IRS has definitively stated “Gambling is not charitable” IRS Publication 3079.
Regardless of the exempt purpose of the organization, the purpose will not be furthered by conducting a raffle.
(2) All UBIT rules will be applied to an organization’s events. This includes all exceptions to UBIT analysis, such as the volunteer-labor exception.
(3) Bingo games are specifically exempt from UBIT regardless of whether the volunteer exception or the donated merchandise exception applies.
(a) Bingo is defined as a game where wagers are placed, the winners are determined, and the distribution of prizes or other property is made, in the presence of all persons placing wagers in such game, the conducting of which is not an activity ordinarily carried out on a commercial basis, and the conducting of which does not violate any State or local See I.R.C. § 513(f).
(b) If an organization is not in full compliance with all laws, any income they make on an otherwise exempt Bingo event will be subject to unrelated business income tax.
d. Federal Reports. Certain Federal Reports may be required depending on the events. Taxes will be required to be withheld from any wages paid. Income from the event must be reported on the annual information returns (Form 990). Additional forms may be required depending on the game and the size of the prizes given out (Form W-2G). See IRS Publication 3079.

2. State and Local Requirements.
a. Constitution, Statutes, and Ordinances.
(1) The New York State Constitution makes all games of chance illegal with certain exceptions. Lotteries run by the State and games of chance run by certain “bona fide” religious and charitable organizations fall within this exemption.
(2) The General Municipal Law also provides that these organizations must have “lawful purposes.” New York General Municipal Law § 186 (5). “Lawful purposes” include charitable purposes that benefit needy or deserving persons by enhancing their opportunity for religious or educational advancement, by relieving them from disease, suffering or distress and purposes that lessen the burdens borne by government.
(3) By statute, all municipalities have the power to allow or disallow charities to conduct games of chance.
b. The New York State Gaming Commission.
(1) The New York State Gaming Commission oversees and monitors the conduct of all bingo and games of chance by authorized nonprofit organizations.
(2) In order to conduct a game of chance, an organization must register with the Gaming Commission and complete the proper form based on the type of event being conducted. Bingo, raffles, bell jars, and other games all have different individual forms. There is no charge for the initial registration; however, there are fees and “taxes” that must be paid depending on the type of event.
(3) There are rules on the design and conduct of individual games. For example, depending on the type of game, there are limitations on the amount of any one prize, on the aggregate amount of all prizes given, and on the number of times any one organization may run a game in a given year.
(4) Penalties.
(a) Running a lottery may classify as a felony. See New York State Penal Law §225.00.
(b) Under the New York General Obligations Law §5-423, any person who buys into a lottery may sue and recover double the money paid for the lottery chance, and double the cost of the suit if the lottery or distribution is prohibited by the penal law.
c. Municipal Requirements.
(1) As noted, New York State has given each municipality the authority to allow or deny charitable organizations to conduct games of chance.
(2) In municipalities which allow such fund-raising, the applications which are filed with the Racing and Wagering Board must also be filed with the municipal clerk. Organizations wishing to conduct games of chance should contact the municipal clerk for further information.

E. New York Prudent Management of Institutional Funds Act (“NYPMIFA”)
1. Enacted September 17, 2010, replacing the former law, which had been modeled on the Uniform Management of Institutional Funds Act (“UMIFA”). Creates new Article 5-A of the Not-for-Profit Corporation Law. Replaces the long-standing provisions of Article 5 that had been modeled on UMIFA. The most comprehensive changes in provisions regarding endowment funds since the law was first enacted.

2. Applicability:
a. Applies to (a) “institutional funds” of the corporation, meaning most funds, and (b) existing and future “endowment funds,” meaning funds not wholly expendable on a current basis under the terms of the gift instrument (not including board-designated funds).
b. Does not apply to “program-related assets,” meaning assets held primarily to accomplish a program purpose, not for investment.
c. Parts of NYPMIFA apply to ALL not-for-profit corporations, whether or not they hold endowment funds.
d. Some of the new provisions regarding “endowment funds”: (1) Eliminates the “historic dollar value” spending limitation, which required that expenditures from appreciation in endowment funds could be made only to the extent in excess of the “historic dollar value.” Result of that limitation in the recent economic recession was that many endowment funds reportedly became “underwater.”

(2) Single endowment fund spending standard: endowment funds may be expended under a “prudence” standard, without the historic-dollar-value spending limitation. In effect, the “underwater” problem is eliminated.

(3) Factors that must be considered under the “prudence” expenditure standard:
(a) The duration and preservation of the endowment fund;
(b) The purposes of the institution and the endowment fund;
(c) General economic conditions;
(d) The possible effect of inflation or deflation;
(e) The expected total return from income and the appreciation of investments;
(f) Other resources of the institution; and
(g) The investment policy of the institution.
(4) Rebuttable presumption of imprudence if expenditures of more than 7% of the fair market value of the fund averaged over the previous five years.
(5) Donors can specifically restrict their gifts to override the “prudence” standard. But be careful. Words in a gift instrument such as “to establish an endowment fund” or “to preserve principal intact” do establish the endowment fund BUT do NOT limit the application of the above new prudence standard for expenditures.
(6) For endowment funds established before NYPMIFA, one-time notice must be given to “available” donors before making expenditures under the new “prudence” standard for the first time, giving the donors the opportunity to change the gift restrictions. This notice requirement is not applicable to funds established by the corporation unless particular donors to that fund specifically imposed particular conditions.

3. Some of the new provisions regarding all institutional funds:
a. Written investment policy now required for ALL not-for-profit corporations.
b. Required to contain guidelines on the management and investment of the corporation's “institutional funds.”
c. Must consider specific factors (“if relevant”): (A) general economic conditions; (B) the possible effect of inflation or deflation; (C) the expected tax consequences, if any, of investment decisions or strategies; (D) the role that each investment or course of action plays within the overall investment portfolio of the fund; (E) the expected total return from income and the appreciation of investments; (F) other resources of the institution; (G) the needs of the institution and the fund to make distributions and to preserve capital; and (H) an asset's special relationship or special value, if any, to the purposes of the institution.
d. Must diversify or, if do not diversify, must document reason to not diversify and periodically confirm.
e. Must make a “reasonable effort to verify facts relevant to the management and investment of the fund.” (Is this an anti-Madoff provision?).
f. May pay only “reasonable” costs for management and investment.

4. NYPMIFA also amended the so-called “duty of care” in Section 717 of the Not-for- Profit Corporation Law. This has implications far beyond endowment funds.
a. New language (showing old language crossed out and new language underlined): “Directors and officers shall discharge the duties of their respective positions in good faith and with the care that an ordinarily prudent person in a like position would exercise in similar circumstances.”

b. Query whether new language, which simply requires “care,” dilutes the standard of the previous language, which required “diligence, care and skill,” or is a welcome simplification.
c. But NYPMIFA also requires that a board member selected because of “special skills or expertise…has a duty to use those skills or that expertise in managing and investing” institutional funds. [Emphasis added]


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