Non Profit Report - March 2013

Date: March 29, 2013

The Group Ruling Questionnaire - What is it and what does it mean to your organization?

By: Jerome C. Schaefer, Esq.

First of all, if your organization has no affiliates, you can skip this article entirely.

For the rest of you, especially those whose affiliates operate under a Group Exemption: You may have already received from the IRS a "Group Ruling Questionnaire" (GRQ). The IRS began sending them out at the end of 2012 to several thousand tax-exempt organizations that had obtained a Group Exemption for their subsidiary organizations. The purpose of the GRQ is to help the IRS develop new regulations applicable to parent organizations to assure tax compliance and timely filing of IRS Form 990s by subsidiaries.

As you probably know, in the past several years, thousands of subordinate entities have lost their tax-exempt status because they failed to file their Form 990 for three consecutive years. In 2011, the Advisory Committee on Tax Exempt and Government Entities (ACT) issued a report raising numerous concerns about Form 990 compliance. The GRQ initiative grew out of some of the concerns raised, and delves into the details of subordinate activities and the supervisory role actually being exercised by the parent organization.

Although the IRS is still in its “fact finding” phase, if the ACT report's recommendations were to be enacted in full, then additional general supervision by parent organizations will likely be required to assure tax compliance by subordinates covered by the group exemptions. While some parent organizations now file group returns for some or all of the subordinates, new regulations will likely require more active supervision by the parent organization to assure full compliance by all subordinates covered by the group exemption. In fact, ACT has recommended that group returns be abolished to assure greater transparency for subordinate activities. However, abolishing the group returns will not mean less supervision by parent organizations – instead, it will push the responsibility for compliance directly onto the parent organization.

Rather than waiting passively for any IRS action, proactive organizations are reviewing or formalizing their processes and procedures for assuring subordinate filing of Form 990 to include a verifiable audit trail of tax compliance by their subordinates. Documentation should include formal protocols of communications with subordinates, sign-off by the officers and directors of subordinates, and documented training of and meetings with subordinate representatives to assure tax compliance. Additionally, parent organizations should implement appropriate protocols and safeguards to assure that all subsidiaries are organized and operated consistent with their tax-exempt purposes.

FTC Guidelines May Require Disclosure by Conference Speakers Using Social Media

By: Stephen M. Schaefer, Esq.

Takeaway: If a nonprofit organization asks its conference or meeting speaker to use social media to promote the organization’s event, the Federal Trade Commission’s "Guides Concerning the Use of Endorsements and Testimonials in Advertising" may require the speaker to disclose his or her relationship with the organization. 

Discussion: The FTC Endorsement Guides address the application of Section 5 of the Federal Trade Commission Act regarding the use of endorsements and testimonials in advertising and set forth the basis for compliance with the law by advertisers and endorsers. The Guides state the general principles that the FTC uses in evaluating endorsements and testimonials, and provide examples showing the application of those principles. The Guides are not intended to cover every possible use of endorsements and testimonials in advertising; the specific facts and circumstances of the advertisement or testimonial at issue are determinative of whether the endorsement is deceptive.

The original Endorsement Guides were drafted in the 1980’s. While the principle of “truth in advertising” that is the basis for the Guides has not changed, the FTC has revised the Guides in recent years to address new media, including blogs and social networking websites. However, the law still requires an endorser who has been paid or given something of value for advertising a good or service for a marketer to disclose the relationship with the marketer. If such disclosure is not made, the advertisement is deemed misleading.

The foregoing principle likely applies to nonprofit organizations contracting with conference or meeting speakers. If an organization requires a speaker to promote the organization’s conference or meeting via social media as part of the speaker’s contract and the speaker is being compensated or given something of value to speak at and promote the event, then the speaker should disclose the fact that he or she is being compensated to promote the event within the social media platform. While the FTC has not specified the exact wording for the disclosure, the relationship between the organization and speaker should be disclosed clearly and conspicuously by the speaker.

Additional information regarding the Endorsement Guides can be found here.