charitable solicitations, but the numerous accounts of abuses in congressional testimony and elsewhere suggest that they are not infrequent.
290In some reported cases, fund-raising expenditures alone consume as much as 60 to 80 percent of the contributions received through direct mail solicitations.
Mailing lists are such a valuable asset in the charitable fund-raising business that one professional fund raiser reportedly uses a charity organized by himself merely to solicit signatures, without seeking any contribution, to accumulate a potential list of contributors that can be used in soliciting for other organizations at a fee.
Other fund-raising promoters, using telephone rather than mail techniques, conduct "boiler-room" operations using hired "phonemen" to solicit in the name of small charitable organizations, with "runners" sent out promptly to collect promised contributions; the percentage of returns retained by the promoter can be many times that paid to the charitable organization (in effect for the use of its name).
291The child described in one foster parents magazine solicitation as a five-year-old boy is actually a 12-year-old girl already supported by regular donations.
292And recipients are seldom told that the unsolicited items enclosed in a solicitation letter need not be paid for or returned.
293The practice of compensating professional fund raisers with a percentage of contributions received, provides an incentive for unethical solicitors to make false or misleading statements in charitable solicitations. The practice is apparently not infrequent, although it is forbidden by the Civil Service Commission for solicitations of federal employees
294and condemned by the ethical standards of the American Association of Fund-Raising Counsel (AAFRC), the National Society of Fund Raisers (NSFR), the National Information Bureau, and the Council of Better Business Bureaus.
295Even if solicitation abuses are relatively infrequent, the publicity they receive coupled with the absence of effective regulation can impair public confidence in charitable fund raising generally.
Third, assuming a need for regulation of charitable solicitations and professional
fund raisers, it seems clear that only the federal government can adequately do the job.
2 9 6State regulation, self-regulation, and monitoring by organizations of donors should be encouraged, but these are not sufficient, and, in our view, cannot be made so.
Large fund-raising drives involve many states, in various ways. The charitable organization for which contributions are to be solicited may be incorporated in one state, have its headquarters in another, and conduct mailings from still another. The same is true of the fund raiser, who plans and executes the solicitation. Some fund raisers operate on a transient basis. Donees will be found in many states. Mail or telephone solicitations originating in one state and directed to donees in another state cannot easily be controlled by the latter state. This pattern is likely to leave no single state with sufficient interest to regulate vigorously.
Even where state regulation is vigorous, enforcement can be evaded by allocating expenses and receipts arbitrarily among states so as to comply with specific state limitations.
297Moreover, only about one half of the 50 states in fact regulate the solicitation of funds for charitable purposes, and the coverage and scope of regulation vary widely.
298While the federal legislation proposed below is not intended to preempt the states from continued regulation on the local level, the interstate character of the typical fund-raising drive makes exclusive reliance on state regulation unrealistic.
Self-regulation has been useful, and should be expanded and encouraged. Two
associations of professional fund raisers determine ethical standards for their
members, the American Association of Fund-Raising Counsel and the National
Society of Fund Raisers. However, only 29 fund raising firms are members of the
2646
AAFRC, compared with an estimated 200 to 20,000 such firms (not including direct mail firms); only about 1,500 individual fund raisers are members of the NSFR, compared with an estimated 15,000 to 50,000 individuals in the business of fund raising.299 Moreover, professional and trade associations must rely on voluntary cooperation from their members and have no effective means of enforcing their standards.
Two nonprofit organizations provide information about solicitations. The most extensive service is the Philanthropic Advisory Department, Council of Better Business Bureaus (CBBB). The CBBB has adopted reasonably detailed standards for charitable solicitations and responds to requests for information. Although the information program has been actively conducted for only three years, and is still not well known, the CBBB received 175,000 inquiries in 1973; the inquiries increased during 1974 to more than 525,000, demonstrating the public's desire for a reliable source of information.300 The CBBB, however, has a staff of three and a budget of $35,000. The only other information service that we are aware of, the National Information Bureau, reports only on about 500 charities that conduct national fund-raising campaigns; it provides these reports to member firms and subscribing individuals only, for a minimum of $15 per year for individuals and $25 per year for corporations and foundations.
The greatest obstacle to self-regulation is not lack of resources — presumably private funding could be found, for example, to enlarge the valuable work of the CBBB. Neither the CBBB nor NIB can compel charities to provide information.
Between 20 and 25 percent of the soliciting charities about which the CBBB receives inquiries from the public either refuse to respond to CBBB questionnaires or respond less than forthrightly. To compel the production of truthful information requires the authority of government. And self-regulation cannot prevent fraud or compel redress when it occurs.
The Current Role of the Internal Revenue Service
The Internal Revenue Service has no mandate to regulate charitable solicitations as such, but it does have some tools to deal with flagrant abuses. These tools — audit, treating unreasonable fund-raising arrangements as "private inurement,"
making information available, and public warnings — have not been frequently used.
We recommend below that new legislation be enacted to regulate solicitations.
Meanwhile, the role of the Service remains important, particularly since the general public may regard recognition of exempt status by the Service as a certification of a public charity's continuing reliability?© I
Audits
Since 1969 the Service has audited an average of about 2,000 public charities per year, only 2.5 percent of the 80,000 public charities that filed returns with the Service in FY 1973. The Service apparently assumes, judging from informal discussions with several officials and the relative neglect of public charity audits, that public charities are either large, reputable, and well-conducted or else too small to warrant increased attention. The assumption may be valid with respect to charitable operations generally but it does not seem warranted with respect to solicitations.
Disqualification for Excessive Fund-Raising Costs
The Service's Tax Audit Guidelines — Exempt Organizations directs revenue agents examining 501 (c)(3) organizations to determine whether the expenses of a
2647 fund-raising activity "are proper and not excessive" and whether "the proceeds are being distributed for exempt purposes."302
The Service's Audit Division, however, has taken the position that a public charity spending 80 percent of its receipts for fund-raising costs, 10 percent for overhead, and only 10 percent for program purposes continues to qualify under section 501(c)(3) because, "There is no rule in the federal tax law that has as a bar to qualification for exemption a certain amount or certain percentage of fund raising for expenses."303 The quoted statement is accurate in general, but in such extreme cases the Service could regard excessive compensation as transforming an organization's principal activity into a joint venture that triggers the "private inurement" disqualification of section 501(c)(3).304 The Service disallows taxpayer
"business expenses" that it regards as excessive. One problem may be that disallowance of a "business expense" results only in additional tax; disqualification of a fund-raising cost could lead to the more drastic remedy of revocation of exempt status. We discuss the problem of remedies at pages 2653 and 2657-58 below.
Public Information
The critical problem is lack of access by donors to reliable information about donees. Disclosure is the core of our recommendations below; the problem cannot be solved by the Service, at least not without substantial changes in budget and operations, but some progress is possible.
The Internal Revenue Service is directed by Code section 6104(b) to make the annual information returns of 5O1(c)(3) organizations available to the public "at such times and in such places" as the Commissioner may prescribe. The Service presently requires those requesting such returns to appear in person at the office of the District Director of the district where the organization's principal place of business is located (or at the National Office in Washington or the Philadelphia Regional Service Center), fill out a form, await notification as to when the return will be available for inspection (often weeks later), come back to the Service's office to inspect the return in the presence of a Service employee, and pay a duplication fee for any copies.305 Furthermore, Form 990 returns are usually not available for one or two years after they are filed; many are several years older due to delinquent filing, thus limiting the usefulness of even the most current return available.306 The Service included on Form 990 for 1973 a question designed for the first time to elicit fund-raising expenses, but no accounting standards have been prescribed for de- termining such expenses. (We discuss below at pages 2656-57 the need for uniform accounting standards).
Budget restraints may account in part for the Service's Nmited use of its §6104 authority. Attitudes conditioned by a justifiable preoccupation with the secrecy and confidentiality of tax returns generally may also be relevant. But there is a strong public interest in and need for the information; even taking budget problems into account, the present procedures seem designed to frustrate rather than facilitate access to information. We believe the Service should make the returns available in a more convenient way.
Public Warnings
The Service has procedures for warning the public of misleading solicitations and advertisements in fund-raising activities of particular organizations.307 To its credit, in view of the potential for misuse, the Service has used these procedures sparingly.
Nonetheless, these warnings are now issued only to correct misleading statements about the deductible portion of tickets, and so forth. The Service might similarly warn the public of other varieties of "flagrant disregard of the law or regulations"
by soliciting organizations.
2648
Pending Proposals for Federal Legislation
Two proposals for federal regulation of charitable solicitations are pending: H.R.
1123, originally introduced in the last Congress (then as H.R. 11991) by Representative Van Deerlin and reintroduced by him on January 14, 1975, referred to the Committee on Interstate and Foreign Commerce; and the proposed Truth in Contributions Act introduced on March 12, 1975, by Senator Mondale as S. 1153 in the Senate (referred to the Committee on Finance) and by Representative Karth as H.R. 4689 in the House (referred to the Ways and Means Committee).
H.R. 1123
H.R. 1123 would require persons making interstate charitable solicitations to provide specified information to any recipient of the solicitation who so requests, in writing, within 180 days after receiving the solicitation. The information would have to be provided within 30 days after the request was received.
Section 3 of the bill would require soliciting organizations — with important exceptions — to affix the following statement to all solicitation material, in a conspicuous place and in conspicuous type: " Recipients of this solicitation may receive pertinent information about it and the person making the solicitation by sending a request and a self-addressed, stamped envelope within one hundred eighty days after receipt of this solicitation to [insert the name and address of the person making the solicitation]."
Unfortunately, the exceptions, set forth in section 2(b)(1), include all 509(a)(1), (2) and (3) organizations,308 that is, all public charities except those exclusively testing for public safety, thus exempting virtually all soliciting organizations from the notice requirement of section 3.
Section 4 prescribes the information that would be required to be provided, upon request, by all persons making interstate charitable solicitations (including those excepted from the notice requirement), as follows:
(1) the name and principal address of the person making the solicitation;
(2) the general purpose or purposes for which the person referred to in paragraph (1) is organized and operating;
(3) the general purpose or purposes for which the contributions solicited shall be used by the person referred to in paragraph (1);
(4) the financial terms of any contract or agreement between the person making the solicitation (or his agent) and the person on whose behalf the solicitation is made (or his agent) which in any manner —
(a) bases the amount of receipts received by the person on whose behalf the solicitation is made on the amount or number of contributions received from the solicitation; or
(b) bases the fee or other charge of the person making the solicitation on the amount or number of contributions received from the solicitation;
(5) the total income and total expenditures of the person referred to in paragraph (1), including a listing of the kind and amount of contributions received for charitable purposes and expenditures made with respect to solicitations for contributions for charitable purposes (including administrative and managerial costs attributable to such solicitations), with respect to the most recent fiscal year of such person for which there is an audited financial statement or financial statement sworn to by an officer of such person, or,