(a) Wilson Bill

As introduced in various forms by then-Congressman Charles H. Wilson (D-Cal.),⁷ the Wilson bill would have grafted federal fundraising regulation onto the postal laws. The U.S. Postal Service would be invested with authority to monitor fundraising for charitable purposes as part of its mail fraud investigative and enforcement functions.

The legislation would be generally applicable to “[a]ny charitable organization which solicits, in any manner or through any means, the remittance of a contribution by mail.” An organization to which the proposed law would apply would have to disclose certain specified information in the literature used in the solicitation process, including the amount expended for charitable purposes during its preceding fiscal year, expressed as a single percentage. (The percentage rule would not, however, become effective until three years after the effective date of the act.) Comparable rules would apply to audio and visual communications. A soliciting organization would be required, within 30 days after the request, to provide a person with a financial statement for its most recent full fiscal year, prepared in accordance with generally accepted accounting principles.

Exceptions would be available for solicitations of organizations' “constituencies,” such as solicitations by bona fide membership groups (including local religious congregations or parishes) exclusively of their members; by schools, colleges, and universities (and their supporting foundations) exclusively of their students, alumni, faculty, trustees, committee members, and family members of these individuals; and by hospitals or other health care facilities (and their supporting foundations) exclusively of their professional staff, other personnel, trustees, committee members, and family members of these individuals.

Although enforcement of this proposed law would be a responsibility of the Postal Service, there was considerable desire by the author of the measure to not create a massive regulatory bureaucracy. Thus, the final versions of the bill expressly prohibited the Postal Service from requiring charitable organizations to furnish it at regular intervals with audit reports, accounts, or other information, or from prescribing any rules or regulations to carry out the provisions of the statutory law.

The Wilson bill basically addressed the matter of federal charitable fundraising regulation as a consumer protection effort, emphasizing public disclosure by charitable organizations rather than governmental regulation of them.

(b) Mondale Bill

The Mondale bill, as originally authored by then-Senator Walter F. Mondale (D-Minn.),⁸ reflected an attitude that charitable organizations and their solicitations need to be strenuously regulated by the federal government.

The Mondale proposal would have added requirements to the Internal Revenue Code pursuant to which certain types of publicly supported charities and related entities would have to distribute at least 50 percent of their gross revenues each year for charitable purposes. Expenditures for salaries (except for persons performing services in furtherance of charitable programs), outlays for office facilities, administrative expenses, and fundraising expenses would not qualify as expenditures for charitable purposes.

Public charities subject to the Mondale bill's requirements would be those receiving a substantial part of their support from the general public or organizations supportive of them.⁹ Thus, the measure would not apply to institutions such as churches, colleges, universities, hospitals, and medical research organizations. Also, the bill's requirements would not apply to any organization with revenues of $25,000 or less in a tax year.

Charitable organizations subject to the Mondale bill's provisions would have to annually prepare and file with the IRS information (in addition to that required in the annual information return) for determination by the IRS as to whether the 50 percent payout requirement has been met. These data would have to be prepared by a certified public accountant in accordance with approved uniform accounting principles. This annual report would also have to be filed with the appropriate officials in each state where a solicitation of contributions is made.

A public charity subject to these requirements would have to furnish prospective contributors with adequate information regarding its revenues and expenditures for charitable purposes and for other purposes during the previous year. This information would have to be disclosed at the time of the solicitation, regardless of the manner or the medium used. A “disclosure statement,” approved (or at least not disapproved) by the IRS, would be required. This statement would have to be mailed within 15 days to any person who requests it, and it would have to be filed with the appropriate officials in each state where a solicitation is undertaken.

These requirements would be enforced by a system of excise taxes, in imitation of the present enforcement scheme underpinning the private foundation rules.¹⁰ The measure would extend the termination rules, now applicable only to private foundations, to this category of public charities, and would impose civil and criminal penalties on organizations or persons responsible for a failure to comply with these various requirements.

The bill would direct the Department of the Treasury to develop standard accounting principles for public charities. The department would also be required to encourage state and local governments to accept filings made in compliance with this law in lieu of separate local reports.

Thus, the Mondale bill approached the matter of federal law applicability to charitable solicitations by the proposed establishment of rather stringent regulatory authority.

(c) Luken Bill

An effort once was under way to invest the Federal Trade Commission (FTC) with authority to investigate and regulate fundraising for charitable purposes. On July 28, 1989, hearings on this subject were held before the Subcommittee on Transportation, Tourism, and Hazardous Materials of the House Committee on Energy and Commerce. This subcommittee was interested in charitable fundraising because it has jurisdiction over the FTC, and the then-chairman of the subcommittee, Congressman Thomas A. Luken (D-Ohio), was of the view that the FTC should investigate and curtail certain direct mail fundraising efforts, such as the use of misleading sweepstakes.

The regulatory community has been showing renewed interest in direct mail sweepstakes as a fundraising form, in part because, all too often, little of the money raised goes for charitable purposes and in part because the promised prizes rarely materialize. Some state attorneys general have sued direct mail promotion firms over the issue, and the U.S. Postal Service has become involved. The bases for these actions are allegations of fraud and other deceptive practices.

The history of this matter includes an inquiry to the FTC from then-Congressman Edward F. Feighan (D-Ohio) in December 1987, requesting information about certain fundraising programs, including a sweepstakes appeal. The FTC response and subsequent action were less than satisfactory to the House members, thus prompting a more formal inquiry.

The present jurisdiction of the FTC in these matters is not clear. The FTC has some jurisdiction over nonprofit organizations, but the extent of its reach is uncertain. The FTC also has jurisdiction over direct mail companies and other for-profit fundraising entities. Under existing law, the FTC must go through the exercise of determining its jurisdiction in a case before it can review the case on its substantive merits. One of the goals of the congressional inquiry was to determine whether the FTC's jurisdiction should be clarified in relation to charitable fundraising, so that the agency's resources would not be depleted in precomplaint investigations. The ability of the FTC to investigate, make rules, and enforce law in this field is dubious.

At the hearings, the FTC representatives testified that the agency welcomes the clarification as to its jurisdiction and responsibility for investigating abuses in the field of fundraising for charitable purposes.

Thereafter, Congressman Luken introduced legislation that would have amended the Federal Trade Commission Act to empower the FTC to regulate the fundraising activities of charitable organizations.¹¹ The proposal would accord the FTC jurisdiction over nonprofit organizations. The bill would require a charity that uses a professional fundraiser¹² in connection with the solicitation of funds to provide to each person solicited, at the time of the solicitation, a “clear and conspicuous” statement that the fundraising is “being conducted by” the fundraising professional, containing the name and address of the fundraiser. The FTC would be required to promulgate uniform accounting principles governing the costs of fundraising for charitable purposes. A professional fundraiser would be required to report annually to “appropriate State agencies the amounts charged each charity for its services and the amount raised for each charity.” It would prevent a charitable organization¹³ from having an individual serve as an officer or director, if they are also an officer, director, or agent of a “professional fundraising organization” that is employed by the charity. The requirement of a statement to prospective donees and the prohibition on interlocking directorates between charities and professional fundraisers would preempt any state or local law that is “inconsistent” with the requirements, although a state or political subdivision would be able to secure a waiver of the preemption where the FTC determined that the requirement of state or local law “affords an equal or greater level of protection to the public” than would be afforded by the preemptive requirements.

When introducing the legislation, Congressman Luken said that the measure “will help stamp out modern peddlers of deceit, who use sophisticated technology to raise money in a way that cheats many people, particularly the elderly, and injures legitimate charities by siphoning off much needed money.”¹⁴

(d) Metzenbaum Proposal

The most recent effort in Congress to enact a fundraising regulation bill was initiated by then-Senator Howard Metzenbaum (D-Ohio), who contemplated introduction of a “Truth in Fund-Raising Act.”

This proposal would have utilized federal tax rules to create a new disclosure requirement.¹⁵ The disclosure rule would be applicable to nearly all tax-exempt organizations. Technically, this law would be applicable to all organizations that are required to file annual information returns with the IRS, other than those that have annual gross receipts that normally are not more than $50,000.¹⁶

The specific rule underlying this proposed legislation was that a fundraising solicitation by or on behalf of a tax-exempt organization must contain an “express statement (in a conspicuous and easily recognizable format) setting forth the exempt purpose expenditure percentage.”

The term fundraising solicitation would be the same as that under certain disclosure rules.¹⁷ That is, it is a solicitation of contributions that is made in written or printed form, by television or radio, or by telephone.

The term exempt-purpose expenditure percentage would be determined by using the figures for the year immediately preceding the year in which the solicitation took place. For example, if the disclosure was to take place in 2002 and the organization uses the calendar year as its fiscal year, the organization would compute the percentage using 2001 figures. If this organization received $1 million in gifts in 2001 and had a fundraising cost of $100,000, its exempt-purpose expenditure percentage used in 2002 would be 90 percent. Thus, this organization, in its fundraising during 2002, would be required to conspicuously state that 90 percent of its gift support went to programs. The same would be true for an organization that had a 2001 fundraising cost of 60 percent, except that its exempt-purpose expenditure percentage would be 40 percent.

The legislation would not allow for the allocation of costs between programs and fundraising. The draft bill stated that the “cost of any solicitation shall include the entire cost of preparing and disseminating the written or printed form, television or radio advertisement, or telephone call of which it is a part.” This would prevent the cost of, for example, a direct mail letter from being allocated partly to programs (education) and partly to fundraising.

In computing gift support, an organization would not be able to include funds derived from a grant from a governmental unit or from any tax-exempt organization.

The penalty for violation of this law would be $1,000 for each day on which a failure to comply occurred or continued.¹⁸

This legislative proposal was endorsed by some state officials at a hearing held before the Senate Judiciary Subcommittee on Antitrust, Monopolies, and Business Rights on December 15, 1989. The subcommittee was chaired by Senator Metzenbaum, who retired in 1994. The proposal was never formally introduced.

Each of these members of Congress, and others, have found to their chagrin that this area of law is a political and legal quagmire. The issues are difficult and the politics intense. Many a politician, motivated perhaps at the outset by high ideals, has regretted entry into the murky world of charitable fundraising regulation. Influenced no doubt by the angst experienced by their predecessors, it has been nearly two decades since a member of the House of Representatives or Senate has proposed a federal charitable solicitations act. Yet, other attempts seem inevitable.

(a) Necessity of More Rules

As noted, many observers are skeptical of the need for more law in the charitable solicitations field. If, however, the issue concerns the appropriateness of a law requiring the disclosure or availability of pertinent information concerning a charitable organization to those individuals who have been solicited for a charitable contribution to that organization (and who lack another means for obtaining that information, such as membership status in the organization), it is difficult to find a basis for contending against this type of a law. It is equally difficult to argue against a law designed to eliminate the criminal, fraudulent, and/or unscrupulous solicitor from the marketplace of charitable giving. One can argue against the specifics of these laws but not against the concept; many precedents for this approach are embedded in the U.S. legal system, and this type of emphasis on disclosure is being expanded as part of consumer protection efforts.

This assumes, of course, that one can make the case that a sufficient number of charitable solicitations are being conducted by the abusive and the unscrupulous to warrant corrective action at the federal level. Because of the exploits of a few, there is widespread belief that this case can be made. It must also be assumed that self-regulation by the philanthropic community cannot generate the requisite degree of disclosure to the public of the activities and financial practices of charitable organizations.¹⁹

Assuming, then, that this type of law—as a concept—is necessary, the next question must be whether there should be laws at the state and local levels or (perhaps preemptive) law on the federal level. For the most part, the answer to this question will depend on one's philosophy about the system and role of government in the United States, and about whether federal law would preempt state and local law.

Many believe that a scheme of well-written uniform state laws, if fairly and uniformly enforced, would be preferable to federal law. Others contend that the existing state and local law picture is one of a battery of burdensome statutes and ordinances that are poorly conceived, poorly written, and poorly enforced. Thus, some assert that the entire system should be scrapped as far as solicitations in interstate commerce are concerned and replaced by a well-written effective federal law. By contrast, others would argue that the solution lies with uniform requirements, accounting standards, reporting forms, and the like.

(b) Mode of Disclosure

The previously discussed bills embody the point-of-solicitation disclosure concept. For example, the Wilson bill would have required the solicitation to include a statement of the “purpose of the solicitation and the intended use of the contribution solicited.” The Wilson bill also would have required the information to be included with a written solicitation to be “presented in language which is readily understandable by those persons to whom the solicitation is directed, … be located in a conspicuous place on such solicitation, and … appear in conspicuous and legible type in contrast by typography, layout, or color with other printed matter on such solicitation.” The Metzenbaum bill reflects a penchant for the use of percentages.

The point-of-disclosure solicitation approach is also often accompanied by a requirement that the charity supply additional information (including a financial statement) to the public upon request, with notice of the availability of this information to accompany the solicitation. Under the Wilson bill, this additional information would have to be provided within 30 days after receipt of a request for it. Under the Mondale bill, a disclosure statement would have to be mailed within 15 days to any person upon request. Provision of information to the federal enforcement agency would be still another disclosure and data dissemination requirement.

Under the disclosure-on-demand approach, the solicitation material would have to contain a statement notifying the recipient of his or her right to information about the soliciting charitable organization. For example, a recipient of a charitable solicitation might have 180 days to request the information and the organization might have 30 days within which to respond.

One can argue that all that is required is a federal statute mandating every charitable organization to provide, in response to every request received, a copy of an annual report containing financial statements that, among other elements, would state fundraising costs. A notice of the availability of this report could accompany the solicitation. Perhaps this report could be the information return that charitable organizations annually file with the IRS (Form 990), although the contents of that filing might then have to be expanded.

(c) Disclosure of Fundraising Costs

A federal charitable solicitations law would likely provide for disclosure of a charitable organization's fundraising costs. A principal issue, however, is the appropriate format and method of this disclosure.

The question of format is entangled in the issue of whether disclosure in general is to be accomplished by the point-of-solicitation or disclosure-on-demand approach, as discussed earlier. As to method, this issue has become narrowed to two positions: presentation of fundraising costs as a line item within a general financial statement or expression of fundraising costs as a single percentage of receipts. The Mondale bill utilized the first approach; the Wilson and Metzenbaum bills had, as one of their key provisions, the second approach.

The Wilson bill would have required a charitable organization to state its outlays for charitable purposes as a percentage and to do so on the solicitation materials. This type of a percentage would be based on the prior year's financial data. The Metzenbaum proposal was based on a comparable approach. The deficiencies of this requirement are discussed in a previous section.

The ultimate resolution of the matter of the method of fundraising costs disclosure will probably be a byproduct of the point-of-solicitation versus disclosure-on-demand conflict. If the single fundraising cost percentage became a requirement of a federal charitable solicitations law, however, consideration should be given to the use of a three- or four-year moving average rather than a single year's performance. As noted, Congress at present requires the utilization of such a computation in assessing a charitable organization's eligibility for non-private-foundation status.²⁰

(d) Uniform Accounting Principles

A federal charitable solicitations law would be a major force for adoption of uniform accounting principles throughout the nonprofit organization community. (It may be noted that uniform accounting principles for nonprofit organizations seem inevitable for other reasons.) At present, colleges and universities, hospitals, voluntary health and social welfare organizations, and other organizations observe varying accounting standards.²¹

The issue of the proper method of disclosure of fundraising costs will likely depend on the requirements of the applicable set of generally accepted accounting principles. This matter transcends current federal legislative developments because of the ferment—which is coincidental but exceedingly pertinent—taking place at this time within the accounting profession. These developments are far from incidental, inasmuch as federal law may require that the financial statements of covered philanthropic organizations be prepared and/or be the subject of a favorable opinion by a certified public accountant. This means that these statements will have to be prepared in accordance with generally accepted accounting principles.

The American Institute of Certified Public Accountants (AICPA) promulgates rules by which financial statements are to be prepared if they are to conform with generally accepted accounting principles. For voluntary health and welfare organizations, colleges and universities, and hospitals, the AICPA has issued such rules in the form of three separate “audit guides.”²² (A fourth audit guide applies to state and local government units.) The AICPA also has developed a set of accounting principles and reporting practices for nonprofit organizations not covered by an existing audit guide (such as private schools, clubs, civic associations, and political organizations).²³ Many regard these principles and practices as the beginning of development of a single package of accounting standards to be uniformly adhered to by all categories of nonprofit (including philanthropic) organizations.

Congressman Wilson repeatedly stated that it was not the intention of his legislation to have the Postal Service itself design accounting principles for charitable organizations but rather to incorporate by reference existing accounting standards in its enforcement of this law. These standards would presumably include not only those in the AICPA audit guides and the principles for other nonprofit organizations but also other standards. Thus, the Wilson bill contemplated the retention and use of uniform accounting standards for different categories of charitable organizations.

The Mondale bill would have imposed much more detailed obligations in this regard. As part of the annual information return (Form 990) filing requirements, a public charity (as defined) would be mandated to report its annual gross income “on a fund accounting basis in which restricted and unrestricted sources of revenue are clearly distinguished, broken down into such categories as are appropriate for their organization.” Expenses would be reported “on a functional basis in which program costs, administrative and fundraising expenses are reported separately, and in which the program expenses are also broken down to show each of the major programs carried out by the organization together with expenses applicable to more than one program or functional category being allocated as appropriate in accordance with generally accepted accounting principles or standards.”²⁴

This and other information would have to be accompanied by a statement by a certified public accountant that the return was prepared in conformance with generally accepted accounting principles. The Treasury Department would be authorized to require reporting of additional information that is determined to be “necessary to inform prospective contributors of the activities and fiscal policies of the public charity, and to present fairly the financial status of the public charity.” Moreover, the Mondale bill, as part of the requirement of a separate annual report, would mandate preparation of that document in conformance with generally accepted accounting principles and a statement by a certified public accountant to that effect.

The matter of disclosure of fundraising costs is very much intertwined with the matter of the applicable accounting standards. Of great concern must be the manner in which the pertinent accounting standards define the term fundraising costs. In many instances, such as programs and publications of schools, colleges, and universities for distribution within their alumni and membership organizations, it may be difficult to ascertain the extent to which the costs of these endeavors are properly regarded as being for fundraising.

The interplay of fundraising costs' disclosure and accounting principles becomes crucial when viewed in light of proposals that such costs be displayed as or reflected in a percentage of the charitable organization's annual gross receipts.²⁵ As noted, the Wilson and Metzenbaum bills would have required such a percentage on the solicitation materials, and the Mondale bill would have required it as part of the disclosure statement. The fundraising cost percentage is highly dependent on the accounting rules, for that is how the amounts to be used as the numerator and denominator of the ratio are determined.

For example, the AICPA statement of accounting principles for organizations not covered by an audit guide require those organizations to report on the accrual basis of accounting. But the Wilson and Mondale proposals appear predicated on use of the cash basis accounting method. The AICPA statement contemplates a category of receipts to be characterized as “deferred revenue,” which includes donor support when tendered in the form of pledges, bequests, and perhaps other types of gift transactions. The AICPA statement would not permit the deferral of fundraising expenses that are associated with the deferred gift support. Thus, for many organizations, the result may be mandatory disclosure of a fundraising cost percentage that is much higher than is actually the case, with a consequent deleterious effect on subsequent giving by the general public.

As discussed, the Mondale measure would have the Department of the Treasury promulgate uniform accounting principles; the Luken bill would have the FTC do this.

The inconsistencies and dilemmas may well be the result of a deficiency in the proposed federal laws rather than in the accounting principles. Nonetheless, as the federal law proposals evolve, the relationship between their requirements and the applicable accounting standards will have to be carefully monitored and closely studied.

(e) Federal Agency Jurisdiction

The prospect of federal government involvement in the establishment or recognition of accounting principles for philanthropic and other types of nonprofit organizations raises still another important question in this area: Which agency of the government should assume the responsibility for administering and enforcing the charitable solicitations law?

Many advocates of a federal charitable solicitations law contend that the appropriate agency must be the IRS, because of the agency's experience and expertise in the field of tax-exempt organizations and charitable giving, guided by regulations promulgated by the Department of the Treasury. This was the approach of the Mondale bill.

The Postal Service is an unlikely candidate for the task. The Wilson bill, however, would assign such a role to the Postal Service, specifically the Postal Inspection Service, with its existing investigatory and enforcement authority, the latter including the ability to institute mail stops.

The Department of Commerce does not want the assignment. Some, like Congressman Luken, proposed this role for the FTC. Others raise the possibility of creation of a new federal agency to regulate solicitations and perhaps other activities of charitable organizations.

The only independent analysis of this subject to date is contained in the Filer Commission report.²⁶ The commission, in urging the establishment of a system of federal regulation of interstate charitable solicitations, recommended that all charitable organizations be required to disclose solicitation costs to the IRS and that a special office be established somewhere in the federal bureaucracy to oversee and regulate charitable solicitations.²⁷ It is clear, however, that the creation of such a new agency is not to be reasonably expected any time soon. Evidence of this was manifested in 1977, at the outset of the Carter Administration, when then–Treasury Secretary Michael Blumenthal disbanded the Advisory Committee on Private Philanthropy and Public Needs, only weeks after it was assembled by the Ford Administration. This type of a commission or committee has never been reestablished.

In relation to legislation actually introduced in this field to date, the federal agency named in the particular bill as the enforcement agency has been a matter of happenstance: a member of Congress becomes interested in the subject and introduces what he (only, to date) perceives to be a remedial bill, naming in it a federal agency that is subject to the jurisdiction of the legislative committee of which the representative or senator is a member. Thus, Senator Mondale and Representatives Karth and Lehman picked the Department of the Treasury; Representative Wilson opted for the Postal Service; Representative Van Deerlin selected the Department of Commerce; and Representative Luken chose the FTC.

A possible compromise would be to assign principal jurisdiction in this field to the IRS and Treasury Department, which would develop regulations and to which reporting would be made. Collateral enforcement authority could be vested in the Postal Service, which has available to it sanctions (principally, the mail stop) that could be more effective than those available to the IRS (principally, imposition of subsequent penalties and revocation of tax exemption).

(f) Exemptions

Another controversial question is whether or to what extent one or more categories of charitable organizations should be exempted from coverage by a charitable solicitations regulation law.

One school of thought is that a federal charitable fundraising law should apply only to those charitable organizations (and their fundraisers) that extensively engage in fundraising activities as the principal means of deriving their financial support. (Whenever an abuse in this field surfaces in the media, the charity involved inevitably is heavily engaged in fundraising, usually by direct mail.) An opposing contention has it that a charitable solicitations law should apply to every philanthropic organization simply because it engages in charitable activities or to the extent it solicits funds from the public irrespective of its other sources of financial support.

If a federal charitable solicitations law is not to apply to all categories of charitable organizations, the question becomes how to distinguish between the charitable organizations that warrant coverage by a fundraising regulation statute and those that do not. An answer to this question lies in existing federal tax law, inasmuch as Congress has enacted an extensive statutory scheme that categorizes charitable organizations in a way that could be extremely useful for this purpose and adaptable to it. This body of law²⁸ is that which differentiates private foundations from other categories of charitable organizations.²⁹ These provisions specifically reference operating institutions (such as churches, schools, colleges, universities, and hospitals)³⁰ and charities heavily supported by charitable contributions³¹ (publicly supported organizations).

Consequently, in formulating a charitable solicitation law that applies only to organizations that derive most of their financial support from fundraising campaigns targeted to the public, application of the law could be confined to publicly supported organizations. These are charitable entities that, for the most part, receive at least one-third of their support from the public. (One flaw in this effort to distinguish between publicly supported charities and operating institutions is that the statutory definition of publicly supported charities includes such “operating institutions” as some libraries, museums, orchestras, theaters, and the like.) The Mondale bill would have utilized these rules, exempting such organizations from its definition of a “public charity.”

By contrast, the Wilson, Metzenbaum, and Luken bills would not have exempted any category of charitable organization from all of the stated requirements. Instead, for example, the Wilson legislation offered only a limited exemption from the point-of-solicitation disclosure requirement and then only where the individuals solicited have a relationship with the organization by which they already receive or can obtain sufficient information about the organization by reason of that relationship. These partial exemptions were for membership organizations soliciting gifts from among their bona fide members; schools, colleges, and universities soliciting contributions from their alumni, students, faculty, trustees, advisory committee members, and family members of such individuals and supporting foundations of these institutions to the extent they are soliciting those individuals; and hospitals soliciting contributions from their trustees and employees and supporting foundations of these institutions to the extent they are soliciting those individuals.

Institutions such as schools, colleges, universities, and hospitals infrequently solicit the public for financial support and rarely engage in direct mail appeals, particularly on a nationwide scale. For the most part, these institutions solicit only those individuals who constitute a relatively well-defined group that has an ongoing relationship with the institution. These individuals collectively share two common characteristics: (1) they are already in a position to secure the same information from the institution that any solicitations law could reasonably require, and (2) they are not solicited as members of the “general public.” Similar observations may be made as respects the fundraising practices of other operating institutions.

The Wilson bill's partial exemption for membership organizations would have encompassed churches, synagogues, and temples soliciting their congregations. (The Wilson bill did not contain a general exemption for religious organizations.) Also, the Wilson bill would have created a total exemption for a written solicitation by an individual of a small number of persons who are presumably personal acquaintances of the correspondent.

A difficult aspect of the exemption question is the unavoidable fact that when one category of charitable organization is granted an exclusion, other categories of organizations immediately lay claim to a comparable exemption, making the issue a divisive one within the philanthropic community. The exemption for solicitations of a group of acquaintances or an organization's natural constituency is not actually an exemption at all, however, but is instead a reflection of the legitimate scope of charitable solicitations regulation. That is, law in this field should be designed to encompass solicitations of the public and hence need not and should not apply to personal, private, and constituent-oriented types of solicitations. This little-discussed aspect of these proposed laws deserves treatment in the legislative history of any federal statute in this field.

One other aspect of appropriate classification of organizations for purposes of fundraising regulation requires brief mention: the proper treatment of religious organizations. First Amendment problems lurk here.³² It has proved impossible (and would be unconstitutional in any event) for any agency of the government to comprehensively define the term religion. At the same time, some of the most vigorous, remunerative, and abusive fundraising takes place in the name of religion.

It may be that a fundraising regulation law that is made applicable to religious organizations (as would have occurred pursuant to the Wilson bill), particularly to churches, would be unconstitutional as “prohibiting the free exercise” of religion. It may also be that this type of a law, if made applicable to charitable organizations but not to religious organizations (solely because of their religious orientation), would be unconstitutional as law “respecting an establishment of religion.” (A law of the latter variety may also be constitutionally infirm as a denial of equal protection of the laws under the Fourteenth Amendment.) The outcome of this issue may also be of particular consequence to institutions operated by direction of a church or church denomination (integrated auxiliaries of churches).

The answer to this dilemma was hinted at by the Supreme Court in 1970 when it upheld the constitutionality of tax exemptions for religious organizations for properties used solely for religious worship.³³ This exemption, said the Court, is “benevolent neutrality”;³⁴ the exemption was seen as simply sparing the exercise of religion from the burden of property taxation as is done for a broad class of charitable organizations. Therefore, the standard for the exemption may be that it is constitutional where the religious organization is treated no differently from its counterparts in the law of tax-exempt organizations. The legal questions on this point could be clarified somewhat if a challenge is ever mounted against the extension to churches of the tax on income from an unrelated trade or business. It may also be noted that nearly every state with a charitable solicitation statute exempts religious entities from some or all of its requirements.³⁵

(g) Federal Preemption of State Law

Another key, and the most controversial, issue with respect to federal charitable solicitations legislation is whether this type of law should preempt state and local laws where solicitations using a means of interstate commerce are involved.

A federal statute cannot preempt state law unless it (or perhaps its legislative history) explicitly states that it is doing so, assuming the preemption is constitutionally permissible. Rarely does Congress preempt state law on a subject, although it will where circumstances warrant. For example, this was done in connection with the expansion of laws governing campaign financing and reporting practices where elections for federal office are involved, and the establishment of a regulatory system concerning the trading of commodity futures. By contrast, in what may serve as a close model to any federal law regulating fundraising—the federal laws regulating interstate offers and sales of securities—Congress has permitted the states simultaneously to legislate and enforce laws in this field.

Nonetheless, some people believe that a federal law regulating solicitations for charitable purposes should expressly preempt comparable state and local law. This means that the federal government would assume the basic responsibility for regulating solicitations for charity where a means of interstate commerce is used. (None of the bills introduced in Congress in this area to date carried a preemption feature.) This approach would leave to the states and perhaps local governments the responsibility for monitoring intrastate charitable solicitations and prosecuting cases of charitable (other than mail) fraud involving violations of general civil and criminal laws.

The calls for federal law preemption of this field clearly stem not from any belief that federal government responsibilities require expansion but rather as a means of affording relief from the existing hodgepodge of state laws and local ordinances regulating charitable solicitations.

This type of a preemptive federal statute would have the virtue of enabling charities and their fundraisers to comply with only one set of requirements: one law, one due date, one form, and the like. Aside from the inherent advantage of having to cope with only one law instead of many, there is a substantial savings of time and money to be achieved in effecting compliance. Also, the danger of running afoul of enforcement authorities is minimized; many philanthropic organizations and their agents seem to be soliciting support across the country without much awareness of the states' and other jurisdictions' legal requirements for doing so. Finally, an obvious virtue of a preemptive federal law in this area would be the substitution of one statute for dozens of varying statutes and ordinances.

Another solution to the problem would be, of course, for the states to adopt uniform laws or, on a less-extensive scale, uniform reporting requirements, forms, and due dates. Even the use of standardized registration and reporting forms among the states would go a long way toward easing the costs and other burdens of compliance with these laws. In several states, the legislatures have explicitly authorized the regulators to agree reciprocally with their counterparts in other jurisdictions to exchange information for enforcement purposes and to accept filings and grant exemptions on a uniform, multistate basis where the requirements are substantially similar. Fortunately, some progress has been made in this area.³⁶ In most instances, express statutory authority to achieve uniformity is not even required, since the enforcement officials (attorneys general, secretaries of state, and the like) have ample authority within the scope of their regulatory powers to work toward and achieve a standardized registration and reporting system. In fact, it would seem that this uniformity would breed an increase in charitable organizations' compliance with these laws, thereby enhancing the regulatory function.

A measure along the lines of a Wilson bill, emanating from a postal law-writing committee, could be a vehicle for a preemptive law in this field, unless it is sequentially referred to another committee for amendment for this purpose. The same is true for the other proposals discussed earlier; however, other legislation may be introduced to this end, under the combined jurisdiction of the judiciary, interstate commerce, and/or taxation committees in Congress.

Realistically, however, there is not much likelihood of a preemptive federal statute in this area. The attorneys general of the states covet too greatly their present authority to investigate abuses in charitable solicitations; they can be expected to strongly oppose such a feature.³⁷ Thus, Congress will probably elect to continue to rely on the states as the principal vehicle to monitor charitable fundraising, with the federal government playing a supervisory but secondary role. If this happens, the provisions of the Mondale bill, by which the Secretary of the Treasury would be directed to “encourage the appropriate officers of State and local governments to accept copies of the annual information returns and annual reports [as would be required by the bill] in satisfaction of the requirements of the States and local laws for similar reports from such organizations” (i.e., “public charities”), may represent the extent to which the federal government may reasonably go in securing, by statute, uniformity of reporting in this field.

At a minimum, however, coordination among federal, state, and local law and enforcement in this field is essential. Perhaps, with the cooperation of federal and state officials and representatives of interested organizations, the practical equivalent of preemption can be realized: adoption of a federal reporting form that could be filed, in lieu of separate state reports, in those states where a solicitation is undertaken and made available to the interested public.³⁸

(h) Sanctions

Still another major issue with respect to a federal law regulating the solicitation of charitable contributions is the nature of the sanctions to be imposed.

Mention has been made of the possibility of invocation of the mail stop by the Postal Service as a means of circumscribing solicitations by mail that are not in compliance with the federal requirements. Other potential sanctions include those usually levied as part of the federal tax system: monetary penalties, injunctions, and criminal penalties (including imprisonment) for violations of the law. Also, some conceive of a point-of-solicitation disclosure requirement as a type of sanction.

A proposal prepared for the United Way of America³⁹ suggested fashioning sanctions parallel to those underlying the private foundation rules, namely, a series of excise taxes imposed in the event of the payment of “unreasonable” fundraising fees. This approach would track existing tax law,⁴⁰ by which foundation directors, officers, and other insiders who receive unreasonable compensation become subject to an initial 5 percent excise tax on the amount of compensation in excess of what is reasonable, and a 200 percent additional tax if that excessive amount is not timely repaid to the foundation, with additional sanctions available in the case of willful, repeated, or flagrant violations. As the proposal stated, “[t]his pattern could be applied to unreasonable fundraising expenditures, providing (1) a relatively modest initial excise tax on the recipient of excessive compensation, (2) a much larger excise tax if the excessive amount is not repaid within a correction period, and (3) recourse to the federal district courts for the traditional battery of equitable remedies (injunctions, removal of trustees, surcharge of trustees, and the like) in the case of repeated or serious violations.”⁴¹ The proposal also suggested that this approach could be applied to other types of payments by private foundations where the payments exceed the level of reasonableness.

In explanation of this proposal, it was pointed out that the term reasonable is often employed in the Internal Revenue Code, such as the limitation on the deductibility of salaries and other business expenses. Thus, this approach would look to actual practices and comparable data in assessing whether a particular fundraising or other expenditure is in fact reasonable. The principal difficulty with this idea is the absence of meaningful information and understanding about how to assess the reasonableness of fundraising costs, although this set of rules could well serve as an incentive for the development of that information.

As an alternative to this excise tax system, the proposal advocated point-of-solicitation disclosure of information, including fundraising expenses, to prospective donors and others. Pursuant to this approach, charities could report their fundraising costs as an average of four years' experience (five years for new organizations), and most solicitations for churches would be exempted from the requirements.

(i) Filer Commission Recommendations

One of the recommendations of the Filer Commission was that a “system of federal regulation be established for interstate charitable solicitations and that intrastate solicitations be more effectively regulated by the state governments.”⁴² The commission's specific recommendations for federal regulation of charitable solicitations are as follows:

In the Commission's sample survey of taxpayers, 30 percent of those questioned said they did not like the way their contributions were used [by charities] and one out of seven respondents specifically complained of excessive fundraising or administrative costs. This wariness undoubtedly has been heightened in many minds by recent cases, including those uncovered in congressional investigations, where some costs of charitable fundraising absorbed most of the funds raised, leaving the impression that some charitable solicitations are more for the benefit of the solicitors than for the charitable causes involved. In some other instances, contributions have been recurrently solicited and raised that are far in excess of the organization's operating outlays.

The Commission believes that the vast majority of charitable solicitations are conscientiously and economically undertaken. Nonetheless, cases of unduly costly or needless fundraising point to the absence of any focused mechanism for overseeing such activity and, if need be, applying sanctions. One Commission study finds, in fact, that only one half of the 50 states regulated the solicitation of funds and that “the coverage and scope of” those that do regulate “vary widely.” State regulation of intrastate solicitations, the Commission believes, should be strengthened, but because many solicitations spread over many states at once, state regulation is inevitably limited in its effectiveness. Clearly, the federal government and federal law must play the major role in assuring the integrity of charitable solicitations, a role that they just as clearly do not play today. The Commission recommends specifically that all charitable organizations should be required by law to disclose all solicitation costs to the Internal Revenue Service, in accordance with accepted accounting principles; that all solicitation literature should be required to carry a notice to the effect that full financial data can be obtained from the soliciting organization on request; that any such requests be required to be rapidly answered; and that a special office be established in the Internal Revenue Service or in some other federal agency or regulatory body, such as the Federal Trade Commission, to oversee charity solicitation and take action against improper, misleading, or excessively costly fundraisings. This special office might be supplemented by and guided by an accrediting organization, which would review the finances of and certify all exempt organizations whose solicitation practices are found to merit approval.

The Commission considered but rejected proposals that solicitation costs be legally limited to a fixed percentage of receipts because, unless such a ceiling were so high as to be an ineffective restraint on most fundraising, it would risk being too low to account for the often justifiably high costs of solicitation for new or unpopular causes. On the other hand, state as well as federal agencies concerned with regulating solicitations should be required to establish clear qualitative criteria as to what constitutes “excessively costly” fundraising (or improper or misleading solicitation, as well). Such criteria should be widely publicized so that both soliciting organizations and the contributing public would clearly understand the limits within which fundraisers operate.⁴³

These recommendations, however, drew the following dissent from commission member Raymond J. Gallagher:

State governments already adequately police the solicitations of charitable contributions. There is no hard data in the material collected by this Commission that warrants a recommendation that the federal government assume a new policy role in this area. The Commission indicates that it believes that the vast majority of charitable solicitations are conscientiously and economically undertaken. The Commission, however, is concerned about the impression of many taxpayers that charity solicitations cost more than they should. I do not believe that the effective remedy for this impression is the creation of a new federal bureaucracy or the expansion of an existing one. Potential donors who have doubts about the efficiency of charitable solicitations can inquire directly of the organizations they are concerned about; and if they are not satisfied with the answers they are given, they have the most effective remedy of all: not making the contribution.⁴⁴

(j) Ford Administration Treasury Proposals

When outgoing Treasury Secretary William E. Simon, on January 14, 1977, sent a package of legislative proposals to Congress to “improve public accountability and prevent abuses” in private philanthropy, the proposals included a recommendation that interstate solicitations be subject to federal legislation that would be administered by the Treasury Department. The Treasury also recommended disclosure of financial information about the soliciting organization, particularly with respect to its fundraising and administrative costs.⁴⁵

In assessing the present situation, the Treasury proposals contained the observation that “[t]here is no supervision or monitoring of interstate solicitation [of charitable contributions] by the Federal government, and the State laws affecting it vary considerably, making it easy, particularly for large fundraising drives, to circumvent tough enforcement by any one state.”

This is a curious statement. In fact, the application for recognition of exemption filed by charitable organizations (Form 1023)⁴⁶ requests information concerning charitable solicitation activities. Also, the IRS and Treasury are fully empowered to request more information about solicitation activities in the application for recognition of exemption and in an organization's annual information return (Form 990). Further, it is an understatement to say that the state laws relating to charitable solicitations vary considerably. In fact, they vary widely, and the accompanying regulations, forms, and enforcement efforts are even more divergent. It does not follow from this observation, however, that this variation contributes to lack of enforcement of these laws. Additionally, “large fundraising drives” are able to “circumvent tough enforcement by any one state” only by refraining from soliciting contributions in that jurisdiction (unless the state law is simply violated); at the same time, the tradeoff resulting from such a decision is that the organization deprives itself of the financial support otherwise available to it from the citizens of the particular state.

In connection with its recommendations, the Treasury Department suggested that Congress (specifically, the House Committee on Ways and Means and the Senate Committee on Finance) conduct hearings on the “appropriate methods” for regulating charitable solicitations, with “emphasis” on the following issues:

• The extent of financial data concerning the soliciting organization that must be supplied with the solicitation material
• The need for administrative review of solicitation material before dissemination (as opposed to relying solely on criminal and equitable sanctions for misleading or incomplete material)
• The appropriate method for regulating oral solicitations (e.g., by telephone and television) and the extent of disclosure required for them
• The need for limitations on fundraising and administrative costs
• The preemption of varying state reporting requirements for interstate solicitations, with a uniform federal report to be filed with all requesting states

The Treasury Department recommendations went far beyond the supervision and monitoring of charitable solicitations. In related areas, the recommendations also included a proposal that every private foundation, every public charity that makes grants, and every public charity or social welfare organization with annual gross receipts of at least $100,000 (other than a church or integrated auxiliary thereof or a convention or association of churches) be required to make available to the public an annual report on its finances, programs, and priorities. Also, the Treasury recommended that certain of the restrictions on private foundations be extended to public charities. These restrictions involve the present Internal Revenue Code Chapter 42 requirements with respect to self-dealing, minimum payout, jeopardy investments, and taxable expenditures.

This proposal for an annual report by most public charities has considerable merit. This type of report could be the document that a soliciting charity would have to send to the public upon request and also file with the Postal Service, and perhaps with the states where the solicitation is to take place. The prospects of preparation of another major document for filing with the federal tax authorities (in addition to the Form 990), however, would generate protests if only because of the increased costs. Another reason that such a proposal would be resisted is that the federal disclosure requirements⁴⁷ may have the effect of converting the annual information return into a type of public annual report.

Regarding other aspects of federal involvement in the private philanthropic processes, the Treasury Department has recommended a variety of revisions of the tax laws with respect to the charitable contribution deduction and an investment of U.S. district courts with equity powers sufficient to remedy any violation of the substantive rules concerning philanthropic organizations in such a way as to minimize any financial detriment to the organization and to preserve its assets for its philanthropic purposes.