Associations, Nonprofits and Political Organizations Report - Spring 2022
Beware of Contingent Fee Restrictions When Your Association Hires a Lobbyist
By: James A. Kahl
Originally published by ASAE here
Many states prohibit lobbyists from receiving contingent fees, and those bans can be broader than they appear. Click below for a look at scenarios that could run afoul of state restrictions, as well as some precautions your association can take when hiring a lobbying firm.
More than 40 states and the District of Columbia prohibit the receipt of contingent fees for lobbying. This restriction generally prohibits a person or entity from being paid a fee that is contingent upon a successful outcome, including the passage or defeat of legislation, the issuance of an executive order, the adoption or rejection of a regulation, or the award of a public contract.
Compliance with all lobbying rules is essential for associations to limit legal risks and protect their organization’s reputation. In the area of contingent fee restrictions, liabilities exist not only for the lobbyist, but also for the client association. Unfortunately, many states do not provide clear guidance on the scope of these restrictions, and in some cases, they have been applied in ways that are far broader than the statute’s wording might suggest.
If your association is contemplating retaining a lobbyist or lobbying firm, avoid the following scenarios, which can result in violations of contingent fee lobbying prohibitions.
Separate but Connected Agreements
In this scenario, a consultant performs both lobbying and nonlobbying work, but only the latter is compensated on a contingent basis. Several states, including Connecticut, Kentucky, Maryland, Minnesota, and Oregon, have addressed when these types of engagements can violate contingent fee prohibitions. In a nutshell, the contingent fee prohibition is triggered if the contingent payment can be viewed as connected to the success of the legislative affairs efforts.
A 1994 Connecticut Office of State Ethics (OSE) opinion examined a public relations firm that had two separate agreements with a client. The first agreement supported the client’s efforts to obtain state-issued bonds and/or other state financing to develop a continuing care retirement community (CCRC). These services did not involve lobbying under Connecticut law, and compensation was a set monthly payment and an incentive payment if the financing was secured.
A second contract provided for the firm to lobby to obtain a change in Connecticut law regarding the provision of guaranteed life care by CCRCs. The change in law would have enhanced the client’s ability to obtain the state financing it was seeking under the first agreement.
OSE found the contingent fee ban was violated. While the desired legislative amendment was not “absolutely necessary,” it would have contributed to the client obtaining its financing and to the public relations firm obtaining its contingent incentive payment. The arrangement was a violation because the incentive payment was “dependent,” to some material extent, on the legislative outcome
Nonlobbying Work as Reward
This scenario was addressed in a 1988 Maryland Ethics Commission advisory opinion. Under a proposed agreement, if a law firm successfully lobbied to get a state contract awarded to its client, then the firm would serve as counsel to the client for nonlobbying legal work related to the contract. Even though the legal work would be paid for on a flat fee basis, the commission viewed the payments for this subsequent nonlobbying work as prohibited contingent fees.
Bonuses and Other Incentives
Several opinions have addressed proposed agreements that are not on their face contingent on the success of lobbying efforts, but rather have payments tied to the client’s broader financial success.
For example, a 2002 Kentucky Legislative Ethics Commission opinion addressed a public communications and lobbying firm (which was partially owned by registered lobbyists) that was retained to provide public relations services to a company. Compensation included a bonus tied to the increase in gross revenue realized by the company in future years. The commission concluded that the firm’s public outreach efforts did not meet the statutory definition of lobbying. However, had any part of its services for the client included “lobbying,” the arrangement would have been considered a prohibited contingent fee.
For the same reason, both Connecticut and New York generally view stock option payments to lobbyists as violating contingent fee bans if the value of the stock is dependent, in part, on the success of the lobbying efforts.
Precautionary Steps
If your association is considering a retainer agreement with a lobbyist or lobbying firm that falls into any of these categories or includes any type of incentive pay provisions, it is important to ensure that it complies with the applicable contingent fee restrictions.
If the arrangement is proposed by a lobbyist or lobbying firm, ask if it has been approved by state regulators or reviewed by the lobbyist’s counsel. Review any available written guidance from the state lobbying regulatory agency. Many state regulators provide helpful advice over the phone or through email. They also may be able to help you find opinions and guidance materials not readily available to the public.
Finally, consider retaining experienced counsel who can assist you in drafting a compliant retention agreement that will achieve your public policy goals and protect your legal interests.
IRS Clarifies Royalty Income Considerations for Job Board Revenue
By: Mark C. Franco, ICE-CCP
Associations are logical places for individuals and employers to connect about job opportunities. With both individuals and employers coming to associations for information, it makes sense for associations to try to facilitate these connections and a common way to do that is through a job board. In addition to being great resources for individuals and organizations within a profession, job boards can also be a good source of non-dues revenue to the association. However, the Internal Revenue Service (IRS) has re-affirmed non-dues revenue from a job board can be taxable as unrelated business income (UBI) even if designated as a royalty.
Non-Dues Revenue and UBI
Since non-dues revenue generally encompasses revenue from sources other than membership fees, it is important to make sure that the activity generating the non-dues revenue is evaluated properly to determine whether the revenue may be taxable as UBI. Generally, if a particular activity is (1) a trade or business, (2) that is not substantially related to the organization’s tax-exempt purposes, and (3) is regularly carried on by the association, then the revenue from the activity may UBI. However, non-dues revenue can also be exempt from tax. Section 512(b)(2) of the Internal Revenue Code (IRC) states that royalties are excluded from UBI.
Non-Dues Revenue as Royalties
Courts have identified certain circumstances when exempt organizations may treat non-dues revenue as royalties. In Sierra Club, Inc. v. Commissioner, the Ninth Circuit stated that royalties can be payments that are received for the right to use intangible property rights, such as payments for the rental of a mailing list. However, in Arkansas State Police Ass’n v. Commissioner, the Eighth Circuit found that substantial participation and control of the activities negated the Association’s claim to exempt royalties. Following these court decisions, the IRS has generally held that payments for the use of trademarks, trade names, service marks, copyrights, and the right to use an intangible asset are ordinarily classified as royalties. However, royalties are not payments for services.
In order to reconcile these requirements, some associations have outsourced functions like a job board that generate non-dues revenue to a third party. The third party manages and controls all of the operations of the job board and pays the association a royalty for the use of the association’s name, logo, and membership list, while the association maintains an entirely passive role in the function of the job board. Under these circumstances, the association can make an argument that its treatment of payments from the third party administering the job board as royalties complies with the IRS requirements detailed above.
When “Royalty” Income is Taxable
In 2020, the IRS issued a Technical Advice Memorandum (TAM) that found the “royalty” income from exempt organization’s online job board to be taxable income. A few of the factual issues that the IRS identified included the following:
No Licensing of Trademark or Other Intangible Property
In the contract between the organization and the vendor, there was no mention of the use of the organization’s property by the vendor. In fact, the online resources, including the website used for the job board, belonged to the organization and not the vendor.
Organization Received Most of the Income Generated from the Job Board
Almost all income from certain uses the job board, including advertising income, went to the organization. Although there was a fee charged by the vendor, and also a credit card transaction fee, those fees were only a small percentage of the revenues generated by the job board. In certain cases, 100 percent of the income was distributed to the organization.
Vendor Provided Services to the Organization, Not the Job Board Users
In the agreement between the organization and the vendor, the parties unfortunately referred to users of the job board as the organization’s rather than the vendor’s “clients.” Also, the agreement included fees that the organization would pay to the vendor for services such as billing and collecting payments from users, and providing technical support/customer service to users. The IRS concluded that because of the language of the agreement, the vendor was actually servicing the organization and not the users, and that the funds paid to the organization were not royalties, but instead were the fees that the vendor was collecting from users on behalf of the organization.
Conclusion
Simply designating non-dues revenue as royalties does not allow an association to exclude that revenue from unrelated business income, particularly when, as noted in the TAM discussed in this article, the revenue is generated as a fee for services. However, there may be circumstances that may allow an association to treat non-dues revenue, such as revenue from a job board, as royalty income excluded from UBI. If you have any questions or concerns about the way your association is currently utilizing non-dues revenue, our attorneys can help you review your situation to identify and address any potential UBI considerations.
Responding to Exam Security Breaches
By: Mark C. Franco, ICE-CCPAs published by Institute for Credentialing Excellence (I.C.E.) here - Additional contributing author: Sarah Toton, PhD, Caveon Test Security
Uh-oh. You’ve received information that your program’s test content and/or test security protocols have been breached. What should you do? Take a breath, don’t panic and read on. Below is a condensed guide to help you address a test security breach methodically, rather than reacting as the situation evolves. Preparing ahead of time is better than thinking through test security for your program during a breach, but this article is designed to help when that is simply not the case.
Identify Resources
To successfully navigate a breach, you should seek sources of guidance. First, you will need to identify all of your organization’s applicable policies and procedures related to a test security breach as these will dictate how you act in any specific situation. Next, you will need to reach out to experts that can help you deal with different aspects of the breach. These may include in-house or outside legal counsel, your current testing vendor or a test-security vendor. Then, set aside time for addressing and navigating the breach. Often, we all have full plates before a breach occurs and very little bandwidth for dealing with a crisis situation. However, a breach is the top priority and you will likely need as many resources as you can muster.
Assess the Current Situation
What do you know? How do you know it? This will help you 1) design a plan for dealing with the breach and 2) inform the people who will be involved in executing the plan. Channel your inner detective and try to answer the questions “Who?”, “What?”, “When?” and “Where?” Start with the information you already have or could find out internally and work from there. This is not the time to contact individuals allegedly involved in the breach.
For example, let’s say you receive a tip that a group of candidates is sharing content and the tipster sends you a PDF of the alleged test content:
Who? Try to determine the tipster’s identity and which candidates are implicated in the sharing of this content. Sometimes the document itself allows the author of the document to be identified. For example, the document properties of the PDF may contain the name of the author, or the order of the test items in the document may be unique to the test for a particular candidate.
What? Assess the content for legitimacy and accuracy. Is it actually your test content? How accurately has the content been captured? How much of your content is in the document? Is there an answer key? What organizational policies and procedures need to be applied or considered?
When? When was the content disclosed? Document properties and the tipster may provide helpful information.
Where? Are the candidates implicated in the sharing of this content linked to a particular test site, training center or company?
Some of these questions may be unanswerable until additional information is obtained.
Collect Additional Information
Gather all of the information you have based on your initial answers to the questions above. If the breach may involve a particular test site, look into that site’s history and characteristics. If there are specific candidates implicated, take stock of all the information that your program collects about candidates and their test session. Do you take video recordings of candidates as they test? Proctor logs? Do you have information about the candidate’s employer, training center or previous exam attempts? You don’t know what you don’t measure, so start with what you have available.
If you choose to partner with your testing vendor or a test-security vendor, they may be able to help by conducting investigations, data forensics or monitoring the web for disclosed content.
If the potential breach involves sharing test content on the internet, consider searching the web for disclosed content. Beware though, entering your actual item text into search engines can actually cause a breach by disclosing your item content. If you try this yourself, it is best to search general terms like “answer key for x exam” and use more than one search engine.
Data forensics is the statistical analysis of test data to identify unusual patterns that may be associated with cheating or test fraud. The results obtained from such analyses may not directly prove that cheating or a breach of test security protocols has occurred, but could provide the information needed to demonstrate a reasonable basis for taking certain types of action, such as invalidation of test scores.
Assess Your Policies
Do you have a candidate agreement, handbook or internal policy documents? If you use a third-party test administrator or delivery vendor, do they have exam-related policies? Generally, these materials will dictate what remedial measures are available following an exam security breach.
If you encounter circumstances that are not addressed by policies, then you should proceed carefully in considering any potential measures. You will need to balance the importance of maintaining the integrity of the exam against an obligation to ensure every candidate is treated with fundamental fairness.
If consistent with any applicable policies or prior decisions, a program can consider invalidation of test results. Otherwise, you may have to consider other courses of action. You will typically only want to take actions consistent with your organization’s policies and if you are unable to determine what those actions may be, seek legal advice before taking any action.
Take Action
Once you’ve discovered a breach, you need to address it. Your responsibilities as a testing program include ensuring the validity of test scores and protecting the integrity of the testing program. The specific actions you take will depend on the nature of the breach and your organization’s policies. If you discover a small group of candidates shared answers, score invalidation may be appropriate, as well as other punitive measures such as denial of future eligibility. If you discover that administrators at a specific test site have not been following testing protocols, you may decide to replace testing staff or shut down testing at the site. If you discover a large braindump of your test content on the web, you could deploy an emergency form, stop testing until replacement forms are ready and/or use data forensics to identify invalid scores. The goal is not just to take action, but to take justified action that is appropriate for the situation. Inappropriate action will exacerbate an already bad situation.
It is important to remember that whatever action you take remains consistent with your organizational policies and procedures. Depending on the particular circumstances, your policies and procedures may not provide enough guidance. For example, what if you don’t become aware of a violation of exam security until many months after the exam occurred and results were provided. Do your exam-related policies still apply or could there be an applicable code of conduct that would be more relevant? These are not questions that you will want to determine on your own and it would be good to consult with experts that have appropriate legal, exam, and industry or profession-related perspectives.
Communicating About Actions
Legal support is essential when communicating your actions to various stakeholders following a breach. What and how you communicate will depend on the particular circumstances of the exam security breach. It should be made clear why a specific action was taken by the organization and what opportunity, if any, is available to retest. In certain situations where revocation of a credential is also a possibility, you will need to provide an affected individual an opportunity to refute the findings and to appeal any decisions. You will also want to make sure your communications do not create any additional problems for the organization and it is recommended to have your legal support perform a thorough review on any candidate-facing communications regarding the breach.
Move Forward
If you experience a serious breach for which you were not prepared, you should proceed carefully and make sure you act in accordance with your own policies, procedures and applicable laws. Even though a breach may be stressful and uninvited, it presents an opportunity to learn from the experience to improve your program’s security.
In many situations, a serious breach has ended up being a huge catalyst for positive change and stronger programs have emerged with better policies, stakeholder buy-in and methods for monitoring test security. Do the best you can within your existing policies, leverage your resources and bring in experts to help. Then, make a plan to prevent it from happening again, detect it if it does and handle it in a fair and consistent way.
If you are fortunate enough to be reading this article and not dealing with a potential breach, stay tuned for another article on designing test security measures for your program, where we will cover topics such as candidate agreements that allow you to take action, auditing test deliveries for potential test security violations, conducting data forensics to proactively monitor your program’s test security, developing emergency forms and creating an incident response plan before a breach occurs.
Virginia Exempts Property of Certain Charitable Single Member LLCs from Taxation
By: Naema Mallick
Single member limited liability corporations organized as nonprofits will see property tax relief in Virginia this year. The Virginia General Assembly just expanded the property tax exemption to allow real and personal property tax exemption for certain nonprofit single member LLCs. Currently, the law allows for nonprofits such as volunteer fire departments and volunteer emergency medical services agencies, societies for prevention of cruelty to animals, home demonstration clubs, churches and religious bodies, college alumni associations and foundations, future homemakers of America, and future business leaders of America to exempt real and personal property. Habitat for Humanity and local affiliates or subsidiaries are also exempt, if the local governing body where the property is located approves an exemption and the organization uses that property for charitable purposes.
Under this new law, single member LLCs operating as a nonprofit organization, such as the ones listed above, would not pay a tax on real and personal property. This new law does not change the Retail Sales and Use Tax exemption, under which nonprofit single member LLCs have been exempt from taxation since 2019. Any single member LLC wishing to take the property tax exemption should ensure that the property was acquired after 1971; the single member LLC is organized for religious, charitable, patriotic, historical, benevolent, cultural purposes, or is a public park or playground; and the property must be used in accordance with the purpose for which the nonprofit organization is classified.
Employment Offer Letters
By: Steven E. Bers
Good news! During these times of challenging recruitment, a viable applicant seems interested in your passenger vessel business. What’s the next step to set the hook?
The Offer of Employment letter serves many purposes. The letter must enhance the applicant’s interest in the opportunity and protect the employer against claims that it misrepresented the employment opportunity. The letter must be sufficiently substantial to allow the applicant to resign from current employment. It must sell the job.
The offer letter should be organized as a story – beginning with the first global considerations followed by the terms that naturally follow. It should be positive. Too often we see offer letters that start with a message similar to “you are employed at will and can be terminated at any time.” Some offer letters continue the buzz-kill with multiple repetitions of the “at will “ status warning.
Instead, the natural order is an introduction welcoming the applicant and expressing enthusiasm for the applicant’s interest. Next follows the name of the position, the reporting date, and a reference to the supervisor to whom the individual will report. A description of the expected work schedule is included completing the initial employment landscape.
Then comes compensation, expressed as either an hourly rate, or a base salary calculated “at an annualized rate of $X.” Too often HR professionals unnecessarily add that the position is “exempt” or “non-exempt.” The average person outside the HR world can find these terms confusing. Clarity is achieved by merely noting if overtime is paid. Finally, the compensation section should state the frequency of pay, and whether the employer employs direct deposit.
Next, explain the benefits. Bullet each benefit separately. There is no need to identify every term or condition of every benefit, so long as the following necessary language is included, “This letter provides a general summary of the terms and conditions of our benefit plans, which are further explained in our company policies or in material provided by our benefit providers.” The offer letter is not the place to attempt a detailed description of every retirement or health benefit term.
The bulleted benefits should include holidays, vacation, personal or sick day allotments; life, disability, health insurance; retirement programs; and any other significant benefits. For health insurance, the offer letter should identify if there is shared payment, and what coverage is available, along with a statement that coverage and carriers may change from time to time, and that employee contribution costs may vary.
Toward the end of the letter it is adequate to write that employment is “at will.” There is no legal need to add that the employer may terminate at any time. The mere statement that employment is “at will” is adequate to establish the right to terminate at any time.
Next, there should be an “integration clause,” stating that all the terms of the employment offer are included in the offer letter, to the exclusion of any other oral or written representations. This term is vital to avoid any retroactive claims that matters represented in initial conversations were misleading, or that any oral promises were made. This is especially important if recruiters may have been over zealous in representing the position.
The offer letter should include a representation by the applicant that the applicant is not otherwise prohibited from accepting employment, most notably by any pre-existing non-competition term, and that all matters provided by the employee in applying for the position were truthful, without known misrepresentation or deletion of material information.
It is also protective of the employer to direct that the applicant is expressly prohibited from using the confidential information from any prior employer in furtherance of the employment. So too, the applicant must be informed if the employer will require the signing of a non-compete agreement or confidentiality agreement.
Finally, any contingencies, such as the requirements of a medical examination, substance abuse testing or a favorable background check, must be spelled out. Note particularly that most states now require an offer of employment to be provided prior to these contingencies.
The letter should conclude with a portion of the letter to be returned to the employer, signed by the employee, accepting the terms of employment and attesting that the representations and warranties are true and correct.
Introducing New ANPO Attorneys at Whiteford
Kevin M. Serafino, CAE
kserafino@wtplaw.com
Associate
Washington, D.C., Office
Advises associations on compliance with campaign finance and lobbying laws, as well as nonprofit governance and contracts.
Naema Mallick
nmallick@wtplaw.com
Associate
Washington, D.C., Office
Advises associations on contract matters and compliance issues.
Tax Reminder for Organizations
For all tax-exempt organizations that file on a calendar year basis, their returns for 2021 are due to the IRS on May 16. An automatic extension can be obtained by filing Form 8868 with the IRS by May 16. This will extend the due date for the return until November 15, 2022.
Organizations that are classified as Type III supporting organizations under § 509(a)(3) and that file on a calendar year basis are required to provide an annual report to their supported organizations by May 31. This report must include:
(1) A written notice describing the type and amount of support provided by the supporting organization to the supported organization during the prior tax year;
(2) A copy of the supporting organization’s Form 990 or 990-EZ that was most recently filed as of the date the notification is provided; and
(3) A copy of the supporting organization’s governing documents, as most recently amended, to the extent not previously provided.
Recent and Upcoming Interviews
In case you missed it, we interviewed Irving Washington, FASAE, CAE, the Executive Director/CEO of the Online News Association ("ONA"), in the newest podcast for our "Associations Creating Community" series.
WATCH THE INTERVIEW HERE
Keep a lookout for our newest "Associations Creating Community" interview with President and CEO of ASAE, Michelle Mason, available for your viewing pleasure shortly!
Upcoming Ask Us Anything! Session
Thursday, May 12th at 10am
For our final Ask Us Anything! of Spring 2022, we have invited Mary Claire Chesshire, a Whiteford partner focusing on Employee Benefits/ERISA, to discuss the trends she is seeing in employee retirement benefits.