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Dear Friends and Colleagues, Welcome to the spring 2007 “religion” edition of LAPA News & Views. As you may be aware, one of LAPA’s specialties is our work with synagogues, churches, and faith-based groups. Rabbis, Rectors, Imams, and Pastors have often asked me if they should have a separate 501(c)3. The article below responds to this challenging question. Episcopal Charities of the Diocese of New York liked the answer so much they sent the article to the Episcopal churches in their diocese. Also in this issue, “Ask LAPA” addresses a question from a Pastor in Queens: "Our parish is considering a capital campaign, but we are afraid it will decimate our annual stewardship drive. What should we do?" A good question, and our Senior Fundraising Consultant, Ed Winters, addresses it head on. Do you have a question you want addressed in a future issue? Email me today! Enjoy! - Laurence A. Pagnoni, president - (212) 932-9008, ext. 0 or lpagnoni@lp-associates.com A Guide for the Perplexed: Should a Faith-Based Institution Seek 501(c) Status? Of the 386,000 American congregations that provide charitable services in their communities, half are registered with the Internal Revenue Service as 501(c)3 public charities. This would suggest that persons of faith in the U.S. are split 50-50 over the need for their institutions to formally apply for tax-exempt status. To apply or not to apply—indeed, a puzzling question. After all, the IRS stipulates in its Tax Guide for Churches and Religious Organizations (www.irs.gov/pub/irs-pdf/p1828.pdf) that faith-based institutions meeting the requirements of Internal Revenue Code 501(c)3 “are automatically considered tax exempt and are not required to apply for and obtain recognition of tax-exempt status from the IRS.” These requirements are:
Item number four (“the organization may not intervene in political campaigns”) has aroused the suspicions of certain fringe groups. According to hushmoney.org, the Web site of an entity called Heal Our Land Ministries, the automatic exemption dates to 1954 and the machinations of “a shrewd and cunning” U.S. Senator who “had it in mind to silence the church.” His name was Lyndon B. Johnson, our 36th President. Interestingly, the term “church” is not defined in the Internal Revenue Code. Instead, the IRS relies on a form of pattern recognition, like an intelligent machine devised in a computer science lab. Fourteen “attributes” of faith-based institutions are applied, including a recognized creed, a distinct religious history, ordained ministers, established places of worship, a congregation, and regular religious services. An organization that exhibits a cluster of the highlighted attributes and also abides by the requirements bulleted above will be recognized as church. Such an organization does not have to formally seek a tax exemption. It is exempt. The organization may solicit donations, and the contributions it receives are entirely tax-deductible. Why, then, should it spend time and resources applying for tax-exempt status? A 501(c)3 public charity must make documents available for public inspection—why expose the institution to an intrusive, required audit should the IRS raise compliance issues? Additionally, the IRS recognizes group exemptions (www.irs.gov/pub/irs-tege/p4573.pdf). According to this stipulation, the local affiliates of a central organization do not each have to apply for a tax exemption. The governing body can obtain a group exemption letter for itself and its satellites. The group exemption applies to faith-based institutions. The Evangelical Lutheran Church in America and Catholic Charities are examples of denominations that have taken advantage of this rule. Given the availability of the group exemption for parishes that belong to a diocese, as well as the automatic exemption for faith-based organizations, why should an individual congregation consider applying for a 501(c)3? Essentially, there are two reasons: First, the 501(c)3 may be desirable as a management tool. Suppose a compassionate congregation decides to develop housing for homeless people or to open a day-care center? The parish staff may hold advanced degrees in divinity, but a priest or minister is not ordinarily trained to manage housing and child-care services. The most efficient way to proceed might be for the institution to create a spin-off to discharge what is essentially an ancillary mission. An executive director trained in social service delivery would be hired to run the program; the parish leaders would likely occupy seats on the board of directors. The housing or child-care program would develop a mission statement and apply for a tax-exemption as an independent public charity. The 501(c)3, in this instance, enables the parish to resolve the managerial dilemmas of a complex charitable activity. Second—and this is the most compelling reason for obtaining the 501(c)3—it may be a necessity given the scope and scale of your fundraising program. If you plan to apply for government or foundation grants, you will need to formally apply for tax-exempt status because large public and private funding agencies usually require the 501(c)3 as a condition of their support. There is a certain philosophy behind this requirement that is well worth thinking about. The government formally awards a tax exemption to encourage organizations to make a contribution to civil society. The 501(c)3 is fundamentally a contract between the government and the officers and board of directors of the exempt organization. In exchange for 501(c)3 status, the officers and directors, in effect, are commissioned to ensure that the agency is doing what it is charged to do by its mission statement. They are enjoined to perform the function of a public watchdog. The tax exemption is, therefore, a quid pro quo. That is why grant makers insist that grantees provide proof of 501(c)3 status as a matter of course. Faith-based organizations need not be deterred by the responsibilities inherent in formal tax-exempt status. Most of the conversations about seeking or not seeking the 501(c)3 occur when an organization of faith resolves to engage in social outreach for community improvement. My feeling is that the institution should conduct its social ministry in a nondenominational way, free of proselytizing. It should proceed on the understanding that its social services cannot be restricted to its own congregants and that, in the performance of human service, it cannot proselytize. Outreach services should be delivered without allegiance to creed. Most of us think of the word “service” in connection with things that are due us: room service, customer service, etc. There is a more traditional meaning of “service”: to serve, to give of oneself without thought of reward. This is the concept embodied, for example, in St. Ignatius’ Prayer for Generosity:
Social services performed in this spirit will not violate the responsibilities, stated and unstated, of a 501(c)3 public charity. So, do not be persuaded by salesmen attempting to market “faith-based” 501(c)3 application kits. Faith-based institutions are not required to have a formal tax exemption to solicit tax-deductible contributions. But they may want to secure the 501(c)3 for management and/or fundraising reasons. As Matthew Heyd, associate director of Trinity Grants Program, puts it, “I hear many parish leaders ask, ‘Do I need it or not?’ But they do not always know how to get an answer to the question. The legal answer is one thing, but the management answer is just as vital. if not more so. For those who have pursued a new 501(c)3, having the vision and capacity to support it after the filing occurs is essential.” And, if so, they need not fear the consequences of rendering unto Caesar. Or LBJ. -- Laurence A. Pagnoni, president * Research assistance for this article was provided by Sheldon Bart, LAPA’s grants officer. "ASK LAPA": Answers to Your Questions About Management and Fundraising Issues "Our parish is considering a capital campaign, but we are afraid it will decimate our annual stewardship pledge drive. What should we do?" - Reverend John Arthur Smith, New York City Religious organizations often face this concern. It is reasonable to worry that loyal parishioners might feel “maxed out” and even offended that they are being pressured into giving more than usual. However, honoring donors’ limits and inviting them to give without pressure are fundamentals of value-based fundraising. In short, don’t let your fear rule your decisions. Here are three things to consider which should lessen your concern: Timing: To avoid having your annual stewardship pledges compromised, pay close attention to the timing of each drive. The drive for the annual pledges should be far from the date for the drive for the capital campaign—six months apart is about right. Capital campaigns usually last three to five years, so creating a long-range calendar can help. Good Preaching about Stewardship: Another imperative is to tie the pastor’s sermons to the biblical basis for tithing and stewardship. The story of the Widows Mite can be used because the Widow gave from her need, not her surplus, so she is lauded as the most generous. If a congregation’s vision is raised to higher levels of thinking about money, then its behavior often is more likely to be forward-acting and generous. A Feasibility Study is essential: You won’t know if your concern is real or not until you conduct a feasibility study. The steps of a feasibility study include the following conducted by outside fundraising counsel:
Please know that our experience shows that the implementation of a capital campaign can actually enhance your overall fundraising program because it results in a more disciplined and diligent approach. During a campaign, data entry and quality control are high, as is staff support for enhanced communication and task-completion because fundraising council is hired to get these things done. A capital campaign is one of the most sophisticated exercises that an institution will ever conduct. Capital campaigns should be viewed as an opportunity for an institution to really “get into the game” and upgrade their entire fundraising strategy. Best of luck to you. -Ed Winters, MBA -- senior fundraising counsel See http://www.lp-associates.com/service_capitalcampaigns.php for more information on capital campaigns. If you have a question about capital campaigns, please contact Ed Winters at LAPA – (212) 932-9008, ext. 5 or ewinters@lp-associates.com LAPA Workshops for Nonprofit Executives
LAPA offers state-of-the-art workshops and you can bring one of them to your agency! (Laurence comes along for the ride too!) For example, on March 27, LAPA sponsored Joining the Pieces of the Puzzle: Government Grant writing in a Competitive Environment, a half-day workshop for nonprofit professionals to “brush-up” on best practices in government grant writing. Fifty-five attended and rated the seminar a 5 out of 5. And then again on April 12, NYU’s Heyman Center for Fundraising and Philanthropy presented; Is It Really All About the Money? The Board’s Role in Fundraising.This half-day seminar was an interactive workshop designed to assist executive directors, board members, and fundraisers in formulating a targeted board development plan for their organizations. The seminar was facilitated by Laurence Pagnoni, president of LAPA, and Michael Davidson, chair of Governance Matters, and 77 attended. Nonprofit executives from numerous sectors were present at both workshops, and representatives from the arts, education, social services, cultural organizations, hospitals and health agencies were all in attendance. Both workshops were sold out and the response was excellent. Laurence will be conducting two seminars in the fall at NYU’s Heyman Center for Philanthropy: one on the Board’s Role in Fundraising and the other on Capital Campaigns (dates to be announced). We hope to see you there! If you would like Laurence and/or one of LAPA’s many associates to speak at your organization, please contact Dwayne Sampson, Executive Assistant, at 212-868-4800, ext. 0. Give us the topic, and we will customize the training for your particular needs. A full list of our trainings can be seen here: http://www.lp-associates.com/service_traning.php LAPA News Laurence Pagnoni, LAPA’s president, recently joined the board of the Kirkridge Retreat Center, a retreat and study center located in the Pocono Mountains of Pennsylvania. For more information, go to www.kirkridge.org. Melissa Shurkin was promoted from senior associate to senior director of LAPA. Congratulations Melissa! Enid Harlow, senior grants officer, recently had a short play presented at a ten-minute play festival produced by NYC Playwrights. On June 3rd Enid’s one-act play, HOTEL WINDOW, will be shown at NY’s Studio Theatre as part of the Wonderland One-Act Play Festival, produced by You Are Here Productions. LAPA staff and associates may be reached as follows: Sheldon
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