“The Strike” – Non-Profit/Charity Law

(Thanks to longtime reader of the blog Samuel Weiss for making a joke about #GivingTuesday that became the idea for this post.)

In order to avoid giving holiday gifts to his coworkers, George sends letters to his colleagues claiming that “a donation has been made in your name to the Human Fund,” a fake charity he created to avoid giving real Christmas gifts. Later, Mr. Kruger gives him a check for $20,000 because he’s supposed to throw some of the company’s money at a charity. Could George face liability for violating non-profit law? How could he spend the money if he actually started a charity?

Charitable and non-profit organizations that intend to solicit contributions in New York are required to register with the state’s Charities Bureau. The registration must contain basic information, like the names and addresses of the founders, the name of the organization, and its stated purpose, i.e. “money for people.” Anyone who fails to follow the registration requirements can face criminal liability from the state.

It is clear that George did not register the Human Fund as a charity with New York state. Mr. Kruger confronts George with the news from accounting that there is no such thing as the Human Fund. But could there really be incoming criminal liability for George for his understated stupidity in failing to comply with the registration requirement?

Phil, loved those cigars. Incoming.

To begin with, George would almost certainly not face any liability for merely distributing the cards to his coworkers saying that he had made a donation in their name. While George may have violated social order (as he so often does) it does not appear that he violated any New York state law by merely telling his coworkers he gave their gifts to somebody else.

But once George received the donation from Mr. Kruger on behalf of Kruger Industrial Smoothing, this may trigger the registration requirements. This is because George has now actually received a financial contribution.

Nevertheless, it seems likely that George has a number of defenses.

The first is that when he started this whole scheme, he had no intent to solicit contributions. He only wanted to avoid giving his coworkers holiday gifts. Since he had no intent to solicit donations, and one just happened to fall into his lap, then he should not be obligated to register with the state. George’s second defense would be that since he never cashed or deposited the check, there was never any contribution to begin with.

You wanna give something back? Start with the $20,000.

Finally George also benefits from a clause built into the New York registration law, which exempts any non-profit that receives less than $25,000 in contributions per year from the registration requirements. Since the only donation is the $20,000 from Mr. Kruger, George would not need to register the Human Fund with the state until he received another $5000 and actually started to become a kick ass philanthropist.

If George did follow through on his decision to become a philanthropist, then he could apply for 501(c)(3) tax status with the IRS. This would permit anyone who donated money to the Human Fund to deduct the contribution from her taxes, and exempt the Human Fund from having to pay taxes as well. The only two requirements are that George use the money in accordance with the Human Fund’s stated mission of “Money for People” and that he not withdraw money from the Human Fund as profits for his personal use.

George does not actually create the Human Fund, but we have some indication of how he would operate his non-profit. He says that he “would have all this money, and people would love me. Then they would come to me.. and beg! And if I felt like it, I would help them out. And then they would owe me big time!” Is there anything wrong with running a non-profit organization this way?

I think I could be a philanthropist. A kick-ass philanthropist.

George would certainly be abusing his position to curry favor with those he helps out, but there might not be anything technically illegal at work here. As head of a non-profit, George would be free to use discretion with whom he helps out (assuming he complies with any anti-discrimination laws) and he can benefit from all the love and adoration that comes with being a wealthy philanthropist. George might run into trouble if he really means that people will “owe [him] big time,” but this might just be George getting all lathery and excited and not really meaning what he is saying.

George would even be permitted to hire a driver, so long as it was related to his work with the Human Fund. In recent year, some major non-profits have faced public pressure to minimize lavish spending on overhead and administrative costs. But so long as the spending is towards the central missions (which includes employee expenses), George is free to use the money as he sees fit.

Even though George did not register his non-profit with New York state, he likely won’t face any criminal liability since he did not solicit donations nor did he receive donations totaling more than $25,000. If George did want to become a philanthropist, he would have to register with the state and could also seek tax-exempt status by filing a 501(c)(3) application with the IRS. George may not have violated the law, but he definitely did not uphold the Christmas Spirit of giving an eye for an eye when he pretend gave his coworkers’ gifts to other people.

I got him Yankee tickets. He's saying, "I gave your gift to someone else."

4 thoughts on ““The Strike” – Non-Profit/Charity Law

  1. Love this! So if George did deposit the check, even though he wouldn’t have to register the “charity”, would he have to prove he’s using the money for the “charity” mission? Could he potentially deposit the money into his own account and use it for personal expenses if he paid taxes on it?

    1. Thanks for loving the blog! And great question. I would think that if he accepted donations claiming to represent a non-profit but then used those for personal expenses (like rent or to buy dinner for his friends) he would be liable for fraud.

  2. Interesting. But this was all about New York. What about federal law and the IRS? Registering as a 501(c)3, issuing receipts, and such?

    1. Thanks for reading!

      So we did go into some detail about how George could operate The Human Fund if he did decide to register as a 501(c)(3) organization. That analysis begins with “If George did follow through on his decision to become a philanthropist…”

      Honestly, we are not totally familiar with all the IRS regulations of how to operate a non-profit and thankfully George did not actually register with the IRS so none of those rules would apply to him either. But if they ever do a reunion show, and George is now a wealthy philanthropist, you can be sure we will breakdown whether he is appropriately operating his charity with the IRS regulations.

      Hope you enjoy our future posts!

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