What is the Johnson Amendment?

Congress was in the process of modernizing the tax code in 1954 when then-Senator Lyndon Baines Johnson offered a provision clarifying reasonable boundaries between electoral politics and tax-exempt activities, including religious exercise. It was so noncontroversial at the time that Congress incorporated the Johnson Amendment without extended debate and Republican President Dwight D. Eisenhower signed it into law. The Johnson Amendment bars 501(c)(3) tax-exempt organizations, including churches and charities, from directly or indirectly participating in political campaigns for or against candidates. Violations can, in theory, lead to loss of tax-exempt status or excise taxes, though such penalties have historically been rare.

Current Legal Status

The Johnson Amendment remains part of the Internal Revenue Code and still technically applies to all 501(c)(3) organizations, including churches, charities, and educational institutions. It continues to prohibit these organizations from directly or indirectly intervening in political campaigns for or against candidates. While the Johnson Amendment remains federal law and has not been repealed by Congress or struck down by the courts, its scope and enforcement—especially for churches—has been actively contested and narrowed through administrative and legal actions.

The 2025 IRS Consent Decree Controversy

The National Religious Broadcasters Case

On July 7, 2025, the IRS entered into a proposed consent judgment in National Religious Broadcasters, et al. v. Bessent (formerly v. Long), filed in the U.S. District Court for the Eastern District of Texas (Case No. 6:24-cv-00311-JCB). In this case, two Texas churches (Sand Springs Church and First Baptist Church Waskom), along with National Religious Broadcasters and Intercessors for America, challenged the constitutionality of the Johnson Amendment, arguing it violated their First Amendment rights to free speech and free exercise of religion.

Rather than defending the Johnson Amendment in court, the IRS agreed to a proposed consent decree stating that the Johnson Amendment, “as properly interpreted,” does not prevent a “house of worship” from speaking “to its congregation, through customary channels of communication on matters of faith in connection with religious services, concerning electoral politics viewed through the lens of religious faith.”

Scope and Limitations of the Proposed Decree

The proposed consent decree is formally narrow: it directly binds only the named plaintiffs in the case. However, it has prompted significant concern among nonprofit and church-state advocates that the IRS is effectively creating a de facto carve-out for all houses of worship without issuing formal nationwide regulations or guidance. Critics argue that once the IRS accepts this interpretation for specific plaintiffs, it would be exceedingly difficult to enforce the Johnson Amendment against other similarly situated religious organizations.

The decree’s language about “customary channels of communication” has proven particularly controversial. During oral arguments on November 25, 2025, Judge J. Campbell Barker questioned what activities would qualify under this broad language. While plaintiffs argued it is limited to worship services, critics note that in the modern era, “customary channels” could include livestreamed sermons on YouTube, podcasts, and other digital platforms accessible to the general public—not just congregants.

Opposition and Intervention Attempts

Americans United for Separation of Church and State (AU) sought to intervene in the litigation to oppose the consent agreement. On December 12, 2025, Judge Barker denied AU’s motion to intervene as a party, ruling that AU lacked a direct, legally protectable interest in the potential enforcement of the Johnson Amendment against the plaintiffs. However, the court allowed AU to file amicus briefs and participate in oral arguments.

In a letter dated November 20, 2025, six Democratic Senators and nine Congressional Representatives, including Representatives Jamie Raskin, Jared Huffman, and James Clyburn, along with Senator Ron Wyden, urged Acting IRS Commissioner Scott Bessent to withdraw the proposed consent decree. The letter argued that the decree would violate the First Amendment’s Establishment Clause and the Fourteenth Amendment’s Equal Protection Clause by creating exemptions for religious entities that are unavailable to secular nonprofits.

Current Status of the Case

As of February 2026, the case remains pending before Judge Barker. Americans United for Separation of Church and State did not appeal the denial of its intervention motion within the 60-day window, and the court reopened the case in early February 2026. A final decision on the proposed consent decree is anticipated before spring 2026.

Enforcement Trends and Political Context

Enforcement of the Johnson Amendment against churches was already extremely rare before the 2025 consent decree. A 2017 Trump executive order had instructed the Treasury Department to be lenient in applying Johnson Amendment rules to religious entities, effectively softening enforcement in practice. The current Trump administration has renewed political efforts to severely limit or repeal the Johnson Amendment.

However, Congress has consistently rejected attempts to repeal or modify the Johnson Amendment. The Trump administration’s approach through the consent decree has been criticized as an “end run around Congress” that attempts to achieve through litigation and administrative settlement what could not be accomplished through the legislative process.

New York State’s Legislative Response: The Nonpartisan Pulpit Act

In direct response to the federal developments, legislation was introduced in the New York State Legislature on August 13, 2025. Senate Bill S8475 (sponsored by Senator James Skoufis) and its Assembly companion bill A9067 (sponsored by Assemblymember Tony Simone), collectively known as the “Nonpartisan Pulpit Act,” would amend both the New York State Tax Law §27-a and the Real Property Tax Law §§420-a and §420-b.

Key Provisions

The legislation would suspend tax-exempt status at the state level for any nonprofit organization that engages in political campaign activities as defined under the law. Organizations found to be in violation would lose eligibility for:

• Sales and use tax exemptions

• Real estate tax exemptions

• Corporate tax exemptions under 20 NYCRR 1-2.11(b)(6)

The bills build upon previous New York legislation. During the first Trump administration, in 2019, then-Governor Andrew Cuomo signed legislation (S.4347/A.623) that codified the Johnson Amendment into New York law by amending one section of the state tax law. The 2025 legislation goes significantly further by creating comprehensive enforcement mechanisms and expanding the scope of tax exemptions that could be lost.

Definition of Political Campaign Activity

The legislation defines “political campaign activity” as “any action, communication or expenditure which constitutes participation or intervention, directly or indirectly, in any political campaign on behalf of or in opposition to any candidate for office.” Specifically prohibited activities include:

(a) Making, soliciting, or facilitating, directly or indirectly, any contribution to or for the benefit of any candidate for public office’s authorized political committee or political party.

(b) Publishing or distributing, by any medium, including but not limited to written, electronic or oral statements, that expressly advocate for the election or defeat of a clearly identified candidate for public office.

(c) Using or permitting the use of the organization’s assets, facilities, staff, mailing lists, websites or other resources to support or oppose a candidate for public office, except as explicitly permitted under the safe harbor provisions.

Permissible Activities and Safe Harbors

The legislation carefully delineates permissible activities that would not be considered political campaign activity, including:

• Engaging in lobbying or advocating for the adoption or rejection of legislation

• Conducting non-partisan analysis, study or research and making the results available to the public

• Providing non-partisan voter education

• Encouraging participation in the electoral process through non-partisan voter registration

Safe harbor activities are also defined, including:

• Candidate appearances—only if all candidates are invited to participate equally; no communication about the event favors one candidate over another; and political fundraising does not occur

• Providing goods or services to candidates—so long as those goods and services are made available on the same terms to all candidates and the provision is part of the organization’s regularly conducted activities

• Website content or links—so long as the information is provided equally to all candidates and is unbiased or presented in a manner that does not indicate support or opposition to a particular candidate

Impact and Enforcement

The legislation is expansive and would impact not only nonprofits domiciled in New York State but also non-domiciled organizations operating or holding assets in the state. Section 5 of the bill directs the New York State Department of Taxation and Finance to establish rules and regulations to administer and enforce the provisions.

Senator Skoufis stated: “Most New Yorkers want politics to stay where it is—in political debates, newspaper op-eds, and the comment section on Facebook. Not in museums, soup kitchens, and certainly not in churches.” Assemblymember Simone added that “Community organizations succeed when they remain safe havens from partisanship.”

Current Legislative Status

As of February 2026, both S8475 and A9067 remain pending in committee. Senate Bill S8475 is assigned to the Senate Rules Committee, while Assembly Bill A9067 is in committee in the Assembly. Neither bill has advanced to the floor for a vote in either chamber.

However, the lack of movement thus far suggests that the legislation may face significant political obstacles, particularly given concerns about enforcement against houses of worship and potential constitutional challenges.

The fate of the legislation may also be influenced by the outcome of the federal National Religious Broadcasters case. If Judge Barker approves the consent decree, it could strengthen arguments for state-level protections. Conversely, if the consent decree is rejected and the Johnson Amendment is upheld at the federal level, the urgency for state legislation may diminish.

Outstanding Questions and Concerns

Numerous concerns have been raised about New York’s effort to reinforce the Johnson Amendment at the state level:

Will Other States Follow?

A critical question is whether other states will enact similar legislation or whether New York will remain an outlier. If New York stands alone, the impact of the legislation may be limited, as organizations could simply avoid operating in New York or relocate their activities to other states.

Constitutional Challenges

If the U.S. Supreme Court takes up a Johnson Amendment case and determines—following reasoning similar to Citizens United v. FEC—that the Johnson Amendment violates nonprofit corporations’ right to free speech, state-level enforcement could be deemed unconstitutional as well. The proposed federal consent decree, if approved, could serve as a stepping stone toward such a Supreme Court challenge.

Practical Implementation Challenges

The safe harbors, while well-intentioned, may prove impractical when multiple candidates are running for the same position. For example, if ten candidates are running for a single office, must a nonprofit invite all ten to speak at an event to maintain safe harbor protection? What happens if some candidates decline to participate?

Enforcement Against Houses of Worship

The most sensitive question involves enforcement against religious organizations. Who will enforce the prohibitions if clergy endorse candidates from the pulpit? Will houses of worship actually lose their tax exemptions, potentially forcing churches, temples, and mosques to close their buildings as they lose valuable real estate tax exemptions? This scenario could create significant First Amendment concerns and political backlash.

De Minimis Standard

Is there a de minimis test that accounts for an isolated, errant comment by clergy or nonprofit leaders? The legislation does not explicitly address whether a single inadvertent statement would trigger loss of tax-exempt status or whether there is a threshold of activity required before enforcement action is taken.

Financial Impact

Democratic lawmakers have raised concerns about the fiscal impact of weakening the Johnson Amendment. The Congressional Joint Committee on Taxation estimated in 2017 that repealing the Johnson Amendment would cost taxpayers $900 million over 10 years. If the federal consent decree or state legislation leads to increased political activity by tax-exempt organizations, contributions could be redirected from taxable sources to tax-deductible donations, reducing tax revenue while subsidizing political speech.

Equal Protection Issues

If the federal consent decree is approved and applies only to the named plaintiffs, it could create equal protection violations by treating similarly situated organizations differently. Conversely, if other organizations successfully petition for the same exemption, it could lead to a cascade of litigation that effectively nullifies the Johnson Amendment without Congressional action.

Looking Ahead

As of February 2026, the fate of both the federal consent decree and New York’s Nonpartisan Pulpit Act remains uncertain. Judge Barker’s decision on the National Religious Broadcasters case is expected soon and will have significant implications for the future of the Johnson Amendment nationwide.

The New York legislation remains pending in committee. If enacted, it would create the first comprehensive state-level enforcement mechanism for Johnson Amendment principles, potentially serving as a model for other states—or standing as an isolated effort in a changing landscape of church-state relations and campaign finance law.

What is clear is that after 70 years of relative stability, the Johnson Amendment faces its most serious challenge yet. The outcome of this controversy will shape the intersection of tax policy, campaign finance, religious freedom, and the separation of church and state for years to come.

Sources

National Religious Broadcasters v. Bessent, No. 6:24-cv-00311-JCB (E.D. Tex.)

New York State Senate Bill S8475 (2025-2026)

New York State Assembly Bill A9067 (2025-2026)

Letter from Representatives Raskin, Huffman, Clyburn, and Senator Wyden to Acting Commissioner Scott Bessent (November 20, 2025)

National Council of Nonprofits, “Protecting the Johnson Amendment and Nonprofit Nonpartisanship”

Interfaith Alliance, “What is Happening with the Johnson Amendment?”

Tax Notes, “Parties Square Off in Johnson Amendment Oral Arguments” (November 26, 2025)

Tax Notes, “Organization Not Allowed to Intervene in Johnson Amendment Case” (December 12, 2025)

The National Law Review, “IRS Enters into Consent Decree Limiting Application of Johnson Amendment” (September 12, 2025)

Religious News Service, “Democrats urge Trump administration to keep ban on letting churches endorse” (November 20, 2025)

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New Foreign Qualification Requirement

Colorado now requires all charitable organizations registered or preparing to register to solicit charitable contributions in Colorado that are incorporated in a state other than Colorado to obtain a Statement of Foreign Entity Authority (foreign qualification to transact business or conduct activities in the state). This foreign qualification must be in place before the organization’s charitable solicitation registration or renewal will be approved. While this requirement has been statutorily required for many years (see CO Rev. Stat. § 7-90-801(5)), Colorado is only now beginning to actively enforce it.

If the organization is legally formed in a jurisdiction other than Colorado and is currently registered—or plans to register—to solicit charitable contributions in the state, it must complete the foreign qualification process first. 

New Registered Agent Requirement 

As a prerequisite for obtaining a foreign qualification, Colorado requires the appointment of a registered agent with a physical address in Colorado.  The registered agent may be an individual Colorado resident or a commercial registered agent service.

Certificate of Good Standing 

Although Colorado’s foreign qualification filing process does not require submission of a Certificate of Good Standing (also called a Certificate of Existence), all organizations must be in good standing in their home state to obtain a foreign qualification in Colorado. Good standing means (1) the organization has met its state filing obligations (such as filing of annual reports) in its state of incorporation and (2) the organization’s state of incorporation has not suspended, dissolved, or revoked the organization’s legal status. Accordingly, the organization should take steps to confirm that its home-state status is current and in good standing.

Ongoing Foreign Qualification Compliance: Colorado Periodic Report (annual report)

Once an organization is qualified to transact business in Colorado as a foreign entity, it must file ongoing Periodic Reports with the Secretary of State. This Periodic Report must be filed annually, in addition to the charitable registration renewal. 

State Filing Fees (current published amounts)

Colorado assesses the following filing fees for these required filings:

• Statement of Foreign Entity Authority (foreign qualification – one-time filing fee): $100 
• Periodic Report (annual filing fee): $25 

In practical terms, organizations should treat Colorado charitable solicitation compliance as a two-part filing process: obtain (and maintain) foreign qualification first (including maintaining a registered agent in the state), then proceed with charitable solicitation registration or renewal. Organizations registered to solicit in Colorado should review their current compliance status in the state and be prepared to meet any additional foreign qualification requirements to remain compliant.

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Here are five of the most frequently asked questions on cause marketing compliance that we are asked.  

1. When and where must a company be registered to conduct a charitable sales promotion (also known as a CCV)? What about the nonprofit beneficiary? 
2. Does a company need to register as a commercial co-venturer in every state that has a CCV registration requirement if it’s only conducting a charitable sales promotion on its website? 
3. What advertising disclosures must be included in a charitable sales promotion, and how can companies run into issues with their disclosures? 
4. What key strategies can nonprofits use to navigate unrelated business income tax (“UBIT”) issues during their cause marketing campaigns and corporate partnerships? 
5. What options are available for companies to engage with nonprofits that offer public visibility but are not subject to state CCV registration and reporting requirements? 

Navigating the compliance landscape of cause marketing can be complex. Still, the core goal remains the same: to ensure transparency, protect consumers, and make sure companies fulfill their commitments to nonprofit partners.

Cause marketing is powerful because it allows consumers to make a positive impact through their purchasing decisions. By proactively addressing registration requirements, providing clear disclosures, and strategizing with your nonprofit partner on the optimal campaign structure, companies can ensure that their campaigns are both effective and compliant with legal requirements. For more detailed answers to these questions and additional resources about cause marketing, visit the website of our long-term partner, Engage for Good — the leading community where cause meets commerce.

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Strategic Adaptations for 2026 and Beyond

To meet this evolving challenge, both sectors must adapt their partnership strategies.

For Businesses and Nonprofits

Implement “Bunching” Strategies

• Focus on negotiating larger, multi-year partnership commitments. This allows the company to concentrate contributions into specific tax years, ensuring the total donation clears the 1% threshold and maximizes the tax benefit.
• Explore Alternative Structuring of Cause Marketing Programs: Companies engaging in cause marketing can explore structuring of its cause marketing partnerships to generate royalty payments (in exchange for the use of the nonprofit’s name or logo) rather than traditional charitable donations, which may offer a different path for deductibility.

For Nonprofits

Deepen CSR Alignment

• Shift the focus from short-term campaigns to long-term partnerships that are inextricably linked to the corporate partner’s core values and robust CSR goals. Partnerships that demonstrate strong, long-term social impact will prove more sustainable than those driven purely by annual tax incentives.

By proactively adjusting their financial and engagement strategies now, both businesses and nonprofits can ensure their collaborations continue to thrive and generate meaningful impact despite the evolving tax rules.

This update was originally published in the December 2025 email newsletter of the firm’s long-term partner, Engage for Good— the leading community where cause meets commerce.

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Twenty-six states require fundraising counsel to register prior to providing services. The state’s interest is to protect charitable assets for their intended use and to ensure that donations contributed by state residents are not misapplied through fraud or other means.

Who Qualifies as a Fundraising Counsel?

A fundraising counsel (“FRC”) is generally a person or entity paid to plan, manage, advise, counsel, consult, or prepare materials for, or with respect to, a charitable solicitation. A fundraising counsel does not solicit contributions or have custody of solicited funds.  Most often, an FRC is paid a fixed fee or rate rather than a percentage of contributions collected. Consultants providing services that fit within the definition of a fundraising counsel, but who also solicit contributions, have custody of funds, or are compensated on a percentage basis may be considered “professional fundraisers” under some state laws. Professional fundraisers are subject to greater regulatory obligations, including obtaining bonds and filing detailed reports after each solicitation campaign.

Typically, an FRC provides strategic planning services with the goal of improving a charity’s fundraising activities in order to increase donations. States define “fundraising counsel” broadly, however, and thus FRC services include a variety of activities, such as the following:

• A company hired to design and manage a direct mail campaign
• A company hired to manage an annual fundraising gala
• An individual hired to design a digital fundraising strategy
• A firm hired to develop a major gift or capital campaign strategy
• An individual hired to prepare fundraising materials, including providing advice on how best to use the materials to maximize fundraising results
• An individual hired to coach an organization’s development staff or volunteers who are conducting peer-to-peer fundraising campaigns
• An online fundraising platform that is paid by a charity to help optimize its fundraising efforts. (This might include providing customized advice on how to better use the platform’s tools to maximize the charity’s fundraising success. Since each state has adopted slightly different definitions of “fundraising counsel,” states may reach varying conclusions on a platform’s classification.)

Where Do Fundraising Counsels Need To Register?

The key question in determining whether a fundraising counsel must register is whether sufficient contacts exist between the fundraising counsel and the state such that it is not fundamentally unfair for the state to subject the fundraising counsel to its registration and reporting requirements. The fundraising counsel must purposefully avail itself of the privilege of conducting activities within the state. Several Supreme Court cases have addressed whether a fundraising counsel has enough contact with a state to be subject to its regulatory jurisdiction. Interpretation of these cases suggests the following takeaways:

• Fundraising counsel should register in the state where the charity is located;
• Fundraising counsel may have to register in the state where they are domiciled;
• Fundraising counsel that advise charities with respect to solicitation in particular counties, states or regions or that, in some other way, target a particular state with its fundraising counsel activities should register in the targeted states. For example, a fundraising counsel that, as part of managing a direct mail campaign, recommends specific donor mailing lists, should register in the states where the direct mail recipients reside.

Online fundraising platforms are often structured to avoid classification as a fundraising counsel. Common reasons for falling outside the fundraising counsel definition are either that the online platform is directed at providing technology rather than consulting services, or the platform does provide fundraising counsel services but is also collecting a percentage of funds raised, thereby triggering categorization as a professional fundraiser.

Determining whether an online fundraising platform is classified as fundraising counsel, and if so, where it should register, requires a nuanced analysis that takes into consideration published guidelines for state regulation of online fundraising. A concise analysis of this issue is contained in my colleague Karen Wu’s Nonprofit Times article A Moving Target: The regulation of online fundraising platforms

Fundraising Counsel Contracts

In addition to the registration requirements, state charitable solicitation statutes require that contracts between a charity and a fundraising counsel include certain provisions. Common contract provisions required by state statute including the following:

• Legal name/address of the charity
• Statement of the charitable purpose for which the solicitation campaign is being conducted
• A clear statement of the fees to be paid to the fundraising counsel
• The effective/termination dates of the contract
• A statement that the fundraising counsel will not have control or custody of funds
• A statement that the charity exercises control and approval over the content, volume and/or frequency of any solicitation
• California and New York require lengthy cancellation provisions designed to allow the charity cancel the contract within 10-15 days of signing without penalty
• Several states require the contract to be signed by two authorized officials of the charity

The services fundraising counsel provide can be of great value to nonprofit organizations. Understanding the regulatory framework governing fundraising counsels will help you avoid missteps that can lead to actions by state regulators, including fines and penalties. It is incumbent on both the fundraising counsel and its charity clients to take the steps that ensure compliance under state charitable solicitation laws seriously. If in doubt, it’s always a good idea to seek counsel.

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Attending the annual NAAG/NASCO Charities Conference is the perfect opportunity to understand what truly matters to charity regulators. This yearly event brings together state charity officials and nonprofit leaders to discuss oversight, compliance, and the charitable sector’s overall health. This year’s meeting in Columbus, Ohio, clearly showed that enforcement expectations remain a priority even as nonprofits face unprecedented operational and political challenges. 

The Regulator’s Lens: Practical Duties Over Abstract Ideals

State officials emphasized four key boardroom priorities: (1) act with care, (2) remain committed to the mission, (3) follow governing documents and the law, and (4) manage the organization’s finances responsibly. Regulators look for disciplined decision-making, precise adherence to bylaws and filings, and budgets that align with program objectives. 

This practical approach to compliance also guides how states identify compliance issues. Regulators are increasingly analyzing public IRS data (Form 990s, the Master Business List, and similar sources) to find nonprofits that appear to be operating or soliciting without being properly registered to solicit. If you’re fundraising nationwide, you can assume your filings are being reviewed across jurisdictions and that outreach may occur before any complaints are filed. 

A Sector Under Strain

Conference sessions ranged from fundraising practices, the role of religious organizations, and complex organizational structures. Throughout, the message was clear: charities face a loss of funding, legal and political hurdles to DEI initiatives, and possible threats to their tax-exempt status. Many organizations are responding by refining program design, renegotiating grants, training staff, and adjusting public-facing language to mitigate risks. 

The consensus is that the sector is on the brink of rapid contraction. This means fewer nonprofits, fewer services, and increased pressure on the organizations that do survive. As local and state governments attempt to fill this gap, there will be significant strains on the social safety net. In this environment, some organizations are reducing their strategic planning cycles from years to months as they wait for clearer funding signals. 

Regulatory Enforcement Remains Active

Despite the mounting pressures on the sector, state regulators continue to register charitable organizations, oversee charitable solicitation activities, and protect charitable assets. Recent multi-state enforcement actions, such as the settlement involving Kars-R-Us.com Inc. and its owners alongside 19 states and the FTC, underscore states’ significant effort to engage in coordinated enforcement to prosecute multi-state deceptive fundraising activities. 

What You Can Do Now 

Here are some practical tips to enhance your governance and compliance.

• Conduct a quick governance and filing audit. Ensure that your bylaws and board actions align with the information you report to the IRS and each state. Confirm that your charitable registrations cover the areas where you actually solicit and double-check that your budget accurately reflects your programming mix. These are the first areas regulators will examine—and they’re the easiest places to get right. Please read our article Consider a Nonprofit Legal Audit to learn more.
• Think of your Form 990 as a multi-state postcard. If it indicates activity that suggests solicitation or programs in a state, ensure that your filings and website disclosures are aligned. If you notice a gap, consult an attorney or the relevant office to determine the best course of action to address it. 
• Tighten program and grant documents to address today’s risks. Wherever you use terms that could be read politically or legally (DEI, immigration, safety protocols), define them, tie them to applicable law, and train your staff. Where you rely on partners, embed compliance expectations and reporting in the agreement, but keep it operational rather than aspirational. 
• Keep the language used with your audience straightforward. Public materials should reflect your legal reality: who you are, where you work, what you do, and under what rules. If a sentence makes your general counsel raise an eyebrow, your regulator might raise two.  
• With funding in flux, adopt a rolling three-to-six-month plan that prioritizes core services, documents compliance assumptions, and allows for flexibility and adaptation. That cadence helps boards fulfill their duties without overpromising. 
• If key funding cuts are straining your organization’s financial viability, consider the strategic options to ensure that you can continue providing critical programming to those your organization serves, including a possible merger or similar transaction with an organization providing similar or complementary services. Please read our article The Next Phase – Nonprofit Mergers & Acquisitions to learn more.

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ABC Foundation (the “Foundation”) is a private foundation in a major city in the United States. The Foundation has been renting office space in the city’s commercial district, for which it has entered into a lease with an unrelated third party at a market rate. The Foundation is expanding, and its staff requires additional space, actively seeking office space in the local area. One of the Foundation’s directors informs the Executive Director that his son owns a building in the heart of the commercial district and is willing to rent office space to the Foundation at a significantly discounted rate. Aside from the steeply discounted rent, the Foundation would reimburse the director’s son for its share of janitorial services. The Foundation’s Executive Director signs a lease for office space with the director’s son and has paid the necessary deposits.  

On its face, this hypothetical appears harmless. The Foundation stands to gain a significant financial benefit. Although it seems advantageous, this hypothetical contains a number of prohibited transactions under the United States Internal Revenue Code (the “Code”) known as acts of self-dealing. Before I explore why, let’s review the basics.

Self-dealing involves any direct or indirect transaction between a private foundation and a disqualified person that personally benefits the disqualified individual. The rules governing such transactions are meant to prevent insiders from improperly benefiting from the foundation’s assets.

More specifically, section 4941 of the Code imposes an excise tax on any “disqualified person” who engages in self-dealing with a private foundation and any foundation manager involved in such self-dealing. An initial tax of 10% of the transaction amount is applied to the disqualified person, while the foundation manager faces an initial tax of 5% of the same amount. If the self-dealing is not corrected, it results in a second-tier tax of 200% on the disqualified person and 50% on the foundation manager.

What is Self-Dealing?

Under section 4941 of the Code, the following transactions constitute acts of self-dealing. 

1. Sale, Exchange, or Leasing of Property

Any sale, exchange, or leasing of property between a private foundation and a disqualified person is considered self-dealing. 

2. Lending of Money or Other Extension of Credit

The lending of money or other extension of credit between a private foundation and a disqualified person constitutes self-dealing. However, loans without interest or other charges from a disqualified person to a foundation are exceptions if the proceeds are used exclusively for charitable purposes.

3. Furnishing of Goods, Services, or Facilities

The furnishing of goods, services, or facilities between a private foundation and a disqualified person is self-dealing unless they are provided by the disqualified person to the foundation without charge and used exclusively for charitable purposes.

4. Payment of Compensation

Payment of compensation or reimbursement of expenses by a private foundation to a disqualified person is self-dealing unless it is for “personal services” that are reasonable, necessary, and not excessive.

5. Transfer or Use of Income or Assets

 Any transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a private foundation is self-dealing. This includes transactions that affect the price of securities to benefit a disqualified person.

6. Payments to Government Officials

Agreements by a private foundation to make payments to government officials are self-dealing, with certain limited exceptions for specific types of payments such as scholarships or awards.

It’s important to understand that the self-dealing rules apply regardless of whether the transaction benefits the private foundation. There is also no minimum threshold—even minor transactions can trigger a violation.

Common Inadvertent Acts of Self-Dealing

Private foundations can inadvertently engage in self-dealing when attempting to operate efficiently or fulfill their charitable mission—often without realizing they’re crossing legal boundaries. Here are five common self-dealing transactions that foundations most commonly run afoul of.

1. Paying personal expenses of a disqualified person
2. Leasing office space from a disqualified person 
3. Loans between a foundation and a disqualified person
4. Excessive or improper compensation to a disqualified person
5. Improper use of foundation assets by a disqualified person

Who is a Disqualified Person?

Generally, a disqualified person regarding a private foundation is anyone or any entity that has significant influence over the foundation’s activities or finances, or who might improperly benefit from the foundation’s assets.

More specifically, section 4946(a) of the Code defines “disqualified persons” (for purposes of the self-dealing rules) as any of the following. 

1. “Substantial contributors” to the foundation. 

2. Owners of more than 20% of the (i) total combined voting power of a corporation, which includes voting power represented by holdings of voting stock, actual or constructive, but does not include voting rights held only as a director or trustee; (ii) profits interest of a partnership; or (iii) beneficial interests of a trust or unincorporated enterprise; if the corporation, partnership, trust or enterprise is a “substantial contributor” to the foundation.

3. Certain foundation managers

4. Family members of any individual described in paragraphs 1, 2, or 3 above. 

5. Corporations, partnerships, trusts, or estates in which persons described in paragraphs 1, 2, 3 or 4 above own more than 35% of the total combined voting power, profits interests, or beneficial interests, respectively.

6. Government officials

Under the Code, a foundation manager is an officer, director, or trustee of a private foundation (or an individual having powers or responsibilities similar to those of officers, directors, or trustees of the foundation). Generally, independent contractors, such as lawyers, accountants, and investment managers and advisors, acting in their respective capacities as such, are not considered officers of the foundation they advise. 

The Code defines “family members” as spouses, ancestors, lineal descendants, and spouses of lineal descendants of substantial contributors, foundation managers, and 20 percent owners. Legally adopted children of an individual are the lineal descendants of the individual under this definition. The notable exception here is siblings. Siblings of anyone in the first three categories are not considered disqualified persons.

Key Exceptions to the Self-Dealing Prohibition

Although the self-dealing rule is broad, there are several important exceptions to it.  These include the following.  

1. A disqualified person can loan funds to a private foundation provided the loan is without interest or charge and the proceeds are used exclusively for charitable purposes. 
2. The furnishing of goods, services, or facilities by a disqualified person to a private foundation is not an act of self-dealing if the furnishing is without charge and if the goods, services, or furnished facilities are used exclusively for charitable purposes. 
3. In addition, the furnishing of goods, services, or facilities by a private foundation to a disqualified person is not an act of self-dealing if such furnishing is made on a basis no more favorable than that on which such goods, services, or facilities are made available to the general public. 
4. A foundation’s sharing of office space, equipment and supplies, support staff, and group insurance with a disqualified person is not an act of self-dealing when the foundation contracts with and pays for such services, etc., directly to lessors and vendors who are not disqualified persons. 
5. Generally, naming opportunities and favorable publicity that benefit a disqualified person due to the private foundation’s payment or grant are considered incidental and tenuous benefits that do not give rise to an act of self-dealing.
6. The payment of compensation (and the payment or reimbursement of expenses) by a private foundation to a disqualified person for personal services that are reasonable and necessary to carry out the exempt purpose of the private foundation is not an act of self-dealing if the compensation (or payment or reimbursement) is not excessive. For example, legal services and investment counseling are considered personal services; however, it is prudent to consult with legal counsel to determine what types of services can be considered personal services.

Correction

The Code allows a private foundation to “correct” an act of self-dealing by undoing the transaction to the extent possible, but in any case, placing the private foundation in a financial position not worse than that in which it would be if the disqualified person were dealing under the highest fiduciary standards. Returning to our hypothetical situation, we can now re-evaluate which options would and wouldn’t be considered self-dealing.

The director’s son, who owns the office building, is a disqualified person in relation to the Foundation. Therefore, he cannot rent space to the Foundation for a fee, no matter how favorable the deal might be for the Foundation. Furthermore, the Foundation cannot reimburse the director’s son for the janitorial expenses; this would be considered self-dealing even though it is only paying its share of the expense. Had the Foundation paid its share of the janitorial services directly to the vendor, that may have been allowed. Several individuals and entities, including the executive director of the Foundation, and the son of the director, who owns the building, could face excise taxes.

In Closing

Sometimes doing a good deed isn’t that simple. Given the complex and extensive tax rules that govern self-dealing transactions, foundations and their disqualified persons should proceed cautiously and seek proper tax guidance before engaging in transactions with disqualified persons.

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Legal audits may be particularly timely when an organization undergoes significant organizational changes, including leadership changes, a potential merger or acquisition, or preparation to enter a major growth phase.

Key Areas Covered in a Legal Audit

A legal audit reviews an organization’s compliance and organizational health across a variety of key areas, including the following:

1. Corporate Governance

• Review of articles of incorporation and bylaws
• Verification of current board members and officers
• Board meeting minutes and adherence to governance policies
• Conflict of interest policy and disclosures

2. Tax-Exempt Status and IRS Compliance

• IRS determination letter (501(c)(3), etc.)
• Annual filings (Form 990 or equivalent)
• Compliance with public support test (if applicable)
• Unrelated Business Income (UBI) issues

3. Employment and Labor Law

• Employee vs. independent contractor classification
• Employment contracts and offer letters
• Compliance with wage, hour, and anti-discrimination laws
• HR policies, employee handbook, and training procedures
• Volunteer agreements and waivers

4. Fundraising and Charitable Solicitation

• State charitable registration compliance (multi-state if applicable)
• Donor acknowledgment letters and receipts (substantiation)
• Restricted vs. unrestricted funds tracking
• Compliance with fundraising regulations and platforms

5. Contracts and Agreements

• Review of leases, vendor contracts, MOUs, and grant agreements
• Intellectual property ownership (e.g., logos, content, trademarks)
• Confidentiality and data-sharing agreements
• Insurance policies and liability coverage

6. Financial Oversight and Internal Controls

• Financial policies and procedures
• Audit requirements and practices (external or internal)
• Recordkeeping and document retention policies

7. Risk Management and Insurance

• General liability, directors & officers (D&O), and other coverage
• Event liability and waivers
• Crisis management and disaster recovery plans

8. Privacy, Data, and Technology

• Data privacy and cybersecurity practices
• Website terms of use and privacy policy
• Compliance with applicable data protection laws (e.g., GDPR, CCPA)

Deliverables of a Legal Audit

The findings of a legal audit are often summarized in key documents that allow the organization to make decisions on next steps, and may include the following:

• Audit report summarizing findings and recommendations
• Compliance checklist for ongoing monitoring
• Action plan with prioritized legal fixes
• Updated or new policies, procedures, or templates

The Importance of a Proactive Approach to Compliance

In today’s complex regulatory environment, nonprofit organizations must actively manage legal compliance to protect their mission, reputation, and tax-exempt status. A legal audit provides a structured opportunity to evaluate vulnerabilities, adopt best practices, and strengthen organizational governance. By identifying and addressing potential legal risks early, nonprofits can prevent costly issues and build a solid foundation for long-term success. Whether preparing for growth, funding opportunities, or ensuring daily compliance, a legal audit is a valuable tool for any organization dedicated to operating with integrity and impact.

The post Thinking about a Compliance Check-Up?  Consider a Nonprofit Legal Audit. appeared first on Perlman & Perlman.

How the New Law Defines a “Foreign Source of Concern”

According to Senate Bill 700, a “foreign source of concern” means any of the following:  

1. The government or any official of the government of a foreign country of concern; 
2. A political party or member of a political party or any subdivision of a political party in a foreign country of concern;
3. A partnership, an association, a corporation, an organization, or other combination of persons organized under the laws of or having its principal place of business in a foreign country of concern, or a subsidiary of such entity;
4. Any person who is domiciled in a foreign country of concern and is not a citizen or lawful permanent resident of the United States;
5. An agent, including a subsidiary or an affiliate of a foreign legal entity, acting on behalf of a foreign source of concern; or
6. An entity in which a person, entity, or collection of persons or entities described in paragraphs 1-5 above has a “controlling interest”. ¹

“Foreign countries of concern” are designated as the People’s Republic of China, the Russian Federation, the Islamic Republic of Iran, the Democratic People’s Republic of Korea, the Republic of Cuba, the Venezuelan regime of Nicolás Maduro, or the Syrian Arab Republic, including any agency of or any other entity under significant control of such foreign country of concern. See Fla. Stat. § 286.101(1)(b).

Potential Penalties for Noncompliance

For a first violation of the new law, the Florida Department of Agriculture and Consumer Services (“Department”) will not take punitive action if the charitable organization satisfies all of the following requirements:

1. Provides the Department with a solicitation or contribution form containing an attestation from such foreign source or country of concern in which the person, country, or entity falsely certifies that they are not a foreign country of concern or a foreign source of concern;
2. Provides the Department with a copy of a refund to the foreign source or country of concern within 30 days after notification by the Department of the prohibited act; and
3. Provides the Department with a plan of action to prevent the charitable organization from accepting contributions from a foreign country or source of concern in future solicitation activities.

Note that the requirements to avoid any punitive action on a first violation are so specific that the organization could really only avoid a punitive action by taking proactive steps to implement measures to comply with the new requirements. A second or subsequent violation may lead to additional consequences, including financial penalties and/or cancellation of the organization’s charitable solicitation license. 

Establishment of an “Honest Services Registry”

The law requires the Department to establish a voluntary “Honest Services Registry” accessible on its website. This registry will provide Florida residents “with the information necessary to make an informed choice when deciding which charitable organizations to support.” 

Charitable organizations can be listed on the Honest Services Registry by submitting a form prescribed by the Department with an attestation statement confirming that the organization does not accept or solicit contributions, funding, support, or services from any foreign source of concern, directly or indirectly. The organization must also certify that a foreign source of concern does not influence its messaging and content. 

New Registration Attestation Requirement

Additionally, the law requires charities to include attestations as part of their charitable registration filing in Florida, confirming they are either not involved in state and local election-related activities (including organizations that are prohibited by federal or state law from engaging in such activities) or, if they are engaged in election-related activities that would require registration with the Florida Department of State, that they are properly registered.

Tips for Complying with Senate Bill 700

Organizations should consider taking steps to ensure their compliance with the new requirements in Florida Senate Bill 700, which may include the following:

• Revise your solicitation materials, including disclosures on your organization’s website donate page or third-party fundraising platforms, to include an affirmation statement confirming that the person making a donation is not a foreign source of concern.
• Coordinate with online donation vendors to block contributions originating from addresses in foreign countries of concern.
• Review and return any donations from foreign sources of concern that the organization receives in response to solicitation efforts targeting Florida. 
• Educate your board, fundraising staff and volunteers on the new rules and update your gift acceptance policies accordingly so that everyone involved in fundraising can spot prohibited foreign donors and the proper process for declining or refunding such gifts.

1. The term “controlling interest” means the possession of the power to direct or cause the direction of the management or policies of an entity, whether through ownership of securities, by contract, or otherwise. A person or an entity that directly or indirectly has the right to vote 25 percent or more of the voting interest of the company or is entitled to 25 percent or more of its profits is presumed to possess a controlling interest. ↩︎

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This article highlights the key characteristics of different M&A transaction options, outlines strategic questions to ask to help identify the best transactional structure for your nonprofit, and reviews essential due diligence steps to follow. 

Structural Options
Mergers and acquisitions often appear similar because both are frequently announced as the combination of two organizations. However, the differences in these transaction structures carry significant legal implications, so understanding those distinctions is essential for deciding which is best for your nonprofit. A subsidiary restructuring is another frequently used option.

Merger
A merger is a legal combination of two or more entities into one. In a merger, the surviving corporation assumes all the non-surviving entity’s rights, assets, and liabilities. A nonprofit merger offers the advantage that any bequests or future gifts will go to the surviving organization. While this could be a significant benefit for organizations with a history of regularly receiving such planned gifts, many nonprofits do not have a history of receiving such gifts. Additionally, mergers come with the notable downside that all potential future claims and liabilities will persist within the merged entity. 

Acquisition (or Asset Transfer)
Unlike a merger, in an asset transfer acquisition, there is no automatic legal succession to all rights and obligations. Instead, only the transferor’s specifically identified assets and liabilities are transferred. The actual legal nature of the transaction is often a dissolution under applicable state law, where the asset transfer occurs as part of a dissolution proceeding. Acquisitions or asset transfer transactions are popular choices for organizations looking to expand their programs and assets but want to avoid the risk of taking on another organization’s liabilities. However, a nonprofit must take reasonable steps to address known and unknown liabilities before dissolving. 

Subsidiary Restructuring
Some organizations opt to bring another organization under its control through a subsidiary restructuring while continuing to operate as separate tax-exempt nonprofits. This structure might be chosen to keep the liabilities of different programs separate or to maintain distinct brand identities, while also benefiting from the cost efficiencies of a combined legal structure that often includes a cost-sharing or shared services arrangement. A subsidiary restructuring can be achieved by making one entity the sole member of the other. The “parent” nonprofit, as the sole member of the subsidiary, would have specific statutory rights regarding the “subsidiary” nonprofit, such as the right to elect the subsidiary’s directors and approve certain key corporate actions or transactions (e.g., mergers, asset transfers, dissolutions, and amendments to the certificate of incorporation). Additional rights may be granted to the member through the subsidiary’s certificate of incorporation or bylaws. However, the subsidiary’s board of directors is the legal fiduciary body responsible for overseeing the activities of the subsidiary, and appropriate corporate formalities must be maintained to ensure separation of liability between the parent and subsidiary. 

Strategic Questions
Deciding if a merger or acquisition is the right next step for your organization involves asking specific key questions.

• Will the transaction allow us to accomplish our mission better?
  Consider whether the transaction will help the organization enhance its services and program offerings or expand the reach of its programs.
• Will the transaction improve our operational and financial efficiency?
  Combining two smaller organizations or bringing a smaller organization’s programs into the operational framework of a larger organization can reduce the administrative costs necessary to support the combined programs.
• Do the organizations have sufficiently compatible organizational cultures and values?
  This question is particularly relevant if certain staff members or board members will move from one organization to the other as part of the transaction, which is often — though not always — the case.
• How much would the transaction cost in legal and other fees?
  For smaller organizations, complex transactions may not be practical or cost-effective. In addition to internal approvals, which may include approval by the board of directors and any voting members, some states also require Attorney General or court approval. Additional regulatory approvals may also be needed, depending on the organizations involved (e.g., state and federal education agencies for schools). That said, combining two organizations’ programs under one legal entity (or other unified structure) could be a worthwhile upfront investment for long-term savings and mission optimization.

Key Due Diligence Considerations
Nonprofits considering a merger or acquisition should thoroughly review key risk areas before moving forward. Although the due diligence process will differ based on the nature of the transaction and your nonprofit’s role in it, the following are important issues a nonprofit should examine regarding its counterparty. 

Financial Health
Look for fiscal stability, donor concentration risks, and hidden liabilities.

Tax and Regulatory Compliance
Make sure the other organization has historically fulfilled its tax and compliance obligations. 

Governance and Operational Health
Confirm whether the other organization followed good governance (e.g., annual conflict of interest disclosures, maintaining minutes of Board meetings) and operational practices (e.g., proper management of HR matters, internal financial controls, and data security).

Contracts
Determine which agreements require affirmative consent to be transferred and which should and can be terminated, versus those that would be critical or beneficial to continue. 

Legal Proceedings
Review for any active or potential lawsuits or legal proceedings and evaluate their possible impact after the transaction.

Staffing/HR Considerations
Assess potential retention risks, including any necessary adjustments to ensure equal treatment among similarly situated staff members after the transaction.

Assets & Liabilities
Make sure you understand the assets and liabilities of the other party, including whether it holds clear title to its key assets (such as real property and intellectual property).  

Reputation
Verify that the other organization has a trustworthy reputation among its stakeholders and the public. 

Whether your organization aims to enter a strategic growth phase or establish a home for your key programs before winding down, nonprofit mergers and acquisitions can be an effective tool to help you reach your goals. By understanding how different M&A options impact your ability to achieve your objectives, your nonprofit can confidently step into the next phase.

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