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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Nonprofits and for-profits (in this article, “Brands” for easy reference) can collaborate in a number of ways to benefit both organizations. Nonprofits benefit by receiving financial support and access to a wider audience. Brands benefit from the goodwill generated by supporting a charitable cause, while simultaneously furthering their own purposes. These collaborations may take a number of forms. (For further reading, see  articles on our website , Selfish Giving, and Engage for Good’s online resource Cause Marketing and the Law).

We’ve recently seen a number of nonprofits expand their efforts to more consciously address online collaboration. In this article, I provide a refresher to clarify where the IRS draws the line on these types of partnerships. Understanding this line can help Brands to maximize their benefits and charities to avoid unwanted tax consequences.

What are Qualified Sponsorship Payments?

A typical strategy for Brands and nonprofits to collaborate is through sponsored events. While the pandemic has thrown traditional fundraising events for a loop, many nonprofits have pivoted to digital engagements or are now beginning to plan live events again as vaccination rates rise. Whether an event is digital or live, many nonprofits underwrite their events with support from Brand sponsors. In exchange for this support, Brands typically receive certain benefits. Those benefits may include a page in the event program, placement of their logo on the step-and-repeat, or a booth at the event. In the virtual context, Brands may get a shout-out or other acknowledgment during the event, in thank-you emails to attendees, or in press releases issued by the nonprofit.

If a nonprofit wants to avoid tax on the sponsorship payments that are received in exchange for certain benefits to the Brand, one strategy is to ensure that the payments qualify as “Qualified Sponsorship Payments”, the term used in Section 513(i) of the Internal Revenue Code. In order to be categorized as a Qualified Sponsorship Payment, the payment must be made without any arrangement or expectation of a “substantial return benefit.” Payments made in return for advertising or marketing services may constitute a substantial return benefit, and cause the payment to be subject to tax under the IRS’s Unrelated Business Income Tax (“UBIT”) rules.

So when does including a Brand’s logo in the nonprofit’s event, or allowing the Brand to have a booth or table at the event, constitute a “substantial return benefit”? Fortunately, the IRS has provided guidance on this question. According to the IRS, one way to avoid providing the Brand a “substantial return benefit” is for the Brand and nonprofit to avoid language that “promotes or markets any trade or business”. The IRS goes on to provide several examples of activities that are allowable under the qualified sponsorship rules, including:

• Distributing a Brand’s products to the general public at the event, either for free or purchase
• Including a Brand’s logo, slogan, address(es), telephone number, descriptions of a Brand’s product line or services, PROVIDED that all the foregoing do not include any comparative or qualitive descriptions of the Brand’s goods and services.
• Exclusive sponsorship arrangements (i.e., having a Brand be the only bakery sponsoring the event. NOTE – this is different than an exclusive provider arrangement, described below)

The IRS, in its guidance, also describes what types of messaging and activities are considered “substantial” return benefits for Brands and therefore NOT qualified sponsorship activities, including:

• Advertising for the Brand (messaging that promotes or markets a Brand, including messaging that contains comparative or qualitative descriptions of the Brand’s goods/services)
• Exclusive provider arrangements that limit the sale, distribution, availability, or use of competing products/services in connection with the nonprofit’s event/activities (i.e., having a Brand be the sole provider of cookies for an event. NOTE – this is different from the exclusive sponsorship arrangements, described above)

Social Media Considerations

Many Brands and nonprofits have begun to include social media posts as part of their messaging around events and partnerships. In addition to concerns about UBIT and qualified sponsorships, Brands and nonprofits have to be wary of rules implemented by the social media platforms (Instagram, Twitter, and TikTok, for instance) and guidelines issued by the Federal Trade Commission.

Nonprofits often thank their Brand sponsors for their support. It’s important that the language included in those posts is agreed upon by the Brand and nonprofit, and is vetted to make sure it doesn’t amount to an advertisement or endorsement of the Brand’s products or services. Similarly, when a Brand posts to highlights its support of the nonprofit, the parties should ensure that the post doesn’t create the implication that the nonprofit is endorsing the Brand’s products.

Brands and nonprofits also have to make sure their posts include appropriate disclosures to put their respective followers on notice that the content they are posting is part of a partnership. How those disclosures should be structured depends on the platform and the nature of the post, but has to be clear enough so that the posts comply with the platforms’ rules and the FTC’s guidelines.

If the Brand and nonprofit have brought a celebrity or influencer into the event to help raise its profile, the same general principles apply to the influencer’s posts. The Brand and nonprofit should make sure there are contractual provisions as well as practical guidelines provided that clarify what the influencer can and cannot post, how those posts should be timed and structured, and what material disclosures must be included.

Advice for Brands and Nonprofits

Brands and Nonprofits need to carefully review their contracts and social media posts to ensure they are not violating the rules regarding Qualified Sponsorships or social media platform disclosures. All posts made by the nonprofit thanking the Brand should avoid any qualitative language. Here are two sample statements to differentiate between comments that could be considered advertising vs. those that are just acknowledgments:

• Acknowledgment – NONPROFIT thanks BRAND for their steadfast support of our event. With BRAND’s support, we raised $100,000 in furtherance of our mission to end childhood hunger.
• Advertising – NONPROFIT thanks BRAND, purveyor of the best chocolate chip cookies in the NYC-area, for their support of our event. BRAND is one of the best companies and we thank them for their continued support. Find their cookies available for delivery at [WEBSITE].

In the second statement, the nonprofit used qualitative language around the Brand and its products. It also made a general comparative characterization of the Brand and linked to the Brand’s website, not for general informational purposes but to encourage viewers to order the Brand’s products. The second statement would be considered advertising, and could trigger UBIT for the nonprofit. The first statement merely identifies the Brand as a supporter of the nonprofit and its mission, and would be considered an acknowledgment.

In the contract governing the sponsorship or collaboration, the nonprofit should include restrictions on the Brand’s ability to use the nonprofit’s name and trademarks. For instance, the nonprofit should include a clause that prohibits the Brand from using pictures and videos from a nonprofit’s event in the Brand’s television, print, or social media advertising to promote its products or services. If a Brand seeks to incorporate the nonprofit’s photos and videos into content that highlights the Brand’s social mission and corporate responsibility, the nonprofit should carefully define the limits of that right to avoid an inadvertent endorsement.

The Brand and nonprofit should also consider how to enforce their contractual rights with regard to one another and any social media personalities that are part of the event. Payments can be delayed until after certain deliverables, to ensure all parties remain in sync in the run-up to the event. The parties should also consider the duration of their contractual rights –event contracts often terminate immediately upon the completion of the event, but if the parties are allowed to use each other’s names and logos even after the event is over, the contract should cover that ongoing use.

In order to manage the logistics of the event and the many deliverables that are included in sponsorship agreements, Brands and nonprofits can designate point people to review and approve deliverables. Specifying in the contract who the points-of-contact will be, as well as the required turnaround times, will help ensure the parties remain on good terms and maximize the event’s potential.

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Are you looking for answers to legal questions that arise in cause marketing and corporate partnerships?  If so, look no further!

Last year, Selfishgiving.com founder and blogger  Joe Waters and I distributed a five-question survey to businesses and nonprofits regularly engaged in cause marketing and corporate partnerships, asking them to share their top legal compliance questions and challenges.  After reviewing the survey responses, we decided to create a series of blog posts to address the most common corporate partnership legal compliance questions covering four issue categories: (1) Advertising Disclosures; (2) Registration and Reporting Requirements; (3) Contracts; and (4) Unrelated Business Income Tax (UBIT).   I hope you will find these FAQs useful in helping to navigate the legal and regulatory issues that arise as your company or charity engages in corporate partnerships.

Click on the FAQ headers below to read the answers to each question, which are posted on SelfishGiving.com, and sign up for Joe’s informative and entertaining weekly email newsletter, which has all the latest trends and strategic advice about cause marketing and corporate partnerships!

Part 1: Advertising Disclosures

1. Are cause marketing advertising disclosure “best practices”  required by law? Some of our corporate partners think they are just “suggestions.”
2. What if a company insists on structuring a campaign where the donation is based on a percentage of its profits, rather than a percentage of the purchase price?
3. Have any companies gotten into trouble with regulators for failing to include certain information in their cause marketing advertisements?
4. Advertising disclosure problems only present a real legal risk to the corporate partner, not the charity, right?
5. Can the company simply state on the hang-tag or store signage, “10% of the purchase price will be donated to ABC Charity, see www.company.com/ABCCharity for details,” and then include the website URL where the minimum guarantee and/or donation cap can be found?

Part 2: Registration and Reporting Requirements

Company FAQ

1. Our company is conducting its first ever cause marketing campaign. I heard that we may need to file state registrations. How do I know if I need to register, what does it entail, and how long will it take?  Note: The answer to this includes a chart on the state registration and reporting requirements applicable to companies acting as commercial co-venturers.
2. I operate a small e-commerce business in Massachusetts that sells clothing online, and would like to run a promotion in which the company will donate $5 to a local, nonprofit homeless shelter for every special edition T-shirt sold through our website. Does my company need to register nationally? What, if anything, does the nonprofit need to do?  Note: The answer explains how to determine the parties’ fundraising compliance obligations specifically in the context of an online cause marketing promotion.
3. Our company’s cause marketing campaign launched last week and we just found out we are supposed to register in certain states as a commercial co-venturer! Are we going to face fines or other penalties?

Charity FAQ

1. Our charity was asked to be the beneficiary of a company’s charitable sales promotion, but we’ve never engaged in a cause marketing campaign before. What do we need to be aware of before we proceed with this opportunity?
2. Our nonprofit is already registered nationally, and discloses all of its CCV partners as part of our annual charitable solicitation registration renewals, so we should be set with our CCV-related compliance, right?  Note: The answer includes a chart on the state reporting requirements applicable to charities that have entered into a CCV agreement.
3. Our charity was approached by a start-up company that wants to conduct a cause marketing campaign to benefit our organization. When we told them they may need to register with certain states and obtain bonds, they were concerned about the cost and burden of compliance. We don’t want to lose the opportunity to build a partnership with this company. What can we do?

Part 3: Contracts

1. We are entering into a cause marketing promotion in which our charity will receive a portion of the proceeds from the sale of each Sellco product. SellCo sent us a draft contract to sign. It seems to describe the promotion the way we discussed it. Should we go ahead and sign it?
2. What provisions should be included in our cause marketing agreement? Note: The answer includes a 15-point cause marketing contract checklist!
3. Is there a way to streamline the preparation of cause marketing agreements so they are compliant with all 50 states’ laws as well as for online sales?
4. Our corporate partner wants to enter into a multi-year relationship that includes a significant financial commitment, and will involve numerous customer activations.  Only the details for the first activation have been solidified. How do we draft an agreement to cover this type of arrangement?

Part 4: Unrelated Business Income Tax (UBIT)

1.  My organization, Charity Corp., has a corporate partner, Cool Products Co., that is conducting a charitable sales promotion in which it will advertise that it is donating a portion of the purchase price from sales of a particular product to Charity Corp.  Cool Products has asked to promote their sales campaign to our members and donors through email and social media. I heard that charities aren’t allowed to promote these types of campaigns because it might subject the charity to a tax called UBIT.  What is UBIT, and why and when is it a potential problem? How do we avoid creating taxable income?
2. How can our organization appropriately communicate about a corporate partnership to our donors/members/social followers without crossing  the line into marketing for the corporate partner?
3. The UBIT rules make our corporate partnerships team feel constrained in our partner cultivation strategy. What options does our organization have to provide value to our corporate partners?

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1. Can my 501(c)(3) charitable organization conduct an emergency hardship assistance program, even if such assistance was not part of the stated purposes of my organization when it applied for tax-exempt status with the IRS?

With respect to federal tax law considerations, 501(c)(3) organizations do not have to obtain pre-approval from the IRS to provide emergency hardship or disaster relief assistance, including fundraising to make grants for such purpose.  However, if a public charity carries on emergency hardship and disaster relief assistance as one of its three largest programs, it will need to describe those services in the organization’s annual Form 990 filed with the IRS. The organization may also need to report grants and other assistance given to organizations or individuals within and outside the U.S., and noncash contributions received, such as donations of food or other supplies to distribute to families in need.

With respect to state law considerations, organizations should review their statement of legal purposes, as documented in their certificate of incorporation filed with the state in which they are incorporated.  Some organizations draft their statement of purpose very broadly to include any charitable purposes and activities that are permissible under section 501(c)(3) of the Internal Revenue Code (which would include operation of a disaster or emergency hardship assistance program).  However, some organizations draft their statement of purposes narrowly.  If the organization’s legal purposes are drafted narrowly, and would not include the operation of a disaster or emergency hardship assistance program, the organization may need to amend the purposes in its certificate of incorporation to conduct the program.  In addition, organizations should use donations that were previously received for a different charitable purpose for those specified purposes only, and only apply new donations solicited for purposes that include disaster or emergency hardship assistance for that purpose.

2. Can my organization solicit donations to support specific individuals or families in need?

An emergency hardship or disaster relief assistance program cannot be designed to serve any particular individuals, but rather, must be designed to assist a “charitable class.” An assistance program serves a “charitable class” if the group of eligible beneficiaries is either: (1) large enough that the potential beneficiaries cannot be individually identified, or (2) sufficiently indefinite such that the entire community benefits from the charitable assistance.

If the group of eligible beneficiaries is limited to a smaller group, an assistance program will still be considered to benefit a charitable class if the group of beneficiaries is indefinite. For the group of beneficiaries to be indefinite, the program should be open-ended such that the total number of potential members making up the charitable class cannot be counted or identified. For example, if a financial assistance program is designed to benefit families of alumni from a particular college in connection with a current disaster or emergency as well as future disasters and emergencies, the program would be viewed as serving an indefinite charitable class.

3. What kind of documentation must my organization maintain as part of an emergency assistance program?

In general, organizations must maintain adequate records to show that the organization’s assistance, whether in the form of tangible goods, services, or cash assistance, furthered charitable purposes, and that the recipients are needy or distressed.

Organizations providing emergency short-term assistance (e.g., hot food, clothing) to individuals in need of immediate assistance with basic necessities are not required to undertake a needs assessment. The organization should document the criteria for disbursing assistance (e.g., sudden loss of home and/or belongings), date/place of distribution, estimated number of individuals assisted, the charitable purpose intended to be accomplished, and the cost of the aid.

For longer-term assistance, organizations must maintain more detailed records to demonstrate that the organization has conducted an appropriate needs assessment which confirms that the individuals or families are financially in need. Being in financial need does not require individuals to be totally destitute; it is sufficient if they simply lack the resources to obtain basic necessities. An organization’s decision to provide financial assistance should be based on a reasonable determination that the individual’s financial resources, such as available cash, expenses, other financial obligations, assets that can be disposed of without causing further personal hardship, and anticipated cash flow (income, insurance proceeds, etc.), will be insufficient to provide for timely coverage of his/her existing obligations and basic needs.  Longer term financial assistance may include assistance with rent, mortgage payments or car loans to prevent loss of a primary home, utilities payments, and childcare and tuition costs for children.

Documentation relating to long-term assistance should generally include:

• a complete description of the assistance provided,
• costs associated with providing the assistance,
• the purpose for which the aid was given,
• the charity’s objective criteria for disbursing assistance under each program,
• how the recipients were selected,
• the name, address, and amount distributed to each recipient,
• any relationship between a recipient and officers, directors, or key employees of, orsubstantial contributors to, the charitable organization, and,
• the composition of the selection committee approving the assistance.

4. How do we determine the appropriate amount of assistance to provide to families as part of our financial assistance program?

An organization’s decision about how much to distribute to individuals and families in need must be based on an objective evaluation of the individual’s needs at the time the grant is made.  The amount needed to relieve financial hardship and distress should be based on all the facts and circumstances of the individual’s situation and the charity’s resources.  Making an individual whole on account of a disaster or emergency hardship does not, necessarily, further charitable purposes. IRS guidance cautions that an outright transfer of funds based solely on an individual’s involvement in a disaster or without regard to meeting the individual’s particular distress or financial needs would result in private benefit, which is impermissible. Similarly, grants to replace lost income rather than to meet basic living needs would generally be viewed as serving personal and private interests, which is also impermissible.  Adequate documentation should be maintained to justify that the individual grants are appropriate in amount and further charitable purposes.

5. Will recipients of financial hardship funds need to pay taxes on the amounts received from a 501(c)(3) tax-exempt organization?

Financial assistance that a 501(c)(3) tax-exempt organization gives to individuals or families in need for emergency hardship situations are excludible from the recipient’s gross income as a gift under Section 102 of the Internal Revenue Code.

6. Can a public charity, private foundation, or donor-advised fund established by a company provide disaster or emergency hardship assistance to the company’s employees and their families as a result of COVID-19?

Companies can provide disaster or emergency hardship assistance to employees and their families in connection with the COVID-19 outbreak through these charitable vehicles, but as further discussed below, need to structure their programs in ways that do not provide impermissible private benefit to the employer.

Employer-sponsored public charities, which typically receive broad financial report from the general public and are subject to greater transparency requirements, may provide disaster or emergency hardship assistance to their employees and their family members, as long as a related employee does not exercise excessive control over the organization.  Typically, a significant portion of the board of such employer-sponsored public charities are individuals who are not in a position to exercise substantial influence over the affairs of the employer.

Employer-sponsored donor-advised-funds (DAFs) and private foundations are only allowed to provide assistance to employees and their family members if they’ve been affected by a “qualified disaster.” COVID-19 was officially declared a “qualified disaster” on March 13, 2020, so employer-sponsored DAFs and private foundations can provide payments to employees and their family members as long as there are safeguards in place to make sure the payments are for charitable purposes.

Employer-sponsored assistance programs should follow the program requirements discussed above (e.g., support of a charitable class, selection of recipients based on an objective determination of need, and adequate documentation of recipients’ need for assistance). In addition, the selection of beneficiaries must be made using either an independent selection committee or adequate substitute procedures to ensure that any benefit to the employer is incidental and tenuous. The selection committee is considered “independent” if a majority of the members of the committee are not in a position to exercise substantial influence over the affairs of the employer.  Pursuant to statutory restrictions applicable to donor-advised funds, no payment may be made from the DAF to or for the benefit of any director, officer, or trustee of the sponsoring public charity, or members of the fund’s selection committee.

Additional information about providing disaster relief assistance through charitable organizations, including employer-sponsored assistance programs, is available in IRS Publication 3833.

The information provided does not constitute legal advice, and is not intended to substitute for legal counsel.

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Three Key Benefits of Establishing a Corporate Foundation

Provides Consistent Funding for Charitable Programs
A corporate foundation can be a vehicle to build up a charitable reserve in years of higher profits, allowing for a steady flow of charitable grants to organizations in leaner years.[1]  Companies can donate appreciated assets or make a large infusion of cash to establish an endowment. Corporate foundations can be used to fund grants to public charities, pay employee matching grants, or administer scholarship programs for employees’ family members.

When grants are made directly out of a corporate giving department, the funds may be required to be expended during the period for which they are budgeted.  This reduces the control the corporation has over the strategic timing of grants, including support of larger charitable projects.  It should be noted, however, that many companies simply fund their foundation with the same amount as they grant out each year. When considering the compliance obligations that come with the operation of a tax-exempt entity (see below), a company with this type of funding and grant-making strategy may not find that a corporate foundation provides sufficient value vis-à-vis the regulatory burdens.

Accomplishes Strategic Programmatic Objectives
Companies are increasing their focus on issues that align with the companies’ brand(s) and the philanthropic concerns of their customer base.  Financial institutions, for example, may emphasize financial literacy and inclusion issues, while athletic and outdoor gear companies may align their charitable giving towards healthy living and environmental protection initiatives.  In many instances, companies want to not only make strategic grants, but also to operate their own programs that further their charitable objectives. Having a dedicated charitable entity through which the program will operate can help the business maintain its charitable mission focus.

Companies that decide to establish corporate foundations must ensure that they do not use charitable assets to improperly benefit the business.  Companies should review any such initiatives with legal counsel to safeguard against violations of the IRS’s rules prohibiting self-dealing.[2]

Allows One Charitable Entity to Receive Steady Contributions Triggered by All or a Portion of Sales of the Company’s Goods or Services
A number of companies have formed corporate foundations that receive donations triggered by customer sales. Through this structure, the charitable cause becomes part of the brand identity. The IRS, recognizing that payments to charities can, in fact, benefit a business’s bottom line, issued a General Information Letter in 2016, stating that a new group of socially conscious companies formed as “benefit corporations” may treat payments to charitable organizations as a business expense rather than as a charitable donation so long as the payments “bear a direct relationship to the taxpayer’s business and are made with a reasonable expectation of a commensurate financial return.” The General Information Letter therefore clarifies that benefit corporations can take unlimited business expense deductions on their charitable contributions as opposed to limiting such deductions to the standard 10% cap for corporate donations to charitable organizations.

While IRS regulations do provide other advantages that come with the operation of a corporate foundation, such as facilitating employee matching grants and scholarship programs, today, a number of independent public charities exist that manage such programs for companies, obviating the need to form a separate foundation for this purpose.  As such, these charitable programs no longer seem to be key drivers for companies to form corporate foundations.

Three Reasons Companies May Not Want to Establish a Corporate Foundation

Meeting the Compliance Obligations of Corporate Foundations Can Be Costly and Time-Consuming
A corporate foundation is a separate legal entity, whose board members owe a fiduciary duty to act in the best interest of the foundation.  In addition, a separate annual financial report must be filed with the IRS.  Corporate foundations that fundraise, either by being the beneficiary of charitable sales promotions conducted by their founding company, or by soliciting customer donations, may need to register to solicit charitable contributions in up to 38 states, each requiring annual renewal.  The state registration process also requires the foundation to prepare and file audited financial statements, adding to the compliance burden.

Companies should evaluate whether the anticipated annual donations and the sought-after social impact outcomes are significant enough to warrant taking on the cost of compliance.  In many cases, the same results could be achieved through a direct relationship with one or more existing charities, wherein the partner charities are responsible for their own compliance.

The Self-Dealing Rules Can Be Challenging
The IRS prohibits private foundations from engaging in certain financial transactions with certain “disqualified persons,” a category which includes the founding company.  For example, the company’s provision of goods or services to the foundation at a significant discount would be a violation of the self-dealing rules (although donating such goods or services is permitted).  Companies must carefully navigate any financial transactions, including shared expenses, to ensure that the corporate foundation’s charitable assets are not used in a manner that violates the self-dealing rules.

Certain Grants Require Burdensome Oversight Obligations
International grants and grants to non-charitable entities to support charitable activities may be undertaken by corporate foundations, but the federal tax code requires the foundation to follow special grant oversight procedures.  Foreign grants also require additional oversight.  Today, a number of charities serve as charitable giving vehicles through which donors (including corporations) can make such grants, and will undertake the required grant oversight, while the corporation can receive the full tax-deductible benefits. The fees charged by these third party charities to provide grant administration and oversight services may be less than the costs of operating an affiliated foundation, and come with the benefit of staff trained in the IRS’s requirements and best practices for grantmaking.

Companies Can Achieve Their Social Impact Objectives Using Strategies That Work Alongside, or in Place Of, a Corporate Foundation

Direct Corporate Giving
Companies can make direct tax-deductible donations to 501(c)(3) tax-exempt charities, either in the form of restricted gifts (documented through a grant agreement) to support a specific charitable purpose or program, or unrestricted grants. Companies are also uniquely positioned to donate significant volumes of in-kind goods to organizations that will distribute them to individuals, families, or organizations in furtherance of charitable purposes.  Sponsorship agreements allow the company to connect its brand to the brand of a charitable partner and its programs. Many longstanding businesses strategically utilize direct corporate giving alongside the work of their corporate foundation. Walmart recently rebranded the collective corporate giving efforts of the company and its foundation under the new philanthropic name, Walmart.org.

Cause Marketing
Cause marketing campaigns, whereby the company advertises that the sale of its goods or services will result in a donation to a charitable organization or cause, or otherwise engages its customers to take actions to support a cause, can be conducted to benefit an unrelated charity or a company’s own corporate foundation.  Partnering with a reputable independent charity allows the company to benefit from a charity’s strong reputation and proven record of making a real impact on a charitable issue. During the last decade Subaru of America achieved success by donating $140 million to four national charities and hundreds of local nonprofits as part of its annual Share the Love cause marketing campaign.

While less common, a few companies have made their own corporate foundations the beneficiary of cause marketing campaigns, and either fund the foundation’s own charitable program or support other charities addressing specific causes through strategic grants. Since 2000, the Ralph Lauren Corporation has sold a line of pink products to benefit the Pink Pony Fund, a program of the Polo Ralph Lauren Foundation focused on fighting cancer.

Collaborations and Joint Ventures with Established Nonprofits
Companies can collaborate with existing nonprofits to generate social good without forming their own nonprofit entity. This collaborative strategy is increasingly evident in companies’ corporate social responsibility (CSR) reports, which often highlight partnerships with nonprofits as a core strategy for fulfilling their CSR objectives.  Given that nonprofits often have expertise and on-the-ground implementation capabilities on social and environmental issues, this strategy makes sense. In 2015, American Diabetes Association launched a joint marketing and communications initiative with the Hispanic television network Telemundo, aimed at improving overall health and wellness for Latinos in the United States. These types of collaborations are particularly successful because they leverage each partner’s core strengths in order to achieve their shared charitable and social impact objectives.  Companies have also made strategic grants to fund research that will hopefully lead to more sustainable and responsible business practices.

Determining whether a corporate foundation will provide good value for a company ultimately depends on the company’s overall objectives, and should take into account the benefits and challenges of, and alternatives to, operating a corporate foundation.  For this reason, performing a strategic assessment on whether to form a corporate foundation is a worthy upfront investment.

[1] Corporate foundations classified as private foundations under the Internal Revenue Code must distribute a minimum amount annually, equal to approximately 5% of their net investment assets each year, which must be used for charitable purposes, typically in the form of charitable grants.

[2] The IRS has carved out benefits to the company that are “incidental and tenuous” from the self-dealing prohibition, such as through positive goodwill and recognition received by the company arising from the shared name, but how that rule applies in various contexts should be carefully reviewed with legal counsel.

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Layered on top of these market drivers are journalists and the media, who investigate and report on specific instances of harmful business practices by companies and entire industries. Athletic gear company, Nike, experienced a major public scandal in the 1990s when media reports revealed abusive labor practices at factories contracted to produce Nike apparel. Nike began conducting factory audits in the early 2000s, and published a detailed report of its findings. Nike has publicly acknowledged its past failures and now publicizes their ongoing commitments, standards, and audit data as part of the company’s CSR reports.

But do CSR efforts actually pay off?  A recent research study looked at the impact of linking executive compensation to CSR criteria (known as “CSR contracting”) among all S&P 500 companies and found that this practice led to an increased long-term orientation, an increase in firm value[1], and an increase in social and environmental initiatives. On average, CSR contracting also led to companies cutting emissions by nearly nine percent, increasing green patents by three percent, and receiving a five percent higher CSR rating. These findings demonstrate that CSR efforts do, in fact, benefit society while strengthening firm value.

A company’s CSR strategy should not be equated with its corporate philanthropy or giving program. Corporate philanthropy focuses on charitable contributions, through donations of money, goods and services, as well as employee volunteer time, however, it does not generally change how a company — at its core — does business. CSR, by contrast, affects a broader group of stakeholders through the actual operation of the business, including customers, employees, shareholders, communities, and the environment. Yet it’s not just for-profit businesses that drive CSR; the nonprofit sector plays a vital role in CSR implementation. Given that nonprofits are, by their nature, exclusively dedicated to promoting and supporting charitable and educational objectives, including publicly beneficial social, economic, and environmental objectives, it should come as no surprise that nonprofits often play an integral role in driving CSR strategies.  At the same time, the tax-exempt status of nonprofits creates certain constraints on how they can support businesses as they move towards practices that are more socially and environmentally responsible. As such, knowledgeable legal counsel can help ensure a successful collaboration. This article highlights three different roles nonprofits play in helping companies achieve their CSR goals, and highlights the legal structures and parameters in which they operate.

1. Advancement of Ethical and Responsible Business Practices

The most recognized CSR strategy involves the advancement of ethical and sustainable business practices. This includes a company’s business practices with respect to the environment, labor practices and human rights, business ethics, and supply chain management. A few legislative efforts have been undertaken to push companies towards more socially responsible business practices, including the United Kingdom Modern Slavery Act 2015 and the California Transparency in Supply Chains Act of 2010 (and similar laws are being considered in Australia and Hong Kong). These laws require large retailers and manufacturers to disclose on their website their voluntary efforts taken to eradicate slavery and human trafficking in their supply chains. Unfortunately, companies can comply with these laws by simply stating that they do not undertake any verification, audits, certification, internal accountability, and training in order to mitigate the risk of human trafficking and slavery. As such, many believe these legislative efforts are insufficient to achieve their otherwise laudable goals.

By contrast, nonprofits are helping companies improve their business practices by articulating clear, objective standards for ethical and sustainable business practices, and conducting independent assessments of company practices against those standards. Consider the well-established LEED (Leadership in Energy and Environmental Design) green building rating system for building design, construction, operations and maintenance. The LEED certification standards were established, and are maintained, by the U.S. Green Building Council, a 501(c)(3) tax-exempt organization. A separate but related entity, Green Business Certification, Inc., a 501(c)(6) tax-exempt organization, administers the LEED certification program, performing third-party technical reviews and verification of LEED-registered projects.  Other well-known certification or verification programs operated by nonprofits include Fair Trade Certified, CDP (carbon footprint disclosure); The Non-GMO Project (non-GMO food supply), and Marine Stewardship Council (sustainable seafood certification). Another nonprofit, Verité, whose mission is to provide the knowledge and tools to eliminate serious labor and human rights abuses in global supply chains, provides assessments and training that focus on safe, fair, and legal working conditions for workers within business supply chains.

501(c)(3) tax-exempt nonprofits are viewed as trustworthy administrators of third party standards for ethical and sustainable business practices thanks to their legal DNA – U.S. tax-exempt nonprofits are organized (and must be operated) to further charitable and educational  purposes, not for private benefit. As such, they are prohibited from using their income or earnings to benefit private interests. Nonprofits can advocate for business practices that minimize harm to people or the environment, but only within the constraints imposed by IRS regulations.

2. Sustainability Reporting and Company-Wide Assessments

As companies work to advance ethical and responsible business practices, they also want to share successes publicly with their stakeholders, but because CSR reporting is purely voluntary, how do we know if companies are truly being good corporate citizens? A global nonprofit, Global Reporting Initiative (“GRI”), pioneered sustainability reporting in 1997, and today, they are the most widely adopted global standards for sustainability reporting.  Sustainability reporting is critical to providing transparency, and therefore public accountability. Sustainability reporting helps companies measure, understand, and communicate their economic, environmental, social and governance (“ESG”) performance. The reports also help companies set goals to continue improving their sustainability practices across economic, environmental, and social impact standards.

While organizations like GRI are creating uniform standards for reporting across ESG standards, other organizations like U.S.-based nonprofit B Lab, require a business to undergo an actual assessment of how significant a company’s current impact is across social impact areas.  Certified B Corporations must achieve a minimum verified score on B Labs’ B Impact Assessment—a rigorous evaluation of a company’s impact on its workers, customers, community, and environment—and make their assessment transparent on bcorporation.net.  [Disclosure: Perlman & Perlman, LLP is a Certified B Corp.] Athleta, a wholly-owned subsidiary of Gap, recently obtained B Corp certification.  According to Athleta’s press release announcing its B Corp certification, 40% of Athleta apparel is made of recycled and sustainable materials, and they are on track to meet their goal of 80% by 2020.

Some nonprofits are not waiting for companies to opt in to being assessed against their standards, and are instead publishing reports based on publicly available information. Environmental Working Group has been doing this for years at the product level through its Skin Deep Cosmetics Database, which combines product ingredient lists with information from more than 60 toxicity and regulatory databases to provide safety ratings for tens of thousands of personal care products. At the company-wide level, Know the Chain is helping companies and investors to understand and address forced labor risks within their global supply chains. Formed in 2013 by nonprofit, Humanity United (which is part of the Omidyar Group), Know the Chain was originally established with the goal of documenting compliance with the California Supply Chain Transparency Act. Today, Know the Chain focuses on benchmarking current corporate practices across key sectors where forced labor is particularly acute, including information & communications technology, food & beverage, and apparel and footwear, with the goal of driving corporate action while also informing investor decisions. The benchmarks are based on the disclosures of policies and practices used by select large companies. Know the Chain aims to use data and market forces to drive a “race to the top” that creates “brand reward for leaders and brand risk for laggards,” and ultimately encourages companies to adopt standards and practices that protect worker’s well-being.

3. Building Charitable Giving Into the Business Model

While sustainability reporting and assessments focus primarily on business operations, a growing number of companies have built corporate citizenship directly into their core retail sales and marketing strategy. TOMS became popular because of its “Buy One, Give One” business model, donating a pair of shoes to a person in need for every pair sold, distributed through its partnerships with global humanitarian organizations. On May 7th, TOMS announced a major overhaul of its giving model.  Based on the premise that the problems facing our world today are more complex than ever, TOMs has decided that, in addition to providing for basic human needs including shoes and clean water, TOMS is asking customers to join them in “taking a stand” on critical issues. As such, when you purchase a TOMS product, you can also pick an issue area that you stand for, such as ending gun violence, equality, mental health, or homelessness, and your purchase helps direct TOM’s giving (carried out in the form of impact grants that support sustainable and innovative strategies and solutions on leading social issues).

Food product company, Newman’s Own, recognized by its tagline, “All Profits to Charity,” has charitable giving embedded into its ownership structure — 100% of the business is owned by Newman’s Own Foundation. Newman’s Own Foundation, whose mission is “to use the power of giving to help transform lives and nourish the common good,” uses the profits to support a variety of charitable organizations. Newman’s Own’s ownership structure is supported by legislation enacted in February 2018 that allows 501(c)(3) tax-exempt private foundations to own 100% of a business under certain conditions. The foundation is now working to promote the “all profits to charity” concept by providing resources and support to other companies that have committed to donating all of their profits to charity.

A more widely adopted model of giving, albeit less deeply embedded in a company’s business structure or strategy, involves entering into a formal commitment to give a portion of company profits to charitable causes. One of the biggest advocates of this model is 1% for the Planet, a 501(c)(3) tax-exempt public charity that encourages businesses to commit to donating 1% of total sales across the company’s operations to support environmental causes.  The organization’s 1200+ members, which includes environmentally conscious brands like Patagonia, give directly to approved nonprofits, and 1% for the Planet provides third party certification of their fulfillment of this giving commitment. They also help companies identify environmental organizations that will make the greatest impact and align with corporate giving goals.  In exchange for upholding this giving commitment, members receive the right to use the 1% for the Planet logo in their marketing.

Companies looking to push their CSR efforts to the next level should be aware of the unique resources available through the nonprofit sector to help them establish and achieve corporate social impact goals. Similarly, nonprofits cannot ignore the significant effect that businesses have on the social and environmental issues they were created to address, and should consider ways they can help companies improve their impact on those issues. Given the strong consumer, investor, and employee demand for corporate social responsibility, there is no better time for companies and nonprofits to work together to help businesses operate more sustainably and responsibly.

[1] The study uses Tobin’s Q to determine firm value, and is a ratio of the market value of total assets to the book value of total assets.

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• failing to properly oversee its commercial co-venturer, Harris Originals of New York and related entities collectively doing business as “Harris Jewelry,” which advertised on its website and retail stores that for each teddy bear purchased in the promotion, a specific amount of money would be donated for the express purpose of sending care packages to service members;
• failing to maintain the donated funds as restricted funds as they were designated for a particular purpose;
• using donated funds for purposes other than those expressly represented as the charitable purpose of OTA;
• spending funds on non-charitable purposes; and
• engaging in unfair, false, misleading, or deceptive solicitation and business practices.

According to the settlement, OTA acknowledged that it failed to oversee Harris Jewelry’s “Operation Teddy Bear” by failing to request an accounting of the numbers of bears sold or any other information in order to determine that the per-bear dollar figure sent to OTA was accurate.  The settlement further notes that OTA failed to provide Harris Jewelry with information on how the funds donated by the company were used, or how many care packages were sent to service members.

The settlement further notes that the funds donated were improperly expended on non-charitable purposes and states that OTA spent funds and took other actions without any discussion, approval, or oversight by its Board of Directors, in violation of the Boards’ statutory fiduciary duties.

As part of the settlement, OTA will cease operating and wind down its operation and OTA’s chief executive Mark Woods is barred from serving as a fiduciary or soliciting for any nonprofit. The agreement will assess civil penalties and requires OTA to continue to provide assistance, as needed, in the states’ continued investigation of Harris Jewelry.

The investigation was by led by New York and Tennessee, joined by executive committee states Nevada, North Carolina, and Washington and participating states California, Delaware, Georgia, Hawaii, Idaho, Illinois, Kansas, Louisiana, Maryland, Pennsylvania, and Virginia.

The multi-state enforcement action is a wake-up call for charities to make certain that they are actively overseeing charitable sales promotions conducted to benefit them. The following steps should be taken to meet these requirements:

• Ensure that each cause marketing relationship is subject to a written agreement;

• require the co-venturer to provide a written accounting with each payment made to the charity to certify that the correct donation amounts are being transferred based on the terms of the promotion;

• review the co-venturer’s advertisements to ensure that the language accurately reflects the terms of the promotion, including how donated funds will be used; and

• guarantee that donations are actually used for the purposes as specified in the advertising of the promotion.

Given a trend towards communicating specific consumer impact in cause marketing campaigns (often structured as 1-for-1 campaigns, in which the purchase of each item triggers a specific charitable impact), charitable sales promotions are increasingly generating restricted donations.  Thus it’s critical for charities to undertake the proper procedures to account for and expend these donations in accordance with the stated restrictions, and to ensure that company advertisements are correctly stating how funds will be used by the organization.  In our Nonprofit Times article, 5 Things That Are Making Regulators Buzz, my colleague Tracy Boak and I highlighted the solicitation and use of restricted gifts as a leading area of regulatory scrutiny.

Nonprofit boards must also provide proper oversight over their organizational activities and expenditures.  While the settlement agreement does not provide much detail on OTA’s governance problems, nonprofit governance is also a key area of regulatory scrutiny, with states increasingly seeking to hold nonprofit boards accountable for the organizations’ violation of state charitable solicitation laws.

This enforcement action is significant in that it apparently is the first multi-state regulatory activity involving cause marketing in almost two decades. The last such collective activity undertaken by the states was issued in 1999 in a report issued by the Federal Trade Commission (FTC), and sixteen State Attorneys General and the District of Columbia Corporation Counsel. It discussed regulatory concerns regarding false advertising, unfair and/or deceptive trade practices and consumer fraud arising from commercial-nonprofit product advertisements, with a particular focus on implied endorsements and exclusive relationships.

In 2012, the New York Attorney General’s Charities Bureau issued “Five Best Practices for Transparent Cause Marketing,” providing guidance to companies and charities on ways to ensure consumer transparency in their cause marketing campaign disclosures.

Does the OTA settlement represent the first of many more regulatory enforcement actions focused on cause marketing activities that may be coming down the pike?  Or does it simply highlight the first of several multi-state enforcement actions arising out of the new federal and state enforcement initiative named Operation Donate With Honor, which focuses on fraudulent solicitation activities purporting to benefit veterans and military service members?  We shall see.  In the meantime, we will continue to monitor state and federal regulatory enforcement efforts affecting charities and companies engaged in cause marketing and other fundraising activities, so please stay tuned.

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Newman’s Own Foundation needed the new law to avoid a requirement that it divest itself of at least 80% of No Limit under the “excess business holdings rule” of Internal Revenue Code Section 4943. The excess business holdings rule generally prohibits a private foundation from owning more than 20% of a for-profit company. It imposes extreme penalties on a foundation that are equal to twice the value of the holdings above the 20% limitation. In most cases, this will completely destroy the value of the “excess” holdings to the foundation. The new law creates an exception to the excess business holdings rule for foundations that own 100% of a business and devote all profits to charity.

Foundations that acquire more than 20% of a company normally have a five-year deadline to sell their excess holdings before the penalties apply. Newman’s Own originally faced that deadline in 2013 but was able to get a five-year extension that would have expired this year. The passage of the new law relieves Newman’s Own from the requirement that it divest itself of No Limit, meaning it can continue operating as it always has without interruption.

New law, new rules
The new law, Section 4943(g) of the Internal Revenue Code, permits a private foundation to own 100% of a company under the following conditions:

1. The foundation must own 100% of the shares. There cannot be any other shareholders, and the shares must have been donated to the foundation or acquired in some manner other than by purchase.
2. All profits must go to charity. The company has to distribute 100% of its net operating income to the foundation within 120 days of the end of each fiscal quarter. Net operating income is defined as gross income minus taxes, deductions directly attributable to the production of income, and an amount for a reasonable reserve.
3. The for-profit company is operated independently of the foundation. First, no substantial donor to the foundation can be a director, officer, or employee of the company. A substantial donor is someone who donates more than 2% of the foundation’s total contributions in a given year, and it includes these who donated shares or anything else of value to the foundation, if their donations exceed 2% of contributions to the foundation for the year. Second, a majority of the company’s directors have to be persons who are not also on the foundation’s board. Finally, the company may not make loans to substantial donors of the foundation.
4. Donor-advised funds and some supporting organizations cannot take advantage of the new law. Donor-advised funds and non-functionally integrated Type III supporting organizations are specifically excluded from the new law, thus are still subject to the 20% rule.

The new law, which took effect December 31, 2017, opens a world of possibilities for founders of companies that want to devote all profits from their businesses to charity, allowing them to place their companies under the ownership of a private foundation and permanently devote all profits to charity.

One way to adopt this model is to have the founder or the shareholders donate their shares to a foundation. They get a tax deduction for the value of their shares, but no buy-out. Since this is a gift, not a purchase, donating the shares satisfies the requirements of the new rule. The donations can happen anytime or even over time, but the new rule does not apply until 100% of the shares have been transferred to the foundation.

Under the new law, a total separation of the two entities is not required. The for-profit company will continue to be governed by its own board and managed by its own managers, with appropriate separation from the foundation. The new law permits the foundation, as the sole shareholder, to appoint the board, and the foundation may also hold other rights, depending on the jurisdiction where it was formed. For example, in many states, a sole shareholder has the right to inspect the books and records of the company and to sue the directors for breach of fiduciary duty (including the duty to pursue a social mission, if the company is a benefit corporation.) The shareholder may also reserve to itself the right to approve mergers, sales of assets, dissolutions, and to veto other fundamental decisions.

Profits of the business will be up-streamed to the foundation in the form of after-tax corporate dividends or, in the case of a pass-through LLC, as partnership distributions, in which case the tax on unrelated business income may apply.

We are sure to see a growing number of private foundations take ownership of profitable businesses as a result of this new law. It also offers another option for founders of mission-oriented companies who want a philanthropic exit that locks mission into the company on a permanent basis.

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