Nonprofits and the Fair Use Defense

It is a common misconception that nonprofit organizations have special rights to use copyrighted works without permission. This misconception arises from the first fair use factor, which considers “the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes.”  As explained below, “nonprofit educational purposes” is very narrowly defined. Even if a use is actually included in “nonprofit educational purpose” the use may not qualify as a fair use if the other fair use factors weigh against fair use. While the law does not generally grant nonprofit organizations the right to use copyrighted works as a fair use, the U.S. Copyright Act does grant several statutory exemptions in limited situations.

The “nonprofit educational purposes” element of the first fair use factor examines the character of the use, not the status of the organization using the work. This is not a blanket exemption that confers fair use protection to any work used by a nonprofit organization. An organization’s status as a nonprofit will rarely help it qualify for fair use. Most uses of a copyrighted work will be of a commercial nature, even uses by nonprofits where no fee is charged. During the drafting of the 1976 U.S. Copyright Act, Congress considered granting nonprofit organizations an exemption from U.S. copyright laws or creating a presumption that nonprofit use was fair use. Instead, the final version of the Copyright Act included “nonprofit educational purposes” as a component of the first fair use factor to allow for a very limited range of nonprofit uses. 

A “nonprofit educational purpose” has a narrow meaning. Case law is inconsistent about what qualifies as a “nonprofit educational purpose,” but it generally involves use for scholarship or research or use in a classroom setting on works unavailable in the commercial market. However, just because a work is used in a classroom does not mean that the use will qualify as a “nonprofit educational purpose.”  A school district recently lost a multi-million-dollar judgment for making copies of a study guide and distributing them through its classrooms. Any use of a work by a school or for any other nonprofit educational purpose should be evaluated by all four fair use factors, which could cause the fair use analysis to weigh against fair use.

Nonprofit organizations should not conclude that just because they are a “nonprofit” that any use of a copyrighted work is a fair use. In most situations, use of a copyrighted work by a nonprofit will not be a fair use. Before using a copyrighted work, nonprofit organizations should obtain the written consent of the copyright owner or obtain competent legal advice concluding that the use is a fair use or qualifies for a statutory exemption. We discuss the statutory exemptions in more detail in a separate article.

This article is provided for general information and should not be relied upon as legal advice for a specific situation. If you are in need of specific advice or legal representation, please do not hesitate to contact us.

©2020 Bea & VandenBerk

Accepting Donations of Crypto Currency

More frequently, nonprofit development officers and fundraisers are asked by prospective donors about whether their organization will accept donations of “Crypto Currency”, or other types of virtual currency.[i] The most commonly known form of Crypto Currency is Bitcoin, however, there are many other types of Crypto Currency that can be bought, traded, and sold.

While nonprofit organizations are accustomed to handling donations of cash, real estate, or other real property, donations of Crypto Currency represent a new form of giving that many nonprofits are unwilling to discuss with donors about—let alone accept that type of donation. While many smaller to medium sized nonprofits may have yet to receive inquiries regarding donations of Crypto Currency, many large nonprofits, especially community foundations, have had discussions with donors about Crypto Currency and have accepted such donations. Whether or not your nonprofit plans to accept Crypto Currency, it’s important to be able to talk with prospective donors about Crypto Currency and the related IRS rules and regulations when dealing with it in regard to donations.

It is important to realize that the IRS treats Crypto Currency as non-cash asset similar to stock, which means that a nonprofit will need to report it as such to the IRS. When a nonprofit accepts a donation of Crypto Currency, it must acknowledge the donation to the donor. If the donation is more than $250, then the nonprofit must provide the donor with a contemporaneous written acknowledgement of the donation. If the donation is over $5,000, the donor may ask the nonprofit to sign Part IV of Form 8283—Donee Acknowledgement. By signing the Form 8283, the nonprofit acknowledges the receipt of the Crypto-Currency as described and dated on Form 8283 and understands the reporting requirements imposed by Form 8283. Please note: by signing Form 8283, the organization is not attesting to the Crypto Currency’s value.

As stated earlier, nonprofits that receive donated Crypto Currency should handle it as a non-cash contribution. As such, it should be reported on the nonprofit’s Form 990 as well as the Schedule M, if applicable. If the organization decides to sell, exchange, or liquidate a portion or the entire Crypto Currency donation within three years after the date of receiving it, the organization must then file the Form 8282, “Donee Information Return.”  

One final consideration is that if a nonprofit plans to accept Crypto Currency, it must have the necessary technology in-place to accept, hold, and then eventually sell, exchange, or liquidate the donated Crypto Currency.

[i] The IRS defines virtual currency as a representation of value “that functions as a unit of account, store of value, and a medium of exchange.” Crypto currency is treated by the IRS as a type of virtual currency that uses cryptography to secure transfers recorded digitally on a ledger. For the purposes of this article, crypto currency will be used to refer to both virtual and crypto currency.

This article is provided for general information and should not be relied upon as legal advice for a specific situation. If you are in need of specific advice or legal representation, please do not hesitate to contact us.

©2020 Bea & VandenBerk

Year-End Federal Tax Changes Benefiting NonProfits

On December 20, 2019, the President signed, “The Further Consolidated Appropriations Act” (H.R. 1865), which contained the “Taxpayer Certainty and Disaster Tax Relief Act of 2019” (“Act”).  The Act contains two important changes to federal tax laws affecting nonprofits: (1) repeal of the parking tax and (2) reduction in the private foundation excise tax.

Continue reading “Year-End Federal Tax Changes Benefiting NonProfits”

IRS Grants The Salt Lake Tribune Tax-Exempt Status

In an interesting new development, the IRS granted 501(c)(3) tax-exempt status to a major daily newspaper.  On November 3, 2019, the Salt Lake Tribune announced that it had incorporated as a non-profit corporation, re-structured its operations, and obtained IRS recognition of its 501(c)(3) status.  Tax-exempt practitioners have speculated for years that a daily newspaper could, in theory, qualify for tax-exempt status under Section 501(c)(3).  However, the Salt Lake Tribune’s announcement was the first time that a major daily newspaper is known to have succeeded in obtaining recognition of 501(c)(3) tax-exempt status. Granting tax-exempt status to this daily newspaper means that the IRS has now officially recognized news-reporting as an exempt purpose. 

Continue reading “IRS Grants The Salt Lake Tribune Tax-Exempt Status”

Where to Incorporate?

An early decision founders of new non-profit organizations must make is where to incorporate. A U.S. charitable, religious, or educational organization has its choice of incorporating in any of the 50 states as well as the District of Columbia. With this many choices, founders may ask if it is advantageous to incorporate in one state over another. When it comes to for-profit companies, it is common for them to incorporate or organize in Delaware due to tax or regulatory issues. We recently ran across an article advising non-profits to incorporate in Delaware. We thought it would be helpful to address if non-profits derive any advantage from incorporating in Delaware or another state in particular.

Continue reading “Where to Incorporate?”

Receipting Donations

Don’t be complacent.

Each year tax-exempt organizations in the United States receive hundreds of millions of dollars in donations.  Donors contributing to 501(c)(3) organizations are able to deduct their own contributions from their taxes, subject to IRS limitations.  Recently, a higher standard deduction has been put in place through the Tax Cuts and Jobs Act.  This will likely diminish the number of taxpayers and donors who itemize their deductions, making it tempting for charities to assume that receipting donations is no longer important.  However, charities should continue to exercise care in receipting donations for the benefit of the donor. Continue reading “Receipting Donations”

Constitution and Bylaws

Does Your Church Need Both?

Sometimes when we analyze governance issues for our clients, we discover that they have two sets of governing documents: a constitution and bylaws. “Constitution” is the title most commonly associated with the governing document of an unincorporated association, whereas “bylaws” govern a corporation.

One of the main reasons churches have both documents is tradition: “It’s always been that way.”  However, it is not legally necessary to have both, and in practice, it can lead to confusion, unclear answers, and unintended outcomes when the organization makes decisions.  To prevent these problems, it is best if the organization has one set of governing documents that addresses all of the relevant governance issues.  Continue reading “Constitution and Bylaws”

The Legal Status of a Church

Is Your Church a Religious Corporation or a Not for Profit?

In Illinois there are two corporation laws that can be used to form churches: the Religious Corporation Act of 1872 and the Not for Profit Corporation Act of 1986.  Most lawyers practicing in the state of Illinois have probably heard of the latter statute, but relatively few may have heard of the former one.

Churches typically function with little awareness of their underlying corporate structure until they need to engage in some sort of commercial transaction–such as the purchase of real estate or obtaining a commercial loan–then the corporate structure becomes a matter of some attention.

Both kinds of corporations can function in the modern world of commercial transactions, but one type functions more easily than the other.   Care to guess which one?  Continue reading “The Legal Status of a Church”