Nonprofit Organizations' Cost Allocations

By Tinkelman, Daniel | The CPA Journal, July 2005 | Go to article overview

Nonprofit Organizations' Cost Allocations

Tinkelman, Daniel, The CPA Journal

The Implications of Madigan

Americans give tremendous sums to charity every year. According to the American Association of Fundraising Counsel, total donations in 2003 were over $241 billion, accounting for about 2% of gross domestic product Donors, however, can find it difficult to determine whether their gifts are being used properly. A 2001 survey by the Better Business Bureau Wise Giving Alliance and Princeton Research Associates found that 70% of people surveyed found it difficult to determine whether a charity is legitimate.

While most charities use donor money wisely, sometimes abuses come to light. Some charities are merely inefficient; a rare few are basically fronts formed to raise money for the enrichment of their organizers or consultants. State and local governments have tried a variety of methods to protect the public from inefficient or unscrupulous solicitations. Various states are now considering stricter rules-incorporating some aspects of the Sarbanes-Oxley Act's rules-for nonprofit organizations, and the Senate Finance Committee has held hearings on possible changes in federal regulations.

The Supreme Court has frowned upon attempts to legislate against inefficiency. Some states presumed that high fundraising costs, as a percentage of donations, were in some ways a fraud on the public. These states forbade organizations from soliciting if they spent more than a specified percentage of donations on fundraising. In two decisions, Schaumberg v. Citizens for a Better Environment (444 U.S. 620, 1978) and Maryland v. Munson (467 U.S. 947, 1984), the U.S. Supreme Court struck down such laws as unconstitutional restrictions on freedom of speech. The Court noted in Munson that "there is no necessary connection between fraud and high solicitation and administrative costs. A number of other factors may result in high costs; the most important of these is that charities often are combining solicitation with dissemination of information, discussion, and advocacy of public issues, an activity clearly protected by the First Amendment." In a third decision, Riley v. National Federation of the Blind ofN.C. (487 U.S. 781, 1988), the Court noted that small or unpopular charities would tend to have higher fundraising cost ratios. In Riley, the Court held that a state could not compel charities or professional fundraisers to include a statement about their fundraising cost percentages in their solicitations.

While in these three decisions the Court struck down laws it considered overly broad, it showed some sympathy for states' desires to protect the public. It noted that states could require charities and fundraisers to make certain information, such as financial information, publicly available, so that donors could compare charities. It also noted that states had the ability to prosecute cases of fraud. In Riley the Court said: "We do not suggest that States must sit idly by and allow their citizens to be defrauded. North Carolina has an antifraud law, and we presume that law enforcement officers are ready and able to enforce it." In Madigan v. Telemarketing Associates (538 U.S. 600, 2003), Illinois took the Court at its word.

Madigan v. Telemarketing Associates

Telemarketing Associates, Inc., had a series of contracts from 1987 to 1995 to conduct telemarketing campaigns for VietNow National Headquarters, a nonprofit organization whose stated purpose was to aid Vietnam veterans. Telemarketing Associates also performed some other services for VietNow, such as producing a magazine with about 2,000 subscribers. As compensation for its efforts, the contracts provided that Telemarketing Associates would keep 85% of all funds raised in Illinois. Telemarketing Associates also acted as a broker for fundraising efforts by other telemarketing firms in other states. Telemarketing Associates was entitled to keep between 70% and 80% of all funds raised by these firms. After considering these commissions, VietNow was, by contract, entitled to receive only 15% of Illinois donations and 10% of out-of-state donations. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • A full archive of books and articles related to this one
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Cite this article

Cited article

Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)


1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25,

Cited article

Nonprofit Organizations' Cost Allocations


Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Citations are available only to our active members.
    Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25,

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

    Already a member? Log in now.