Along with prohibited political activity, another way a 501(c)(3) organization can risk its tax exemption is too much lobbying.

Why? Because a tax exemption is a taxpayer subsidy to your organization — without it, you’d have to pay tax on your revenue.  So Congress has wanted to make sure that a 501(c)(3)’s activities don’t veer too far into the partisan arena.

But the lawmakers have also realized that many nonprofits have valuable insight and information about policy matters:

All nonprofits have a vital role to play in strengthening democracy, advancing freedom of expression, and adding richness and diversity to community life. Throughout our history, Americans have turned to nonprofit organizations to provide a strong, collective voice to inform and influence public policy.

So political activity in any amount is not ok, but public charities are allowed to engage in some lobbying activity unless it is too substantial.

          But What Exactly does “Lobbying” Mean?

Since the lobbying rules include determinations of how much is too much, we have to know exactly what we’re talking about.

Is “lobbying” something like “obscenity”:  a term that Supreme Court justices can’t define but they know it when they see it?

Let’s go back to the statute again: section 501(c)(3) of the Internal Revenue Code.  Organizations that qualify for this preferred tax exemption status are defined for what they do and for what they can’t do:

Corporations, . . . organized and operated for . . . [exempt purposes] . . . , no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.  (emph. added)

Notice it doesn’t actually use the word “lobbying.”  That’s shorthand. And,  sometimes, the term is used interchangeably with “advocacy” – though they aren’t the same, particularly when these terms refer to what is or is not permitted under the tax exemption rules.

Simply stated, all lobbying is advocacy, but not all advocacy is lobbying:

Advocacy is a broad term covering a range of activities that seek to bring about systemic social change. One form of advocacy is lobbying – attempts to influence specific legislation through direct or grassroots communications with legislators or their staff – but advocacy also includes executive branch activities, issue organizing, and nonpartisan voter engagement.

So, “advocacy is more broadly urging or advancing public policy rather than specific legislation.”  And public charities should be encouraged to engage in advocacy; it’s a “powerful tool” to “advance their mission.”

By contrast, lobbying — that is, “attempting to influence legislation” — occurs if an organization “contacts, or urges the public to contact, members or employees of a legislative body for purposes of proposing, supporting or opposing legislation, or advocates the adoption or rejection of legislation.”

Stated another way, “lobbying is any attempt to influence legislation by:

• stating a position on specific legislation to legislators or other government employees who participate in the formulation of legislation (known as direct lobbying); or

• urging your members or the general public to contact their legislators with a position on specific legislation (a “call to action”) (known as grassroots lobbying).

There are separate sets of rules regarding how much and what kind of lobbying is acceptable for public charities and private foundations.

          Examples  of Lobbying vs. Advocacy

Here are a few examples of permissible advocacy:

• Presenting nonpartisan analysis or research;

• Discussions of broad social or economic problems;

• A charity telling its members about the issues and its position on a specific piece of legislation – so long as it does not encourage them to contact elected officials; and

• Distributing educational fact sheets to the general public about important issues, but without any call to action directed at specific legislation.

For an excellent, detailed guide to this topic, check out Alliance for Justice’s “Being A Player: A Guide to the IRS Lobbying Regulations for Advocacy Charities.”

“It’s easier to get tax-exempt status under Form 1023EZ than it is to get a library card,” says Tim Delaney,  the President and CEO of the Council of Nonprofits about the new exemption-application alternative for smaller organizations.

While that may be a bit of an overstatement, there’s no question that the 3-page Streamlined Application for Exemption from Tax under Section 501(c)(3) of the Internal Revenue Code is much easier to prepare than the complex, 26-page, standard Form 1023.

And the differences are much than just the page length. “The three-page form, . . . mostly asks applicants for contact information, intended charitable activities, and a list of their board members.. . . (I)t asks applicants to verify that they have forms and policies in place, but does not require applicants to provide copies of the forms and policies” including the key governing documents, the articles of incorporation and the bylaws.

Nor is the organization required to submit detailed information about the organization’s actual and proposed purposes and activities. Instead, the signer of the Form 1023EZ, on behalf of the organization, attests to certain legal conclusions – primarily, that the organization will be organized and operated in compliance with Section 501(c)(3) of the Internal Revenue Code.

          Almost a Self-Certification System

The bottom line is that the Form 1023EZ omits the usual information and documents that the Exempt Organizations Division of the IRS currently needs and relies on to perform “due diligence” before issuing the determination letter that transmits the approval of the application for tax-exempt status.

One analyst makes the observation that the new procedure is akin to a “self-certification system.”

“Since its release in April, the Form [1023EZ] has received widespread criticism in the philanthropic community, concerned that the process is nothing more than a rubber stamp, . . .”

          Rationale of New Procedure

Both before and after the launch of the Form 1023EZ at the beginning of July 2014, the IRS has promoted it as  reasonable and workable. It solves two key problems, explains the Commissioner of Internal Revenue, John Koskinen: (1) the burden of the complexity of the standard Form 1023, especially for smaller, simpler organizations; and (2) the huge backlog (60,000+) of pending tax-exemption applications causing approval delays averaging at least a year or more.

He explains: “This is a common-sense approach that will help reduce lengthy processing delays for small tax-exempt groups . . . We believe that many small organizations will be able to complete this form without creating major compliance risks.”

Drastically cutting the approval time, Koskinen continues, is a benefit not only to the applicant-organization but to society as well. “They can focus on their important work” right away.

The Commissioner acknowledges that there will be little up-front review of the applicants’ proposed structure and activities, but defends the new procedure: “(It) allow(s) us to devote more compliance activity on the back end to ensure groups are actually doing the charitable work they apply to do.”

Two more points: First, there will be a sampling of applicants who will be subjected to a more comprehensive review than usual for the Form 1023-EZ. This also is intended to thwart would-be wrongdoers. Second, since the process is much simpler, it will allow small organizations without the funds for professional assistance to get the ball rolling and collect some donations

Unspoken, of course, is the elephant in the room: The long delays could have been alleviated with increased funding and staff, but Congress won’t do that. Instead, the Exempt Organizations Division has to choose – in most cases – between front-end, in-depth review and back-end compliance audits.

The Commissioner’s point is that the Exempt Organizations Division is doing the best it can under difficult circumstances. It’s not a perfect plan, but it will work out. At least, that’s what they’re thinking and hoping.

          Increased Risk of Fraud and Misuse of Funds

Critics of the new Form 1023EZ applaud the IRS for attempting any kind of fix for these serious problems, but still have reservations: “Some see this abbreviated form as an invitation to abuse of charitable status, with the IRS lacking the documentation to evaluate the facts.”

The IRS has “long tried to find more efficient ways to catch bad actors while allowing good charities to get on with their programs.”

So the main concern about the Form 1023EZ procedure is that  bad actors can and will intentionally apply for  a 501(c)(3) tax exemption when they know or reasonably should know that they will not qualify.  The IRS’ adopted solution, these critics conclude, “…is too broad to accommodate ease of applying and processing applications while also protecting taxpayers from unscrupulous and ill-prepared applicants for tax exemption.”

State charity regulators are concerned as well. They have “sternly warned the IRS” that “the Form 1023EZ will increase opportunity for fraud and heighten the burden on state regulators.”

          A Trap for the Unwary 

There is also worry in the philanthropy community that applicants with good-faith intentions can and will unintentionally run afoul of the 501(c)(3) rules – with severe consequences for them in the long-run.

For instance, if an organization is planning to have an income-producing activity, and the person completing the Form 1023EZ reads the instructions about unrelated business income but believes that the proposed activity does “contribute importantly” to its exempt purpose, what are the consequences if the IRS later decides that the activity is unrelated?  Will the IRS revoke the exemption? (During the application process of a standard Form 1023, the organization discloses the details of its exempt purposes and of the proposed activities, and the IRS makes a fact-specific, pre-approval decision about the proposed business activities. Under the Form 1023EZ procedures, there would be no such advance review.)

Consider another example. The eligibility criteria to apply under the Form 1023EZ includes an annual revenue limit of $50,000 or less in the first few years. What if an organization reasonably believes that its modest revenue will continue for the first 2 or 3 years – or indefinitely – but its fundraising is more successful than predicted? What happens then? “Will its exempt status be revoked? Will its initial exemption letter be viewed as somehow contingent on continued compliance (at least during  the first few years) with the Form 1023-EZ filing criteria…?”

          Conclusion

The jury is – and will remain – out.  Whether this stop-gap plan solves what ails the 501(c)(3) application process, or whether it will be a mere bandaid that hides a festering problem underneath, remains to be seen.

It’s likely that the availability of the Form 1023EZ for so many applicants will give the IRS some breathing room to clear out the large backlog of pending cases. But just as this happens, there will be a huge stack of back-end compliance audits for the newly approved Form 1023EZ applicants that will need attention.

In this era of budget cuts — and with the Exempt Organization’s Unit on Congress’ firing line for other perceived faults — there will be no relief. The front-end approval pileup just may be replaced by an equally burdensome back-end compliance-review clog.

You probably thought we’ve told you all you need to know about charity board meeting minutes in “Breach of Duty by Ogling the Doughnuts,”  “Fun Facts About Corporate Minutes,” and “Nonprofit Corporate Minutes: What Not To Do.”

There’s just a bit more.

It’s about motions and resolutions. They aren’t the same.  All resolutions start out as motions, but not all motions end up as resolutions. The distinction is important.

          Motions

Generally, corporate board meetings – for-profit or nonprofit – are run according to some system of parliamentary procedure. We’ve already suggested avoiding Robert’s Rules of Order like the plague.

But there has to be some kind of order. The opposite of order is chaos. Even when boards follow some kind of rules or order, the proceedings often  disintegrate into mind-numbingly boring, unproductive repetition of what the board already discussed at earlier meetings.

When new agenda items are raised for discussion, there should be some action taken – or an affirmative decision not to take a particular suggested action. So motions are key.

“Motions are how action is proposed at a meeting run under parliamentary procedure, . . .”

A motion doesn’t have to be in writing. Any director may propose a motion. As long as another director seconds the motion, the board can proceed to discuss and debate the proposed action. Discussion and debate on a significant issue may include several motions.

But – and here’s the key point – “motions are generally considered actions by the board of directors and not necessarily the corporation.”

          Resolutions

While a resolution starts out as a motion, it is a much formal and consequential matter.

“Corporate resolutions are written records of all formal decisions made by a company’s board of directors… The resolutions are binding.”  They are official acts of the corporation.

At the initial meeting, certain, standard, key resolutions are made, including, for example:

• adopting proposed bylaws
• electing officers
• authorizing officers to take actions including opening bank account
• selecting corporate tax year
• designating  annual meeting date
• authorizing payment of incorporation expenses
• filing documents with government, including applying for tax exemption

and later:

• approving real property transactions (purchase, lease)
• entering into major contracts
• hiring and terminating key employees
• amending bylaws
• making any important decisions

There is no required format for a resolution, but it should clearly state its purpose, and be signed by the corporate secretary, with a declaration proving that the board members took that act on behalf of the corporation.

Fourteen years ago, today. We remember.

There’s a good reason why you’re likely to find an amendment clause in your nonprofit’s bylaws: It’s meant to be used from time to time.

The amendment bylaw wasn’t thrown into the mix as an afterthought, or as filler to pad the document’s page-count to make it look more impressive.

It’s perfectly ok, often advisable, and sometimes absolutely necessary, to review and update your corporate bylaws.

But too many nonprofits, including venerable institutions that have been around for generations, neglect this critical task.

That was our message in “Bylaws are Sometimes Like a Decades-Old Hairstyle”:

Big hair, long bangs, and enough hairspray to withstand a Category 4 hurricane: The style was new and fresh in the ‘80s.  Everyone was doing it. It worked. It seemed like a good idea at the time.

But walk around today with a hairdo like that, and people will snigger and stare.

If only it were that easy to realize that your organization’s bylaws are outdated.

 

Are Your Bylaws Overdue for a Checkup?

If your nonprofit has recently adopted or updated bylaws with the help of experienced counsel familiar with the laws of your state and the federal tax exemption rules, it’s likely that you’re good to go for a while.  A general rule-of-thumb is to review bylaws about once every year or two, or whenever there are significant changes in your mission, operations, or activities.

Many organizations, though, don’t fit within this limited “no-review-needed-yet” exception. Even if your nonprofit is operating much the same as it has always done, if the bylaws were originally drafted without specific reference to your state’s corporation law, or were cobbled together with bits and pieces from sample documents from who knows where, then it’s time to act. Dig out and dust off that fancy, gold-embossed, 3-ring binder you ordered when you filed the articles of incorporation.                                                    

Where to Start: What, Exactly, Are Bylaws?

A useful first step is making sure that all decision-makers understand the purposes and functions of the two key – and distinct – corporate governing documents: the articles of incorporation and the bylaws.

What role does each document play in the legal structure and operations of a nonprofit? How much leeway does an organization have in drafting them so they fully comply with  law, but are useful, flexible, and don’t present unnecessary complications or obstacles?

Around the nation, the general model for corporate law is fairly standard, but the devil is in the details. Each state has its own highly rules for how its nonprofit corporations are formed, how they must operate, and how they are monitored.

This blog post is specific to California nonprofit corporations. The Golden State, unlike some others, has a highly specific statutory scheme, so it’s particularly important that governing documents are drafted with this law in mind.

     Articles of Incorporation

Simply put, a corporation is a legal entity that is separate and independent of the individuals involved in it. This entity exists only if, and when, a state government grants it permission to be formed and to operate there.

In California, the legal authority to form and operate a nonprofit corporation comes from the statutes comprising the California Nonprofit Corporation Law; that is, sections 5000 et seq. of the Corporations Code.  More specifically, nonprofits that qualify for section 501(c)(3) federal tax exemption are created under the Nonprofit Public Benefit Corporation Law at sections 5110 – 6910.  Here’s a table of contents, with links to each section.

How do the founders – the incorporators – get the initial permission to be a corporation? “One or more persons may form a [California nonprofit public benefit] corporation  … by executing and filing articles of incorporation” in the California Secretary of State’s office. When that office reviews and accepts the document for filing, “[t]he corporate existence begins . . . . “  (Corporations Code section 5120)

Generally, articles of incorporation are brief documents – about two pages long. That’s because state law mandates – (“The articles of incorporation … shall set forth…”) – only a few bits of basic information:  corporate name, purpose, and the name and street address of the corporation and of the initial “agent for service of process.”

A few optional clauses – (“The articles of incorporation may set forth . . .”) –  are also permitted, but most organizations stick with the mandatory basic declarations, unless there are good reasons not to keep the document slimmed down.

State governments, including California, also allow and recommend that nonprofits include certain additional language required by federal and state tax agencies concerning compliance with the rules for tax-exemption.

There’s now a fillable form on the Secretary of State’s website that generates an acceptable, complete articles of incorporation for a California Nonprofit Public Benefit Corporation, but this form should be used with caution. For example, in California a Nonprofit Public Benefit Corporation can be formed for a “public” purpose… but a “public” purpose is not an “exempt” purpose under the meaning of the Internal Revenue Code. Sometimes the IRS doesn’t like it when that particular box on the form is selected.

Keep the articles of incorporation short and sweet. Don’t tinker around with it unnecessarily.  The place to write a comprehensive, useful, custom document is the bylaws.

Bylaws

The document titled articles of incorporation, with several mandatory clauses, is absolutely required. It’s the launch pad for the corporation’s very existence.

As a practical matter, corporations have bylaws, too. It’s customary. It’s expected. The folks at the IRS Exempt Organizations Division will flip out if you don’t produce bylaws when they ask to see it.

And, typically, the bylaws is much longer than the articles. A common criticism is that corporations throw everything but the kitchen sink into the document.

But what’s the real deal with bylaws?

Well, California nonprofit public benefit corporations are granted various powers including the power to “adopt, amend, or repeal bylaws.” [Section 5140(b)]  

So – generally – “bylaws may be adopted, amended or repealed by the board . . . “  It’s optional. [Section 5150(a); emph added)].  

Except that, in most cases, bylaws are mandatory because of this one requirement:

The bylaws shall set forth (unless that provision is contained in the articles, . . . ) the number of directors of the corporation, or that the number of directors shall not be less than a stated minimum nor more than a stated maximum with the exact number of directors to be fixed, within the limits specified,  . . .  [Section 5151(a); emph. added]

Most organizations don’t include this clause in the articles of incorporation because it’s optional there, and they intend to have bylaws in any event.

Other than this mandatory item, the bylaws “ . . . may contain any provision, not in conflict with law, or the articles, for the management of the activities and for the conduct of the affairs of the corporation, …” [Section 5151(c)]

Section 5151(c) continues with a (non-exhaustive) list of various matters that may be included, including – for example – details about “calling, conducting, and giving notice of” meetings; directors’ “qualifications, duties and compensation”; and the “appointment, duties, compensation, and tenure of officers.”

In later sections of the Nonprofit Public Benefit Corporation Law,  default rules on these and other topics concerning corporate governance and operations are described.  Just a few of these are mandatory; you’ll recognize them by the use of the term “shall.” Many others are suggested or optional; those statute sections use the term “may.”  The optional default provisions apply unless the corporation adopts bylaws that modify them.

Here’s an example:

[Generally] … , directors shall be elected for the terms, not longer than our years, as are fixed in the articles or bylaws. However, the terms of directors of a corporation without members may be up to six years. In the absence of any provision in the articles or bylaws, the term shall be one year. The articles or bylaws may provide for staggering the terms of directors by dividing the total number of directors into groups and the number of directors in each group need not be uniform. No amendment of the articles or bylaws may extend the term of a director beyond that for which the director was elected, … [Section 5220(a); emph. added]

Conclusion

California bylaws serve multiple purposes:

• to alter the standard, default provisions;  
• to add additional operating rules not mentioned in the statutes; and
• to compile in a single document how the corporation will be governed; namely, a handy reference manual for those concerned: the directors, officers, staff, and counsel.  

The bottom line is that there is significant room for custom drafting. What goes into this second-most-important corporate governing document should be a matter of considerable thought, and it should be reviewed periodically.

Of course, it’s also important to know what to leave out. You don’t want bylaws that comply with some other state’s law. You also don’t want too much detail. For instance, you can mention or authorize in the bylaws that the corporation adopt certain policies (e.g., employment, social media, whistleblowing, conflict of interest). Just put the full, written policies in separate handbooks or manuals.

And, finally, leave out provisions that are inflexible and cumbersome. A good example is a bylaw that mandates use of Robert’s Rules of Order. We devoted an entire blog post  –  “Who is Robert and Should Nonprofits Follow His Rules of Order?” – to explaining why we agree with the astute commentator who advised:   “…[A]void [it] ‘like the plague.’”

From our family to yours – we wish you a very merry Christmas and a joyous New Year!

The post Merry Christmas and Happy New Year! appeared first on For Purpose Law Group.

We are excited to announce that Carol Stachwick, CPA has agreed to lead For Purpose Accounting, a new practice area of For Purpose Law Group! Carol most recently was an audit manager with AKT LLP, where her practice focused on providing audit and compliance services to nonprofit, exempt organizations throughout Southern California.

Carol received her business degree from Cal Poly Pomona and soon joined the Sonnenberg & Company, CPA where she began her focus on audit and tax services for nonprofit organizations.

Currently, Carol is the Board Vice Chair for Partnerships With Industry and was a founding Board member of SPORTS for Exceptional Athletes. Carol has also previously served on the boards of Nonprofit Management Solutions, San Diego Blood Bank, and National Foundation for Autism Research. She was a contributing author to the AICPA “Audit Committee Toolkit for Not-for-Profit Organizations” in both 2005 and 2010. Additionally, Carol was an adjunct professor, teaching nonprofit finance in the University of San Diego’s graduate program in Nonprofit Leadership and Management.

“The For Purpose team is thrilled to have Carol working with us,” said founder May Harris.  “Carol’s reputation for outstanding service to her clients and dedication to the foundational principles of the accounting profession make her an invaluable addition to our team. We look forward to working with Carol to expand on the services we provide to our nonprofit and social enterprise clients.”

For Purpose Accounting is a boutique bookkeeping and accounting firm based in San Diego, CA.  Founded in collaboration with For Purpose Law Group, the firm specializes in providing full service bookkeeping, accounting, payroll, and outside CFO services for its diverse nonprofit and business client base. 

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A scheme described – in a model of understatement – as a “pernicious charity fraud” has finally been stopped.

On March 30, 2016, the FTC announced a settlement in the “most ambitious and largest multi-state prosecution of a nonprofit,” the notorious Cancer Fund of America scam headed by James Reynolds, Sr. and various family members.

But it’s taken years and a massive coordinated effort by federal and state regulators, and the result is “anticlimactic,” considering the grand, deliberate scale of this deception.

   Background: The Scam

A few years ago, the Tampa Bay Times and the Center for Investigative Reporting called the Cancer Fund of America the second on its list of “America’s Worst Charities” All you’ll ever need to know about it is in the 148-page complaint filed on May 18, 2015, by the Federal Trade Commission, in conjunction with the Attorneys General of all 50 states and the District of Columbia.

The “Summary of The Case” provides an excellent introduction:

1. Defendants, four sham charities and the individuals who run them, have engaged in a massive, nationwide fraud, telling generous Americans that their contributions will help people suffering from cancer, but instead, spending the overwhelming majority of donated funds supporting the Individual Defendants, their families and friends, and their fundraisers. Collectively, between 2008 and 2012, Defendants raised more than $187 million from donors in the United States. This case is about those sham charities, the individuals who ran them, and the false and deceptive claims they made while raising these enormous sums from an unsuspecting public.

Paragraph 2 explains that —

[i]n telemarketing calls, direct mail solicitations, websites, regulatory filings, financial documents, and Combined Federal Campaign materials, Defendants have portrayed themselves as legitimate charities with substantial nationwide programs whose primary purposes were to provide direct support to cancer patients, children with cancer, and breast cancer patients in the United States. They also have described specific programs that donors’ contributions supposedly would support, including, e.g., stating that donations would be used to provide pain medication to children suffering from cancer, transport cancer patients to chemotherapy appointments, or pay for hospice care for cancer patients. These were lies. Not one of the Defendants has operated a program that provides cancer patients with pain medication to alleviate their suffering, transports cancer patients to chemotherapy appointments, or pays for hospice care. Moreover, the vast majority of donors’ contributions have not directly assisted cancer patients in the United States or otherwise benefitted any charitable purpose. Rather, donations have enriched a small group of individuals related by familial and financial interests and the for-profit fundraisers they hired. This diversion of charitable funds has deceived donors and wasted millions of dollars that could have been spent as donors intended, to help Americans suffering from cancer.

Paragraph 3 describes how these Defendants hid “their high fundraising and administrative costs from donors by using” a certain nefarious “accounting scheme.”

They were sued “for deceptive conduct under Section 5 of the Federal Trade Commission Act (“FTC Act”), 15 U.S.C. § 45(a), and the Telemarketing Sales Rule (“TSR”), 16 C.F.R. Part 310, as well as state statutes regarding charitable solicitations and prohibiting deceptive and unfair trade practices.”

   Result: The Settlement

“The settlement is meant only to ensure that the Cancer Fund of America (CFA)” and a related entity, “be permanently dissolved.” Their leader, James F. Reynolds, Sr. is “banned for life from managing charitable assets or being part of a charity’s board or being a trustee.” He is also required to “surrender an unspecified amount of his personal assets.”  

What little money is left “will first go to repay states’ litigation fees and after that to legitimate charities selected by the states.”

Conclusion

That many questions remain is an understatement. How many other Cancer Funds of America are out there? “Health charities, or rather disease charities have become a big business” and there are likely “more out there delivering only tiny proportions of their charitable take as legitimate service.” And what about so-called veterans charities – now in the news as well?

How did all of this get by the IRS for so long? Why did the FTC, along with the state attorneys general, take the lead but get such a paltry result?

And what about other “nonprofits out there that know other charities that operate much like those of the Reynolds family.” While “[n]onprofits don’t like to call for government oversight and investigations,” the damage caused by fraudsters like this “…is not avoided by nonprofit leaders’ adopting ostrich strategies.”

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We are excited to announce that starting June 27th, 2016 the San Diego offices of For Purpose Law Group will be operating out of our NEW location at 1435 30th Street in the charming – and centrally located – neighborhood of South Park.

This move will enable us to better serve our client needs with additional space, better access, and lots of free street parking.

Find us on Google Maps HERE!

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We’ve reported before on nonprofits being caught in the financial crossfire from state (and local) budget impasses and cutbacks.

In “Local Governments Eager to Snag Revenue from Nonprofits,” we alerted you to the alarming trend of local governments trying to scoop up any revenue possible from the nonprofits in their communities. A favorite method, we reported, is the PILOT; that is, “payments in lieu of taxes.” Another is renaming what are clearly “taxes” as “fees” so that local, tax-exempt charities, have no apparent shield from them.

In “Property Tax Exemptions: The New Battlefield,” we described two important lawsuits in New Jersey pitting local communities against their most important charitable institutions – for the purpose of yanking part or all of the property tax exemption from them. The two organizations featured in this post are Morristown Medical Center and Princeton University; although this story is from New Jersey, similar battles have, or are about to, erupt in other states.

    Additional Attempts to Squeeze Nonprofits

Here is just a small sampling from around the nation of additional recent efforts of state governments to cover shortfalls on the backs of nonprofits.

   Connecticut

Faced with severe budget shortfalls, Connecticut has made deep cuts in the current and upcoming fiscal years for services provided by nonprofits.

There have been legislative attempts as well to target certain categories of nonprofit institutions for more revenue. For instance, a bill pending in the Connecticut General Assembly seeks to require a $500K cap on nonprofit hospital administrator salaries; otherwise, the hospital would be required to pay property taxes to the local municipality. A bill in the Senate seeks to “tax the property of certain colleges where activities conducted thereon generate at least six thousand dollars in revenue in a taxable year.” And another Senate bill is aimed at “taxing certain endowment funds of institutions of higher education.”

   Illinois

Illinois has had a budget stalemate for more than a year; the state’s nonprofits have been devastated. The state has demanded that nonprofits with government contracts keep providing services – without payment. Hundreds of millions of dollar are owed. There have been layoffs; many organizations have shuttered. And individuals in the state are not receiving needed services.

  Kentucky

During the former Governor’s administration, a special tax reform commission was convened to address key fiscal problems including pension obligations.  This Blue Ribbon Commission recommended caps on state itemized deductions including the charitable giving incentive, and there have been moves in that direction. Organizations representing the Commonwealth’s nonprofits have pointed to damaging results in other states when caps on the charitable deduction have been imposed. They have urged lawmakers to consider other ways to address the budget problems.  

   Louisiana

Louisiana narrowly missed the prize for “worst revenue decisions” when the new Governor, John Bel Edwards, called the Legislature backed into session recently to “clean up various unintended tax consequences created” in the last session. Lawmakers did, indeed, comply, and reversed these outrages.

What happened? Louisiana has a state constitutional mandate to end each June 30 fiscal year in the black. There was a huge budget shortfall, though, and in desperation, legislators decided to unleash the Girl Scouts, armed with their thin mints, as tax collectors. That is to say, they passed laws temporarily suspending hundreds of sales tax exemptions and exclusions. In addition to the Girl Scouts, other targets included food banks, homeless shelters, and school booster clubs.

It’s no surprise that the backlash was swift and effective.

  Conclusion

We have no doubt, unfortunately, that there will be many more news items like these to report in upcoming weeks and months.

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There is “…ongoing tension between government regulation of the financial and political activities of U.S. organizations and their First Amendment rights of speech and association,” according to the Jon Pratt, author of “Battlefield History and Status: First Amendment Tensions between Nonprofits and Governments,” an excellent new article appearing in the Nonprofit Quarterly magazine, summer 2016 edition. “Struggles over the regulatory frame surrounding nonprofits represent the next chapter in the evolution of the structural definitions of the nonprofit sector.”

Nonprofits rely upon government authority to provide their structural integrity—a reliable degree of certainty regarding corporate formation, ownership of property, tax treatment, and contract enforcement; but they struggle to maintain their autonomy and range of movement in the face of various government accountability reforms and political pressures.

In an April 2016 editorial in The Chronicle of Philanthropy, Tim Delaney, President and CEO of the National Council of Nonprofits, wrote that  “[a]cross the country, state lawmakers are introducing measures … that trample on nonprofits’ constitutional rights — seeking to invade our boardrooms, muzzle what we say, and control how we spend our funds and run our programs.”

Recently, though, there was a victory for the International Rescue Committee (IFC) and the federal government in a lawsuit brought by the State of Texas trying to block resettlement of Syrian refugees in the Lone Star State. The favorable outcome also directly affects almost 20 other relief agencies in that state.

Opposition to Syrian Refugee Resettlement

After the terrorist attacks in Paris in November 2015, there was an immediate political pushback in many states against accepting refugees from strife-torn hotspots in the Middle East.

Under the federal Refugee Act of 1980, though, Congress granted the president and the State Department sole power over refugee policy. “Both the Constitution and federal law prohibit states from picking and choosing among refugees, … [and] multiple Supreme Court decisions dating back to the late 1800s make it clear that states are constitutionally prohibited from discriminating on the basis of national origin or denying the opportunity to live or seek work to immigrants once the federal government has seen fit to admit them.”

“The lion’s share of refugee placement is shouldered by a network of nongovernmental organizations that partner with the State Department to help refugees find places to live and work and ease their transition into new communities.”

Federal law includes a role for state and local officials, but it is limited to “advice-giving and consultation.”

“Refugee resettlement in the United States is completely funded by the federal government, but the state is in charge of contracting with local nonprofit organizations and distributing federal dollars to those agencies. Texas also oversees health assistance to refugees through two federally funded programs.”

“In Texas, most refugee services are carried out by private organizations that receive funding in the form of contracts from the state,” in part so that Texas can “put relatively little of its own tax revenue into social services.” Under federal law, the states have no authority “to nullify the president’s decision to increase the number of type of refugees or where those refugees will eventually live….”

“No matter what these governors say as part of their political grandstanding, states cannot actually stop Syrian refugees from settling within their borders.”

  Texas Efforts to Strongarm Nonprofits

Just days after the Paris attacks, though, Texas Governor Greg Abbott ordered the Texas Health and Human Services Commission (HHSC) to “suspend its cooperation with federal officials” on refugee resettlement. Governor Abbott wrote a letter to President Obama informing him that Texas would not accept any Syrian refugees.

The director of the Texas HHSC then sent a “troubling” letter to “nonprofits and other private agencies with refugee resettlement programs” and which are under contract with Texas to administer federal funds for this purpose. The bottom line of this letter to the relief organizations was an instruction to immediately discontinue plans for any resettlement of Syrian refugees. In fact, members of one family were scheduled for imminent placement in Texas.

The International Rescue Committee (IRC) and other groups objected on numerous grounds including that this directive is a violation of federal law that “put nonprofit agencies in the position of either disobeying state-level requests or breaking federal law.” Some of the faith-based agencies also asserted that this move is a violation of their religious liberty rights; namely, that their faith beliefs are a key foundation of their dedication to relief work.

   Texas Files Suit Against the Feds and IRC

“The federal Office of Refugee Resettlement …warned Abbott and other governors that they do not have the power to reject Syrian refugees, telling them they would be breaking the law if they denied benefits or services to refugees based on their country of origin or religion. And the International Rescue Committee’s Dallas branch informed the state it would continue aiding Syrian refugees placed in Texas despite Abbott’s orders.”

In early December 2015, Texas filed a federal lawsuit in the U.S. District Court for the Northern District of Texas:  Texas Health and Human Services Commission v. U.S. et al., Case No: 3:15-cv-03851. The named defendants were the federal government and the International Rescue Committee.

Texas alleged that “the federal government and the resettlement group have not fulfilled their contractual obligations to consult with, and provide information, to state officials.” The state also claimed that federal government had not given Texas “enough information and about the refugees” and that it had “security concerns.”

In addition, Texas asserted that the IRC “violated a separate provision of the [Refugee Act] requiring the nonprofit work ‘in close cooperation and advance consultation’ with the state.”

   Outcome of Lawsuit

Long story short, federal judge David C. Godbey refused interim injunctive relief twice, and then in mid-June 2016, tossed out the lawsuit entirely against the federal government and against the International Rescue Committee.  In addition to substantive reasons for the denial of relief, Judge Godbey [a Harvard-trained lawyer appointed by President George W. Bush] observed:

Somewhat ironically, Texas, perhaps the reddest of red states, asks a federal court to stick its judicial nose into this political morass, where it does not belong absent statutory authorization….Finding no such authorization, this court will leave resolution of these difficult issues to the political process.

  Conclusion

This battle in Texas has been wrapped up, but the battle over refugee resettlement continues in other jurisdictions, placing relief agencies in the crosshairs of this political dispute.

The post Refugees Relief Agencies Win Standoff Against Texas appeared first on For Purpose Law Group.

In “Local Governments Eager to Snag Revenue from Nonprofits,” we quoted the warning from the late Rick Cohen back in 2010:

If Congress tried to take away the tax exemption from nonprofit 501(c)(3) organizations, our sector would be united and up in arms. But instead we are besieged with hundreds of local attacks on the tax exemption from cities, counties, and states.

While some measures by these government entities are directed at stopping abuses, many are “being mounted by financially starved local and state governments. Clever, creative examples include: changing the terminology of what ordinarily would be called a “tax” into a “fee” and charging nonprofits “for … anything … they can think of” like turning “the local hydrant tax into a fee.” And a major trend is imposing (or asking for voluntary) “payments in lieu of taxes” (PILOTs) to fund important public services like police, fire, and public works.

But the biggest prize is the possibility of challenging the property tax exemptions of the major charitable institutions of a community – the “eds and meds”; that is, the universities and hospitals. As major property-holders, they gobble up many key real estate parcels – removing these valuable assets from the property-tax base.

An early – and widely publicized – victory was in 2010 in Illinois; Downstate Provena Covenant Medical Center lost its tax exemption by failing to prove it was “used for exclusively charitable purposes.” Key factors in the decision were the sources of revenue and the failure to provide enough charity care.

More recently, the State of New Jersey has become a focus of attention because of two key property tax challenges; first, against Morristown Medical Center (decided in the municipality’s favor last year) and an upcoming contest with Princeton University. The same New Jersey tax court judge, Vito Bianco, who ruled against the hospital, will preside over the university lawsuit.

   Morristown Property Tax Challenge

In June 2015, Chief Judge of the New Jersey Tax Court issued a decision that “sent shock waves through the state’s nonprofit health care community.” He ruled that Morristown Medical Center was not eligible for a property tax exemption on almost all of its 40-acre property.

The 88-page opinion was a harsh blast against not only this Morristown facility but more generally against the modern nonprofit health-care institution model. “Non-profit hospitals have changed significantly,” he wrote, “from their early origins as charitable alms houses providing free basic medical treatment to the infirm poor….” The [modern] “medical center appears functionally similar to for-profit hospitals,” operating as “labyrinthine corporate structures, intertwined with both non-profit and for-profit subsidiaries and unaffiliated” entities.

Asserting that “times have changed and the longstanding tax exemption based on state law should no longer apply, Judge Bianco challenged the Legislature to change the law if it disagreed.” He also suggested that “all 72 nonprofit hospitals in the state” may have cause to worry about their property tax exemptions.

The New Jersey Hospital Association is fighting back, though, trying to get legislation passed. The issue is being tossed around like a football between legislators and Governor Chris Christie. The latest news is that Gov. Christie says he will support a proposed “two-year freeze” until the issue can be studied by a proposed 9-member commission.

   The Other Shoe Has Dropped

While the New Jersey Hospital Association fights back trying to get legislation passed, the matter is being tossed back and forth between legislators and Governor Chris Christie.

In late August 2016, though, news broke that 35 New Jersey hospitals have been sued by their local communities, based on the Morristown’s success in attacking the property tax exemption of Morristown Medical Center. A few of those hospitals have already settled with their municipalities.

Gov. Christie has called for “a moratorium on the lawsuits until a study commission can be convened to find a systemwide solution, but there remains opposition to this study group.”

     Conclusion

“[W]hile most organizations are (legitimately) focused elsewhere; that is, on compliance with the complex, federal income tax-exemption rules, these widespread attacks on property tax exemptions around the nation should be a wake-up call. “It’s been clear for several years that this is a trend that the philanthropy community should ignore at its peril.”  

The post More N.J. Nonprofit Hospitals With Property Tax Troubles appeared first on For Purpose Law Group.

This election season includes important candidate races at all levels of government. But, also on the ballot in California, are numerous ballot propositions.  It’s easy to assume that the political ban in section 501(c)(3) on campaign activities would apply to all of the items on which voters have a choice when they enter the voting booth.

Ballot initiatives, however, are not treated the same as candidate races. Section 501(c)(3) public charities are permitted to:  “initiate ballot measures, react to measures proposed by others, and support or oppose ballot measures and encourage the public to vote accordingly.”

Organizations may propose ballot measures (including indirect initiatives) and collect signatures so a ballot measure can be certified. Additionally, public charities can challenge the certification of any proposed ballot measure or oppose indirect initiatives by lobbying the legislative body. Additionally, even though public charities cannot support or oppose candidates for public office, they can urge voters to support or oppose particular ballot measures.

   Ballot Measures Are Treated as Lobbying Activities

Although ballot initiatives are a key element in any election season in California, they are not viewed by the Internal Revenue Service under the same prism as activities in support of or in opposition to candidate races.

The rationale is that voters act as citizen-legislators when they approve or vote against a particular ballot measure.

Accordingly, the intricate  lobbying rules and restrictions are triggered. Public charities are allowed to engaged in a certain amount of lobbying, depending on which of two calculations it uses: either the “insubstantial part test” or the “501(h) expenditure test.”  

If an organization uses the “insubstantial part test,” then any attempt to influence legislation, including ballot measure activities, is considered lobbying. Under the alternative “501(h) expenditure test,” lobbying is divided into two categories:  “direct lobbying” and “grassroots lobbying.” Ballot measure work is considered direct lobbying under the 501(h) expenditure test.

Generally, whether a public charity uses the “insubstantial part test” or the 501(h) election, the organization is allowed to: “publicly endorse or oppose ballot measures;  propose ballot measures;  draft language for ballot measures;  organize volunteers to gather signatures on petitions;  send staff to gather signatures or conduct other ballot measure campaign work;  contribute money to ballot measure campaigns;  loan money to ballot measure campaigns;  host ballot measure campaign events at their offices; and  register people to vote and encourage them to vote for or against a ballot measure.

   Conclusion

Many states, including California, view ballot measure activity as an “electoral” activity and require those who work on ballot measures to report all contributions and expenditures under campaign finance and disclosure laws.

The post Public Charities and Ballot Initiatives appeared first on For Purpose Law Group.

Sometimes called “slush funds” and “shadow corporations,” the foundations that support the nation’s public universities have been grabbing headlines recently: ones they would rather avoid. We highlighted some developments in “Foundations of Public Universities: Too Secretive?”

“Public officials are raising questions about the spending practice of the nonprofit fundraising arms of public universities,” because “they control huge amounts of money with little accountability.”

In our earlier post, we discussed two cases that already received attention earlier this year.

The first example is the University of North Carolina System – and the 17 foundations connected with 11 campuses around the Tar Heel State. With assets recently estimated at almost $1.66 billion, they are fundraising powerhouses. Not for the first time, there have been concerns about the “investment practices of these foundations and how they interact with university finance and property transactions.” Complicating any inquiry is that the UNC System doesn’t even have a complete and readily accessible list of all campus foundations, much less information about how the money is raised and spent. There are suspicions that the foundations are used to circumvent the bureaucracy and oversight of the normal university finance channels. “There are ‘a lot of different colors of money in university operations’ and foundations intermingle that money.” The money flowing out “can be used for anything.”

The second example is the The UConn Foundation, the “private, nonprofit fundraising arm” for the University of Connecticut. While the foundation raised some $80 million last year, “about half of the foundation’s annual operating budget comes from UConn, and it receives ‘some $8 million a year of taxpayer funds.’” As state budget cuts increase, the University relies more and more on UConn Foundation and donations to pay for programs. But there is little transparency, in part because The UConn Foundation “is the only type of university organization in New England that is not subject to freedom of information laws” under state “sunshine” statutes.

These secretive university foundations are not isolated situation; experts believe this is a problem nationwide.

   City University of New York

Another example making headlines currently is the City College 21st Century Foundation, the principal fundraising arm of CUNY.

Earlier this year, “[t]he finances of that foundation, as well as those of City College’s president and her family” had already become the subject of an investigation by federal prosecutors in Brooklyn.

The current story, though, focuses on a specific account within the Foundation: the Martin and Toni Sosnoff Fund for the Arts. In June 2016, a $500,000 donation to the Sosnoff Fund was made; the purpose was “to bolster the humanities and arts” at CUNY’s “flagship school.”  Earlier donations to the same fund had been earmarked and “used to support more than 100 adjunct professors and lecturers in the Division of Humanities and Arts to ensure that students have access to courses they need to successfully pursue their programs of study.”

Faculty members discovered that, by July, just $76 remained in this account.  “That prompted widespread concerns, because ‘diverse programmatic initiatives, student projects and salaries for some faculty and staff depend upon the Sosnoff Fund’” and outstanding invoices were piling up. There was worry that the money had been diverted to help CUNY “close a budget deficit at the end of its fiscal year on June 30.”

The professors who had asked questions were “met with ‘stonewalling,” prompting a broad-based faculty delegation to contact the University chancellor directly. “We are deeply concerned about the practical, ethical and legal implications of the situation,” they wrote. This is a restricted gift that appears to have been diverted from the stated purpose and intent of the donors.

The chancellor, along with CUNY’s general counsel, has launched a new internal investigation specifically relating to this issue – in addition to the move made earlier to hire an outside counsel in response to the broader law enforcement investigation already underway.     

    Conclusion

In addition to following-up on these investigations, in later posts, we’ll take a look at the important topic of donor-restricted gifts.

The post Another Public University Foundation Under Fire appeared first on For Purpose Law Group.

Negative lawyer jokes have been around since (at least!) the time of Shakespeare. Remember this old chestnut?

”The first thing we do, let’s kill all the lawyers…” – Dick the Butcher, Shakespeare’s ”Henry VI”

It’s part of our culture, and sometimes it is unfortunately justified. The attorneys at For Purpose Law Group, however, strive to serve by providing guidance to the purpose-driven organizations and businesses that do good. We do what we do not for the money or the power, but because we believe in what we do… helping our clients to serve those most in need, and to make a positive change in the world.

We’re thrilled that today, November 4th, is Worldwide “Love Your Lawyer Day.” This day of recognition is designed to highlight all of the positive experiences you have had with your lawyers, and to recognize the vast amounts of good work that lawyers do. Click here to see more:

http://www.alpia.org/love-your-lawyer-day.html

If you loved your experience with For Purpose Law Group, the best way to support us would be to post a positive review on our Facebook, our Google+, or on Yelp. You can also share a comment about us on your own social media with the #loveyourlawyer hashtag, or recommend us to someone in need of our legal help.

If you would be willing to provide us with a testimonial (we’d LOVE that!), then all you have to do is complete this form.

We are so very honored by your trust in our ability to provide you with the highest quality legal service with integrity, dedication, and passion.  We thank you.

The post November 4th is International #LoveYourLawyer Day appeared first on For Purpose Law Group.

In “Charities and Embezzlement,” we discussed what to do as soon as embezzlement or fraud is discovered; namely, report it to the authorities and charity regulators.

Of course, an ounce of prevention is worth a pound of cure. As part of a comprehensive risk management plan, an organization should have certain internal controls in place to prevent employee theft. “Nonprofits are not defenseless against charitable asset diversion.”

     Effective Internal Controls

There is no “one-size-fits-all” model for every entity; appropriate precautions depend on the size and the complexity of the organization and its financial management systems.  But accounting and security experts generally suggest a number of steps that can be taken to prevent fraud and embezzlement or to detect it in progress.

These are among the most frequently recommended:

• Dual Signatures and Authorizations

Require two signatures for every check over a specified amount, as well as two signatures on every authorization or other payment. If possible, have someone else – an administrative assistant, for instance – bring the checks to each of the signers, so there is an intermediary serving as a buffer.

• Back-up Documentation

Require backup documentation – an invoice or document demonstrating the transaction is appropriate – for each request for a check or for a cash disbursement. For costs over a specified amount, require prior written approval from two people for credit card payments, and require documentary proof of the reason for the expense.

With credit cards, require prior written approval, again from two individuals, for costs estimated to exceed a certain amount. Require backup documentation demonstrating the need for the expense. The person using the card should not be the one approving the credit-card use. “Multiple layers of approval will make it far more difficult for embezzlers to steal from the organization.”

• Segregation of Duties

“Hand-in-hand with multiple authorizations goes the segregation of duties.”  Create a system where different people: prepare payment records, authorize payments, disburse funds, reconcile bank statements, and review credit card statements. Make sure that duties concerning money coming into the organization are handled by more than one person. “No single individual should receive, deposit, record, and reconcile the receipt of funds.”

• Automated Controls

Take advantage of available electronic notifications to alert more than one senior member of the organization about: bank account activity, balance thresholds, and wire notifications.

  Additional Controls

• Fixed Asset Inventories

At regular intervals, conduct fixed asset inventories to determine if any equipment or other property are missing.

• Audits and Board-Level Oversight

Schedule regular external audits to ensure these controls are effective. 

Establish audit committees of the board of directors, preferably with at least one person familiar with finance and accounting who will serve as primary monitor of these anti-fraud measures. In lieu of an audit committee, recruit a CPA or other financially knowledgeable person to serve on the board.

Periodically bring in an outside expert – for instance, a CPA experienced in conducting fraud audits and in evaluating internal control systems.

• Encourage Whistleblowers

Draft and adopt a written whistleblower policy. In “Whistleblower Policy and Nonprofits,” we explained this requirement. An organization “must develop, adopt, and disclose a formal process to deal with complaints and prevent retaliation.” It must “take any employee complaints seriously, investigate the situation, and fix any problems or justify why corrections are not necessary.”  

Create a “comprehensive and vigorous compliance program, … tailored to the organization, with a written code of ethics,” and regular training. Include “real consequences for violations of the policy, have an effective reporting mechanism, and be periodically audited to ensure its effectiveness.”

   Conclusion

The kindly school library clerk, whose pilfering exploits were described in our earlier post, was able to walk off with $300,000 from the Clinton Valley Little League precisely because that tiny organization had neglected to put in place even a single item in this list of recommended controls.  

Make sure that your organization doesn’t make the same mistake.

The post Charity Embezzlement: Thwart It With Good Controls appeared first on For Purpose Law Group.

Each year, the Internal Revenue Service issues a “Priority Guidance Plan” to announce the “tax issues that should be addressed through regulations, revenue rulings, revenue procedures, notices, and other published administrative guidance.”  

The purpose of this document is to focus “resources on guidance items that are most important to taxpayers and tax administration. Published guidance plays an important role in increasing voluntary compliance by helping to clarify ambiguous areas of the tax law.”

    New Priorities for Exempt Organizations Issued

On August 15, 2016, the Treasury Department issued the latest update of the 2016-2017 Priority Guidance Plan. It includes 281 projects across a broad spectrum of federal tax issues “that are priorities for allocation of the resources of our offices during the twelve-month period from July 2016 through June 2017.” Included are 15 issues of interest to exempt organizations and their advisors.

Listed items are the “projects [the Treasury Department intends] to work on actively” during this time frame….”  Development of this Plan followed Notice 2016-26 in which Treasury “solicited suggestions from all interested parties, including taxpayers, tax practitioners, and industry groups.” Tax officials “recognize the importance of public input to formulate a Priority Guidance Plan that focuses resources on guidance items that are most important to taxpayers and tax administration.”

The items listed for exempt organizations are:

1. Revenue procedures updating grantor and contributor reliance criteria under §§170 and 509.
2. Revenue procedure to update Revenue Procedure 2011-33 for EO Select Check.
3. Final regulations under §§501(a), 501(c)(3), and 508 relating to a streamlined application process for eligible organizations to apply for recognition of tax-exempt status under §501(c)(3). Final and temporary regulations were published on July 02, 2014.
4. Update Revenue Ruling 67-390.
5. Proposed regulations under §501(c) relating to political campaign intervention. Note:  Project suspended in accordance with section 127 of the Department of the Treasury Appropriations Act, 2016 (Title I of Division E of the Consolidated Appropriations Act, 2016).
6. Regulations and other guidance on §506 as added by the Protecting Americans from Tax Hikes Act of 2015. • PUBLISHED 07/12/16 in FR as TD 9775 (FINAL and TEMP). • PUBLISHED 07/25/16 in IRB 2016-30 as REV. PROC. 2016-41. (RELEASED 07/08/16).
7. Final regulations on §509(a)(3) supporting organizations. Proposed regulations were published on February 19, 2016.
8. Guidance under §512 regarding methods of allocating expenses relating to dual use facilities.
9. Final regulations under §529A on Qualified ABLE Programs as added by §102 of the ABLE Act of 2014. Proposed regulations were published on June 22, 2015.
10. Guidance under §4941 regarding a private foundation’s investment in a partnership in which disqualified persons are also partners.
11. Update to Revenue Procedure 92-94 on §§4942 and 4945.
12. Guidance regarding the excise taxes on donor advised funds and fund management.
13. Guidance under §6033 relating to the reporting of contributions.
14. Final regulations under §6104(c). Proposed regulations were published on March 15, 2011.
15. Final regulations under §7611 relating to church tax inquiries and examinations. Proposed regulations were published on August 5, 2009.

  Example: No. 4, Update on Changing Domicile

The 4th item, indicating an intention to “[u]pdate Revenue Ruling 67-390,” appears to signal an official relaxation of the previously rigid position requiring an organization to “re-apply” for  tax-exemption if it changes its corporate structure, including when an exempt organization reincorporates under the laws of another state – even if there is no change in charitable purposes.

There was some unofficial, unpublished “evolution” on this issue in 2014 when the IRS issued Private Letter Ruling 201446025.  (A private letter ruling is not officially published, but available online with redactions. It applies only to the party requesting help on a particular proposed transaction. Nevertheless, it can be helpful in understanding the thinking of IRS officials.)

In PLR 201446025, the IRS indicated that a 501(c)(3)’s move from one state to another without any change in its charitable mission or activities, is not considered the formation of a new legal entity or other change in structure that might otherwise require the filing of a new application for tax exemption. In this situation, the requesting organization had filed a certificate of conversion in its original state of domicile as well as articles of domestication in the new state. The result, therefore, was not the creation of a new entity but merely a continuation of the same entity with a new state of domicile.

It seems likely, then, that the “update to Revenue Ruling 67-390” will follow the reasoning of this recent private letter ruling.  This new position will remove an important – but not the only – barrier to 501(c)(3)s which want, or need, to cross state lines. There may still be obstacles from state law.

   Conclusion

While the items listed on the Priority Guidance Plan are ones that the Treasury Department intends to tackle during the upcoming year, there is an important caveat: “… issuance of the Plan does not place any deadline on completion of projects.” The agency also issues updates during the year, and will, in several months, request input and advice from the public for the 2017-2018 priorities list.

The post IRS Announces Guidance Priorities for Exempt Organizations appeared first on For Purpose Law Group.

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Insurance is an essential component of a nonprofit organization’s comprehensive risk management plan; that is, the strategic review of the potential exposure “to unexpected losses, and then develop[ment][of] strategies either to prevent losses from happening, or to reduce damage and expense when they do.” It protects the “the people and assets that help the nonprofit fulfill its mission.”

   Basic Recommended Coverage

Nonprofits need “at least minimal levels of insurance to protect themselves against some … risks to which all corporations are … vulnerable” as well as coverage for the special situations and needs of philanthropic organizations. The exact types and amounts of insurance vary dramatically, depending on the corporation’s activities, revenues, size of workforce, risk experience, and other factors.”

Most organizations need, at a minimum, commercial general liability insurance. They are well advised, also, to secure directors’ and officers’ liability insurance.

• Director and Officers (D&O); Employment Practices

This insurance coverage is the one that nonprofits generally ask about first, but which is most misunderstood. The common misconception is that a D&O policy is “catch-all coverage to protect the leadership against any and every lawsuit.”

D&O coverage is more aptly described as “management liability coverage. It protects the board and leaders and organization against lawsuits brought for ‘wrongful acts.’”

What is the meaning of “wrongful acts” under a D&O policy? It’s not defined consistently, but it is, “in essence, a leadership team’s breach or neglect of fiduciary obligations.”

For nonprofit coverage, most policies include “employment practices liability” coverage, which protects against claims involving the Equal Employment Opportunity Commission or other claims involving sexual harassment and discriminatory practices.”

• General Liability Insurance:  

Because D&O coverage excludes claims involving bodily injury and property damage, the nonprofit organization needs separate general liability coverage.

Most insurers offer and include several types of coverage in a general liability package for nonprofit organizations:

General liability:  Covers bodily injury or property damage claims, and includes defense for personal and advertising injury claims like copyright infringement. “If you want to rent space, gain a contract, get funding, have a special event, or work in partnership with another organization, you will most likely be asked to provide proof of general liability insurance.”

Professional liability: Covers the nonprofit for “services that could be considered professional in nature, whether you employ licensed professionals or not. If you have a mentoring, educational, life skills, counseling, or case management exposure at all, then professional liability is a necessary consideration.” Generally, for nonprofits, it’s bundled with the general liability coverage, so there are no gaps in coverage.

  Additional Coverage

• Workers Compensation or Accident Insurance:

This coverage is generally required by law even if there is just a single employee. General liability insurance does not cover injuries to employees.

“Volunteer injuries can be addressed by a standard general liability policy (unless there’s an additional volunteer exclusion added). Still, the volunteer accident policy can help protect your general liability bad claims experience by picking up minor volunteer mishaps.” Check with your insurance agent about this issue.

• Property Insurance:

Even if a small nonprofit doesn’t own much in the way of business property, there can still be unexpected and costly losses, e.g., “pipes bursting in an office, windstorm, fire, hail damage, theft, and vandalism.”

• Auto Insurance

Coverage is needed for any vehicles owned by the organization. Even if an organization does not own a vehicle, there may be a need for “hired/non-owned auto coverage” for protection when someone uses a personal vehicle “for activities related to the nonprofit: running running errands, transporting clients, etc.”

• Cyber Liability

Coverage for security breaches of data. 

• Employee Dishonesty

Also called “crime coverage” or “crime bonds”; municipal contracts or foundation grants often require this type of coverage.

• Abuse and Molestation Liability

Coverage that is usually excluded on general and professional liability policies, but needed if the nonprofit serves “youth, seniors, developmentally disabled, or otherwise are charged with helping a disadvantaged population.”

  Conclusion

Risks can be mitigated, but never entirely eliminated. There is insurance coverage for many, though not all, risks.  

Because of the specialized nature of the nonprofit sector, and the particular circumstances of each situation, it’s important to work with an experienced, knowledgeable, insurance professional who specializes in this type of insurance coverage.

The post Insurance for Nonprofits: A Primer appeared first on For Purpose Law Group.