Nonprofit Law Blog

2013 Annual Private Foundation National Conference - Day Two

2013-05-24T15:27:22-07:00

Highlights from the morning sessions of Day Two of the 2013 Private Foundation National Conference in Seattle below.

BREAKING NEWS: Greg Colvin's Committee housed within Public Citizen drafted a proposal on clarifying IRS rules on political intervention. See Bright Lines Project (just published yesterday).

Direct Charitable Activities - Jody Blazek and Jane Searing

A private operating foundation is any private foundation that spends at least 85 percent of its adjusted net income or its minimum investment return, whichever is less, directly for the active conduct of its exempt activities (the income test). In addition, the foundation must meet one of three tests: the assets test, the endowment test, and the support test.
If a private foundation’s qualifying distributions exceed its minimum investment return for the tax year, but are less than its adjusted net income, substantially all of the total qualified distributions must be made directly for the active conduct of the foundation’s exempt activities. But if the foundation’s minimum investment return is less than its adjusted net income and its qualified distributions equal or exceed the adjusted net income, only that part of the qualified distributions equal to substantially all of the foundation’s adjusted net income must be made directly for the active conduct of the foundation’s exempt activities.
The Internal Revenue Manual gives the following examples of expenditures for Direct Charitable Activities: amounts paid or set aside to acquire or maintain the operating assets of a museum, library, or historic site, or to operate such facility; to provide goods, shelter, or clothing to indigents or disaster victims if the foundation maintains some significant involvement in the activity rather than merely making grants to recipients; to conduct educational conferences and seminars; to operate a home for the aged or disabled; to conduct scientific, historic, public policy, or other research with significance beyond the foundation's grant program, and which does not constitute a proscribed attempt to influence legislation; to publish and disseminate the results of such research, reports of educational conferences, or similar educational material; to support the service of foundation staff on boards or advisory committees of other charitable organizations, or on public commissions or task forces; to provide technical advice or assistance to a governmental body, a governmental committee or subdivision of either in response to a written request by the governmental body, committee or subdivision; and, to conduct performances in the performing arts.
Technical assistance must have significance beyond the purposes of the grants made to grantees, and must not consist merely of monitoring or advising the grantees in their use of grant funds. Technical assistance involves the furnishing of expert advice and related assistance regarding, for example, compliance with governmental regulations, reducing operating costs or increasing program accomplishments, fund-raising methods, and maintaining complete and accurate financial records.
Expenses attributable to administering grant programs, such as reviewing grant applications, site visits, selecting grantees and reviewing reports relating to the use of grant funds, usually do not constitute Direct Charitable Activities,

Private Foundations Can't Influence the Government? Think Again - Greg Colvin

Lobbying laws applicable to public charities differentiate between direct and grassroots lobbying. [Ed. See "Direct" and "Grass Roots" Lobbying Defined (IRS)]
Ballot measures - public is the law-making body - lobbying directed to the public = direct lobbying. [Ed. See Ballot Measures and Public Charities: Yes You Can Influence That Vote (AFJ)]
Exceptions to lobbying include response to written request for technical assistance from government body. See templates for written request and affirmative response from Adler Colvin
Private foundations cannot earmark grants for lobbying, but they can make general support grants and certain specific project grants for projects that will involve lobbying so long as the grant amount is at least equal to the nonlobbying portion of the project budget ("McIntosh rule")
Private foundation grant agreements are NOT required to prohibit use of funds for lobbying, but make sure you have protective language (e.g., "The Grant is not earmarked for use in any attempt to influence legislation ... and the Grantor and Grantee have not entered into any agreement ... that directors that the grant funds be used for lobbying activities ...")
"Educating public officials" could be lobbying - understand the definitions and be careful. Check whether there was a communication made and to whom. Look for a specific legislative proposal. In public messaging, look for a call to action. See if an exception applies.
"The bigger the public policy advocacy campaign, and the longer it goes on, the smaller the proportion of expenditures within the IRS definition of lobbying"
See Independent Sector's Beyond the Cause: The Art and Science of Advocacy
Lobbying regulations take up about 50 pages. Prohibited political intervention activities regulations take up about 1/4 page. More detailed regulations and bright-line tests needed.

[Ed. Also see Private Foundations May Advocate (AFJ)]

Day One Highlights

Nonprofit Tweets of the Week - May 24, 2013

2013-05-24T05:00:00-07:00

This week's selection of nonprofit tweets is coming from Seattle, where I'm attending the Fourth Annual Private Foundation National Conference. Have a listen to local group The Postal Service perform Such Great Heights while perusing the list:

Nonprofit Quarterly: Congress stumbles toward a sharper understanding of what happened at the IRS http://ow.ly/liC2J
Rick Cohen: The results of our live blogging from the Senate Finance Committee on the IRS controversy are here http://bit.ly/18gtBsj
Gene: Confusion and Staff Troubles Rife at I.R.S. Office in Ohio [exemption determinations unit] http://www.nytimes.com/2013/05/19/
Politico: IRS hearing: The takeaways: http://politi.co/15TU4hU
Emily: Leveraging the Power of Foundations-An Analysis of Program-Related Investing from IUPUI http://flip.it/lAMjz
Gene: Legalities of Nonprofit Internships http://www.blueavocado.org/content/legalities-nonprofit-internships
Eugene Fram: When is the Right Time to Change a Nonprofit’s Bylaws? http://wp.me/pz57p-Je
Sustainable Law Group: Here's the info on the new social enterprise bill in Congress. http://cicilline.house.gov/press-release/
Social Entrepreneur: Will Seattle Become The Capital Of Social Entrepreneurship? http://www.fastcoexist.com/node/1680153

Patty Morrissey provided 3 great tweets from Van Jones' keynote at the Social Enterprise Alliance Summit:

False idea that killed the economy #1 "We can have an economy based on consumption, not production" Malls over Factories.
False idea that killed the economy #2 "We can build an economy on credit and debt"
False idea that killed the economy #3 "We can have an economy based on environmental destruction instead of restoration"

2013 Annual Private Foundation National Conference - Day One

2013-05-23T16:55:35-07:00

I'm in beautiful Seattle for the Fourth Annual Private Foundation National Conference. Day One highlights below:

Primer on private foundations - Jody Blazek

Motivation for starting a private foundation must be charitable
Special rules and excise taxes apply to private foundations (n/a to public charities)
Self-dealing penalties cannot be abated
The statute of limitations on acts of self-dealing will not run if such acts were not properly disclosed to the IRS
Important to use professionals to understand when and how the minimum distribution requirement can be reduced to 1 percent
Less than 100 private foundations make PRIs - see Leveraging the Power of Foundations-An Analysis of Program-Related Investing (IUPUI)
See Tax Information for Private Foundations (IRS)

Private Foundation Sector Update - King McGlaughon

The majority group of private foundations (other than the top 5-10% in size) increased their giving during the recession, and their founders/benefactors increased their giving to their private foundations during this time
Distributions from these private foundations (particularly the $1-10M foundations) from 2008-2011 (through the recession) were about twice the amount of the minimum amounts required
These "entrepreneurial foundations" are led by individuals who are driven by their charitable motivations (as opposed to more "institutional foundations" that are often set to operate in perpetuity)

Effectively Understanding and Evaluating Grantee Indirect Costs - Panel

The true cost of running a program includes its direct cost and its fair share of indirect cost
There is no single definition of "indirect cost"
Indirect costs are those that have been incurred for common or joint objectives and cannot be readily identified with a particular final cost objective
Indirect costs include both management & general costs AND shared program costs that cannot easily be identified with a specific program or cost objective
An indirect cost rate is not a measure of program efficacy
Fundraising for a shortfall in recovery of indirect costs is very difficult
Because of the way government reimbursements of indirect costs work, raising private foundation grants that do not pay indirect costs can result in the grantee being in a worse financial situation than if it did not accept the foundation grant
Example of the problem of relying on a single metric and not reviewing multiple metrics in context: Land trust: raises $1M and buys conservation land for $1M. While 100% of funds raised went to directly advance its charitable purpose, its programmatic expense ratio is 0%.

Trends in Philanthropy - Aubrey Haberman

Proportion of Northwest dollars by subsector in 2010 included: 30% education; 18% human services; 17% international; 12% public benefits; 8% health; 7% environment; 7% arts; 1% religion

Trends in Family Philanthropy - Craig Muska

"Wealthy American families increasingly are considering family offices — private entities that manage investments, trusts, and other financial planning — to manage their philanthropic giving ...." See Wealthy Families Using Family Offices to Manage Giving (PND)

Excess Business Holdings Rules - Jeffrey Haskell

Excess business holdings (EBH) rules limit the holdings that a private foundation, together with its disqualified persons (e.g., substantial contributors, insiders like directors and officers, and related persons and entities), may have in a business enterprise.
The EBH rules are meant to prevent the shifting of a foundation's focus away from its charitable/exempt activities and a foundation's unfair competition with for-profit businesses by taking advantage of a much lower tax rate (1% or 2%).
See Taxes on Excess Business Holdings (IRS)

Self-dealing Case Studies - panel

Private foundation self-dealing analysis: (1) Is there value flowing from the foundation to a disqualified person? (2) Is there an exception to self-dealing rules applicable? (3) Is the amount of the transaction excessive? (4) Does the transaction advance the foundation's charitable/exempt purposes?
Foundation credit cards used for personal purposes creates a self-dealing problem. Be very careful with policies on credit card use (including enforcement of such policies).
Reimbursement to a disqualified person may be permissible or may be a self-dealing transaction subject to penalties. Consider whether the transaction advances the foundation's charitable/exempt purposes; whether it was reasonable; whether the purchase by the individual was authorized; whether the individual was acting as an agent of the foundation; and/or whether the individual was acting as a lender to the foundation?
If a disqualified person leases space to a foundation for free (which is okay in and of itself) but is indemnified for fire caused by a foundation employee, the indemnification may be a prohibited self-dealing transaction.
If a disqualified person leases space to a foundation for free (with respect to rent), but the foundation must pay for associated services, the foundation should pay such service fees directly to vendors. If it pays the foundation, there may be a violation of the self-dealing rules.
A private foundation may pay a family management company for personal services (like administrative management) without violating self-dealing rules. However, janitorial and maintenance services are not covered under this exception.
A sponsorship paid 90% by a foundation and 10% by a disqualified person that results in benefits used by a number of people including the disqualified person may be a violation of the self-dealing rules (to the extent that the disqualified person availed himself of a benefit that would not have accrued without the foundation's payment).

These are short summaries of statements made by speakers at a conference regarding highly complex rules that should be discussed with an attorney, CPA or other qualified professional.

All Eyes on Delaware’s Public Benefit Corporation Legislation

2013-05-20T04:30:00-07:00

Last month, with great fanfare, Delaware’s governor Jack Markell introduced legislation providing for the creation of public benefit corporations. Enjoying broad, bipartisan support, the new law is expected to be quickly approved and put into effect as early as August 1, 2013.

That Delaware has decided to legislatively sanctify public benefit corporations is a huge step forward on the path toward broad-based acceptance of this new corporate form. Consider this -- over 1 million business entities call Delaware their legal home, including more than 50% of all U.S. publicly traded companies and nearly 2/3 of Fortune 500 companies. Delaware’s courts have a long and deep corporate jurisprudence. The state even has its own court – the Court of Chancery – for settling corporate disputes and its decisions are often relied on by judges in other states.

Perhaps because it is the granddaddy of corporate jurisdictions, Delaware wasn’t content to mirror other states’ benefit corporation statutes. Its legislation differs in 4 notable ways:

higher shareholder voting thresholds to approve the switch from a traditional to a public benefit corporation;
a different mix of priorities for directors;
greater clarity and specificity in the formation document as to the public benefit at the corporation’s heart; and
relaxed public reporting requirements.

In Delaware, at least 90% of a corporation’s voting shareholders will have to approve the transition to a public benefit corporation. In contrast, most states require only 2/3 of the voting shareholders’ approval.

And unlike other states, which require only that the benefit corporation act to promote a general public benefit, Delaware requires the public benefit corporation to identify in its corporate documents a specific benefit to be promoted. (A public benefit is defined a positive effect or reduction of negative effects to persons, entities, communities, or interests other than stockholders in the capacities as stockholders. This includes, but is not limited to effects of an artistic, charitable, cultural, economic, educational, environmental, literary, medical, religious, scientific, or technological nature.)

The law also places a different set of priorities on directors – requiring them to balance the stockholder’s pecuniary interests, the interests of those materially affected by the corporation’s conduct and the identified public benefit(s) by the corporation in their business decisions. In contrast, other states only require directors to consider other factors, such as environmental and social impact.

Finally, Delaware’s reporting requirements are much more relaxed. Most benefit corporation states require an annual report assessing the overall social and environmental performance of the benefit corporation against a third-party standard, which is made available to the public. But in Delaware, reporting need occur only every other year, the report does not have to be made public, and no third party standard for measuring public benefit is required.

Although the reporting requirements are not the most ideal from an outsider’s perspective, it is hard to deny that Delaware’s endorsement of public benefit corporations is a landmark step in allowing a corporation to pursue both profits and promote social good. It will also provide important assurances to entrepreneurs and investors still cautious of this new corporate form.

Resource: http://www.legis.delaware.gov/LIS/LIS147.NSF/vwLegislation/SB+47?Opendocument

- Michelle Baker

Michelle Baker is a San Francisco-based attorney interested in social enterprises.

Nonprofit Tweets of the Week - May 17, 2013

2013-05-17T04:19:00-07:00

Quite the week for the IRS. Have a listen to Radiohead's Electioneering while perusing this week's serving of tweets:

Rick Hasen: WaPo learned 5 things from the IRS report: http://www.washingtonpost.com/blogs/the-fix/post/five-takeaways-from-the-irs-report/2013/05/15/5d3d0802-bd73-11e2-b537-ab47f0325f7c_blog.html … NPR learned 10 http://n.pr/17wiBJi
Nonprofit Quarterly: The IRS scandal should be a wake-up call for all that it's time to come to grips with the mess of 501(c)(4)s http://ow.ly/l4hxU
L.A. Times: Michael Hiltzik: Political nonprofits are the real IRS scandal http://lati.ms/l2ucm
Tax Policy Center: Regrettably the IRS has succeeded in making all (c)(4)s, on the right & left, even more immune from investigation http://bit.ly/126y5O5
Lori Jacobwith: Today's Withism's from Lori: 5 Questions Every Board Should Ask http://ow.ly/l321y
Foundation Center: [Infographic] Mission Investing http://bit.ly/18G6Oap
Stanford Social Innovation Review: Cover story from our Summer 2013 issue: Exploring the conditions that foster breakthrough innovation in government: http://ow.ly/l70HY
Bruce Campbell: Our own Seth Henry, helps bring the Benefit Corporation to Colorado, and writes of its importance on our blog: http://campbelllawgroup.com/2013/05/benefit-corporations-arrive-in-colorado/
McKinsey on Society: Crowdfunding Landscape: Changing how people support social causes http://ow.ly/l2cyF

Treasury Inspector General Report on IRS "Scandal"

2013-05-15T09:57:13-07:00

On May 14, 2013, the Treasury Inspector General for Tax Administration released its report on the IRS targeting of conservative groups in reviewing applications for exemption under Section 501(c)(4) of the Internal Revenue Code. The report, Inappropriate Criteria Were Used to Identify Tax-Exemption Applications for Review, and problems will continue to be dissected over the coming months.

One section of interest described follow-up questions to exemption applications that the IRS should not have asked:

Seven Questions Identified As Unnecessary by the EO Function

Requests the names of donors.
Requests a list of all issues that are important to the organization and asks that the organization indicate its position regarding such issues.
Requests 1) the roles and activities of the audience and participants other than members in the activity and 2) the type of conversations and discussions members and participants had during the activity.
Asks whether the officer, director, etc., has run or will run for public office.
Requests the political affiliation of the officer, director, speakers, candidates supported, etc., or otherwise refers to the relationship with identified political party–related organizations.
Requests information regarding employment, other than for the organization, including hours worked.
Requests information regarding activities of another organization – not just the relationship of the other organization to the applicant.

IRS/EO apologizes for improperly targeting conservative groups

2013-05-10T17:11:28-07:00

Earlier today, Lois Lerner, the director of the Internal Revenue Service Exempt Organizations division, apologized for the acts of its employees in singling out the exemption applications of Tea Party and other conservative groups for extra scrutiny. The IRS added in a statement that such mistakes "were in no way due to any political or partisan rationale."

From CNN:

Any applications that were incomplete, lacked consistent information, or indicated a group would be involved with some type of advocacy, were filed into a certain group for further review.

However, approximately 75 of the 300 groups that were filed for further review were simply filed because they had the names "tea party" and "patriot," Lerner said.

From NPR:

"They didn't do this because there was any political bias going on," said Lerner, who described the workers as "low level." Instead the workers were trying to streamline their work. They could have avoided the whole controversy by classifying the filings as "advocacy" cases, she explained, but they weren't sensitive to the political dynamics.

Additional Resources:

IRS Apologizes for Scrutiny of Conservative Groups, The Wall Street Journal

Investigations Sought Over U.S. IRS Scrutiny of Anti-Tax Groups, The San Francisco Chronicle

Nonprofit Tweets of the Week - May 10, 2013

2013-05-10T00:14:35-07:00

I'll be on Nonprofit Radio today at 10:30 am PT / 1:30 pm ET talking with Tony about Dan Pallotta's viral video on TED, The way we think about charity is dead wrong. You can catch us live or on iTunes.

Listen to Depeche Mode's Wrong as you peruse this week's list of tweets:

Pro Publica: Announcing Nonprofit Explorer, a simple way to search 990s for nearly 616k nonprofits: http://propub.ca/13kbtfK
Gene: Silicon Valley's philanthropy disconnected from the community - http://www.ssireview.org/blog/entry/local_resources_for_local_needs
C. Garger Siegrist: Settlement ends Hershey Trust probe http://ow.ly/kSDRM
Gene: Banning nonprofits from certain businesses http://nonprofitquarterly.org/policysocial-context/22251-alabama-s-persistent-nonprofit-for-profit-war-extends-to-animal-clinics.html | protecting biz or hurting public
Nonprofit Law News: Internet Fundraising for Tax-Exempt Organizations http://lawdai.ly/11Wg0SM | by @ProskExemptBlog
Gene: Top Ten Tips for Preventing Theft and Embezzlement http://charitylawyerblog.com/2013/04/01/top-ten-tips-for-preventing-theft-and-embezzlement/ - from Charity Lawyer Blog
Debra Beck: Are your board members good problem *finders?* Common barriers http://bit.ly/11GPpJe [Part One]
Debra Beck: Problem-finding: What boards need http://bit.ly/13WnOFM [Part Two]
Emily Chan: California May Introduce Social Impact Bonds via Nonprofit Law Matters http://flip.it/H5TzD
Stanford Social Innovation Review: Scaling is easier said than done. Five critical questions nonprofits should answer before trying to scale: http://ow.ly/kSL10
Jed Emerson: New SJF/Duke Report on Accelerating Impact!! http://bit.ly/12gtb2A

Socially Responsible Businesses Get a Boost from Local Governments

2013-05-08T05:00:00-07:00

In the past year, San Francisco and Philadelphia have taken an exciting lead in encouraging socially responsible businesses by offering them financial incentives.

In April 2012, San Francisco passed an ordinance granting California Benefit Corporations a bidding preference on city contracts. During each stage of the proposal selection process the “Benefit Corporation Discount” provides a 4% advantage when determining the highest ranked or apparent lowest bid.

To get this added value, the business: (1) must have been incorporated for at least 6 months as a Benefit Corporation in California, and (2) cannot be a subsidiary of a non-Benefit Corporation.

Even if a Benefit Corporation qualifies, it won’t get the discount if it displaces other preferential bidders, such as designated local business entities, nonprofits, or San Francisco and regional businesses. (A regional business has its principal places of business in: Alameda, Contra Costa, Marin, Napa, San Mateo, Santa Clara, Solano, Sonoma and Sacramento.) If the Benefit Corporation is also a San Francisco or regional business, the preference will apply, arguably providing a double benefit to the community.

Another city spearheading this movement is Philadelphia, which recently implemented its 2009 decision to grant tax incentives for sustainable businesses. The “Sustainable Business Tax Credit” provides a tax credit of up to $4,000 against the gross receipts portion of the Business Income and Receipt Tax, for the tax years 2012 through 2017.

This tax credit applies to certified B Corporations and city-defined sustainable businesses. (A sustainable business is a “business that gives substantial consideration to employee, community and environmental interests in its practices, products, and services.”)

It remains to be seen whether these financial incentives will prompt the formation of new Benefit Corporations, or the certification of existing corporations as B corporations. By passing these ordinances, San Francisco and Philadelphia have acknowledged that there are additional costs for operating Benefit Corporations, and seek to reward them for their social responsibility. Let’s hope that other cities follow their lead.

For more information on the San Francisco Benefit Corporation Discount, please see http://www.sfbos.org/Modules/ShowDocument.aspx?documentid=41408.

For more information on the Philadelphia Sustainable Business Tax Credit, please see http://www.phila.gov/green/index.html.

For more information on B Corporation certification, please see http://www.bcorporation.net.

- Michelle Baker

Michelle Baker is a San Francisco-based attorney interested in social enterprises.

Nonprofit Tweets of the Week - May 3, 2013

2013-05-03T05:08:00-07:00

The story of the week for me was Jason Collins coming out (Sports Illustrated). Hope to see this lead to widespread support among all the influential superstars (because they can turn minds), less bullying, and more acceptance. Bob Dylan called it: The Times They Are A-Changin' Have a listen while perusing this week's selection of tweets:

Nonprofit Finance Fund: The State of Small Nonprofits
Gene: IRS plans to look at unrelated business income reporting more closely across the nonprofit sector link
Gene: Nonprofit Directors & Officers Liability Insurance and Indemnification link
Nonprofit Quarterly: How Social Ventures Australia led a group of nonprofits to create a scale social enterprise out of a bankrupt business link
McKinsey on Society: 10 Ideas Driving The Future Of Social Entrepreneurship
Law For Change: Some speculation: What Will Be the Identity of the First Delaware Benefit Corporation? link
Acumen: Social Impact Bonds continue to grow, but it's still too early to determine their effectiveness link
Rockefeller Foundation: 5 Key Trends In Impact Investing - Forbes
McKinsey on Society: Is it crazy to think we can eradicate #poverty? Great article from NY Times & Annie Lowrey
Warren Buffett: Read my new essay on why women are key to America's prosperity link
99u: You cannot expect a really good working life until you're really good at something - Cal Newport 99u Conference