Exempt Organizations Blog

Two Recent Tax Court Rulings on Charitable Contribution Deductions That Charities Should Be Aware Of

noreply@blogger.com (Patrick Sternal) — Tue, 05 Jun 2012 01:07:00 +0000

Two recent Tax Court cases were decided last month in which the court upheld the IRS's denial of significant charitable contribution deductions. In both of these cases, there was no dispute that the taxpayers made the contributions, or that they were made to qualified 501(c)(3) organizations, or even that the value of the contributions was at least as much as the taxpayers had reported. In both cases, however, the taxpayers failed to comply in some way with substantiation requirements of the Tax Code and Regulations, and so their contribution deductions were denied.

The first case, Durden v. Commissioner, T.C. Memo. 2012-140 (May 17, 2012), involved a Texas couple who claimed a deduction of $25,171 for cash contributions to their church. The church sent a letter of acknowledgement in January of 2008, but that receipt lacked a statement of whether any goods or services were provided to the Durdens in exchange for their contributions. Obviously trying to make up for the error, the church provided a second acknowledgement in June of 2009, which did include the proper statements. Nevertheless, the IRS denied the deduction because the Durdens failed to get a proper receipt from their church. In the IRS's view, the first acknowledgement was lacking a statement of whether goods or services were provided by the church, and the the second acknowledgement was not a "contemporaneous" receipt, because it was not received by the Durdens by the due date for filing their original return for the year. Because the Durdens did not have proper receipts, the judge agreed with the IRS that the Durdens failed to comply with the substantiation requirements of IRC 170(f)(8).

The second case is Mohamed v. Commissioner, T.C. Memo 2012-152 (May 29,2012). In this case, a California couple made gifts of "extremely valuable" real property (>$18.5 million total) to their charitable trust in 2003 and 2004. The IRS denied the deduction for these contributions because the Mohameds did not have the property independently appraised, as required by Treasury regulations for noncash property contributions of more than $5000. The taxpayer in this case prepared and filed his own tax return, including the required Form 8283 for noncash charitable contributions. The taxpayer admitted that he did not read the Form 8283 instructions (!), although the form itself appeared simple enough, and perhaps was even a little misleading. (The IRS has since revised Form 8283.) The tax court agreed with the IRS that the Mohameds had failed to satisfy the appraisal requirements of the Section 170 regulations, and therefore, their charitable deductions were completely denied. The court agreed that this was a harsh result, but found that "the problems of misvalued property are so great that Congress was quite specific about what the charitably inclined have to do to defend their deductions, and we cannot in a single sympathetic case undermine those rules."

From the perspective of charitable organizations, these cases present reminders that charities need to supply donors with proper receipts. These cases make it clear that, ultimately, it is the taxpayer's responsibility to comply with the requirements for disclosure and substantiation in order to take charitable contribution deductions for gifts they have made. And charities should not be giving their donors legal or tax advice, including putting valuation on property received. That being said, charitable organizations should be familiar with the reporting and substantiation requirements so that they can help their donors comply. At a minimum, charities should be giving donors proper receipts for contributions.

Helpful resources from the IRS include: Publication 1771 Charitable Contributions-Substantiation and Disclosure Requirements, and Publication 526 Charitable Contributions, Publication 561 Determining the Value of Donated Property, and the IRS's Stay Exempt website program, Can I Deduct My Charitable Contributions?

Reminder: Small Organization Transitional Relief - Only Until December 31, 2012

noreply@blogger.com (Patrick Sternal) — Fri, 18 May 2012 22:38:00 +0000

The number of tax-exempt organizations that have had their exempt status automatically revoked by the IRS since May 15, 2010 because they failed to file required annual information returns (Form 990, 990-EZ, or 990-N) is now approaching nearly 440,000(!). While many (most?) of these organizations have been dead for a long time, there are many organizations that are not dead yet, and who will want to have their exempt status reinstated. The burden is now on those organizations either to show that the revocation was a mistake, or to file an application for reinstatement.

As noted previously on the Exempt Organizations Blog, the IRS has put in place certain procedures whereby tax-exempt organizations that have had their exempt status can apply for reinstatement of tax-exempt status and request retroactive reinstatement. For small organizations, in particular, Notice 2011-43 and Rev. Proc. 2011-36 provide "transitional relief" in the form of a reduced filing fee of $100 and a lesser burden for showing reasonable cause for filing failure, thereby allowing reinstatement back to the date of revocation. In order to qualify for small organization transitional relief under Notice 2011-43/Rev. Proc. 2011-36, an organization must:

Not have been required to file Form 990 or 990-EZ for tax years beginning before 2007
Been eligible to file Form 990-N for 2007, 2008, and 2009
Submit its application for reinstatement for exempt status by December 31, 2012.

Although December is months away yet, the time required to prepare and submit a Form 1023 or 1024 application is fairly substantial. There is no "short" Form 1023/1024 and the amount of financial and other information required to complete these applications is significant. Now is the time for small organizations to submit applications under the transitional relief provisions. As Benjamin Franklin said, "You may delay, but time will not." And neither will the IRS.

Round Up of 2011 California Nonprofit Legislation

noreply@blogger.com (Patrick Sternal) — Sat, 15 Oct 2011 01:31:00 +0000

Round'em up!

Governor Jerry Brown signed into law hundreds of pieces of legislation these past few weeks. Most of these laws will go into effect January 1, 2011. The following laws, in particular, impact nonprofit and tax-exempt organizations in some manner:

AB 289, Cedillo - Extends the sales and use tax exemption for retail items sold by thrift stores operated by nonprofit organizations to assist individuals with HIV and AIDS.
AB 657, Gordon - Allows businesses (including nonprofit corporations) to elect to receive email notices from the Secretary of State, in lieu of hard copy mailings. The bill also standardizes the filing requirements for different types of business entities and makes other technical changes to improve the Secretary of State's ability to administer the law.
AB 703, Gordon - Extends the property tax exemption t 2022 for certain lands acquired by nonprofit organizations for natural resource preservation and open-space purposes
AB 997, Wagner - Exempts certain qualified nonprofit corporations and charitable trusts from the requirements of the Professional Fiduciaries Act.
AB 1163, Brownly - Expands the law to allow the California Educational Facilities Authority to act as a conduit issuer of tax exempt bonds for private religious colleges.
AB 1211, Silva - As previously discussed here, makes various changes to the Corporations Code to make the law more clear with regard to the obligations and requirements for nonprofit corporations and unincorporated associations.
SB 436, Kehoe - Authorizes state or local agencies to allow qualified and approved nonprofits or special districts to hold property and long-term stewardship funds to mitigate adverse impacts caused by development projects
SB 668, Evans - Allows cities and counties to accept contributions from nonprofit or public agencies for specific land that is under a Williamson Act contract to supplement forgone property tax revenues.

In addition to the above bills, two separate bills were passed enacting new corporate forms that blend business (for-profit) corporations with nonprofit purposes:

AB 361, Huffman - Authorizes the creation of a new corporate form called a "benefit corporation" and provides the rules that must be followed by these types of entities. See the press release here from B Lab, a primary proponent of the bill.
SB 201, DeSaulnier - Authorizes the creation of a new corporate form called a "flexible purpose corporation" and provides for the rules that must be followed by these types of entities. For a thorough discussion of the flexible purpose corporation, see the FAQs from the California Working Group for New Corporate Forms, who drafted the legislation, available at the Business for Good Blog of R.Todd Johnson, one of the working group members. (h/t Gene Takagi)

For the complete text and current status information for these or any other bills in the California legislature, go to the Bill Information page of the Official California Legislative Information website, www.leginfo.ca.gov.

Governor Brown Signs AB 1211 - Changes to California Nonprofit Corporation Law

noreply@blogger.com (Patrick Sternal) — Tue, 04 Oct 2011 01:02:00 +0000

Governor Brown signed AB 1211 today, and this bill will become effective January 1, 2012. AB 1211 was proposed and sponsored by the Nonprofit Organizations Committee of the Business Law Section of the State Bar of California and authored by Assembly Member Jim Silva. Much like AB 1233 , the NPO Committee sponsored bill from the prior 2009-2010 legislative session, AB 1211 makes primarily technical, clarifying and non-controversial changes to the California Nonprofit Corporation law. Among the specific changes enacted by this bill:

1. AB 1211 will make it clearer as to when the vote of an interested director is not required for a unanimous written consent. This is important because "interested directors" of public benefit corporations who vote on a transaction in which they are interested face certain liabilities, and the transaction itself may be void or voidable. The amendments in AB1211 clarify the law so that nonprofit corporations know who is an "interested director" and whether their vote is required for the corporation to act by written consent.

2. AB 1211 will exempt ballot measure committees formed as public benefit corporations from the Attorney General's supervision upon dissolution. The current Corporations Code requires all public benefit corporations to obtain a waiver from the Attorney General's office in order to file dissolution documents with the Secretary of State. Ballot measure corporations are not currently exempted from this requirement, despite the fact that the primary oversight of them is by the California Fair Political Practices Commission. The result has been that public benefit ballot measure corporations have to submit substantial documentation to the Attorney General's office in order to obtain the waiver letter, essentially a formality. This has needlessly involved the waste of time, resources, attention, and money by the Attorney General's office and the dissolving public benefit ballot measure corporation.

3. Finally, AB 1211 would provide cross-references to various other California Code sections that apply to nonprofit corporations and unincorporated associations. In particular, the bill adds references to the provisions of Government Code Section 12586. These provisions affecting the organization, governance and reporting obligations of nonprofit organizations are within the subject matter scope of existing sections of the Corporations Code, but were codified in the Government Code in the 2004 California Nonprofit Integrity Act. These cross-references in the Corporations Code will help make nonprofit organizations and practitioners aware of these significant obligations.

Hot Off the Press: Nonprofit Governance and Management, 3rd ed.

noreply@blogger.com (Patrick Sternal) — Wed, 28 Sep 2011 19:00:00 +0000

Nonprofit Government and Management, 3rd Ed.

The American Bar Association and the Society of Corporate Secretaries & Governance Professionals have just published the third edition of Nonprofit Governance and Management. As members of the Nonprofit Organizations Committee of the Business Law Section of the ABA, we are proud to have participated in this project by advising on and editing the text.

The book is divided into three broad chapters: "Governance Basics," discussing the principals and practices of nonprofit governance; "Dealing with Substantive Issues," covering the practical management of the organization; and "Governing Documents, Board Structure, and Operations," providing guidance on the internal workings and functioning of the board. In addition to the discussions of issues in the chapters, there are 27 Appendices "Sample Forms and Guidelines," which are also included on CD-ROM, making this book a very useful resource.

As described in the forward, "This book provides an overview of governance basics and board structure and operations, as well as specific guidance on such key substantive issues as strategic planning, financial management, fund-raising, oversight of the executive officer, human resources management, risk management, and handling of crises." Altogether, this is a highly useful book for nonprofit board members, executive directors, as well as the attorneys who advise them.

ABA CLE Presentation: The Accidental Nonprofit Lawyer

noreply@blogger.com (Patrick Sternal) — Mon, 12 Sep 2011 19:33:00 +0000

On Tuesday, September 27, 2011, (1:00PM ET/10:00AM PT) Michael Malumut, Amy Lin Myerson, and our own Lisa Runquist will present, The Accidental Nonprofit Lawyer, an online webinar/teleconference sponsored by the ABA General Practice, Solo and Small Firm Division, the ABA Business Law Section, and the ABA Center for Continuing Legal Education. The program is intended to educate those lawyers who find themselves acting as legal counsel to nonprofit organizations with which they are affiliated (as volunteers, officers, or board members) on the relevant nonprofit law and lawyering skills required in this situation.

This program is geared towards the lawyer without significant nonprofit governance or nonprofit law experience who is asked to represent a nonprofit. The program will also benefit lawyers serving on nonprofit boards who are asked for legal advice as part of their board service.

This program is open to the general public, but lawyers who are members of the ABA are eligible for a discounted rate. The recorded program will also be available in CD-ROM format after the live presentation.

IRS Publishes List of Automatic Revocations for Failure to File Form 990

noreply@blogger.com (Patrick Sternal) — Wed, 08 Jun 2011 23:18:00 +0000

The IRS announced today that it has published the list of organizations whose exemptions have been automatically revoked due to failure to file Form 990, 990-EZ or 990-N for three consecutive years. (See our previous discussions here, here, here and here.) The names of the approximately 275,000 organizations are available on the IRS website, Automatic Revocation of Exemption List, with separate spreadsheet lists available by state. [UPDATE - As Sandy Deja notes in the comments, the number of total organizations on the revocations list is now upwards of 330,000.]

The Service has also published several notices and procedures today along with the announcement of the revocations list in order to provide some guidance and relief to those organizations that have had their exempt status revoked. Below are summaries (and certainly not exhaustive) of the main points in each document.

Revenue Procedure 2011-33 (pdf)- This Rev. Proc. provides that donors to organizations listed in Publication 78 or the Business Master File may rely on that listing to support a charitable contribution deduction for a donation made on or before the date of a public announcement that the organization has ceased to qualify as an organization to which deductible contributions can be made under IRC section 170. As applied to those organizations whose exemption is being revoked for failure to file a Form 990, 990-EZ, or 990-N pursuant to IRC section 6033(j), deductions will be allowed for contributions made on or before the date of publication of the revocation list. However, the Rev. Proc. also notes that the IRS may disallow a deduction where the donor 1) had knowledge of the revocation prior to publication, 2) was aware that the revocation was immanent, or 3) was partly responsible for or aware of the organization's activities and deficiencies that gave rise to the loss of qualification.

Revenue Procedure 2011-36 (pdf) - This Rev. Proc. provides a reduced filing fee of $100 for certain small organizations that have had their exempt status revoked under section 6033(j) and are re-applying for exemption. These organizations must normally have annual gross receipts of $50,000 or less and otherwise qualified for transitional relief under Notice 2011-43. The organization's application (Form 1023 or Form 1024) must be postmarked by December 31, 2012.

Notice 2011-43 (pdf) - This Notice provides "transitional relief" for small organizations that failed to file the Form 990-N (e-Postcard) for the three consecutive years 2007, 2008, and 2009. In addition to the reduced filing fee noted in Rev. Proc. 2011-36, this notice provides that these small organizations will be treated as having established reasonable cause for failing to file and their exempt status will be reinstated retroactive to the date of automatic revocation. In order to qualify, the organization must:

Not have been required to file Form 990 or 990-EZ for tax years beginning before 2007
Been eligible to file Form 990-N for 2007, 2008, and 2009
Submit its application for reinstatement for exempt status by December 31, 2012.

Notice 2011-44 (pdf) - This Notice gives the process and procedures for organizations other than those small organizations to which Notice 2011-43 and Rev. Proc. 2011-36 apply. Generally, these organizations must apply for reinstatement of exemption by submitting a Form 1023 or Form 1024 with the full user fee. They should write "automatically revoked" at the top of the application and on the envelope. If the organization is seeking to have its exempt status reinstated to the date of revocation, it must request reinstatement by including:

A statement statement supporting the claim of reasonable cause for fialure to file and the steps taken to avoid or mitigate such failures
A statement describinig safeguards the organization has put in place to ensure that the organization will not fail to file returns in the future.
Any evidence to substantate the above statements
Properly completed and executed information returns for those years that the organization failed to file.
Properly completed and executed Form 990-EZ returns for those years the organization was eligible to file Form 990-N and failed to file.
A declaration signed under penalty of perjury by an officer, director, trustee or other official.

The Notice goes on to explain what the "reasonable cause" standard of care is for failure to file returns, noting that:

[A]n organization requesting retroactive reinstatement must provide evidence that it exercised ordinary business care and prudence in determining and attempting to comply with its reporting requirement under section 6033 for each of the three years and over the entire three-year period, but was nevertheless unable to file the required returns or notices for three consecutive years.

Needless to say, that's a pretty high standard. It should also be noted that, in order to have the exemption reinstated back to the date of automatic revocation, the Form 1023 or Form 1024 must be filed within 15 months of the IRS's revocation letter or the posting of the organization's name on the revocation list on the IRS website.

Upcoming: 3 ABA Webinars on Nonprofit Legal Issues

noreply@blogger.com (Patrick Sternal) — Mon, 17 Jan 2011 21:21:00 +0000

The ABA Business Law Section's Committee on Nonprofit Organizations, in conjunction with the Section of Taxation's Exempt Organizations Committee, is sponsoring a three part webinar series on nonprofit legal issues. This series is intended for lawyers whose practice does not focus on nonprofits but who either represent public charitable nonprofits or sit on nonprofit boards. It also is a great refresher for lawyers who regularly work in the nonprofit area. Each program will provide practical advice for addressing important nonprofit legal issues.

The topics are as follows: Nonprofit Formation Issues (January 19), Tax Issues for Nonprofits (January 26) and Nonprofit Governance Issues (February 2).

Lisa Runquist will speak on the Nonprofit Formation program on January 19 and on the Nonprofit Governance program on February 2.

IRS Increases Form 990 Filing Threshold; California, Not Yet...

noreply@blogger.com (Patrick Sternal) — Mon, 17 Jan 2011 20:43:00 +0000

Some exempt organizations that previously were required to file Form 990/990-EZ may now file the short "e-postcard" Form 990-N. The IRS announced last week that, pursuant to Revenue Procedure 2011-15 (pdf), small exempt organizations whose gross receipts are not normally more than $50,000 are relieved from the requirement for filing Form 990 (which includes the Form 990-EZ). The previous filing threshold had been $25,000. Regardless of their gross receipts, all supporting organizations must file Form 990 (or 990-EZ), all private foundations must file a Form 990-PF, and churches and their related entities are not required to file informational returns.

While this is a welcome change, insofar as it reduces the filing burden for many organizations, it may create some confusion for California exempt organizations, since the filing threshold for the Form FTB199 is still set by law at $25,000. It should also be noted that, effective for tax years beginning on or after January 1, 2010, small tax-exempt organizations in California with gross receipts normally equal to or less than $25,000 must file FTB 199N, the California e-Postcard similar to Form 990-N.

Thus, if an organization normally has gross receipts less than $25, 000, it will be able to file both Form 990-N and Form 199N. However, if it has gross receipts less than $50,000 and more than $25,000, it may file Form 990-N, however it will still be required to file the full Form 199. Since any organization may file a complete Form 990, organizations in this situation may decide to file both Form 990 (or Form 990-EZ) and Form 199.

Grassley Staff Reports of Media-Based Ministries

noreply@blogger.com (Patrick Sternal) — Mon, 10 Jan 2011 06:43:00 +0000

On January 6, 2011, the staff of Senator Chuck Grassley issued several reports regarding six "media-based ministries", including those run by Joyce Meyer, Benny Hinn, Creflo Dollar, Eddie Long, Paula White, and Kenneth Copeland. These reports are the result of an investigation of these churches begun in November 2007, when Senator Chuck Grassley issued letters of inquiry to them in response to reports he had received that the leaders of these organizations had been engaging in some extravagant spending, such as buying a private jet, driving a Rolls Royce or Bentley, or installing a $23,000 commode. Senator Grassley expressed concern that perhaps the tax-deductible contributions to these organizations were being misused to support luxury lifestyles. The senator requested information from these organizations regarding the compensation of pastors and other individuals associated with these churches. Two of the organizations, Joyce Meyer and Pastor Hinn, complied fully with Senator Grassley's request. The remaining four either did not respond, or provided incomplete responses. The staff summary memo, together with reports on each of the individual ministries and correspondence between Senator Grassley and the Evangelical Council for Financial Accountability (ECFA) are available on the Senate Finance Committee website.

These reports are likely to initiate further inquiry and could lead to new legislation with regard to the federal oversight of not just of religious and church entities, but of all 501(c)(3) tax-exempt organization. The staff summary memo raises several issues in regard to reporting and accountability of churches, as well as the standards applicable to all charitable organizations.

In particular, Appendix C of the staff summary memorandum (pdf) raises the following issues:

Whether there should be a federal advisory committee for churches and religious organizations.
Whether the parsonage allowance under IRC 107 should be limited to a single residence or a specific dollar amount, or whether it should be limited to a more select group of individuals.
Whether churches should be required to make some kind of informational return filing requirement.
And whether the "church tax inquiry" protections of IRC 7611 should be removed in regard to excess benefit transactions.

Appendix D raises several issues which impact all 501(c)(3) organizations, including:

Whether all 501(c)(3) organizations must include specific language in their organizational documents prohibiting engaging in acts of self-dealing (currently only private foundations are required to do so)
Whether a penalty tax should be imposed on charitable entities where there has been an excess benefit transaction.
Whether the rebuttable presumption of reasonableness for transactions should be replaced with minimum standards of due diligence.
Whether guidelines should be developed for compensation studies used to set reasonable compensation under the rebuttable presumption standards.
And whether the practices of "love offerings"should be excluded from gross income of a recipient when a charitable organization has facilitated the offering. (A practice mainly seen in religious organizations)

Finally, Appendix E of the report addresses whether the electioneering prohibition should be eliminated or circumscribed. It is worth noting that political activity was not a significant issue raised in regard to the 6 media-based ministries. Nevertheless, the staff proposes either replacing the prohibition with a limitation similar to the lobbying restrictions on 501(c)(3) organizations, or retaining the prohibition, but defining "participate in" and "intervene in" a political campaign in terms of federal election law.

The individual reports of the 6 media-based ministries suggest that at least some are taking advantage of their religious and a tax-exempt status in order to provide personal benefits to the individuals who are running them. As part of the process and in order to initiate further action, Senator Grassley has formally asked the ECFA to consider the issues raised by his staff and spearhead a discussion about how to address those issues. ECFA has begun to establish an independent commission to review and provide input on major accountability and policy issues affecting church and religious organizations.

Thursday, 1/6/2011: Phone Conference: Practical Considerations on Nonprofit Governance

noreply@blogger.com (Patrick Sternal) — Mon, 03 Jan 2011 23:19:00 +0000

As part of the California State Bar's Cyber Institute, Lisa Runquist will present a telephone seminar discussing the impact that recent developments in the IRS and Attorney General's oversight of nonprofit organizations have had on nonprofit governance. From the description:

The IRS, as well as the Attorney General, are now actively involved in the area of nonprofit governance. As a result, it is imperative that nonprofit leaders take an active role in reviewing, restructuring if necessary, and implementing a corporate governance structure that will allow their organization to thrive in this new environment. We will discuss such issues as: What do you, as a leader need to know in order to make the correct decisions for your organization? What policies does your organization need to adopt or update? What should be included in these policies? How will each policy be implemented? Are there any issues with how your nonprofit is currently organized that might trigger an IRS audit? Will your organization`s answers to the new Form 990 impact the charitable giving to your nonprofit organization.

Although directed at California attorneys who represent nonprofit organizations (MCLE credit is available), non-attorneys and out-of-state practitioners will also find the information useful and relevant and are welcome to attend. Thursday, January 6, 2011, 11:30 a.m. - 12:30 p.m. Pacific Time

Click here to register for this program.

Faith-Based Organizations and Government Partnerships in Focus This Week

noreply@blogger.com (Patrick Sternal) — Thu, 18 Nov 2010 01:33:00 +0000

Three events bring the issue of policy regarding the federal government's partnership with faith-based organizations into the national spotlight this week:

Today, President Obama issued an Executive Order, Fundamental Principles and Policymaking Criteria for Partnerships with Faith-Based and Other Neighborhood Organizations. This Order amends President Bush's 2002 Order, Equal Protection of the Laws for Faith-Based and Community Organizations, and adopts many of the recommendations of the President's Advisory Council on Faith-Based and Neighborhood Partnerships, available here (pdf).

On Thursday, November 18, the House Subcommittee on the Constitution, Civil Rights, and Civil Liberties will hold a hearing on Faith-Based Initiatives: Recommendations of the President’s Advisory Council on Faith-Based and Community Partnerships and Other Current Issues. The hearing is in response to a letter from the Coalition Against Religious Discrimination (CARD) to the Subcommittee Chairman regarding the Advisory Council's recommendations.

Finally, on Friday, November 19, the Faith and Organizations Project will release a policy statement, "Thinking about Partnerships Among Faith-Communities, Faith-Based Organizations, and Government in a New Way." This statement recommends that "private funders, governments, and other social actors seeking to effectively engage with and support faith-based organizations should actively seek to go beyond a one-size-fits-all approach. However, constitutional requirements and operational realities may limit how adaptable government policy, in particular, can be."

H/t to the always insightful eNews from the Institutional Religious Freedom Alliance.

Comments by ABA/CalBar Nonprofit Committees Regarding Form 990

noreply@blogger.com (Patrick Sternal) — Tue, 16 Nov 2010 21:25:00 +0000

Lisa Runquist recently chaired a joint task force of the Nonprofit Organizations Committees of both the Business Law Sections of the American Bar Association and the California State Bar. The purpose of this committee was to draft comments to the IRS regarding the Form 990, Return of Organization Exempt From Income Tax. Letters from both the ABA and CalBar with these comments were submitted to the IRS on November 8, 2010.

As the introduction to the comments states, "as attorneys who work regularly with nonprofit organizations, especially in the areas of entity formation, organization and governance, we are concerned about a number of the provisions [on Form 990] dealing with these areas." With the Form 990 revision in 2007, the IRS has become increasingly involved with overseeing the governance of tax-exempt organizations, in addition to their financial reporting and tax compliance. The comments of the committees are intended to help the IRS improve the governance related items on the Form 990 so that it enable organizations to more accurately reflect their legal requirements, structures and the practices in their responses.

A copy of the complete comment letter is available on the ABA website(pdf).

Failed to File 990s - What Now?

noreply@blogger.com (Patrick Sternal) — Mon, 15 Nov 2010 23:01:00 +0000

The IRS's October 15 last-chance deadline for the small exempt organization filing relief program has come and gone. If an exempt organization has failed to file a return for the past three consecutive years, it has had its exempt status automatically revoked, "by operation of law." The IRS does not have to take any further action in order for the revocation to take effect. A list of the organizations whose exempt status has been revoked will be posted on the IRS Website at some point, though it hasn't yet appeared. 501(c)(3) organizations that haven't filed will also be removed from Publication 78, the official list of organizations eligible to receive tax-deductible charitable contributions.

There is no way to undo the revocation, unless it was clearly an administrative error on the part of the IRS. An organization whose exempt status has been revoked may have its status reinstated by filing a Form 1023 Application for Recognition of Exemption, for 501(c)(3) organizations, or Form 1024 for all others. Even if the organization did not originally have to file for its exemption, it must do so now in order to have its exempt status reinstated. If the organization can give a reasonable cause for the failure to file past due returns, and it makes a written request together with the application, its exempt status can be reinstated back to the date of revocation. This would prevent gaps in the periods of exemption, which could be both administratively burdensome for the organization and a concern to donors.

For further information, see the FAQs regarding Automatic Revocation on the IRS website.

IRS Procedures for Health Insurance Credit for Exempt Organizations

noreply@blogger.com (Patrick Sternal) — Tue, 09 Nov 2010 19:43:00 +0000

Under the health care act signed into law this year (the Patient Protection and Affordable Care Act), a refundable tax credit is available to small organizations, including tax-exempt organizations, that purchase health insurance for their employees. In order to prepare to administer this credit, the Internal Revenue Service released a draft version of Form 8941(pdf) on its website on September 7, 2010. Form 8941, Credit for Small Employer Health Insurance Premiums, will allow both small businesses and tax-exempt organizations to calculate the tax credit, which may be claimed on filings beginning in 2011.

In addition, since exempt organizations normally do not file income tax returns (Form 990 is an information return, not a tax return), they will be able to claim the credit by submitting a soon-to-be-revised Form 990-T, regardless of whether the organization has unrelated business income liability.

For 2010-2013, the maximum credit for exempt organizations is 25% of the premiums paid. In order to qualify, an organization must have no more than 25 full time employees and an average wage of $50,000. Full credit is only available to organizations with 10 full-time employees or less, with average wages of less than $25,000.

For further information, see the FAQs (Frequently Asked Questions) about the Small Business Health Care Tax Credit posted on the IRS website.

Tax Law Change Regarding Employee Cell Phones

noreply@blogger.com (Patrick Sternal) — Sat, 09 Oct 2010 00:51:00 +0000

The Small Business Jobs Act of 2010 was recently signed into law by President Obama. A relatively minor provision of this legislation included a long awaited removal of cell phones from the so-called "listed property" category under federal tax law. Listed property, as defined in Internal Revenue Code section 280F(d)(3), requires strict record keeping in order for an employer to be able to fully deduct it and for employees to fully exclude the value from taxable income. Internal Revenue Code Section 280F(d)(3) provides that an item of listed property can only be treated as a deductible expense by an employee if it is for the "convenience of the employer and required as a condition of employment." Prior to the change in the law, when employees used their cell phones for their own benefit, it was considered taxable to the employee. Onerous record keeping, such as a personal use log, was required in order for an employee to be able to exclude the business use of the phone from income. For nonprofit tax-exempt organizations, the problem was compounded by the fact that listed property that is not properly substantiated and reported is considered an automatic excess benefit transaction and may subject the individual using it to intermediate sanctions. Needless to say, since cell phones are now common place, with many employees expected to have round the clock availability and unlimited calling plans are readily available, applying the listed property rules for employer provided cell phones was obsolete and burdensome.

Although regulations and IRS interpretation have yet to be worked out, it is clear that personal use of an employer-provided phone will no longer automatically create taxable income to employees, any more than personal use of a land line phone would. Similarly, for employees of 501(c)(3) exempt organizations, personal use will not create an automatic excess benefit transaction. It should be clarified, though, that the law change doesn't exclude the possibility that an employer provided cell phone could be taxable income to an employee. For example, if an employer provided a cell phone and calling plan with no expectation that the phone would be used for work, it would still be taxable to the employee as income. Similarly, depending on the circumstances, a cell phone provided by a nonprofit to an employee could also still be an excess benefit transaction and subject to intermediate sanctions. Tax-exempt 501(c)(3) organizations who provide employees cell phones should review and revise their policy with regard to employee cell phones accordingly.

IRS Deadline for 990-N/990-EZ Filing Relief Approaching

noreply@blogger.com (Patrick Sternal) — Mon, 27 Sep 2010 18:50:00 +0000

The October 15 deadline for filing past due Forms 990-N or 990-EZ is three weeks away. Organizations that have a Form 990-N or Form 990-EZ filing requirement and have not filed for the past 3 consecutive years can come into compliance before October 15. Otherwise, they will have their exempt status revoked automatically.

Once exempt status is revoked, the organization will have to re-file Form 1023, including paying the filing fee, in order to be reinstated as a tax-exempt organization. This is a heavy burden, but it is preventable.

Here are some helpful links to information about the Form 990-N/EZ Filing Relief program and automatic on the IRS website.

Filing relief for small organizations

One-Time Filing Relief home page

List of Organizations at Risk of Automatic Revocation

The complete state-by-state list of "at-risk" charities

Frequently asked questions (FAQs)

Answers to commonly asked questions - One-Time Filing Relief Program
FAQs - Annual Electronic Filing Requirement (e-Postcard)

What to do if you think IRS records are in error

Lessons for Charity Boards from AG Audit of CSU Stanislaus Foundation

noreply@blogger.com (Patrick Sternal) — Tue, 17 Aug 2010 22:31:00 +0000

In April of this year, the California Attorney General launched an investigation into the California State University Stanislaus Foundation. The probe followed upon the Foundation's refusal to turn over records to Senator Leland Yee that he requested under the California Public Records Act. Lee began his inquest after it was reported that the Foundation has engaged Sarah Palin as an fundraising event speaker. Since the Foundation is not an entity covered by the CPRA (Yee's pending legislation may change this), it was not required to provide records to Senator Lee, and so, thwarted by the Foundation, he requested the Attorney General investigate it. Under the broad authority given to the AG under California law for the oversight of organizations holding charitable assets, the AG sought to determine whether the foundation, which has assets of more than $20 million, has spent its money to benefit CSU Stanislaus, as it has promised donors, the university and the public.

Based upon the limited review conducted, the AG found no diversion of charitable assets by the Foundation. Nevertheless, the Closing Letter (pdf) by Belinda Johns, Senior Assistant AG to the Foundation's counsel points out that the Board did not always exercise adequate fiscal oversight. This Closing Letter is instructive for understanding what the duties of directors of nonprofit charitable organizations are with regard to adequate fiscal oversight, especially under California law.

The underlying principle of law is that the Board of Directors of an organization holding charitable assets in California has the ultimate responsibility for those assets and must manage and protect them from being diverted from the charitable purposes of the organization or, if applicable, the specific purposes for which the assets were given. The Board must see to the "protection of charitable assets" under its control. As the AG's letter points out, among other things, that means that the Board is responsible for:

Comparing and analyzing revenues and expenses on a periodic basis to determine if the organization is meeting its budgetary goals.

Reconciling endowment accounts and correctly identifying restricted and unrestricted funds. Board members may be personally liable for restricted funds which are incorrectly released.

Reviewing budgets for special events. "Assessing the effectiveness of a fundraising event is essential to avoid waste of charitable assets."

Managing fundraising activities administered by outside groups. "The board must exercise control over the representations made by fundraisers in order to assure those representations are accurate and to determine whether they include language that may restrict donations for a specific purpose."

Johns also pointed out that the Board "does not appear to fully understand its duties and responsibilities under applicable law." Of how many other charitable organizations could this also be said? In particular, these duties and responsibilities are found in the following statues:

Supervision of Trustees and Fundraisers for Charitable Purposes Act (Gov. Code section 12580 et seq)
California Public Benefit Corporation Law (Corp. Code section 5000 et seq.)
Uniform Prudent Management of Institutional Funds Act (UPMIFA) (Prob. Code section 18501 et seq.)

Note that these are all California state laws controlling nonprofit organizations, and not the federal tax code. While the IRS is an important regulator of charities, state laws have traditionally determined most of the governance for nonprofit organizations and the safeguards on charitable assets.

As part of the closing of the investigation, the Board of CSU Stanislaus Foundation agreed to undertake "'board training' to assure they fully understand their fiduciary duties" under these laws. Boards of other organizations that find themselves not fully understanding their fiduciary duties could probably do no better than to initiate a similar board training by reviewing the Closing Letter and discussing how and where they can improve their management and protection of charitable assets.

IRS Offers Relief for Failure to File Form 990-N or 990-EZ

noreply@blogger.com (Patrick Sternal) — Mon, 26 Jul 2010 20:44:00 +0000

As discussed previously on this blog, the 2009 tax year is the first year for which the filing provisions of the Pension Protection Act of 2006 come into effect. Specifically, exempt organizations that have not filed a federal informational tax return (Form 990) for three consecutive years are now subject to automatic revocation of their exempt status.

Even small organizations with annual income less than $25,000 are required to file the Form 990-N, the "e-postcard" for exempt organizations. This filing requirement for small organizations represents a change in the law and, despite considerable publicity and outreach by the IRS, many organizations may not yet be aware of their need to file, or they were not aware of it before the filing deadline of May 17, 2010. In fact, it is estimated that nearly 300,000 organizations are in danger of losing their exempt status as a result of their failure to file a return.

In light of this, the IRS has announced today that it is offering a one-time relief program to small organizations. Organizations can preserve their exempt status under this program by filing past due returns, either Form 990-N or Form 990-EZ by October 15, 2010. Organizations required to file Form 990 or Form 990-PF are not eligible for relief under this program. If these are subject to the automatic revocation of their exempt status, they will have to re-apply for exemption using the Form 1023 or Form 1024 applications.

The IRS has posted the names and addresses, listed by state, of those organizations that are at risk of losing exemption for failure to file returns for the past three consecutive years. Every organization manager - president, CEO, board member, treasurer, secretary, CFO, etc - should take a look at this list and confirm that their organization is not listed, regardless of how certain they are of the filing status of their organization. A cursory review of the list suggests that there are many entities here that may be related to larger organizations as affiliates, subsidiaries or chapters, which nevertheless have independent exempt status. Also, there appear to be listed organizations that are, in fact, churches. While these organizations may not be required to file an informational return, they should contact the IRS and confirm their status as churches so as to avoid future confusion and potential loss of exemption.

Florida's Philanthropic Freedom Legislation: A Reaction to California's AB 624

noreply@blogger.com (Patrick Sternal) — Fri, 25 Jun 2010 22:54:00 +0000

If there is a legislative equivalent to Newton's third law of motion, the recently enacted Florida legislation, SB 998 (pdf -begin page 10, line 288) (signed by Governor Crist on May 27, 2010) must be the equal and opposite reaction to the California legislature's AB 624 (2007-2008 Legislative Session).

AB 624 was a bill proposed in 2007 by Assembly Member Joe Coto and vigorously promoted by the Greenlining Institute. AB 624 would have required a nonprofit corporation or trust, deemed to be a "private, corporate, or public operating foundation," with assets over $250 million, to collect and disclose the racial, gender, ethnic and sexual orientation statistics about its board members and staff, and those of its grant recipients. FL SB 998, on the other hand, prohibits the government from requiring charitable organizations to collect and disclose such information, or make distributions based upon it. It was the result largely of the legislative advocacy of the Alliance for Charitable Reform.

In California, many organizations and advocates were taken by surprise by the proposed AB 624. It took some time to understand how this legislation could seriously impact the operation of philanthropic organizations in California. After several months of discussion and analysis, the Nonprofit and Unincorporated Organizations Committee of the Business Law Section of the California State Bar (made up of lawyers who work with nonprofit organizations) voted to oppose AB 624, and expressed its opposition in a letter to the State Bar Office of Governmental Affairs (March 27, 2008). In that letter, the Committee expressed the reasons for its opposition:

The proposed bill would not advance governance of foundations. On the contrary, the bill is unconstitutionally and impermissibly intrusive at many levels, to foundations, their grantees, grantees’ beneficiaries and businesses with which foundations interact, as well as to the boards of directors and employees of each of the foregoing... Even if a foundation and its grantees could lawfully obtain, assemble and make public the data the bill requires, the lack of clarity as to who and what are described...and the immensity of the task (if made clear) would burden nonprofits well out of proportion to any benefit that might result...Many of the key terms purporting to describe data to be assembled are so vague, undefined or ambiguous as to defy collection... As a result, the bill, if enacted, is likely to adversely impact the efforts of California charitable foundations in making, as well as the ability of worthy beneficiaries in receiving such grants.

Clearly, AB 624 was poorly drafted legislation and would have been highly intrusive and burdensome. In addition to the State Bar's NPO Committee, the bill was opposed by many philanthropic organizations and others who recognized that such an overreaching piece of legislation would impede charitable and grant-making activities. In light of the mounting opposition, the bill was eventually withdrawn. An agreement was also made between the Greenlining Institute and some of the large foundations to direct $30 million in grants to diverse communities and organizations. Nevertheless, the promoters of AB 624 have promised to pursue similar legislative efforts in other states, and this appears to have spurred Florida legislators on to take the proactive step of enacting SB 998.

The "Nonprofit Sector and Community Solutions Act of 2010"

noreply@blogger.com (Patrick Sternal) — Fri, 18 Jun 2010 23:07:00 +0000

Representative Betty McCollum(D-MN) introduced the Nonprofit Sector and Community Solutions Act of 2010 (H.R. 5533) on Wednesday, June 16. The bill has the support of several nonprofit advocacy groups, including the National Council of Nonprofits, Independent Sector and America Forward. The purpose of the Act is to research, report on and coordinate the federal government's interaction with nonprofit organizations. The Act promises to do so by facilitating better communication of the nonprofit sector with the federal government, better coordination between the government agencies, and enhanced data collection about nonprofit organizations.

The Act authorizes the creation of a bipartisan, 16-member “ U.S. Council on Nonprofit Organizations and Community Solutions” which would be tasked with considering the relationship between the federal government and nonprofits and making recommendations based upon its findings to the President and Congress. The Council would also be mandated to host an annual summit to inform Congress and the public on its solutions and progress.

The Act would also create the “Interagency Working Group on Nonprofit Organizations and the Federal Government,” to be composed of Cabinet Secretaries, White House officials, and the heads of agencies that interact with nonprofits. The Working Group would convene and engage a coordinated process to achieve better outcomes in addressing federal priorities on national and community challenges.

Finally, the Act authorizes the Department of Commerce to coordinate data collection on nonprofits and the National Science Foundation to engage research on nonprofit organizations.

Part of the rationale for the Act to move the federal government towards an agency for nonprofits analogous to the Small Business Administration. The bill's authors lament that "no Federal agency has responsibility for evaluating, building, or maintaining the capacity of the nonprofit sector." Should there be one? Strikingly absent from the discussion is recognition of the substantial oversight and regulation of nonprofits that the IRS already does and which promises to increase under the new Form 990 and the Service's governance initiatives.

The nonprofit sector is enormously diverse. It is difficult to see how this proposal will lead to a more vibrant nonprofit community as a whole. Rather, it seems directed primarily at entrenching the relationship between the federal government and large nonprofit organizations. This is good for two groups: the federal government and large nonprofits. Perhaps it will also create more efficiencies in the delivery of goods and services to those who rely on these entities. Beyond that, I am skeptical that a large political and bureaucratic endeavor on the federal level offers much benefit to the sector as a whole.

IRS Cyber Assistant Program Delayed

noreply@blogger.com (Patrick Sternal) — Fri, 14 May 2010 19:58:00 +0000

The IRS has been developing a web-based software program called the Cyber Assistant. Honestly, it sounds cooler than it really is - that is, unless you are a 501(c)(3) geek like we are. In any case, this program is designed to help 501(c)(3) applicants file for exemption (Form 1023)as well as improve the quality and consistency of exemption applications.The program was scheduled to be rolled out this year, but the IRS recently announced that software testing has revealed some problems requiring correction prior to public launch, and so the release of the Cyber Assistant will be delayed beyond this calendar year. The IRS will continue to accept exemption applications using the existing processes and the current user fees will remain in effect for the 2010 calendar year.When the Cyber Assistant is released, the user fee will be reduced to $200 for applications filed using the program.

Exempt Organizations Need to File Form 990/990-EZ/990-N/990-PF by May 17

noreply@blogger.com (Patrick Sternal) — Fri, 14 May 2010 19:30:00 +0000

Most tax-exempt organizations must file an annual return or notice with the IRS. The Pension Protection Act of 2006 provided that if an organization does not file as required for three consecutive years, it automatically loses its tax-exempt status, effective the due date of the filing. The 2009 filing is the first year that the provision will come into effect. The due date for exempt organization returns is May 17th this year.

The IRS has posted new FAQs and an audio interview discussing the automatic revocation of tax-exempt status for failure to file. Also, the Urban Institute's National Center for Charitable Statistics has a searchable database available online to see if an organization is at risk of losing its tax-exempt status. This is a useful tool for checking to see if your organization needs to file a return.

IRS Report on College and Universities Released

noreply@blogger.com (Patrick Sternal) — Fri, 14 May 2010 19:19:00 +0000

The Internal Revenue Service has released an interim report summarizing responses to compliance questionnaires sent to 400 public and private colleges and universities in October 2008. The interim report contains preliminary information on the respondents’ organizational structures, demographics, exempt and unrelated business activities,endowments, executive compensation and governance practices. The survey divided the organizations into three categories: Small (under 5,000 students), Medium (5,000 to 14,999 students) and Large (15,000 or more students). The focus of the report is on UBIT, investments, and executive compensation.

Together with the recently released CBO report on arbitrage by exempt colleges and universities, there is good reason to think that the regulatory winds are blowing for the nonprofit higher education sector. There will likely be new legislation at some point affecting colleges and universities, if not the whole exempt sector, as a result of these reports. A similar IRS study of nonprofit hospitals was begun in 2006 and was directed at community benefit and compensation issues, and there was also a CBO report on tax arbitrage by nonprofit hospitals. The recently enacted of IRC 501(r) as part of the health insurance reform legislation requires that exempt hospitals conduct a community benefit assessment every three years and make fee assistance programs more accessible, among other things.

Tax Tips from the IRS about Exempt Organizations

noreply@blogger.com (Patrick Sternal) — Fri, 26 Mar 2010 23:44:00 +0000

As part of its series of Tax Tips for 2010 aimed at taxpayers, the IRS has issued a short list of tips on exempt organizations called Six Important Facts about Tax-Exempt Organizations (IRS Tax Tip 2010-29). These tips are directed at informing donors about exempt organizations. Here is the list:

Annual returns are made available to the public.
Donor lists generally are not public information.
How to find tax-exempt organizations.
Which organizations may accept charitable contributions.
Requirement for organizations not able to accept deductible contributions.
How to report inappropriate activities by an exempt organization.

The notice also includes links to IRS forms and publications that can assist donors in learning about the destructibility of their contributions and the organization to which they are donating.