Upload
others
View
4
Download
0
Embed Size (px)
Citation preview
Legal Center for Nonprofits, Inc.
© Legal Center for Nonprofits, Inc. Information provided herein is not legal advice and is intended for informational purposes only. Consult an attorney before acting on the information contained herein. Attendance at this program does not result in an attorney-client relationship.
Presented by Linnea R. Michel, Esq.
At the conclusion of this program, you will:
Understand basic requirements to maintain
501(c)(3) tax-exempt status; and
Understand the causes and consequences of
automatic revocation of tax-exempt status.
Generally, we will be discussing tax-exempt charities
(that is, 501(c)(3) organizations).
3/9/2014 2
Maintaining Tax-exempt Status
1. Private Inurement/Benefit
2. “Operate exclusively for exempt purposes”
3. Political activity prohibition
4. Lobbying/legislative prohibition
5. Annual filing requirement
6. Record-keeping
7. Governance practices
Repairing Tax-exempt Status
1. Automatic revocation – what it is, why it happens
2. Recovering from automatic revocation
3/9/2014 3
Prohibition against Private Inurement
Fundamental doctrine underlying tax-exempt
status, states:
No part of an organization’s net
earnings may inure to the benefit of
any private shareholder or individual.
3/9/2014 4
Charities serve a
public interest
not a private interest.
3/9/2014 5
Flashpoints where private inurement may be implicated:
When insiders benefit from organization’s activity; ◦ Board member transactions with organization
Compensation ◦ Executive Director
◦ Board Members
Percentage-based compensation ◦ E.g., fundraisers, development staff
Rental arrangements
Loans
Sales of assets
3/9/2014 6
A finding of private inurement may be fatal to
tax exempt status.
However:
Other penalties have been devised to avoid
harsh result of revocation:
◦ “Intermediate sanctions” tax imposed on
persons who improperly benefit from transaction
with org and on managers who allowed it.
3/9/2014 7
Private Benefit doctrine is similar but different:
Occurs when a private person (individual or
entity) one who is not an insider
benefits from the activities of the charity.
Not fatal to tax-exempt status if incidental.
3/9/2014 8
3/9/2014 9
Private Inurement
occurs when
“Insiders” – those with
Control or Influence –
receive benefits.
May arise
in compensation situations
(e.g., “excess benefit
transactions”)
Private Benefit
occurs when
“Outsiders” benefit
more than incidentally.
Can arise in vendor,
contractor
arrangements
Jeopardy to
tax-exempt status
No Private
Inurement/Benefit
Incidental
Benefit
Insiders
Outsiders
Charities are organized and operated exclusively for
exempt purposes.
Most of an organization’s activities must be for
exempt purposes.
“Exclusively” not defined; courts suggest 90% of
activities must be related to exempt purpose.
Activities that do not directly “further” or support
exempt purposes are called “unrelated”.
3/9/2014 10
What is an exempt purpose?
Purposes deemed worthy of tax-exemption & recognized in statute, by IRS, or by court:
Statute: Section 501(c)(3): Corporations, and any community chest, fund, or
foundation, organized and operated exclusively for
◦ Religious
◦ Charitable
◦ Scientific
◦ testing for public safety
◦ Literary
◦ Educational purposes, or to
◦ Foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or
◦ For the prevention of cruelty to children or animals…”
3/9/2014 11
IRS and the courts have recognized many other
exempt purposes, such as:
◦ Child care organizations
◦ Farmers’ cooperatives
◦ Medical research organizations
◦ Veterans’ organizations
At least 74 categories, as of now…
3/9/2014 12
Organizations with more than “insubstantial” unrelated activities are at risk for: Unrelated Business Income Tax (“UBIT”);
Loss or denial of tax-exempt status.
An activity that may provide funds in support of exempt purposes is still unrelated; for example:
Raffles;
Activities engaged in for profit ( e.g., merchandise sales).
3/9/2014 13
For most tax-exempt organizations, unrelated
business income is income from a trade or
business, regularly carried on, that is not
substantially related to its exempt purpose.
An exempt organization that has $1,000 or more of
gross income from an unrelated business must file
Form 990-T and may be liable for tax.
Exceptions abound!
3/9/2014 14
Activities that may be subject to UBIT:
Parking lot rented to general public
Advertising revenue
Sale of membership lists to for-profit entity
Typically excluded from UBIT:
Real property rentals
Income from research activities
Member convenience activities
Dividends, interest, annuities, royalties
3/9/2014 15
Charities may attempt to influence legislation to an insubstantial degree, but political activity is prohibited. Political activity includes: Directly or indirectly participating in, or intervening in,
any political campaign on behalf of (or in opposition to) any candidate for elective public office; and
Contributions to political campaign funds or public statements of position (verbal or written) made on behalf of the organization in favor of or in opposition to any candidate for public office.
3/9/2014 16
3/9/2014 17
What can 501(c)(3) organizations do in the
political arena? Voter education activities (including presenting
public forums and publishing voter education
guides) conducted in a non-partisan manner;
Activities intended to encourage people to
participate in the electoral process, such as voter
registration and get-out-the-vote drives, if
conducted in a non-partisan manner.
3/9/2014 18
Charities may engage in some
(“insubstantial”) lobbying, but too much
lobbying activity risks loss of tax-exempt
status.
Other tax-exempts may lobby without limits;
e.g., 501(c)(4) social welfare organizations,
501(c)(6) industry groups.
Since “insubstantiality” has never been quantified, a
test was devised that would provide an ascertainable
measurement, called the Expenditures Test.
Organizations that do not affirmatively choose to be
measured under the Expenditures Test fall into the
original Substantial Parts Test.
3/9/2014 19
Expenditure Test is “elected” at time of filing Form 1023, any filing of Form 990, or by filing IRS Form 5768, Election/Revocation of Election.
Choosing the Expenditure Test submits the charity to a 20% limit on expenditures for lobbying and influencing legislation.
Organizations that expect to lobby should choose the Expenditure Test unless their budgets are very large and they plan to do grassroots lobbying (which is limited under the Expenditure Test).
Record-keeping requirements are significant under Expenditure Test and organizations should factor that into their consideration of whether to choose the Expenditure Test.
3/9/2014 20
Tax-exempt organizations must file annual
information returns with the IRS.
Failure to do so for 3 consecutive years results
in automatic revocation of tax-exempt status.
Revocation is automatic “by operation of law”
after 3 consecutive years of failing to file,
effective as of the due date of the filing of the
3rd year.
More on this to come…
3/9/2014 21
Only certain specified organizations are exempt
from the filing requirements:
◦ Churches
◦ Certain schools
◦ State & governmental institutions
◦ Political organizations
For the full list, visit http://www.irs.gov/Charities-
&-Non-Profits/Annual-Exempt-Organization-
Return:--Who-Must-File
3/9/2014 22
Information Return (990, 990-EZ, or 990-N) must be
filed by 15th day of the 5th month after the close of
the fiscal year.
For example, organizations with a calendar (i.e.,
January to December) fiscal year, must file by May
15. The return for 2013 is due on May 15, 2014.
3/9/2014 23
3/9/2014 24
2010 Tax Year and later
(Filed in 2011 and later)
Form to File
Gross receipts normally less than or equal to $50,000 Note: Organizations eligible to file the e-Postcard may
choose to file a full return
990-N
(aka “e-postcard”)
Gross receipts less than $200,000, and
Total assets less than $500,000
990-EZ
or 990
Gross receipts greater than or equal to $200,000, or
total assets greater than or equal to $500,000 990
Private foundation
990-PF
Retention of Records Some records should be kept permanently:
◦ e.g., Form 1023 Application for recognition of exemption (1023 & attachments), determination letter, formation documents, and Board records such as minutes of meetings.
Employment tax, hiring and personnel records should be kept for at least four years after the date the tax becomes due or is paid, whichever is later.
Generally, records should be kept until they are no longer needed for non-tax purposes; other agencies and entities may have differing retention requirements.
3/9/2014 25
Gift Substantiation Requirements Donors cannot claim a tax-deduction for any single contribution of
$250 or more unless the donor obtains a contemporaneous written acknowledgement of the contribution from the recipient charity.
Contributions are deductible only to the extent that they are gifts and nothing of value is received by the donor in return.
Donors may only take a charitable deduction to the extent that the contribution exceeds the fair market value of the item received in exchange. (This is the so-called “quid pro quo”.)
For example, a gala ticket priced at $100 where the dinner’s fair market value is $25--only $75 is a deductible charitable gift.
3/9/2014 26
Certain documents must be kept available for public inspection: ◦ Form 1023 or 1024; ◦ Annual Information Returns (Forms 990, 990-EZ;
990-Ns appear on automatically on IRS website and www.Guidestar.org).
◦ Form 990-T (unrelated business income) report form.
Organizations need not comply with individual requests for copies if it makes the documents widely available, such as on a website.
3/9/2014 27
IRS generally cannot require specific governance practices, but does make recommendations about what it deems “best practices” and inquires about these in the full Form 990; for example:
Policies & procedures to establish executive compensation Conflicts of interest policy Policies for Investments, fundraising policy, document
retention, and whistleblowers Documentation of board decisions (minutes)
Board members’ review of financial statements and information returns.
Make-up of governing board; board should NOT be dominated by the charity’s employees, or those with family or business relationships.
3/9/2014 28
3/9/2014 29
Over 400,000 organizations
have experienced revocation,
over 200 in greater New Bedford alone.
Automatic Revocation of Tax-exempt Status
Occurs upon failure to file information returns
(Form 990, 990-EZ or 990-N) for 3 consecutive
years, effective upon the due date of the 3rd year’s
filing.
Revocation is automatic, by operation of law.
Organizations may also experience revocation for
reasons we’ve discussed, usually as a result of audit
findings or other investigation.
3/9/2014 30
Organizations with annual gross receipts less than
$5,000 have never been required to apply for tax-
exempt status (i.e., submit 1023 or 1024) and prior
to 2006, had no requirement to file information
returns (990, 990-EZ or 990-N).
Now very small organizations must file information
returns, usually the 990-N. (However, they are still
not required to submit 1023s or 1024s—unless they
have been automatically revoked).
3/9/2014 31
Organizations may apply for reinstated tax-exempt
status.
Tax-exempt status will be reinstated effective either:
Retroactively to the date it was revoked (“retroactive
reinstatement”); or
Effective as of the date the application for
reinstatement was mailed and postmarked
(“postmark reinstatement”).
3/9/2014 32
Retroactive Reinstatement
Within 15 months of revocation, “Streamlined”
◦ For orgs eligible to file either 990-N or 990-EZ.
More than 15 months after revocation; or
“Postmark” Reinstatement
15 months is counted from either the date of the
IRS Revocation letter, or the date on which the
revocation was posted—whichever is later.
3/9/2014 33
3/9/2014 34
http://apps.irs.gov/app/eos/
3/9/2014 35
Streamlined Retroactive Reinstatement
1. Submit properly completed IRS Form 1023 or 1024
and attachments within 15 months of revocation,
noting on top, “Revenue Procedure 2014-11,
Retroactive Reinstatement”.
2. Include User Fee (either $400 or $850).
3/9/2014 36
Streamlined (continued)
Reinstatement will be effective as of the date of
revocation.
If organization was eligible to file 990-N, no penalties
will be assessed.
If 990-EZ filer, no penalties will be assessed if owed
990-EZs are filed.
3/9/2014 37
If organization has been required to file the full Form 990, it may not be reinstated under the streamlined process. Instead, it must:
1. Submit properly completed IRS Form 1023 or 1024 and attachments within 15 months of revocation, noting on top, “Revenue Procedure 2014-11”.
2. Include User Fee (either $400 or $850); AND,
3. Include Reasonable Cause Statement for at least 1 of 3 years; AND,
4. File properly completed 990s for the 3 years owed.
If all steps properly completed, reinstatement will be made retroactively as of the revocation date.
3/9/2014 38
Application for reinstatement outside 15 month period:
Same procedure as full 990-filers, except slightly
different Reasonable Cause Statement.
◦ Statement needed for all 3 years.
Postmark Date Reinstatement
File the application and user fee as under
streamlined; however, it appears these organizations
may be liable for penalties ($20/day on both
organization & responsible managers).
3/9/2014 39
The clock begins to toll with incorporation! Or for established organizations, with the most recent 990 filing. Annual reports become due to IRS –whether applying for tax-
exempt status or not– beginning with incorporation—5 ½ months after close of fiscal year.
If organization does not file annual reports (990 or 990-EZ) within 3 years of incorporation date, it will be at risk for revocation, and revocation will be automatically effective on the due date of the third year’s filing.
Having submitted a 1023 or 1024 is no protection; waiting to file until exemption is recognized is not an option.
3/9/2014 40
Whether organization’s name appears on the
IRS’s website revocation list is not relevant;
revocation occurs automatically on the date the
return was due.
Fiscal Sponsorship is no protection; organization
must file information returns if any funds are held
in its own name (e.g., checking account). Fiscal
Sponsor only reports on funds it holds.
3/9/2014 41
If your organization’s tax-exempt status has been revoked, or if
your organization is in the process of applying for original
recognition of tax-exempt status, file annual reports (990 or
990-EZ) in hard copy by their due date. Mail to:
Department of the Treasury
Internal Revenue Service Center
Ogden, UT 84201-0027
It appears 990-Ns (electronic postcard) are not available for
these filers, regardless of size, because the organization is no
longer/not in the IRS system.
3/9/2014 42
To be compliant and maintain tax-exempt status, a 501(c)(3) organization: Must absolutely refrain from participating in the political
campaigns of candidates for local, state, or federal office.
Must restrict its lobbying activities to an insubstantial part of its total activities.
Must ensure that its earnings do not inure to the benefit of any private shareholder or individual.
Must not operate for the benefit of private interests such as those of its founder, the founder's family, its shareholders or persons controlled by such interests.
Must not operate for the primary purpose of conducting a trade or business that is not related to its exempt purpose, such as a school's operation of a factory (such activities will be taxed, i.e., UBI; or tax-exempt status revoked).
3/9/2014 43
May not provide commercial-type insurance as a substantial
part of its activities.
May not have purposes or activities that are illegal or violate
fundamental public policy.
Must satisfy annual filing requirements – failure to file for 3
consecutive years results in automatic revocation of tax-
exempt status.
Must apply for reinstatement of tax-exempt status if tax-
exempt status has been revoked, even if the organization
never applied for tax-exempt status originally, due to very
small size or membership in a group exemption program.
3/9/2014 44
IRS Notice 2011-44 - Application for Reinstatement and
Retroactive Reinstatement for Reasonable Cause Under
Internal Revenue Code § 6033(j) available at:
http://www.irs.gov/irb/2011-25_IRB/ar10.html#d0e479
IRS Life Cycle of a Charity -- http://www.irs.gov/Charities-
&-Non-Profits/Charitable-Organizations/Life-Cycle-of-a-
Public-Charity-Private-Foundation.
IRS website (generally) -- http://www.irs.gov/Charities-&-
Non-Profits/Charitable-Organizations
3/9/2014 45
IRS Compliance Guides –
◦ Publ. #4221-PC Compliance Guide For 501(c)(3) Public Charities
◦ Publ. #4221-NC Compliance Guide for Tax Exempt Organizations (other than 501(c)(3) Public Charities and Private Foundations)
◦ Publ. #4221-PF Compliance Guide for 501(c)(3) Private Foundations
Massachusetts Society of Certified Public Accountants, Inc., The Records Retention Guide, available at http://www.cpa.net/resources/retengde.pdf
Sandy Deja, Prepare Your Own 501(c)(3) Application, 2012 ebook, available by emailing [email protected] or postal mail to P.O. Box 10525, Fairbanks AK 99710. Contains section on applying for reinstatement of tax-exempt status.
3/9/2014 46
3/9/2014 47
Upcoming Programs Nonprofit Start-Up Series Session 2, March 11 — Incorporation & Bylaws
Pros & cons of incorporation; steps to incorporate, creating bylaws, corporate reporting. 6:00 pm, $5/pp
Nonprofit Start-up Group, March 19.
Networking and info-sharing. Meets monthly, 3rd Wednesday at 6:00 pm. Free!
Nonprofit Start-Up Series Session 3, March 25 — Is It a Charity?
Charity registration, in Massachusetts, and beyond. 6:00 pm, $5/pp
Nonprofit Annual Filings: What to File & When; Thursday, April 17, 8:30-10:00 am
Nonprofit organizations—from smallest to largest—must file annually with state and federal agencies or risk serious consequences. Do you know what your nonprofit’s filing obligations are? Lisa Aldrich CPA will join us for this important topic.
Legal Center for Nonprofits, Inc. 412 County Street
New Bedford, MA 02741
www.LegalCenterforNonprofits.org
Connect on Twitter: @LglCtrNP
(508) 264-5996
3/9/2014 48