Top Ten Issues Affecting Nonprofit Tax-Exempt Organizations Presented by Lundy & Flynn LLP Two Bala...

Top Ten Issues Top Ten Issues Affecting Nonprofit Affecting Nonprofit

Tax-Exempt Tax-Exempt OrganizationsOrganizations Presented byPresented by

Lundy & Flynn LLPLundy & Flynn LLPTwo Bala Plaza, Suite 300Two Bala Plaza, Suite 300Bala Cynwyd, PA 19004Bala Cynwyd, PA 19004

610-660-7788610-660-7788

Federal and State Law Federal and State Law ConcernsConcerns

““Nonprofit” is state law conceptNonprofit” is state law concept Not “owned” by anyone – those who control the organization do Not “owned” by anyone – those who control the organization do

not have an ownership interest in itnot have an ownership interest in it Prohibition on paying dividends or profits to shareholders, Prohibition on paying dividends or profits to shareholders,

members or other individualsmembers or other individuals Reasonable compensation can be paid but surpluses must stay Reasonable compensation can be paid but surpluses must stay

within the organization and be used for the organization’s stated within the organization and be used for the organization’s stated purposespurposes

““Tax-Exempt” is generally a federal law conceptTax-Exempt” is generally a federal law concept Section 501 of the Internal Revenue Code provides exemption Section 501 of the Internal Revenue Code provides exemption

from federal income tax for certain listed types of organizationsfrom federal income tax for certain listed types of organizations Currently there are listed 27 separate categories of exempt Currently there are listed 27 separate categories of exempt

organizationsorganizations 501(c)(3) organizations (churches, hospitals, universities, 501(c)(3) organizations (churches, hospitals, universities,

charities) are just one typecharities) are just one type

1. Core Federal Charitable 1. Core Federal Charitable Exemption Requirements Exemption Requirements

Public v. Private Foundation Status Public v. Private Foundation Status All 501(c)(3) organizations are either “public charities” or “private All 501(c)(3) organizations are either “public charities” or “private

foundations”foundations”

Under 509(a), organizations that are considered publicly supported Under 509(a), organizations that are considered publicly supported (churches, hospitals, charities, etc.) are deemed “public charities” – those (churches, hospitals, charities, etc.) are deemed “public charities” – those that are supported by a small group are deemed “private foundations”that are supported by a small group are deemed “private foundations”

Public Charities generally deemed more favorable than private Public Charities generally deemed more favorable than private foundationsfoundations 501(c)(3) public charities can receive deductible contributions 501(c)(3) public charities can receive deductible contributions

(deductible up to 50% of AGI), issue tax-exempt bonds(deductible up to 50% of AGI), issue tax-exempt bonds Private foundations can also receive deductible contributions (but Private foundations can also receive deductible contributions (but

only up to 30% of AGI) and are subject to more restrictive rules: have only up to 30% of AGI) and are subject to more restrictive rules: have minimum distribution requirements; taxes on net investment income; minimum distribution requirements; taxes on net investment income; restrictions on certain transactions with its board members, officers restrictions on certain transactions with its board members, officers and other related persons and other related persons

Core Federal Charitable Core Federal Charitable Exemption RequirementsExemption Requirements

Qualification Under 501(c)(3)Qualification Under 501(c)(3)

Requirements of 501(c)(3) statusRequirements of 501(c)(3) status Must be Must be organizedorganized and and operatedoperated

exclusively (primarily) for religious, exclusively (primarily) for religious, charitable, educational or scientific charitable, educational or scientific purposespurposes

Promotion of health is a recognized Promotion of health is a recognized charitable purposecharitable purpose


OrganizationalOrganizational test -- satisfied by provisions test -- satisfied by provisions in articles of incorporation (clear reference in articles of incorporation (clear reference to the provisions of section 501(c)(3) or the to the provisions of section 501(c)(3) or the regs to operative terms like “religious,” regs to operative terms like “religious,” “charitable,” “scientific,” “educational,” etc.“charitable,” “scientific,” “educational,” etc.

Articles should limit authority to engage only Articles should limit authority to engage only in activities furthering exempt purposes in activities furthering exempt purposes disclaim power to engage in substantial disclaim power to engage in substantial activities not in furtherance of exempt activities not in furtherance of exempt purposespurposes


OperationalOperational test -- satisfied by showing that test -- satisfied by showing that activities will:activities will:

Be exclusively for charitable purposes (i.e., Be exclusively for charitable purposes (i.e., primarily activities that accomplish exempt primarily activities that accomplish exempt purposes, and no more than an insubstantial part purposes, and no more than an insubstantial part other than in furtherance of exempt purposes),other than in furtherance of exempt purposes),

Not permit net earnings to inure to the benefit of Not permit net earnings to inure to the benefit of private shareholders or individuals (i.e., private shareholders or individuals (i.e., “insiders” -- persons with personal and private “insiders” -- persons with personal and private interests in the organization’s activities and in a interests in the organization’s activities and in a position to exercise influence over the position to exercise influence over the organization’s affairs),organization’s affairs),

Core Federal Charitable Core Federal Charitable Exemption RequirementsExemption Requirements Not include participation in political Not include participation in political

campaignscampaigns

Not consist of substantial lobbying, andNot consist of substantial lobbying, and

Private inurement proscription buttressed by Private inurement proscription buttressed by corollary private benefit limitation -- 501(c)corollary private benefit limitation -- 501(c)(3) organization must serve a public interest (3) organization must serve a public interest rather than a private interest – i.e., must not rather than a private interest – i.e., must not be operated for the benefit or private be operated for the benefit or private interestsinterests


Private benefit limitation does not require participation of Private benefit limitation does not require participation of an “insider”an “insider”

Standard IRS formulation of private benefit test is that the Standard IRS formulation of private benefit test is that the benefit to private persons must be “qualitatively” and benefit to private persons must be “qualitatively” and “quantitatively” incidental when compared to the benefit “quantitatively” incidental when compared to the benefit to the publicto the public

To be “qualitatively” incidental, a benefit must be “a To be “qualitatively” incidental, a benefit must be “a necessary concomitant of the activity which benefits the necessary concomitant of the activity which benefits the public at large” in the sense that “the benefit to the public public at large” in the sense that “the benefit to the public cannot be achieved without necessarily benefiting certain cannot be achieved without necessarily benefiting certain private individuals” (e.g., the use of a hospital’s facilities private individuals” (e.g., the use of a hospital’s facilities by private practice physicians on active medical staff for by private practice physicians on active medical staff for treatment of their patients)treatment of their patients)

To be “quantitatively” incidental, the benefit must be To be “quantitatively” incidental, the benefit must be insubstantial in comparison with the benefit conferred insubstantial in comparison with the benefit conferred upon the publicupon the public

2. Fiduciary Issues for 2. Fiduciary Issues for Nonprofit Boards of Nonprofit Boards of

DirectorsDirectors Duty of Care 15 Pa.C.S.A. section 5712Duty of Care 15 Pa.C.S.A. section 5712

Director as fiduciary – “Director shall perform his or Director as fiduciary – “Director shall perform his or her duties as a director . . . in good faith, in a her duties as a director . . . in good faith, in a manner the director reasonably believes to be in the manner the director reasonably believes to be in the best interests of the corporation and with such care, best interests of the corporation and with such care, including reasonable inquiry, skill and diligence, as a including reasonable inquiry, skill and diligence, as a person of ordinary prudence would use under similar person of ordinary prudence would use under similar circumstancescircumstances

Presumption: “Absent breach of fiduciary duty, lack Presumption: “Absent breach of fiduciary duty, lack of good faith, or self-dealing, any act as the board of of good faith, or self-dealing, any act as the board of directors, a committee of the board, or an individual directors, a committee of the board, or an individual director shall be presumed to be in the best interests director shall be presumed to be in the best interests of the corporationof the corporation

Fiduciary Issues for Fiduciary Issues for Nonprofit Boards of Nonprofit Boards of

DirectorsDirectors If a bylaw of the organization so provides, a If a bylaw of the organization so provides, a

director shall not be personally liable for director shall not be personally liable for monetary damages for any action taken or monetary damages for any action taken or any failure to take any action as a director any failure to take any action as a director unless:unless:

1.1. The director breached or failed to perform the The director breached or failed to perform the duties of his or her office; andduties of his or her office; and

2.2. The breach or failure constitutes self-dealing, The breach or failure constitutes self-dealing, willful misconduct or recklessness.willful misconduct or recklessness.

This does not apply to the responsibility of a This does not apply to the responsibility of a director pursuant to any criminal statute or director pursuant to any criminal statute or the liability of a director for the payment of the liability of a director for the payment of taxes taxes


DirectorsDirectorsBylaw Provisions for Nonprofit CorporationsBylaw Provisions for Nonprofit Corporations DirectorsDirectors

Statute requires at least one directorStatute requires at least one director If the Bylaws do not fix a certain number, If the Bylaws do not fix a certain number,

statute mandates that there be threestatute mandates that there be three If no term of office stated, it is fixed by law at If no term of office stated, it is fixed by law at

one yearone year If no mechanism for filling vacancies is If no mechanism for filling vacancies is

specified, vacancies are filled by a majority specified, vacancies are filled by a majority vote of (remaining) directors (even if less than vote of (remaining) directors (even if less than a quorum)a quorum)


DirectorsDirectors Unless Bylaws provide otherwise, each director is Unless Bylaws provide otherwise, each director is

entitled by law to one voteentitled by law to one vote MeetingsMeetings

Statute provides that there must be an annual Statute provides that there must be an annual meeting of directors for the election of directors meeting of directors for the election of directors and officers, appointment of Standing Committees, and officers, appointment of Standing Committees, and the transaction of any other business which and the transaction of any other business which may be brought before the meetingmay be brought before the meeting

Unless Bylaws provide otherwise, regular meetings Unless Bylaws provide otherwise, regular meetings are held at such place and time as shall be are held at such place and time as shall be designated by resolution of the Board designated by resolution of the Board

Special meetings may be called by the Chair, the Special meetings may be called by the Chair, the President, or any two directors upon five days President, or any two directors upon five days noticenotice


DirectorsDirectors QuorumQuorum

Unless the Bylaws provide otherwise, a Unless the Bylaws provide otherwise, a majority of directors shall constitute a quorum majority of directors shall constitute a quorum for the transaction of business. The acts of a for the transaction of business. The acts of a majority of the directors present and voting at majority of the directors present and voting at a meeting at which a quorum is present shall a meeting at which a quorum is present shall be the acts of the Boardbe the acts of the Board

OfficersOfficers The statute requires at a minimum, a The statute requires at a minimum, a

President, a Treasurer and a Secretary President, a Treasurer and a Secretary Unless the Bylaws provide otherwise, officers Unless the Bylaws provide otherwise, officers

are reelected annuallyare reelected annually


DirectorsDirectors Conflicts of InterestConflicts of Interest

By statute, transactions between a By statute, transactions between a nonprofit organization and its officers and nonprofit organization and its officers and directors (or organizations in which the directors (or organizations in which the officers or directors are involved) are not officers or directors are involved) are not void if all material facts concerning the void if all material facts concerning the relationship are made known to the Board relationship are made known to the Board and the transaction is deemed fair to the and the transaction is deemed fair to the nonprofit organization at the time it is nonprofit organization at the time it is authorized. authorized.

Having a Conflicts of Interest Policy is Having a Conflicts of Interest Policy is considered a “best practice”considered a “best practice”


DirectorsDirectors Annual ReportAnnual Report

The statute requires the President and The statute requires the President and Treasurer to present to the Board at its Treasurer to present to the Board at its annual meeting a report, verified by the annual meeting a report, verified by the President and Treasurer or by a majority of President and Treasurer or by a majority of the Board, showing in appropriate detail the the Board, showing in appropriate detail the following for the immediately preceding year:following for the immediately preceding year: The corporation’s year end assets and liabilitiesThe corporation’s year end assets and liabilities The principal changes in assets and liabilitiesThe principal changes in assets and liabilities The revenue or receipts of the CorporationThe revenue or receipts of the Corporation The expenses or disbursements of the Corporation The expenses or disbursements of the Corporation


DirectorsDirectors IndemnificationIndemnification

A nonprofit corporation may indemnify any A nonprofit corporation may indemnify any representative who was or is a party or is representative who was or is a party or is threatened to be made a party to any threatened, threatened to be made a party to any threatened, pending or completed action or proceeding, by pending or completed action or proceeding, by reason of the fact that he or she is or was a reason of the fact that he or she is or was a representative of the Corporation, against representative of the Corporation, against expenses (including attorneys’ fees), judgments, expenses (including attorneys’ fees), judgments, fines, and amounts paid in settlement actually and fines, and amounts paid in settlement actually and reasonably incurred reasonably incurred

The corporation may limit the indemnification by The corporation may limit the indemnification by providing that it applies only if the representative providing that it applies only if the representative acted in good faithacted in good faith


DirectorsDirectorsVolunteer Protection StatutesVolunteer Protection Statutes

The Volunteer Protection Act of The Volunteer Protection Act of 1997, 42 U.S.C.A. § § 14501-14505 1997, 42 U.S.C.A. § § 14501-14505 (1997)(1997)

VPA is intended to promote VPA is intended to promote volunteerism by giving protection volunteerism by giving protection from liability to volunteers who from liability to volunteers who serve nonprofit organizationsserve nonprofit organizations


DirectorsDirectors A volunteer is not liable for his/her actions if :A volunteer is not liable for his/her actions if :

1.1. Volunteer was acting within scope of his/her Volunteer was acting within scope of his/her responsibilityresponsibility

2.2. If required by law, the volunteer was licensed or If required by law, the volunteer was licensed or authorized by the appropriate authorities for the authorized by the appropriate authorities for the activities or practice from which the harm resultedactivities or practice from which the harm resulted

3.3. The harm was not caused by “willful or criminal The harm was not caused by “willful or criminal misconduct, gross negligence, reckless misconduct, misconduct, gross negligence, reckless misconduct, or a conscious, flagrant indifference to the rights or or a conscious, flagrant indifference to the rights or safety of the individual harmed by the volunteer; andsafety of the individual harmed by the volunteer; and

4.4. The harm was not caused by the volunteer operating The harm was not caused by the volunteer operating a vehicle for which applicable state law requires an a vehicle for which applicable state law requires an operator to possess an operator’s license or to operator to possess an operator’s license or to maintain insurance.maintain insurance.


DirectorsDirectors A volunteer will not be shielded from liability A volunteer will not be shielded from liability

if his/her misconduct:if his/her misconduct:1.1. Constitutes a crime of violence or an act of Constitutes a crime of violence or an act of

international terrorism for which the volunteer has international terrorism for which the volunteer has been convictedbeen convicted

2.2. Constitutes a hate crime under state lawConstitutes a hate crime under state law3.3. Involves a sexual offence, as defined under Involves a sexual offence, as defined under

applicable state law, for which the volunteer has applicable state law, for which the volunteer has been convictedbeen convicted

4.4. Involves actions for which the volunteer has been Involves actions for which the volunteer has been found to have violated federal or state civil rights found to have violated federal or state civil rights law; orlaw; or

5.5. Occurred at a time when the volunteer was under Occurred at a time when the volunteer was under the influence of drugs or alcoholthe influence of drugs or alcohol


DirectorsDirectorsPennsylvania’s “Good Samaritan” LawsPennsylvania’s “Good Samaritan” Laws

42 Pa.C.S. § 8332.2 Officer, Director or Trustee of Nonprofit 42 Pa.C.S. § 8332.2 Officer, Director or Trustee of Nonprofit Organization Negligence Standard: “No person who serves Organization Negligence Standard: “No person who serves without compensation, other than reimbursement for actual without compensation, other than reimbursement for actual expenses, as an officer, director or trustee of any nonprofit expenses, as an officer, director or trustee of any nonprofit organization under section 501(c)(3) of the [IRC] shall be liable organization under section 501(c)(3) of the [IRC] shall be liable for any civil damages as a result of any acts or omissions for any civil damages as a result of any acts or omissions relating solely to the performance of his or her duties as an relating solely to the performance of his or her duties as an officer, director, or trustee, unless the conduct of the person officer, director, or trustee, unless the conduct of the person falls substantially below the standards generally practiced and falls substantially below the standards generally practiced and accepted in like circumstances by similar persons performing accepted in like circumstances by similar persons performing the same or similar duties, and unless it is shown that the the same or similar duties, and unless it is shown that the person did an act or omitted the doing of an act which the person did an act or omitted the doing of an act which the person was under a recognized duty to another to do, knowing person was under a recognized duty to another to do, knowing or having reason to know that the act or omission created a or having reason to know that the act or omission created a substantial risk of actual harm to the person or property. It substantial risk of actual harm to the person or property. It shall be insufficient to impose liability to establish only that the shall be insufficient to impose liability to establish only that the conduct of the person fell below ordinary standards of care. conduct of the person fell below ordinary standards of care.


DirectorsDirectors Director & Officer Liability InsuranceDirector & Officer Liability Insurance

Volunteer protection statutes provide Volunteer protection statutes provide volunteers with a volunteers with a defensedefense in the event they in the event they are suedare sued

Even though a volunteer may have a viable Even though a volunteer may have a viable defense, D&O liability insurance helps to defense, D&O liability insurance helps to cover the costs of mounting such a defensecover the costs of mounting such a defense

D&O insurance can be helpful to attract D&O insurance can be helpful to attract new board membersnew board members

3. Annual Information 3. Annual Information Reporting RequirementsReporting Requirements

New Reporting RequirementsNew Reporting Requirements Tax-exempt organizations whose “gross receipts” Tax-exempt organizations whose “gross receipts”

are “normally $25,000 or less” are not required to are “normally $25,000 or less” are not required to file Annual Information Return - “Form 990”file Annual Information Return - “Form 990”

New for 2008 – For tax years ending New for 2008 – For tax years ending afterafter 12/31/07, such organizations are required to 12/31/07, such organizations are required to electronically submit “Form 990-N,” known as the electronically submit “Form 990-N,” known as the “e-Postcard” “e-Postcard”

Due by the 15Due by the 15thth day of the 5 day of the 5thth month after close of tax year month after close of tax year Include: EIN, name, address, name & address of principal Include: EIN, name, address, name & address of principal

officer, etc.officer, etc. Visit Visit

http://www.irs.gov/charities/article/0,,id=169250,00.htmlhttp://www.irs.gov/charities/article/0,,id=169250,00.html to complete and file the e-Postcardto complete and file the e-Postcard

For 2010 tax year, filing threshold increased to $50,000For 2010 tax year, filing threshold increased to $50,000

Annual Information Annual Information Reporting RequirementsReporting Requirements

No significant changes to 2007 Form No significant changes to 2007 Form 990 from 2006990 from 2006

A redesigned Form 990 has been A redesigned Form 990 has been introduced for tax years ending on or introduced for tax years ending on or after 12/31/08 (e.g., if your tax year after 12/31/08 (e.g., if your tax year ends on 12/31/09, the new Form 990 ends on 12/31/09, the new Form 990 is due to be filed by 5/15/09 unless an is due to be filed by 5/15/09 unless an extension is granted)extension is granted)

The redesigned form consist of a The redesigned form consist of a “core” and a series of schedules“core” and a series of schedules

4. Charitable 4. Charitable FundraisingFundraising

Charitable Solicitation RegistrationCharitable Solicitation Registration Fundraising in PA regulated by the Fundraising in PA regulated by the

Solicitation of Funds for Charitable Purposes Solicitation of Funds for Charitable Purposes Act 10 P.S. § 162.2 et seq.Act 10 P.S. § 162.2 et seq.

Requires registration of charitable Requires registration of charitable organizations, professional fundraisers and organizations, professional fundraisers and professional solicitorsprofessional solicitors

Penalties for noncompliance include fines Penalties for noncompliance include fines (up to $1,000 for each act and up to $100/day (up to $1,000 for each act and up to $100/day during which violation continues); revocation during which violation continues); revocation or suspension of registration; cease & desist or suspension of registration; cease & desist ordersorders

Charitable FundraisingCharitable Fundraising

Charitable Solicitation RegistrationCharitable Solicitation Registration Must submit application form (Form Must submit application form (Form

BCO-10) within 30 days of receiving BCO-10) within 30 days of receiving $25,000 in gross national contributions $25,000 in gross national contributions oror prior to compensating anyone to prior to compensating anyone to solicit contributions from Pennsylvania solicit contributions from Pennsylvania residentsresidents

Must file with the application a copy of Must file with the application a copy of IRS Form 990 and appropriate financial IRS Form 990 and appropriate financial statements for the most recently statements for the most recently completed fiscal yearcompleted fiscal year


Internet FundraisingInternet Fundraising Charleston Principles developed by NASCOCharleston Principles developed by NASCO

Advisory only!Advisory only! Out-of-state websites not required to register Out-of-state websites not required to register

if they only passively solicit donations and do if they only passively solicit donations and do not affirmatively target residents of a not affirmatively target residents of a particular stateparticular state

If, after receiving an out-of-state “passive” If, after receiving an out-of-state “passive” donation, the charity solicits that donor for donation, the charity solicits that donor for another donation, the charity another donation, the charity mustmust register in register in the donor’s state the donor’s state


Acknowledging Charitable ContributionsAcknowledging Charitable Contributions Donor must have bank record or written Donor must have bank record or written

communication from charity to claim communication from charity to claim charitable contribution deductioncharitable contribution deduction

Donor is responsible for obtaining written Donor is responsible for obtaining written acknowledgment from charity for any single acknowledgment from charity for any single contribution of $250 or morecontribution of $250 or more

Payroll Deductions – When donor makes Payroll Deductions – When donor makes single payment of $250 or more by payroll, single payment of $250 or more by payroll, donor can use either: (i) pay stub, W-2, etc; donor can use either: (i) pay stub, W-2, etc; or (ii) a pledge card that includes statement or (ii) a pledge card that includes statement that organization does not provide goods or that organization does not provide goods or services for contributions by payrollservices for contributions by payroll

Charitable ContributionsCharitable Contributions

Charitable organization must provide written Charitable organization must provide written disclosure to donor who receives goods and disclosure to donor who receives goods and services in exchange for single payment services in exchange for single payment greater than $75 (greater than $75 (quid pro quoquid pro quo contribution) contribution) Donor can only take deduction to extent Donor can only take deduction to extent

contribution exceeds FMV of goods and services contribution exceeds FMV of goods and services receivedreceived

Written disclosure not required where goods or Written disclosure not required where goods or services meet “token exception,” “membership services meet “token exception,” “membership benefits exception” or “intangible religious benefits exception” or “intangible religious exception”exception”


Token ExceptionToken Exception the fair market value of the benefits

received does not exceed the lesser of 2 percent of the payment or $89, or

the payment is at least $44.50, the only items provided bear the organization’s name or logo (e.g., calendars, mugs, or posters), and the cost of these items is within the limit for “low-cost articles,” which is $8.90


Membership Benefits ExceptionMembership Benefits Exception An annual membership benefit is also considered

to be insubstantial if it is provided in exchange for an annual payment of $75 or less and consists of annual recurring rights or privileges, such as:

free or discounted admissions to the charitable organization’s facilities or events

discounts on purchases from the organization’s gift shop free or discounted parking free or discounted admission to member-only events

sponsored by an organization, where a per-person cost (not including overhead) is within the “low-cost articles” limits


Intangible Religious Benefit ExceptionIntangible Religious Benefit Exception If a religious organization provides only “intangible

religious benefits” to a contributor, the acknowledgment does not need to describe or value those benefits. It can simply state that the organization provided intangible religious benefits to the contributor.

“Intangible Religious Benefits” are benefits provided by a tax-exempt organization operated exclusively for religious purposes, and are not usually sold in commercial transactions outside a donative (gift) context (e.g., admission to religious ceremony).

5. Purely Public Charity 5. Purely Public Charity StatusStatus

To qualify as an “Institution of Purely To qualify as an “Institution of Purely Public Charity” a charity must:Public Charity” a charity must: Advance a charitable purpose;Advance a charitable purpose; Operate entirely free from private profit motive;Operate entirely free from private profit motive; Donate or render gratuitously a substantial Donate or render gratuitously a substantial

portion of its services;portion of its services; Benefit a substantial and indefinite class of Benefit a substantial and indefinite class of

persons who are legitimate subjects of charity;persons who are legitimate subjects of charity; Relieve the government of some of its burdenRelieve the government of some of its burden

Purely Public Charity Purely Public Charity StatusStatus

Benefits of being a Purely Public Benefits of being a Purely Public CharityCharity Can obtain a sales tax exemption from Can obtain a sales tax exemption from

the PA Dept. of Revenue for purchases the PA Dept. of Revenue for purchases made by the charitable organizationmade by the charitable organization

Can obtain an exemption from real Can obtain an exemption from real estate taxes (from the local authority) estate taxes (from the local authority) for property owned and used by the for property owned and used by the charitable organization for charitable charitable organization for charitable purposes purposes

6. Corporate Governance 6. Corporate Governance IssuesIssues

IRS Best Practices IRS Best Practices – Recommends – Recommends adoption of some adoption of some or all of the or all of the followingfollowing Mission StatementMission Statement Code of EthicsCode of Ethics Due DiligenceDue Diligence

Duty of LoyaltyDuty of Loyalty TransparencyTransparency Fundraising PolicyFundraising Policy Financial AuditsFinancial Audits Compensation Compensation

PracticesPractices Document Document

Retention PolicyRetention Policy

7. Lobbying7. Lobbying

No substantial part of the activities of No substantial part of the activities of 501(c)(3) public charity may be carrying 501(c)(3) public charity may be carrying on propaganda or attempting to influence on propaganda or attempting to influence legislation (except as provided in 501(h))legislation (except as provided in 501(h))

““No substantial part” not definedNo substantial part” not defined 5% considered safe (although IRS not bound 5% considered safe (although IRS not bound

by a specific percentage and method for by a specific percentage and method for measuring activities unclear)measuring activities unclear)

Private foundations not permitted any Private foundations not permitted any lobbying activitylobbying activity

LobbyingLobbying IRC § 501(h) permits organizations to elect an objective IRC § 501(h) permits organizations to elect an objective

standard to measure lobbying activitiesstandard to measure lobbying activities

Once the election is in effect, an organization can spend the Once the election is in effect, an organization can spend the following amounts (up to an annual maximum of $1 million) on following amounts (up to an annual maximum of $1 million) on lobbying activities:lobbying activities:

(i) 20% of the first $500,000 of the organization's annual charitable (i) 20% of the first $500,000 of the organization's annual charitable purpose expenditures;purpose expenditures;

(ii) 15% of the next $500,000;(ii) 15% of the next $500,000; (iii) 10% of the next $500,000; and (iii) 10% of the next $500,000; and (iv) 5% thereafter(iv) 5% thereafter

This limitation is further subdivided so that only 25% of the This limitation is further subdivided so that only 25% of the basic limit may be spent for "grass roots lobbying" (i.e., any basic limit may be spent for "grass roots lobbying" (i.e., any attempt to influence legislation through an attempt to affect the attempt to influence legislation through an attempt to affect the opinion of the general public or any segment thereof)opinion of the general public or any segment thereof)

Amounts spent in excess of the permitted lobbying or grassroots Amounts spent in excess of the permitted lobbying or grassroots expenditures are subject to a 25% excise taxexpenditures are subject to a 25% excise tax

File Form 5768 to elect under IRC 501(h)File Form 5768 to elect under IRC 501(h)

LobbyingLobbying Safe HarborsSafe Harbors

An electing organization will not be treated as An electing organization will not be treated as influencing legislation if it:influencing legislation if it:

Makes available the results of nonpartisan analysis, Makes available the results of nonpartisan analysis, study or researchstudy or research

Provides technical advice or assistance at the request of Provides technical advice or assistance at the request of the governmentthe government

Testifies or communicates about legislation that would Testifies or communicates about legislation that would affect the organization’s existence, powers, duties, or affect the organization’s existence, powers, duties, or tax-exempt status, or the deductibility of contributions;tax-exempt status, or the deductibility of contributions;

Communicates with its members (only) about specific Communicates with its members (only) about specific legislation of direct interest to the organization, but legislation of direct interest to the organization, but without urging them to lobby or to urge others to lobby; without urging them to lobby or to urge others to lobby; oror

Communicates with government employees on non-Communicates with government employees on non-legislative matters and without any purpose to influence legislative matters and without any purpose to influence legislation legislation

8. Political Intervention8. Political Intervention All IRC 501(c)(3) organizations are prohibited All IRC 501(c)(3) organizations are prohibited

from directly or indirectly participating in, or from directly or indirectly participating in, or intervening in, any political campaign on intervening in, any political campaign on behalf of, or in opposition to any candidate for behalf of, or in opposition to any candidate for elective officeelective office

Violation may lead to revocation of tax-exempt Violation may lead to revocation of tax-exempt status and imposition of certain excise taxesstatus and imposition of certain excise taxes

Political campaign intervention includes any Political campaign intervention includes any and all activities that favor or oppose one or and all activities that favor or oppose one or more candidates for public office.more candidates for public office.

501(c)(3) organizations are permitted to 501(c)(3) organizations are permitted to engage in certain voter education activities if engage in certain voter education activities if carried out in a non-partisan mannercarried out in a non-partisan manner

9. Unrelated Business 9. Unrelated Business IncomeIncome

Unrelated Business Income (IRC §§ 511-515)Unrelated Business Income (IRC §§ 511-515) A tax on the net income ofA tax on the net income of

trade or businesstrade or business regularly carried on, andregularly carried on, and not substantially related to exempt purposes other than not substantially related to exempt purposes other than

through the production of income,through the production of income, subject to modifications, exceptions, and exclusionssubject to modifications, exceptions, and exclusions

Key modifications includeKey modifications include Dividends, interest, royalties, certain rents and capital Dividends, interest, royalties, certain rents and capital

gainsgains However, above items are However, above items are includedincluded in the case of debt- in the case of debt-

financed property (although schools, qualified pensions financed property (although schools, qualified pensions and similar organizations may, under certain and similar organizations may, under certain circumstances, exclude rents from debt-financed circumstances, exclude rents from debt-financed property)property)

10. Joint Ventures10. Joint Ventures

Reasons for Joint VenturesReasons for Joint Ventures Increasing capital needsIncreasing capital needs

Reduced reimbursements/paymentsReduced reimbursements/payments Technological advancesTechnological advances Expansion refurbishment of physical Expansion refurbishment of physical

facilitiesfacilities Preferable to borrowing (lower cost of Preferable to borrowing (lower cost of

capital – reaching creditor limits)capital – reaching creditor limits)

Joint VenturesJoint Ventures Nature of problematic transactionsNature of problematic transactions

Tax-exempt organizations in joint Tax-exempt organizations in joint ventures/partnerships with private, for-profit or ventures/partnerships with private, for-profit or taxable, business organizationstaxable, business organizations

Organization serving as general partner in a Organization serving as general partner in a partnership or managing member of a limited liability partnership or managing member of a limited liability company (“LLC”)company (“LLC”)

The organization’s participation must further its exempt The organization’s participation must further its exempt purposes, andpurposes, and

The partnership must not prevent the organization from The partnership must not prevent the organization from acting in furtherance of its exempt purposes and cannot acting in furtherance of its exempt purposes and cannot result in inurement to insiders or more than incidental result in inurement to insiders or more than incidental private benefit to the for-profit partnersprivate benefit to the for-profit partners

Limited partner status typically only raises UBI issuesLimited partner status typically only raises UBI issues

Joint VenturesJoint Ventures If exempt organization enters into an “ancillary” If exempt organization enters into an “ancillary”

joint venture that is related to the organization’s joint venture that is related to the organization’s exempt purposes, the partner’s distributive exempt purposes, the partner’s distributive share of income usually treated as exempt share of income usually treated as exempt function incomefunction income

If exempt organization enters into an “ancillary” If exempt organization enters into an “ancillary” joint venture that is unrelated to the joint venture that is unrelated to the organization’s exempt purposes, the partner’s organization’s exempt purposes, the partner’s distributive share of income usually treated as distributive share of income usually treated as unrelated trade or business incomeunrelated trade or business income If unrelated trade or business were substantial If unrelated trade or business were substantial

enough, it could jeopardize 501(c)(3) status because it enough, it could jeopardize 501(c)(3) status because it would be evidence of substantial non-exempt purposewould be evidence of substantial non-exempt purpose

Date post:	28-Mar-2015
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Top Ten Issues Affecting Nonprofit Tax-Exempt Organizations Presented by Lundy & Flynn LLP Two Bala...

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