The IRS recently issued Notice 2014-4 (the “Notice”), which provides interim guidance for Type III supporting organizations seeking to qualify as functionally integrated by supporting governmental organizations. In December 2012, the IRS issued final and temporary regulations that, among other things, set forth the requirements for an organization to qualify as a functionally integrated Type III supporting organization. However, these regulations reserved Section 1.509(a)-4(i)(4)(iv) to provide additional guidance on the requirements for qualifying as a functionally integrated by supporting a governmental supported organization.
A supporting organization, described in Section 509(a)(3) of the Code, is an organization that supports one or more public charities (the “supported organizations”). A Type III supporting organization is “operated in connection with” one or more supported organizations. Under the Pension Protection Act of 2006, a Type III supporting organization that is “non-functionally integrated” must pay a certain amount to its supported organization, while a Type III “functionally integrated” supporting organization does not have any payout requirement. Continue Reading
Tax-exempt organizations that have had their tax-exempt status automatically revoked because of failure to file required annual returns for three consecutive years can follow new procedures for seeking reinstatement of their tax exemptions. The IRS released these procedures in Revenue Procedure 2014-11 on January 2, 2014. The Revenue Procedure, which is the first IRS guidance on this topic since 2011, outlines three procedures that organizations may use to apply for reinstatement.
First, under a “Streamlined Retroactive Reinstatement Process,” small organizations eligible to file a short form (Form 990-EZ) or postcard return (Form 990-N) may have their tax-exempt status retroactively reinstated to the date of revocation, provided that they have not previously had their exemptions automatically revoked. Under this procedure, organizations must complete and submit Form 1023 (Application for Recognition of Exemption Under Section 501(c)(3)) or Form 1024 (Application for Recognition of Exemption Under Section 501(a)) not more than 15 months after revocation.
Under the Not-for-Profit Corporation Law (“NPCL”) it is relatively clear that (i) any committee with corporate authority must be comprised only of trustees, and (ii) committees must be appointed by the board, and not, for example, by the chair (other than special committees). (The foregoing may not apply if otherwise provided by the certificate of incorporation.)
The NPCL currently distinguishes between (i) the executive committee and other standing committees, on one hand, and (ii) special committees, on the other hand.
Executive and standing committees must be appointed by a majority of the entire board pursuant to Section 712(a) which provides, in part, that “the board, by resolution adopted by a majority of the entire board, may designate from among its members an executive committee and other standing committees, each consisting of three or more directors, and each of which, to the extent provided in the resolution . . . shall have all the authority of the board, except . . . .” (Emphasis added.)
The New York Non-Profit Revitalization Act of 2013 (the “Act”), which was passed by the New York State legislature in June, was signed into law by Governor Andrew Cuomo last week. The Act seeks to modernize the New York Not-For-Profit Corporation Law (the “NPCL”), and is the first major overhaul of the NPCL in four decades.
The Act goes into effect on July 1, 2014.
Details of some of the changes to the NPCL include:
• In a critically important victory for common-sense corporate governance, notices and consents under the NPCL may be sent via e-mail and fax.
• Instead of defining not-for-profit corporations as Type A, B, C, or D (a classification system that has bedeviled New York lawyers for years), such entities will be simply “charitable” or “non-charitable.” Former Type-A corporations will be non-charitable, while all others will be charitable. Charitable purposes are defined as “charitable, educational, religious, scientific, literary, cultural or for the prevention of cruelty to children or animals.”
• The New York Executive Law requires submission of audit reports to the Attorney General for entities registered to solicit and collect funds for charitable purposes. The new law raises the gross revenue thresholds for such audits over time. Starting on July 1, 2014, certified audits will be required for those entities with revenue and support in excess of $500,000. The threshold will be raised to $750,000 as of July 1, 2017 and $1 million as of July 1, 2021. Continue Reading
Earlier this year the IRS issued drafts of the 2013 Form 990, Return of Organization Exempt From Income Tax, and 2013 Form 990 Instructions. Although there were no major changes to the Form 990, there were several changes and clarifications in the draft instructions, including:
- Short Period Returns. The draft instructions clarify that a short period return cannot be filed electronically unless it is appropriately designated as an initial return or final return.
- Change in Accounting Method. The draft instructions provide that an organization that files Form 990-N (electronic postcard) must report its accounting changes on Form 990, Form 990-EZ or Form 1128.
- Documentation. The draft instructions clarify what documentation must be attached to Form 990 to support a name change, or by an organization that has terminated, dissolved, merged or had its exemption revoked by the IRS.
- Public Support Test. The draft instructions clarify when an organization can exclude from Schedule B contributors that fall below the greater-than-$5,000/2% threshold. In order to limit the contributors an organization reports on Schedule B, an organization must complete the “support tests” in Schedule A, Part II. Continue Reading
Proskauer’s 18th Annual Trick or Treat Seminar was held on Thursday, October 31.
The Seminar discussed:
- Statutory Authority of New York Attorney General’s Charities Bureau
- Proposed Revisions to New York’s’ Not-for-Profit Corporation Law
- Impact of United States v. Windsor on Health Insurance and Retirement Plans and Key Provisions of the Affordable Care Act
In her introductory remarks, Amanda Nussbaum provided a summary of recent Internal Revenue Service developments and introduced the presenters. Continue Reading
The Advisory Committee on Tax Exempt and Government Entities (ACT) has released its annual report and recommendations to the IRS on selected issues concerning exempt organizations, employee benefit plans, tax-exempt financing, and state and local governmental entities. See our post about last year’s report here. The annual ACT report is always an important indicator and focus group of IRS trends. This year’s Exempt Organizations (EO) report, “Leveraging Limited IRS Resources in the Tax Administration of Small Tax-Exempt Organizations,” is particularly interesting. The development of the Report and recommendations preceded the so-called “IRS TEGE scandal” involving alleged targeting of certain (c)(3) and (c)(4) applications for review, the exodus of Lois Lerner, and the consequent infusion of long-needed resources for eliminating or reducing EO application and review bureaucratic delays, due to pure and simple overload, and limited resources, exacerbated by the Sequester.
The Report also reflects a serious effort by all the players to figure out how to leverage limited administrative, educational and enforcement resources in the interest of providing more public information, transparency and accountability for the “small” and “very small” EOs (in part because the Attorney-General offices (AGOs) often see these EOs being an easy target for fraudsters at the local level, an arena AGOs are charged with policing and which they have far more incentives to monitor than the IRS), expanding the availability of education and technical assistance for these EOs through leveraging a range of private/public vehicles, plus the IRS website itself, and enhanced information sharing for all these purposes with state charity regulators. Continue Reading
In what is characterized as a “Revitalization Act,” and which certainly is a modernization, the New York State legislature has passed and placed before Governor Andrew Cuomo changes to the Not-for-Profit (“NFP”) Corporation Law. The current version of the law, if signed by the Governor, will allow for use of electronic communications (e-mail and fax) more broadly, increase the gross revenue floor for reporting and mandatory independent audits, eliminate the NFP corporation types that have bedeviled New York lawyers for years, mandate conflict of interest and whistleblower protection polices, establish clearer rules on related-party transactions, and enhance the Attorney General’s authority to approve (without further review by a Court), certificates of amendment and corporate mergers and dissolutions. The law will also specifically allow the use of committees for certain super-majority board approval matters such as leases, make every officer and director subject to the jurisdiction of New York courts no matter where they may reside, prohibit employees of NFP corporations from serving as chair of its board, and otherwise generally conform and improve the existing law.
As part of a series of papers outlining tax reform options for the Senate Finance Committee (SFC), the SFC staff recently published a paper on tax reform options for tax-exempt organizations and charitable giving, available here. Like the other staff papers on tax reform options, the exempt organizations paper compiles suggestions that have been made by witnesses at SFC hearings, by policy experts, by bipartisan commissions, and elsewhere. Thus, the paper does not set forth new proposals, but gathers in one place numerous proposals that have been made, with links to sources of those proposals where available. For exempt organizations, the proposals range from taxing all commercial activities of tax-exempt organizations, to revising the unrelated business income tax rules for organizations conducting commercial activities, to requiring specified payout levels from endowments, to limiting executive compensation that tax-exempt organizations may pay. With respect to the tax deduction for charitable contributions, the proposals range from repealing the deduction, to fundamentally changing the deduction, to incrementally reforming the deduction in a variety of ways.
Aside from the compilation of specific proposals, the staff paper sets forth a useful framework of possible goals and concerns for the SFC’s consideration when addressing tax-exempt organizations. Potential goals include:
- Improving tax-exempt organizations’ accountability and oversight;
- Addressing the permissible amount of commercial activity for tax-exempt organizations;
- Aligning tax-exempt status with sufficient charitable benefits more tightly;
- Examining the relationship between political activity and tax-exempt status; and
- Making incentives for charitable giving maximally efficient and effective, and considering whether these incentives should be expanded to more taxpayers.
The listed potential concerns correspond to the potential goals; for example, the concern as to whether tax-exempt organizations provide sufficient charitable benefits corresponds to the goal of more tightly aligning tax-exempt status with charitable benefits.
Whatever the ultimate fate of comprehensive tax reform this session, it is clear that tax-exempt organizations and the options compiled in the report will continue to be under scrutiny by the SFC and others.
The IRS recently released an Information Letter, written in response to a congressman’s inquiry about an unidentified charity’s unidentified practices, confirming that Section 501(c)(3) organizations may use the internet to raise funds. The IRS stated that solicitations made through a website or e-mail should comply with the same rules that apply to other solicitations. However, any organization raising funds over the internet should consider any state laws and regulations that may apply.
The IRS reminded organizations of several important considerations for Section 501(c)(3) organizations, whether or not they use the internet to raise funds:
- Deductibility of donations. An organization that is raising funds, but has not yet received recognition as a tax-exempt organization under Section 501(c)(3), must include a clear and conspicuous statement on its solicitation materials (including its website) stating that it has not received Section 501(c)(3) recognition, and, therefore, donations may not be deductible.
- Professional fundraisers. An organization should consider whether any fees that a fundraiser or other private party charges could be excessive or whether the fees violate the rules against private benefit or private inurement.
- Quid pro quo contributions. If an organization provides something of value in exchange for a donation, then the organization must consider whether this arrangement violates the rules against private benefit or private inurement. The organization must also comply with any substantiation and disclosure requirements for quid pro quo contributions.
- Disclosing fundraising information. An organization that is applying for recognition of Section 501(c)(3) status must describe its actual and planned fundraising activities and its fundraising expenses on its application for exemption (Form 1023). Expenses relating to fundraising incurred by an organization must be reported on the organization’s annual information return (Form 990, Form 990-EZ or Form 990PF).