Not For Profit/Exempt Organizations Blog | Non-Profit Lawyers

Proposed Regulations provide helpful new examples of “program-related investments”

By Kathleen E. Gerber on May 3rd, 2012 Posted in Private Foundations

As repeatedly promised in its work plan, the IRS recently issued Proposed Regulations containing several new examples of investments that qualify as a “program-related investment” (a “PRI”) for purposes of avoiding potential characterization as a “jeopardizing investment,” which could result in the imposition of excise taxes on a private foundation and its managers under Section 4944 of the Code. The proposed regulations can be found at 77 F.R. 23429 (April 19, 2012).

Section 4944 imposes excise taxes on a private foundation that makes a “jeopardizing investment” and on the foundation managers who knowingly participate in the making of the investment. A jeopardizing investment is made when, based on the facts and circumstances at the time the investment is made, the foundation managers fail to exercise ordinary business care and prudence in providing for the long-term and short-term needs of the foundation to carry out its exempt purposes. An investment that qualifies as a PRI, however, will not be characterized as a jeopardizing investment and will not trigger the Section 4944 excise tax. A PRI is any investment made with the primary purpose of carrying out charitable, religious, educational or similar purposes as long as the production of income is not a significant purpose of making the investment and the attempt to influence legislation or participate or intervene in any political campaign is not any purpose of making the investment.

The current regulations (which were promulgated in 1972) contain nine examples of investments that would qualify as PRIs, but the investment examples are limited in scope and fail to address many current investment practices. The Treasury Department and the IRS stated in the accompanying notice that the nine new examples are not intended to modify the existing rules governing PRIs, but rather are intended to fill in the gaps left by the current examples. Importantly, private foundations will be permitted to rely on these new examples prior to their finalization. Specific gaps and ambiguities in the current examples that the new examples are intended to address include clarification that:

an activity conducted in a foreign country furthers a charitable purpose if the same activity would further a charitable purpose if conducted in the United States;
the charitable purposes served by a PRI are not limited to situations involving economically disadvantaged individuals and deteriorated urban areas (which happen to be the types of situations discussed in the current examples);
the recipients of PRIs need not be within a charitable class if they are the instruments for furthering a charitable purpose;
a potentially high rate of return does not automatically prevent an investment from qualifying as a PRI;
PRIs can be achieved through a variety of investments, including loans to individuals, tax-exempt organizations and for-profit organizations, and equity investments in for-profit organizations;
a credit enhancement arrangement may qualify as a PRI; and
acceptance by a private foundation of an equity position in conjunction with making a loan does not necessarily prevent the investment from qualifying as a PRI.

Notably, PRIs are also accorded preferential treatment under other provisions of the Code. For example, a PRI is excluded from the assets that a private foundation must take into account when determining the annual “distributable amount” for purposes of avoiding the excise tax imposed on a foundation’s undistributed income under Section 4942 of the Code. Further, PRIs do not constitute “taxable expenditures” and thus are not subject to the excise tax under Section 4945 of the Code as long as a private foundation exercises certain expenditure responsibilities. Accordingly, while the IRS notes in the accompanying notice that the discussion in the new examples is limited to the impact of Section 4944 on the facts described therein, the examples will be helpful to those in the private foundation community for purposes of determining whether an expenditure may qualify for preferential treatment under other provisions of the Code as well.

The proposed regulations do not address low-profit limited liability companies.

New Streamlined IRS Online Search Tool Makes it Easier to Find Information about Tax-Exempt Organizations, Including Whether an Organization Has Ever Been Subject to Automatic Revocation of its Tax-Exempt Status

By Charles C. Jackson on March 19th, 2012 Posted in IRS Filings

The IRS recently unveiled its new streamlined online search tool, Exempt Organizations Select Check (“EO Select Check”), which provides one place where taxpayers can go to find out: (1) whether an organization is eligible to receive tax-deductible contributions; (2) whether the organization has ever been subject to automatic revocation of its tax-exempt status for failing to file a required Form 990, Form 990-EZ or Form 990-N (aka, the “e-Postcard”) for three consecutive years; and (3) whether a small organization has filed the e-Postcard. Previously, taxpayers had to utilize three separate online search sites to find this information (the electronic version of Publication 78 (i.e., the list of exempt organizations eligible to receive tax-deductible contributions), the online Auto-Revocation List and the e-Postcard database).

EO Select Check consolidates these three former online search sites and also includes an expanded menu of search options, allowing users to search organizations by employer identification number, name, city, state, zip code, country, exemption type and revocation posting date. Additionally, under the new platform both the Publication 78 data and the Auto-Revocation List will be updated monthly. Previously, the electronic version of Publication 78 was only updated quarterly. The Form 990-N (e-Postcard) data will continue to be updated weekly.

New York Attorney General Announces Plan to “Unlock the Full Potential” of Not-For-Profit Organizations

By Yafang Deng on February 17th, 2012 Posted in Governance

February 16, 2012 – Attorney General Eric Schneiderman has announced a new reform plan to reduce the regulatory burden on New York not-for-profit organizations while strengthening their governance and accountability.

The Attorney General’s comprehensive plan distinguishes itself from recent proposals to cap not-for-profit executive compensation, emphasizing that improper compensation is not representative of the New York not-for-profit sector as a whole. Instead, the Attorney General seeks a practical approach to assisting not-for-profits in reducing financial strains while maintaining governance best practices.

The plan takes a three prong approach to reform: (1) The Nonprofit Revitalization Act, (2) the "New York on BOARD" initiative, and (3) the "Directors U" initiative.

Stealth Can Be Good: New Procedure Allows Governmental Entities to Relinquish Section 501(c)(3) Tax-exempt Status

By Elizabeth M. Mills on January 5th, 2012 Posted in IRS Filings

A new provision which was slipped in to the annual announcement of procedures for exempt organization determinations and letter rulings provides a way for governmental entities to voluntarily terminate their Section 501(c)(3) status. This is important for governmental hospitals that otherwise could be faced with new exemption requirements and penalties.

In the past, many local governmental entities, such as hospital authorities or hospital districts, obtained determinations from the IRS that they were tax-exempt organizations described in Section 501(c)(3) of the Internal Revenue Code. A common reason for obtaining recognition of Section 501(c)(3) status (in addition to their sovereign immunity as governmental entities from federal income tax) was so that the governmental entity’s employees could take advantage of Section 403(b) tax-sheltered annuities. (A government entity may not establish or maintain a Section 401(k) plan unless it adopted the plan before May 6, 1986. While governmental entities are permitted to maintain Section 457(b) plans, which are defined contribution plans providing for employee contributions similar to Section 401(k) plans, Section 457(b) plans are subject to lower contribution limits than the overall contribution limits for Section 401(k) plans and Section 403(b) annuities).

Section 501(c)(3) governmental entities were relieved of the burden of having to file a Form 990, which at that time was really the only disadvantage to Section 501(c)(3) status. (Governmental educational institutions were already subject to unrelated business income tax on their income that would have been taxable had they not been governmental institutions.) When the “intermediate sanctions” applicable to transactions with public charities became effective in 2005, imposing potential excise taxes on persons involved in transactions with Section 501(c)(3) organizations that were not public charities, the implementing regulations specifically provided that governmental entities with Section 501(c)(3) recognitions were not covered.

IRS Extends Filing Deadline for Certain Tax-Exempt Organizations

By Kathleen E. Gerber on December 20th, 2011 Posted in IRS Filings

The IRS has granted an automatic extension for certain tax-exempt organizations to file their annual returns electronically. The extension is being provided because the IRS’s electronic filing system (the “Modernized eFile system” or “MeF”) will not be available for filing Forms 990, 990-EZ, 990-PF, and 1120-POL from January 1, 2012 through February 29, 2012 (the “Suspension Period”). The extension is only available for organizations with filing due dates (whether original or extended) during the Suspension Period (“Affected Organizations”). Ordinarily, organizations with a fiscal year ending August 31 or September 30 would have filing deadlines during the Suspension Period. Under Notice 2012-4, Affected Organizations will automatically be granted an extension of time to file electronically to March 30, 2012.

Since the relief is automatic, an Affected Organization does not have to file Form 8868, Application for Extension of Time to File an Exempt Organization Return as long as the organization files its return by March 30, 2012. However, an Affected Organization will still have the option to file a Form 8868 to request an automatic extension of time to file during the Suspension Period. For example, if an Affected Organization’s original deadline to file its Form 990 is on February 15, 2012, the organization may properly complete and file a Form 8868 by such date to receive an automatic three-month extension of time to file ending on May 15, 2012. An Affected Organization that has previously received only one three-month extension of time to file will also continue to have the option to file Form 8868 to request a second automatic three-month extension.

Treasury Releases Long-Overdue Report on Supporting Organizations and Donor Advised Funds

By Elizabeth M. Mills on December 9th, 2011 Posted in Charitable Giving

Along with making significant changes to the rules for supporting organizations (“SOs”) and donor advised funds (“DAFs”) in the Pension Protection Act of 2006 (the “PPA”), Congress directed that Treasury conduct a study on the organization and operation of SOs and DAFs. Congress gave Treasury one year after the enactment of the PPA to submit a report on the study. On December 5th, more than four years past the prescribed deadline, Treasury finally released its long-awaited report to Congress. The report suggests that the current treatment of SOs and DAFs is appropriate and did not recommend any changes. While the report comes as good news to SOs and DAFs, some aren’t so keen. Senator Chuck Grassley (R–Iowa), denounced the study as disappointing, superficial, and a missed opportunity to “advance the ball in closing abusive loopholes.” For more, see his press release. Interested in whether SOs and DAFs should continue to be treated similarly to public charities, Congress asked Treasury to consider three specific questions regarding SOs and DAFs. A discussion of each question and Treasury’s response is discussed below.

Recaps from Proskauer’s 16th Annual Trick or Treat Tax Exempt Seminar

By Jason Friedman on November 4th, 2011 Posted in Governance

Proskauer’s 16^th Annual Trick or Treat Seminar was held on Monday, October 31, 2011.

The Seminar discussed:

Corporate Governance for Not-for-Profit/Exempt Organizations
Maintaining Tax-Exempt Status During Election Season
Investment Management under UPMIFA: What’s Required, What’s Good Practice
Executive Compensation & Employee Benefits Developments

In her introductory remarks, Amanda H. Nussbaum , Partner, highlighted the Congressional hearings on proposals to modify the structure of tax breaks for charitable donations. In addition, she also discussed recent state legislation adopting flexible purpose corporations – - new companies that are part social benefit and part low-profit entities such as the L3C – - and whether these types of companies were really necessary or whether they would just fade away. She also mentioned the IRS monthly updates of the list of the names of organizations whose tax-exempt status has been automatically revoked due to the failure to file a Form 990 for three consecutive years and some of the IRS’s recent projects such as its college and university compensation and unrelated business income study and its governance check sheet.

Here are some take-away points from each presentation:

Recent Changes in Delaware Law Governing Not-for-Profit Corporations

By Kathleen E. Gerber on October 5th, 2011 Posted in Formation

Incorporating under Delaware law can be an attractive option for a not-for-profit organization because Delaware law often grants greater flexibility with respect to the governance and structuring of the organization. For example, under Delaware law, a corporation (whether organized for profit or not) is only required to have one director, whereas the majority of states require a not-for-profit organization to have at least three directors, and Delaware law does not require a corporation to have officers.

Unlike many other jurisdictions, Delaware does not have a separate code governing not-for-profit corporations. Instead, not-for-profit corporations are governed by the same Delaware General Corporation Law (the “DGCL”) that applies to for profit corporations. Typically, although other entity options are available for forming a Delaware not-for-profit organization (such as a trust or a limited liability company), most Delaware not-for-profit entities choose to incorporate as a nonstock corporation (i.e., a corporation that is not authorized to issue capital stock and that has “members” and a “governing body” rather than “shareholders” and a “board of directors”).

IRS Tutorial Explains the Special Rules for International Activities of U.S. Charities

By Jason Friedman on October 2nd, 2011 Posted in IRS Filings

The IRS presents webinars on a variety of subjects. In August, the IRS presented a webinar conducted by two IRS representatives on the special rules affecting charities that make grants to foreign organizations or engage in activities in foreign countries.

In a fairly comprehensive course, the following significant points were made:

1. A U.S. charity can do anything in a foreign country that it can do here, provided that the activity is consistent with the charity’s exempt purposes.

2. For purposes of the rule that a charity may not devote a substantial part of its activities to legislative lobbying:

a. lobbying includes action by the public in a referendum, ballot initiative, constitutional amendment or similar procedure;

b. actions by executive, judicial or administrative bodies are not considered legislation;

c. legislation includes foreign laws; and

d. in certain countries ruled by authoritarian or theocratic regimes, it is questionable whether the governing body is a legislature or if a legislative process even exists.

Treasury Releases its Priority Plan and the Form 990 Implementation Regulations

By Jason Friedman on September 13th, 2011 Posted in IRS Filings

Treasury just released the 2011—2012 Priority Guidance Plan. The Plan lists 317 projects that are priorities for Treasury resources through June 2012. Included in these projects are 13 projects directly related to Exempt Organizations. Many of the other projects such as the 66 employee benefits, executive compensation and employment taxes projects may affect Exempt Organizations.

Among the projects directly relating to Exempt Organizations are:

Updating grantor and contributor reliance criteria;
Regulations on additional requirements for charitable hospitals;
Final regulations on the new supporting organization requirements;
Update on guidance for distributions by private foundation to foreign charities;
Guidance on excess business holdings and program-related investments rules;
Regulations on new donor advised funds rules; and
Final regulations on church tax inquiries and examinations.

Treasury also released final regulations under various Code Sections to implement the redesigned Form 990 . According to Treasury “All tax-exempt organizations required to file [990s] are affected by these regulations.”