The Advisory Committee on Tax Exempt and Government Entities (“ACT”), an IRS advisory panel, made several recommendations on issues relating to unrelated business taxable income (“UBTI”) in its annual report to the IRS (the “Report”). In recent years, the IRS has focused on UBTI reporting for tax exempt organizations; issues relating to UBTI reporting were addressed in Colleges and Universities Project Final Report, which was released in April last year. In light of the IRS’ increased focus on UBTI reporting, ACT selected UBTI as a focus for its annual project.
The rollout of the New York Nonprofit Revitalization Act of 2013 (the “Revitalization Act”), effective July 1, 2014, is causing challenges for many New York charities as the compliance date approaches. For more information on the challenges resulting from the rollout of the Revitalization Act, click here. For more coverage on the Revitalization Act, click here.
A New York court has held that the State’s regulatory limits on executive compensation and administrative expenses for entities that receive state funds unconstitutionally exceed proper regulatory authority. The regulations, which implemented a 2012 executive order by Governor Andrew Cuomo and went into effect on July 1 of last year, were promulgated in substantially similar form by thirteen different New York State agencies. Although other plaintiffs have challenged the regulations, this is the first time a court has held that they are unconstitutional.
On April 9, in Agencies for Children’s Therapy Services, Inc. v. New York Department of Health, the Nassau County Supreme Court held that the Department of Health (“DOH”) “strayed from the administrative into the legislative field” in promulgating the regulations, which, among other things, prohibit the use of more than $199,000 in State funding to compensate certain executives and employees of entities that receive at least 30 percent of their overall in-state revenues from the State. Using the factors identified in the New York Court of Appeals’ holding in Boreali v. Axelrod, 71 N.Y.2d 1 (1987), to determine whether DOH “had usurped the role of the legislature in making public policy assessments,” the Supreme Court concluded that: Continue Reading
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
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