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).
The IRS released its Final Report on its five year study of the audit results of colleges and universities. Lois G. Lerner, Director of the Exempt Organizations division of the IRS announced the “long awaited” posting of the report.
In 2008, the IRS sent a 33 page questionnaire to 400 randomly selected colleges and universities. In 2010, the IRS released an Interim Report. Following review of the responses and Forms 990 and 990-T, the IRS selected 34 schools for audit. The audits were limited to two specific areas, unrelated business income tax (UBIT) and executive compensation.
The Final report was released on April 25, 2013. The IRS points out that because the 34 organizations that were audited were not randomly selected, the schools do not represent a statistical sample.
Correction of Plan Errors
Final Internal Revenue Code Section 403(b) regulations which became effective January 1, 2009 require that plan sponsors adopt written 403(b) Plan documents. A 403(b) Plan is a form of defined contribution retirement plan that may only be offered by employers that are tax-exempt entities under Section 501(c)(3) of the Internal Revenue Code or that are public educational organizations and for the benefit of certain clergy members. If a 403(b) Plan sponsor did not adopt a written plan document by December 31, 2009, the sponsor’s 403(b) plan is technically no longer considered to be a qualified tax-deferred retirement plan as of January 1, 2009. The benefit of correcting the written document failure is that all money that has been contributed to the 403(b) Plan will remain tax-deferred and that all investments under the 403(b) Plan will retain their tax-favored status.
To help 403(b) Plan sponsors voluntarily correct any plan document errors, the IRS recently updated its Employee Plans Compliance Resolutions System (referred to as EPCRS). Plan document errors are cured through the voluntary correction program (referred to as VCP) by having the 403(b) Plan sponsor adopt a written plan document that complies with the final regulations, make a VCP submission, and pay a compliance fee based on the number of employees eligible to participate in the 403(b) Plan. To simplify this procedure, the IRS has made available a 403(b) VCP Submission Kit, and to encourage 403(b) Plan sponsors to take advantage of this program, the IRS has reduced the compliance fee by 50% if the VCP filing is made by December 31, 2013.
IRS Exempt Organizations group has sent out more than 1,300 questionnaires to self-declared Section 501(c)(4) social welfare organizations; 501(c)(5) labor, agricultural or horticultural organizations; or 501(c)(6) business leagues. The questionnaires are part of IRS efforts to increase voluntary compliance, learn more about self-declared exempt organizations, and determine whether self-declared exempt organizations are complying with applicable tax-exempt law. The questionnaires are directed to organizations that are not recognized by the IRS as tax-exempt, but claim exemption under Section 501(c)(4), (5) or (6) and filed a Form 990 for tax years beginning in 2010 or 2011. Unlike most Section 501(c)(3) organizations, these types of exempt organizations are not required to apply to the IRS for recognition of exemption.
The questionnaire contains questions about the organization generally, its activities and related organizations, revenue and expenses, and compensation of directors, officers, trustees and key employees. While the range of questions is broad, there is a particular focus on political activity, like political campaign intervention. While 501(c)(4) organizations are allowed to engage in some political activity, it must not be their primary purpose. In recent years, the IRS, members of Congress, and advocacy groups have been concerned that 501(c)(4) organizations are engaging in political activity beyond what is permitted by law. In fact, this initiative was anticipated in the IRS Exempt Organizations FY 2013 work plan. The questionnaire also has a number of questions about whether the organization received professional advice in determining its tax status and whether activities constituted an unrelated trade or business.
Only the organization that receives the letter may complete the questionnaire. Although the questionnaire is a voluntary compliance instrument, the IRS may refer the organization for examination if the organization does not complete the questionnaire. The IRS has not indicated when results from the survey will be analyzed and made available to the public, but this usually takes a year or two.
Note: This article is a recap of Lesley Rosenthal’s presentation at Proskauer’s 17th Annual Trick or Treat Tax Exempt Seminar, November 29, 2012
Attorneys can reap enormous rewards by serving on nonprofit boards. Lawyers derive tremendous personal satisfaction in governing an organization that is meaningful to them. They can do the public good by participating in a charity that feeds the poor, heals the sick, enlightens through culture and education, or preserves the environment.
Nonprofit board service is prestigious, and invaluable for professional networking. It is also a great remedy for the ennui that sometimes sets in when lawyers work inside big law firms, corporate departments or government agencies, and a cure for the isolation of solo or small-firm practice. A lawyer who serves as a nonprofit trustee is likely to quickly become a trusted and valued member of the team, whose individual contributions markedly enhance a worthwhile enterprise.
Proskauer’s 17th Annual Trick or Treat Seminar discussed:
- Key Provisions of the Affordable Care Act
- Cybersecurity Threats and Identity Theft
- Lawyers as Nonprofit Directors
Here are some take-away points from each presentation:
Key Provisions of the Affordable Care Act
Peter J. Marathas, Jr. reviewed some of the key provisions of the Affordable Care Act (“Act”), reminding those attending that many of the Act’s requirements are already in effect, and many more are set to go into effect in 2013 and 2014. Mr. Marathas specifically addressed the “counting rules” under the Act, which will be used to determine whether an employer employs 50 or more full time equivalent employees and is therefore subject to the 2014 “play or pay penalties,” and the number of full-time employees employed by an employer for purposes of determining the extent to which a penalty may apply. Mr. Marathas also discussed issues related to so-called “variable hour employees,” those who work on an as-needed or similar basis, and how they are counted for purposes of the Act. He reminded employers that implementation of the Act continues in full force, with the federal agencies releasing important guidance. Working closely with knowledgeable counsel and other advisors is therefore essential. For additional information on the Affordable Care Act click here.
Cybersecurity Threats and Identity Theft
Kristen Mathews discussed cybersecurity threats and online identity theft. Ms. Mathews emphasized that cybersecurity risks for not-for-profit organizations are similar to those to profit-making enterprises, as they collect and maintain personal, health and financial information of employees, donors and customers. Not-for-profit entities also have the same or similar legal obligations with respect to those types of information. Common data security threats were highlighted, including politically motivated hacking, data theft for profit, and employee negligence. As a case in point, Ms. Mathews recounted a recent incident in which a journalist’s online accounts, computer and mobile device were accessed and controlled and his personal data destroyed by hackers who used social engineering techniques to exploit flaws in the account security procedures of major online service providers. She followed up with recommendations for improved online account security practices for individuals as well as service providers. For identity theft prevention tips click here.
Lawyers as Nonprofit Directors
Lesley Rosenthal, Vice President, General Counsel and Secretary, Lincoln Center for the Performing Arts, discussed the role of lawyers serving on nonprofit boards. Scott Harshbarger facilitated the discussion. Ms. Rosenthal pointed out that both the lawyers and nonprofit organizations can benefit from a lawyer serving on the board. Ms. Rosenthal also addressed certain pitfalls which can result from the dual roles of lawyer and board member and how to avoid them. A forthcoming blog post will discuss Ms. Rosenthal’s presentation in further detail.