Not-For-Profit/Exempt Organizations Blog : Non-Profit Lawyers & Attorneys : Proskauer Rose Law Firm : Tax & Corporate Law for 501(c), 501(3) Organizations

In PLR 20113041, the IRS revoked the tax exemption of a public charity based on excess benefit and private inurement issues.  This ruling highlights practices that charities should avoid in order to maintain their tax-exempt status.

The charity's primary purpose was to pursue the study of how the interaction of land use, disturbance, and climate impact the structure and biodiversity of a particular region, and publish papers relating to such study.  The charity had only one staff member who also functioned as the President.  The charity's governing board consisted of three immediate family members - the President, his father (Vice President), and his wife (Secretary/Treasurer).

The IRS noted that the President had no employment contract with the charity and the charity itself had no Conflict of Interest Policy in place to determine how any conflicts, potential or actual, would be addressed.

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The CFA Institute has released guidance on the management of the financial resources of philanthropic organizations.  Specifically, the CFA Institute developed the Investment Management Code of Conduct for Endowments, Foundations, and Charitable Organizations to specifically address the management of what are typically longer-term or permanent financial assets of these organizations.  Board members and officers should be aware of the principles articulated in the Code of Conduct to successfully manage the investment of these types of assets and to ultimately protect the organization's investments.

The CFA Institute intends for the Code of Conduct to be a "Best Practices" guide for those in the organization responsible for managing the organization's financial assets.  The Code of Conduct also contains ethical principles, along with general policies and procedures related to the management of financial resources.

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In our April 7, 2010 blog entry on the health care tax credit, we explained that the credit was designed to encourage small employers, including exempt organizations, to offer health insurance coverage for the first time or maintain the coverage they already have.  The IRS today has released a draft version of the form that small businesses and exempt organizations will use to calculate the small business health care tax credit when they file income tax returns next year.  The IRS also announced how eligible exempt organizations –– which do not generally file income tax returns –– will claim the credit during the 2011 filing season.

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Earlier this month, the Metropolitan Corporate Counsel interviewed Scott Harshbarger, Chair of Proskauer's Pro Bono Initiative Committee, and Stacey O'Haire Fahey, Pro Bono Counsel at Proskauer, about the Pro Bono Initiative at Proskauer.  Harshbarger and Fahey are also members of the Firm's Not-for-Profit/Exempt Organizations group.

The MCC interview highlights the Firm's commitment to pro bono service, both on a domestic and international level.  Read more about the interview here.

In addition to the many pro bono matters, including asylum, adoption, and advocacy projects, on which the Pro Bono Initiative works, the Initiative also represents all kinds of not-for-profit and exempt organizations (including community organizations and start-ups) that meet the financial criteria for pro bono services.

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Small not-for-profit organizations at risk of losing their tax exemption because of their failure to file the Form 990-N or Form 990-EZ for the 2007, 2008, and 2009 taxable years can preserve their status by filing these returns by October 15, 2010.  The IRS announced yesterday a one-time relief program for these organizations that will give them a "pass" until October 15, 2010.

On July 26, 2010, the IRS also posted a list of the organizations at-risk of losing their tax-exempt status because, according to the IRS, they have not filed their returns for 2007, 2008, and 2009.  Organizations should confirm whether or not they are listed on this list.  And even if an organization does not appear on this list, it should still check its records and determine whether it is at risk of automatic revocation because of not satisfying annual filing requirements.  In fact, the IRS acknowledges that the list may be incomplete and certain organizations at risk of automatic revocation may not be listed. 

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A majority staff director for the Senate Finance Committee said in an April discussion on philanthropy in the 21st century that perhaps it might be time to consider the tax liability for an entity that is neither wholly charitable nor wholly for-profit.  In fact, the director said that the Senate Finance Committee wrestled with the problem of a quasi-charitable entity in enacting the health care legislation, and said that the tax treatment of not-for-profit organizations might be revisited further in the tax reform context.

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In an interesting recent decision, International Schools Services Inc. v. West Windsor Township, N.J., the New Jersey Superior Court Appellate Division ruled that a not-for-profit organization whose purposes were to aid, promote and encourage educational organizations should lose its property tax exemption because its operation and use of the property was conducted for profit.  This decision should make not-for-profits with affiliated for-profits or an ongoing working relationship with for-profits carefully scrutinize their activities with these for-profit entities.

The not-for-profit challenged property tax assessments for the 2002 and 2003 tax years on office condominium units it owned in the township. The not-for-profit argued the property was exempt under N.J.S.A. 54:4-3.6 as property actually used in the work of a not-for-profit corporation organized exclusively for the moral and mental improvement of men, women and children.  Following the township's denial of tax exemption, the not-for-profit appealed to the New Jersey Tax Court.  The not-for-profit admitted that a portion of the property was leased to unrelated and related for-profit organizations, and did not claim an exemption for the portion of the property used for those purposes.

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In a recent New York County Supreme Court case, Empire 33rd LLC v. Forward Ass'n Inc., the court ruled in favor of the defendant charities to dismiss the plaintiff's complaint demanding the return of payments under an agreement in which it alleged defendants lacked the "required approvals and consents required by law" to execute.  The court found that the proposed sale of property by the defendant charities was duly authorized by the NY Supreme Court, as Section 203 of the New York Not-for-Profit Corporation Law ("NPCL") requires.

In this case, the plaintiff alleged that it entered into an agreement to purchase real property from the defendant charities.  The defendant charities submitted two petitions before the NY Supreme Court asking the court's permission to sell the property.  The first petition stated that no member vote was held by the charities on the proposed sale of the property and a revised second petition was later filed stating that no members of the charities were entitled to vote on the sale.  The court authorized the sale by Order.  One year later, the plaintiff demanded return of its payments with interest, alleging that the defendants lacked the required approvals and consents by law to agree to sell the property and were in material breach of their representations and warranties in the agreement.  The defendants later informed the plaintiff that because it did not make a scheduled payment under the agreement, they were retaining the down payment as liquidated damages.

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After attending the Georgetown University Law Center "Representing & Managing Tax-Exempt Organizations" Conference in April, 2010, we wanted to discuss some of the lessons that exempt organizations should take away in the following areas: governance; transparency; compensation; joint ventures; and endowments and investments.

1. Governance - If you did not think that the way that you ran your organization was anybody's business but your own, you will have to immediately adjust that frame of mind.  To say that the IRS is focused on governance would be an understatement.  Governance matters are the motivators for a lot of the changes that the IRS has made in its policies affecting exempt organizations and we can see the IRS's approach to governance in its Form 990 revisions.  The IRS is looking at the management of each organization and how that management runs the organization.  Organizations that do not have good governance policies that are tailored for that particular organization, effective boards, and independent voting members are organizations that will undoubtedly raise a red flag for the IRS.  Moreover, the IRS cares a great deal about the organization's ability to follow its own governing documents and document the decisions that its governing body and officers make.  In short, the IRS is concerned about an organization's leadership being informed about the organization's activities and assets in order to effectively govern the organization.  If you have not implemented an effective governance policy or have an almost absentee board or management, you must address your governance procedures immediately.

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We tweeted live from the Georgetown Conference that occurred on April 22-23, 2010.  Our tweets from the conference highlight IRS next steps and agenda items, as well as discuss other topics of interest to exempt organizations.

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