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

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:

Continue Reading...

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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.

Continue Reading...

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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.

Continue Reading...

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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.

Continue Reading...

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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.

Continue Reading...

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Since the introduction of the revised Form 990 in 2008, the IRS has focused its attention on the governance policies and structures of not-for-profit organizations.  Now, more than ever, directors must be involved in ensuring their organizations are well-governed.  The revised Form 990 has a core form that is 11 pages long and may include up to 16 schedules – most of which inquire about an organization’s policies (conflict of interest, whistleblower, and document retention policies), compensation policy and practice, chapters and affiliates, gift acceptance, expense payments, fundraising, financial information regarding endowment funds and general procedures relating to meetings. 

 

The goal of the revision of the Form 990 is to increase transparency, encourage compliance, and emphasize the importance of ethics within a not-for-profit organization.  Given that so much emphasis has now been placed on “good” governance, it is increasingly important for not-for-profit boards to draft, adopt, and implement relevant governance policies – meant to be “living” documents reflecting the organization itself, and changing as an organization grows and develops.

Continue Reading...

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The Tax Court recently delivered some sound advice – do not play “cat and mouse” with the IRS.  In Ohio Disability Association v. Commissioner, a Tax Court Memo filed November 12, 2009, the Tax Court rejected the petitioner’s request for a declaratory judgment that it qualified as a public charity.  The court’s rejection was based on its inability to conclude that the organization would operate exclusively for exempt purposes.

The opinion is instructive on how not to deal with the IRS in the exemption process.  Organizations seeking IRS recognition of tax exemption (which is required of almost all charities, except for churches) must file a 26-page Form 1023, which is explained in 38 pages of instructions.  The IRS also has extensive questions and answers further explaining Form 1023.

Notwithstanding the broad scope of the questions on the Form 1023, it is quite typical to receive further extensive questions from the IRS following its review of the Form 1023 submission package.  These questions usually seek elaboration on the current and proposed activities of the organization, compensation structure, information about the Board members, copies of documents referred to in the application (e.g., bond offering, leases, and employment agreements).  Some practitioners sometimes treat these supplemental IRS questions in a cavalier manner, considering them a nuisance.  This type of response is a mistake, as the petitioner in Ohio Disability Association v. Commissioner learned.  At a minimum, responding to IRS questions in this manner often leads to extensive delay in obtaining an IRS exemption letter.

Continue Reading...

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The IRS completely redesigned Form 990, the Return of Organization Exempt from Income Tax, to be filed for calendar year 2008 and subsequent periods.  This Form is filed by most tax-exempt organizations and is open to public inspection.  One stated purpose of the makeover was to increase transparency and disclosure of exempt organization operations, thereby improving governance and highlighting conflicts of interest and insider dealings.  One major change in the Form is that it requires extensive reporting concerning the organization’s governance and management policies, the independence of its board, and board members’ and key employees’ family and business relationships with each other and with the reporting organization.

Organizations that report on a calendar year basis will already have filed their first year of the new form and at this point should review their information-gathering procedures to identify any needed improvements.  Organizations that have a June 30 year-end either will already have filed with the new form for the period ending June 30, 2009 or will be in an extension period for filing.  Organizations that have not yet filed the new form should be reviewing their disclosure questionnaires to make sure they are collecting all needed information.

Continue Reading...

• Email This
• Print
• Comments (2)
• Trackbacks
• Share Link

Over the past few years, the IRS has become increasingly interested in monitoring the governance practices of tax-exempt organizations, particularly public charities. This interest has been shown through public statements of IRS officials, the addition of questions about board makeup and policies to the Form 990, an explanation of why the IRS considers governance important, and the development of training materials on governance for IRS personnel.  Not all members of the exempt organizations community agree that the IRS should focus on governance.  However, the IRS rationale is that a well-governed organization is a tax-compliant organization. 

The IRS has now developed and released a governance issues checklist (the Governance Check Sheet) to be completed in each audit of an exempt organization. The checklist provides a very specific roadmap for exempt organizations to compare their practices and policies with what the IRS wants to see and to make adjustments where necessary.

Continue Reading...

• Email This
• Print
• Comments
• Trackbacks
• Share Link

In September, 2009, Proskauer, by way of Scott Harshbarger, was retained by the Association of Community Organizations for Reform Now (“ACORN”) to conduct an independent analysis of the videos that caused this summer’s uproar as well as the organization as a whole, including its core weaknesses and inherent strengths. Our report on ACORN, which was publicly issued on December 7, 2009, can be found here. 

The hidden camera controversy has been perceived by many as a third strike against ACORN on the heels of the disclosure in June, 2008 of an embezzlement cover-up, which triggered the firing of ACORN’s founder, and the allegations of voter registration fraud during the 2008 election, done in collaboration with a separate entity, Project Vote.  It erupted just as ACORN’s reform leadership was about to complete an ambitious and professionally directed organizational and cultural transformation designed to revisit its mission, reshape its scope and charter, and squarely meet its legal, governance, and compliance responsibilities. 

The serious management challenges detailed in our report are the fault of ACORN’s founder and a cadre of leaders who, in their drive for growth, failed to commit the organization to the basic, appropriate standards of governance and accountability.  As a result, ACORN not only fell short of living its principles but also left itself vulnerable to public embarrassment.

See how your organization can learn from ACORN's past failures.

Continue Reading...

• Email This
• Print
• Comments
• Trackbacks
• Share Link