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

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.    

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             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”). 

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                 The IRS recently released a new list of FAQ and tips for Part VI of Form 990, which requires an exempt organization to provide certain information about its governing board and management, as well as its governance policies and disclosure practices. 

               Of particular interest is the clarification that questions in Section B (about whether an exempt organization has adopted certain governance policies such as a written conflict of interest policy and a written whistleblower policy) may be answered affirmatively if a committee of the board with the power to do so has approved such policies by the close of the tax year. This should come as welcome news to those exempt organizations that reacted negatively to a 2010 revision to the instructions, which stated that an organization should only answer yes to these questions if its entire governing board adopted the policies. Some exempt organizations complained that requiring full board approval was in contrast to their usual practice of delegating the authority to adopt such policies to a committee of the governing board. An IRS official indicated earlier this week that in addition to making this point clear in the new FAQ, the IRS will be revising the 2011 instructions to Form 990 accordingly. 

 

Some of the other key points of guidance in the new FAQ are highlighted below:

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               At a recent conference on nonprofit governance sponsored by Georgetown Law Center, an IRS official stated that fringe benefits have become the most common trigger of intermediate sanctions under Section 4958 of the Code. 

As most of you know, or should know, Section 4958 of the Code, enacted in 1996, imposes excise taxes on both “disqualified persons” who receive an “excess benefit” from an exempt organization and any organization manager who knowingly participates in an excess benefit transaction. 

When an economic benefit is not treated as compensation by the organization, the benefit is presumed to constitute an excess benefit transaction in its entirety, unless the disqualified person can establish that it was properly excludable from income for income tax purposes, or involved a legitimate non-compensatory transaction with the organization. 

In February of 2010, the IRS began its first Employment Tax National Research Project in 25 years. This three-year “study” focuses on uncollected taxes in the area of employment for both taxable and exempt entities. As part of this study, 2,000 taxpayers are being selected each year for a comprehensive audit. Fringe benefits are one of the main areas of focus in these audits, making this a priority issue for the IRS.

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            On March 15, 2011, the Treasury published proposed regulations providing guidance on the IRS’s expanded authority to disclose information to appropriate state officers (“ASOs”) under Section 6104(c) of the Code, as amended by the Pension Protection Act of 2006 (the “Act”) . Section 6104(c) of the Code governs when the IRS may disclose certain information to an ASO about Section 501(c)(3) organizations (“charitable organizations”), organizations that have applied for recognition as charitable organizations (“applicants”), and certain other exempt organizations. Prior to the Act’s enactment, the IRS was only permitted to disclose a final determination denying an applicant exempt status, a final determination revoking a charitable organization’s exempt status, the issuance of a notice of deficiency of tax under Section 507 (the termination tax) or chapter 41 or 42 (which relate to excise taxes on prohibited activities), and, upon request of an ASO, returns and other information relating to any of these aforementioned disclosures.           

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