Governance

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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.

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.

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.

Two new bills recently introduced in the California State Legislature would increase the disclosure requirements applicable to certain nonprofit organizations participating in California political campaigns and would strengthen the enforcement authority of the California Fair Political Practices Commission.  Under current California regulations that went into effect this past May, nonprofit organizations such as Section 501(c)(6) trade associations, Section 501(c)(4) social welfare organizations and Section 501(c)(3) charities are already required to disclose the identity of any donor making a contribution of $100 or more within the reporting period who requests or knows that the organization will use the donor’s payment to make a contribution or independent expenditure to support or oppose a candidate or ballot measure in California.  If the donor knows or has reason to know that only a portion of the donor’s payment will be used to make such contribution or independent expenditure, the payment is apportioned on a reasonable basis in order to determine the amount of the contribution.  Both of the two recently introduced bills, Senate Bill 3 and Assembly Bill 45, would codify this relatively new regulation.

New York Attorney General Eric T. Schneiderman has issued proposed regulations that would require many nonprofit organizations to annually disclose certain information about their political spending and their donors’ identities.  According to the Attorney General, the proposed regulations are in response to nonprofit organizations, in particular Section 501(c)(4) social welfare organizations, that have engaged in political campaign activity and do not disclose their sources of funding.  While Section 527 organizations are required to publicly disclose certain information relating to their political expenditures and their donors’ identities, other nonprofit organizations are generally exempt from such reporting requirements.

“Cause marketing campaigns,” or “commercial co-ventures” (i.e., advertising campaigns in which a company indicates that the purchase or use of its products will result in a charitable contribution) have long been a popular fundraising tool for charities. Some state charity authorities regulate cause marketing campaigns with a variety of requirements; some states do not regulate the practice. While such campaigns have grown into a billion-dollar-a-year industry, the perception is that they often fail to provide consumers with sufficient information to enable them to understand how their purchases will actually benefit charity. New York Attorney General Eric T. Schneiderman recently issued a set of best practices, entitled “Five Best Practices for Transparent Cause Marketing,” which are designed to promote transparency in cause marketing campaigns. These were developed in and for the state of New York but, as described below, we can expect other states to consider and possibly adopt these best practices as well.

On July 25, 2012, the Oversight Subcommittee of the House Committee on Ways and Means, led by Congressman Charles W. Boustany Jr., MD (R-LA), heard testimony from the IRS and experts in the tax exempt community on the growing complexity of non-profit organizational structures, tax issues concerning unrelated business income and the redesigned Form 990. The hearing was the second in a series examining compliance and transparency issues facing non-profit organizations.

On May 16, 2012, the Oversight Subcommittee of the House of Representatives Committee on Ways and Means, led by Congressman Charles W. Boustany Jr., MD (R-LA), heard testimony  from representatives of tax-exempt hospitals, universities and charitable institutions on the current state of compliance and reporting requirements for tax-exempt organizations. …