GuideStar Webinar (04/10/12) - Grantmaker Due Diligence in the Pension Protection Act Era

Grantmaker Due Diligencegin the

Pension Protection Act Era:

How to identify supporting organizations and align t d i i t ti ith th 21styour grants administration process with the 21st

century tax code

10 April 2012

1© 2012, GuideStar USA, Inc. All Rights Reserved. This information is copyrighted subject matter owned by GuideStar USA and is protected by United States and international copyright law.

Today’s Facilitators

Pamela Jowdy

Senior Product Manager, GuideStar

[email protected]

llSuzanne Ross McDowell

Partner, Steptoe & Johnson, LLP

[email protected]

2

Participant Poll

3#duediligence

1. Internal Revenue Code: Considerations for Grantmakers

Today’s Objectives

Why Verify: Pension Protection Act of 2006

Supporting Organizations: Relationships and Controlpp g g p

Expenditure Responsibility: Defined

Revenue Procedure 2011-33: Practical Implicationsp

Due Diligence: Methods and Best Practices

2. GuideStar Charity Check: Anatomy of a Solutiony y

How it works and what it delivers

Failure to File Automatic Revocations Failure to File Automatic Revocations

Why it’s 100% compliant

New advanced features: streamlining grantee management

4

New advanced features: streamlining grantee management

3. Q & A

Internal Revenue CodeImpact of the Pension Protection Act of 2006 on Impact of the Pension Protection Act of 2006 on Grantmakers

llSuzanne Ross McDowellPartnerSteptoe & Johnson LLP

5

[email protected]

#duediligence

Summary of Pension Protection Act Provisions

Affecting Grants to Supporting OrganizationsSupporting Organizations

6

Changes Made by the i i fPension Protection Act of 2006

Private Foundations (PFs) Grants to certain supporting organizations (SOs) do

not count towards minimum distribution• Penalty: 30% of shortfall; must make correction

Grants to certain SOs require expenditure responsibilityp y• Penalty: 20% of grant on foundation; potentially 5% on

directors and officers; must make correction Donor Advised Funds (DAFs)Donor Advised Funds (DAFs)

Grants to certain SOs require expenditure responsibility• Penalty: 20% of grant on sponsor of DAF

7

• Penalty: 20% of grant on sponsor of DAF

What is a Supporting Organization?What is a Supporting Organization?

Internal Revenue Code provides-- All 501(c)(3) organizations are either private

foundations or public charitiesp Private foundations are subject to greater regulation

Public charities include: Schools hospitals churches government units Schools, hospitals, churches, government units Organizations that meet specific requirements for

broad public supportSO SOs

All other 501(c)(3) organizations are private foundations

8

What is a Supporting Organization? ( ’d)(cont’d)

SO is a 501(c)(3) organization which is-- Classified as a public charity (not a PF) Because it has a specified relationship with another Because it has a specified relationship with another

public charity (the supported organization) Types of relationships

Type I – Parent-subsidiary Type II – Brother-sister

Type III Operated in connection with Type III – Operated in connection with• Functionally Integrated • Not Functionally Integrated

9

Which Supporting Organizations i di ibiliRequire Expenditure Responsibility?

Type III Non-Functionally Integrated SOs All other SOs if--

A di lifi d f h f d i A disqualified person of the foundation making a grant to the SO directly or indirectly controls the SO or a supported organization; pp g ;or

A donor to a DAF, or a person designated by the donor to advise with respect tothe donor to advise with respect to distributions, directly or indirectly controls a supported organization

10

What is Expenditure Responsibility?What is Expenditure Responsibility?

Procedures designed to ensure that PF funds are used for exclusively charitable purposes-- Pre grant inquiry Pre-grant inquiry Written grant agreement with the grantee Grantee must keep funds separate from Grantee must keep funds separate from

noncharitable funds Regular reports from the grantee to PF PF reports to IRS on Form 990-PF that

expenditure responsibility requirements were met

11

met

Which Grants Do Not Count Toward a Private Foundation’s MinimumPrivate Foundation s Minimum Distribution?

Grants to-- Type III Non-Functionally Integrated SOs All other SOs if--

A disqualified person of the foundation making a grant to the SO directly or indirectly controls the SO or a supported organization

12

When Does a Person Have Control?When Does a Person Have Control?

No IRS guidance provides clear method for determining whether control exists. Control exists when one or more disqualified

persons or donors may, by aggregating their votes or positions of authority require the SOvotes or positions of authority, require the SO or supported organization to make an expenditure or prevent the SO or supportedexpenditure, or prevent the SO or supportedorganization from making an expenditure. See Notice 2006-109.

13

When is a Type III Supporting O i ti F ti ll I t t d?Organization Functionally Integrated?

Proposed Regulations issued on September 24 2009 Proposed Regulations issued on September 24, 2009 Until temporary or final regulations are issued, can

rely on Notice 2006-109 or Proposed Regulationsy p g Notice 2006-109: SO is functionally integrated

• When the activities engaged in for or on behalf of a supported organization(s) are activities to perform the functions of, or to carry out the purposes of, such organization(s), and;p p , g ( ), ;

• But for the involvement of the SO, would normally be engaged in by the supported

i ti ( ) th l14

organization(s) themselves.

When is a Type III Supporting Organization Functionally Integrated?Organization Functionally Integrated? (cont’d)

Proposed Regulations: SO is functionally integrated If engages in activities substantially all of which

directly further the exempt purposes of the supportedy p p p pporganization(s), by performing the functions of or carrying out the purposes of the supportedorganization(s); and

But for the involvement of the SO, would normally be engaged in by the supported organizations

Includes owning and managing exempt-use property Does not include fundraising or managing non-

exempt use property for a supported organization Special rules for hospitals and governmental units

15

Special rules for hospitals and governmental units

Conducting Due Diligence to Avoid Excise Taxes

under the Pension Protection Act

16

Step 1: Determine if Potential i ( )( ) i iGrantee is a 501(c)(3) Organization

Approved Methods IRS Determination Letter IRS Pub. No. 78

• Pub. No. 78 Weekly Updates in Internal Revenue BulletinRevenue Bulletin

IRS Business Master File (BMF) If grantee is not a 501(c)(3) no new rules If grantee is not a 501(c)(3), no new rules If grantee is a 501(c)(3), must determine if it

is an SO17

is an SO

Step 2: Determine if Potential iGrantee is a SO

d h d Approved Methods IRS Determination Letter

• Section 509(a)(1) and 509(a)(2) organization – not a SOSO

• Section 509(a)(3) organization = SO• IRS letter may be silent

BMF BMF• Direct access (Notice 2006-109)• Access to IRS BMF data through third party such as

GuideStar (Rev. Proc. 2009-32; Rev. Proc. 2011-33)( ; ) Pub. 78 does not include information

If grantee is not a SO, can make grant—no new rules If grantee is a SO must determine the type

18

If grantee is a SO, must determine the type

Step 3: If Grantee is a SO, Determine the Type of SO

Method 1: IRS Determination Letter and BMFMethod 1: IRS Determination Letter and BMF Most Determination Letters don’t include Type

• Prior to 2006, no need for Type

May be based on • Advance Notice of Proposed Rulemaking (ANPRM)

issued on Aug. 2, 2007• Prop. Reg. issued on Sept 24, 2009

When Prop. Reg. finalized, rules may change

IRS modifying BMF to show type of SO IRS modifying BMF to show type of SO• Updated monthly• Reflects changes that occur after determination letter

i d

19

issued

Step 3: If Grantee is a SO, Determine h f ( ’d)the Type of SO (cont’d)

Method 2 Reasoned written opinion of counsel of PF or DAF

20


Method 3:Method 3: Good Faith Reliance on Written Representation

by Grantee • Representation by officer, director or trustee• Describes how officers, directors and trustees

of grantee are selectedof grantee are selected• For Type I or II, references governing

document provisions establishing relationship p g pwith supported organization

• For Type III-- identifies supportedi ti

21

organizations


Method 3 (cont’d) PF or DAF must review

• Governing documents of SO and supported organization• Governing documents of SO and supported organization • For Type III, representation from supported

organizationso Re types of activitieso Re types of activitieso That, but for SO, supported organization would conduct

activities of SO

Note: cannot rely on Form 990 to determine Type

22


If grantee is a Non-Functionally Integrated Type III SO, then PF or DAF must exercise

dit ibilit d t d texpenditure responsibility and grant does not count toward non-operating foundation’s minimum distributionminimum distribution If grantee is a Type I, Type II or Functionally

Integrated Type III SO must determine if aIntegrated Type III SO, must determine if a disqualified person of a PF or donor or donor’s designee of a DAF has control

23

g

Step 4: Determine if Disqualified Person or Donor has Control over SO oror Donor has Control over SO or Supported Organization

No IRS approved procedure; use definition in Notice 2006-109

Obtain list of supported organization(s) Obtain list of supported organization(s) Identify disqualified persons for a PF and donors and

their designees for a DAFg Determine if disqualified persons exercise control

over SO or supported organizationD t i if d /d i t l t d Determine if donors/designees control supportedorganization

Direct or indirect control

24

Direct or indirect control

Step 4: Determine Control (cont’d)Step 4: Determine Control (cont d)

If disqualified person or donor (or donor’s designee) has control, then must exercise

dit ibilit d t d texpenditure responsibility and grant does not count toward a non-operating foundation’s minimum distributionminimum distribution

25

SummarySummary

Type III which is Not Functionally Integrated Grant does not count toward non-operating

foundation’s minimum distribution PFs and DAFs must exercise expenditure

responsibility Type I II or Functionally Integrated Type III withType I, II or Functionally Integrated Type III with

disqualified person or donor control Grant does not count toward non-operating

foundation’s minimum distributionfoundation s minimum distribution PFs and DAFs must exercise expenditure

responsibility

26

GuideStar Charity Check®

Anatomy of a SolutionAnatomy of a Solution

Pamela Jowdy Senior Product Manager

27

Senior Product Manager

#duediligence

The ChallengeWhy Verify?

gThree Unique Due Diligence To-Do’s:

To Do: Data Source:

Verify Current Charitable Status

To-Do: Data Source:

Publication 78 and

Identify Supporting Organizations IRS B i M t Fil

Internal Revenue Bulletin

with 509(a)(3) status IRS Business Master File

Identify revoked and / or reinstated organizations

IRS Automatic Revocation of Exemption List

28#duediligence

Pub 78 and Internal Revenue BulletinWhy Verify: IRS Data SourcesPub 78 and Internal Revenue Bulletin

Establish Tax Deductibility and Verify Current Charitable Status

IRS Publication 78: Also known as Cumulative List of Organizations Includes all organizations to which charitable contributions are tax deductible Current tax-exempt status, percentage of contributions that are tax deductible Current tax exempt status, percentage of contributions that are tax deductible Deductibility limitations Published monthly (new for 2012); published quarterly previously

IRS Internal Revenue Bulletin:S te a e e ue u et Also known as the ‘IRB’ Lists organizations whose charitable status has been changed or revoked Updated weekly

Rev. Proc. 82-39, 1982-1 C.B. 759 Sec.3.01 and Sec.3.02 states that grantors “may rely on the classification of an organization listed in or covered by Publication No. 78.”

29#duediligence

IRS Business Master FileWhy Verify: IRS Data Sources

Determine 509(a) Status

IRS Business Master File: Lists all tax-exempt organizations registered with the IRS Published monthly (not necessarily on the same day as Publication 78) Includes reason for non-private foundation status, aka “public charity classification” R f i t f d ti t t 509( ) t t Reason for non-private foundation status = 509(a) status

509(a)(1) and 509(a)(2): A public charity that receives a substantial amount of public support to fund its operations

509(a)(3): Supporting Organization A public charity that provides support to one or more publicly supported organizations Must demonstrate that is has a particular type of relationship with the organization it

supports

30#duediligence

IRS Automatic Revocation of Exemption ListWhy Verify: IRS Data Sources

pIdentify Revoked Organizations

Failure to file annual return or notice with the IRS for three consecutive years 990, 990N, 990EZ or 990PF

Federal tax-exempt status revokedp

Subsequently reinstated organizations remain on the Automatic Revocation List

Erroneously listed nonprofits and nonprofits that already hold an IRS determination y p p yof nonfiling requirement will be deleted from the revocation list

http://www.irs.gov/charities/article/0,,id=221600,00.html

Procedures for reinstatement and other helpful FAQs

31#duediligence

Data Source Size and ScopeHow Big?

pIRS Business Master File: March 2012

1,560,339 total organizations

24,626 Supporting Organizations 408 include supporting organization type

73% Type I SO 14.7% Type II SO 6.9% Type III Functionally Integrated SO 5.4% Type III Not Functionally Integrated SO

~2,200 organizations reinstated from a previous BMF

~6,800 organizations not seen in any previous BMF

1,059,911 501(c)(3)s 960K Form 990 / Form 990 EZ / Form 990 N filers 98K Form 990 PF filers

32#duediligence

Data Source Size and ScopeHow Big?

p

IRS Publication 78: March 2012

825,612 total organizations 337,384 subordinate organizations covered under group exemption but not

listed in Pub 78 that GuideStar matches from BMF

IRS Automatic Revocation List: April 2012

443,447 total organizations 2,189 subordinate organizations covered under group exemption but not

listed in Pub 78 that GuideStar matches from BMF

33#duediligence

Grants Administration Milestones

Charity Check v2.0

•100% compliant •Alerts•Parent /

Charity Check v1.5

100% compliant with IRS FAQ and

Revenue Procedure

1969 August March June June

Parent / Subordinate Linkage

Revenue Procedure 2009-32

g2006 2007 20112009

Pension Protection Act

IRS Revenue Procedure 2009-32

Tax Reform Act

Internal Revenue Code

IRS FAQ on Business Master File

IRS Revenue Procedure 2011-33

New requirements on grants to certain

supporting organizations

[509(a)(3)]

Procedure 2009 32

Formalizes March 2007 FAQ

Precedentialinstrument upon

The legal framework for the regulation of private foundations and public charities

is established

Business Master File Reliance

Allows grantors to use third party resources

to obtain required IRS BMF information

Procedure 2011-33

Supersedes Rev Proc 2009-32

Clarifies reliance on BMF, Pub 78,

Definition of Type III supporting

organizations

Definition of Type III

which compliance and grantmakingteams can rely

about a potential grantee’s charity

classification under section 509(a)(1), (2)

or (3)

Revocations Lists and maintains

requirements for third party BMF

resources

34

Definition of Type III functionally integrated

supporting organizations

IRS Revenue Procedure 2011-33Why Verify: Pension Protection Act

June 2011

Source: http://www.irs.gov/pub/irs-drop/rp-11-33.pdf

35#duediligence

An Integrated, One-Stop Verification SolutionGuideStar Charity Check

How it Works

g , p

FTF Revocations

Incorporates Weekly Internal Revenue Bulletin Marries Publication 78 data with IRS Business Master File data

Married, but never modified Pub 78 Additions included

OFAC verification included (organization level) 501p suspension messaging included

36

p p g g Parent – Subordinate matching (BMFPub 78) Group Exemption Messaging 12 year track record of consuming and managing IRS data


What it Delivers

Date and time stamp

g , p

Electronic or hard copy documentation

Latest Quarterly Pub 78


Latest Quarterly Pub 78

Weekly Bulletin Date

EIN

Reason for Non-Private Foundation Status

EIN

IRS BMF DateIdentify

Supporting Organizations with 509(a)(3)

status

37


g , pWhy it Works

Fully compliant with recently issued guidance

The grantees’ name, EIN and public charity classification (aka “reason for non private foundation status”) under

y p y gfrom IRS concerning reliance on third-party

resources for IRS BMF data:

(aka “reason for non-private foundation status”) under section 509(a)(1), (2) or (3) is presented in the report

A statement that the information in the report is from the most currently available IRS monthly update to the BMF, y y p ,

along with the IRS BMF revision date

The date and time of the grantor’s search is included on the treport

The third party IRS BMF data and report must be in a form which the grantor can store in hard copy or

electronically

38

electronically.

The Challenge: RecapWhy Verify?

g pThree Unique Due Diligence To-Do’s:

To Do: Data Source:


To-Do: Data Source:

Publication 78 and

I t l R B ll ti

Identify Supporting Organizations IRS B i M t Fil

Internal Revenue Bulletin

with 509(a)(3) status IRS Business Master File

Identify revoked and / or reinstated organizations

IRS Automatic Revocation of Exemption List

39#duediligence

Charity Check User ExperienceTwo Clicks to Compliance

Pamela Jowdy Senior Product ManagerGuideStar

40

GuideStar

#duediligence

Charity Check v2.0 New Features E Mail Alerts E-Mail Alerts

Customizable based on 9 different events Upload up to 20K EINs Create individual organization alerts Actively track grantee status as events occur Actively track grantee status as events occur Upload Excel files from MicroEdge GIFTS and other grants

management software solutions Easy 3-step configuration Single click access to Charity Check reports from Alert Emails Single-click access to Charity Check reports from Alert Emails

Parent – Subordinate Linkage Identify over 300K subordinate orgs not listed in Pub 78 but covered Identify over 300K subordinate orgs not listed in Pub 78 but covered

under group exemption Single click link to Parent Charity Check Report

Display of IRB Revoked Organizations Condense 20+ minute manual search process to single click Confirm compliance of past grants by viewing date of IRB revocation Link directly to the IRB PDF for documentation

41

Link directly to the IRB PDF for documentation

Charity Check v2.0 New Features

42

Charity Check v2.0 New Features E Mail Alerts E-Mail Alerts

Customizable based on 9 different events Upload up to 20K EINs Create individual organization alerts Actively track grantee status as events occur Actively track grantee status as events occur Upload Excel files from MicroEdge GIFTS and other grants

management software Easy 3-step configuration Single click access to Charity Check reports from Alert Emails Single-click access to Charity Check reports from Alert Emails

Parent – Subordinate Linkage Identify over 300K subordinate orgs not listed in Pub 78 but covered Identify over 300K subordinate orgs not listed in Pub 78 but covered

under group exemption Single click link to Parent Charity Check Report

Display of IRB Revoked Organizations Condense 20+ minute manual search process to single click Confirm compliance of past grants by viewing date of IRB revocation Link directly to the IRB PDF for documentation

43

Link directly to the IRB PDF for documentation

1 H i kl d G id St bli h IRS ti t d?

Common Questions1. How quickly does GuideStar publish IRS revocations once posted?

2. Can I search for revoked organizations by EIN?

3 D i t bl d PDF t h fl f k d i ti ?3. Do printable and PDF reports have a flag for revoked organizations?

4. Can I set up alerts or manage a watchlist?

5 A id tif i S ti O i ti T ?5. Any progress on identifying Supporting Organization Type?

6. Can grantors still rely on Letters of Determination?

7 Wh t ifi ti ti if I d t b ib t G id St Ch it Ch k?7. What are my verification options if I do not subscribe to GuideStar Charity Check?

8. What is OFAC and why is it important?

9 I th Ad R li P l i l ?9. Is the Advance Ruling Process no longer in place?

10. Does the Charity Check web service include revocation data?

11 D P i P A Y G R t i l d ti i f ti ?

44

11. Do Premium Pay As You Go Reports include revocation information?

Isn’t this good enough?The Letter of Determination

g g

What it is

Static, historic snapshot

Only accurate at time of issuance

What it is NOT

Confirms 501(c)(3) status

Does not account for changes in charitable status since date of original issuance g

Some letters include SO Type (2006)

Does not reflect automatic revocations

45

Grantmaker Verification OptionsExempt Organizations “Select Check”Grantmaker Verification Options

IRS Publication 78 Online: “EO Select Check”

IRS website provides search functionality for three databases:

Pub 78 data (eligible to receive tax-deductible contributions)

Form 990-N (e-Postcard) filers

Automatic Revocation dataAutomatic Revocation data

Can only search one database at a time

M t h IRB t l Must search IRB separately

No date or time stamp

No reinstatement flag

46

g

Source: http://apps.irs.gov/app/eos/

Grantmaker Verification OptionsIRS Internal Revenue BulletinGrantmaker Verification Options

Includes status changes and revocations

IRS IRB

g Published weekly in pdf and html format Does not include EIN Not searchable

47Source: http://www.irs.gov/irb

Grantmaker Verification OptionsIRS Business Master File

IRS Downloadable Business Master File

Draft of manual solution for 509(a)verification directly from

IRS BMF txt file

48

Definition and OptionsOFAC and SDNDefinition and Options

http://www.ustreas.gov/offices/enforcement/ofac/

Office of Foreign Assets Control / Specially Designated Nationals

p g

49

Source: Technology Affinity Group and Council on Foundations’ 2007 Grantmakers Information Technology Report, September 2007

Temporary and Final IRS RegulationsAdvance Ruling Process

Issued September 9, 2008 Eliminated the advance ruling process for 501(c)(3) organizations reasonably expected to be publically

supported IRS automatically classifies new 501(c)(3)s as public charities for first 5 years if can reasonably be expected to

be publically supported Includes public charities whose advance ruling period has not yet expired or expired after June 9, 2008 Final Regulations issued September 8, 2011 Charity Check no longer publishes the Advance Ruling date in the body of the report Footer messaging and link to IRS resource persists

50http://www.gpo.gov/fdsys/pkg/FR-2011-09-08/pdf/2011-22614.pdf

XML* Data and PDF Report DeliveryCharity Check Web Service

*Extensible Markup Language =

t h t t d d t easy way to share structured data

via ether

51

Single reports without a subscription Premium Pay As You Go

commitment

52

Suzanne Ross McDowellSuzanne Ross McDowell

Partner, Steptoe & Johnson LLPPartner, Steptoe & Johnson LLP202.429.6209 | [email protected]

Practice focuses on needs of exempt organizations Member, IRS Advisory Committee on Tax ExemptMember, IRS Advisory Committee on Tax Exempt

and Government Entities, 2004-2007; Chair, Exempt Organizations Group, 2006-07

Chair, ABA Tax Section Exempt Organization Comm, 2011-present; Vice Chair, 2007-2011Chair Tax Section District of Columbia Bar 2005 2006; Chair, Tax Section, District of Columbia Bar, 2005-2006; Vice Chair, 2004-2005

Fellow, American College of Tax Counsel Associate Tax Legislative Counsel, Office of Tax Policy,

US Department of the Treasury, 1984-1987US Department of the Treasury, 1984 1987 Former SVP and Deputy General Counsel, National Geographic Society Frequently speaks and writes about exempt organization issues Listed in Chambers USA, America’s Leading Lawyers for Business, Best

Lawyers in America, and District of Columbia Super Lawyers

53www.steptoe.com

Contact Information

[email protected]

Suzanne Ross McDowell

Partner, Steptoe & Johnson, LLP

[email protected]

54#duediligence

Appendix

55

Access Points: ResultsGuideStar Charity Check

56#duediligence

Access Points: ReportGuideStar Charity Check

p

57

509(a)(3) Supporting OrganizationGuideStar Charity Check

( )( ) pp g g

58

Not Verified in Publication 78GuideStar Charity Check

59

Not Listed in IRS Business Master FileGuideStar Charity Check

60

OFAC Organization: Results GuideStar Charity Check

g

61

OFAC Organization: ReportGuideStar Charity Check

g p

62

Charity Check v2.0 Alerts and Watchlists

y

63

ConsiderationsInternational Grantmaking

Does the foreign charity already have a Letter of Determination? Exercise expenditure responsibility Equivalency Determination International Repository Project:

www.USIG.org [COF-sponsored website]www.ngosource.org [international repository project website]

Become familiar with the USA Patriot Act

64#duediligence

Options and ApproachesSupporting Organization Types

Supporting Organization Guidesheets published by IRS GuideStar Charity Check policy and long term product vision http://www.irs.gov/charities/article/0,,id=174956,00.html Consult your legal counsel!

65

Grantmaker Due DiligenceGrantmaker Due Diligencein the

Pension Protection Act Era:

How to identify supporting organizations and How to identify supporting organizations and align your grants administration process with

the 21st century tax codethe 21 century tax code

66© 2012, GuideStar USA, Inc. All Rights Reserved. This information is copyrighted subject matter owned by GuideStar USA and is protected by United States and international copyright law.