Form 1023 and the Toughest Compliance Challengesmedia.straffordpub.com/products/form-1023-and-the-toughest-compliance... · on your screen. • Click on the tab labeled “Handouts”

Form 1023 and the Toughest Compliance Challenges Clearing the Hurdles When 501(c)(3) Organizations Apply for Tax Exempt Status

WEDNESDAY, OCTOBER 23, 2013, 1:00-2:50 pm Eastern

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Form 1023 and the Toughest Compliance Challenges

Oct. 23, 2013

Rich Ruvelson, Green Hasson Janks [email protected]

Ofer Lion, Hunton & Williams [email protected]

mailto:[email protected]

Today’s Program

Introduction Slide 4 – Slide 7 [Rich Ruvelson, Ofer Lion]

Due Dates and Required Attachments Slide 8 – Slide 10 [Rich Ruvelson]

Form 1023: Parts I-XI Slide 11 – Slide 25 [Ofer Lion]

Form 1023: Schedules A-H Slide 26 – Slide 36 [Rich Ruvelson]

Expedite Requests Slide 37 – Slide 38 [Ofer Lion]

Closing Remarks Slide 39 [Rich Ruvelson, Ofer Lion]

Notice

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

6

INTRODUCTION

Rich Ruvelson, Green Hasson Janks Ofer Lion, Hunton & Williams

© 2011 - 2013 Green Hasson & Janks LLP. All Rights Reserved. An Independent Member Firm of HLB International. October 21, 2013

Exemption Issues • 26 USC Section 501-Exemption from tax on corporations, certain trusts, etc.

• (c) List of exempt organizations…..

» (3) Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.

» (4)

» (A) Civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare, or local associations of employees, the membership of which is limited to the employees of a designated person or persons in a particular municipality, and the net earnings of which are devoted exclusively to charitable, educational, or recreational purposes.

» (B) Subparagraph (A) shall not apply to an entity unless no part of the net earnings of such entity inures to the benefit of any private shareholder or individual.

8


IRS Scrutiny and Scrutiny of IRS

• 501(c)(4)’s: Tea Party exemptions

- The Internal Revenue Code isn’t always black and white Lois Lerner, Official at Heart of IRS Investigation, Resigns

9


Interactive Form 1023

10

DUE DATES AND REQUIRED ATTACHMENTS

Rich Ruvelson, Green Hasson Janks


Due Dates and Required Attachments

• Charities file Form 1023 within 27 months after the end of the month in which the

organization was legally formed

- Reasonable cause

- File Forms 990, 990-EZ 0r 990-N for tax years ending before approval

• Churches do not need to file

• Conformed articles of incorporation, bylaws and/or trust document

• Other attachments as specified on form

• User fee

• Power of Attorney

• Checklist

• Conflict of interest policy?

• Form 1023 and correspondence are open for public inspection

• Organizations other than charities file Form 1024

12

Slide Intentionally Left Blank

FORM 1023: PARTS I-XI

Ofer Lion, Hunton & Williams

15

Form 1023 Seminar

Form 1023 Checklist Make sure to include all of the documents listed, and

include them in the order requested – it’s the first test they use to see if you know how to follow directions (this is important to IRS agents).

Note the four bullet points under the first check box – the last one is key: Financial information should correspond with proposed activities.

The first mailing address shown (with the PO Box) has been changed to IRS, PO Box 12192, Covington, KY 41012-0192.

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Form 1023 Seminar

Part I Identification of Applicant If you are preparing and submitting the application, you

should probably be the primary contact. If the primary contact is an authorized representative

(attorney/accountant), be sure to include a power of attorney on the then current version of Form 2848.

Many organization website addresses are “under construction.”

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Form 1023 Seminar

Part II Organizational Structure Be sure to include a state certified copy of the

corporation’s articles – this is typically my Exhibit A. My usual Exhibit B: The bylaws should include an

adoption date – typically a certificate of the corporate secretary.

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Form 1023 Seminar

Part III Required Provisions in Your Organizing Document A 501(c)(3) must be both “organized” and “operated”

exclusively for charitable or other exempt purposes, and this is the basic organizational test.

A proper purpose clause and dissolution clause are a must, but make sure that they also meet any state property tax exemption or other requirements.

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Form 1023 Seminar

Part IV Narrative Description of Your Activities Typically my Exhibit C, the narrative description is the

backbone of the entire application. Here, you need to clearly set forth how the organization meets the “operational” test.

What exempt purposes will you further, and how will you do it? (See the Instructions for further queries).

I’ve drafted one page narratives, and 15+ page narratives – decide what’s appropriate under the circumstances.

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Form 1023 Seminar

Part V Compensation and Other Financial Arrangements With Your Officers, Directors, Trustees, Employees, and Independent Contractors For 3b, don’t forget to include short bios for all of the

officers, directors, trustees and the highest paid employees and IKs (include service provider entities).

Question 4: Do you establish the rebuttable presumption of reasonableness?

Questions 7/8/9: Related party transactions – look back to question 4 for guidance (establish the presumption).

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Form 1023 Seminar

Part VI Your Members and Other Individuals and Organizations That Receive Benefits From You The heading here is somewhat decieving. Presumably,

the answer to either 1a or 1b or both is yes. Otherwise, how do you further an exempt purpose?

For the narrative response in your exhibit, feel free to cross reference back to the main narrative from Part IV.


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Form 1023 Seminar

Part VII Your History If your organization is a successor under the definition

provided in the instructions, complete Schedule G (which can be painful).

If your organization is filing 27 or more months after forming, it may face bigger challenges than Schedule E, but start there.

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Form 1023 Seminar

Part VIII Your Specific Activities If your answer to question 1 is yes, you can stop here. For question 4 regarding solicitation and fundraising

activities, be sure to understand all of the state law implications of your organization’s intended activities. In many cases, a “50-state solicitation registration” is required (in almost all 50 state). Do not try this at home – use a service provider.

A good answer to question 5 can be helpful, but a government affiliation is not enough – you still need a valid exempt purpose (and “lessening the burdens of government” is low on the IRS totem pole).

Foreign operations? Know the anti-terrorist regulations.

25

Form 1023 Seminar

Part IX Financial Data Some time ago, a cursory presentation with a handful of

obviously made up line items would do the trick. Make sure that the financial projections are complete and

line up with the narrative description of your activities, your compensation disclosures, and the years the IRS wants to see (the description at the top is inaccurate).

If a line item calls for an itemized list – provide one in the exhibits.

Line item 22 (professional fees, that’s you) doesn’t ask for an itemized list, but provide one anyway. They follow up on this one a lot, but “legal and accounting fees” tends to be an adequate response.

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Form 1023 Seminar

Part X Public Charity Status Is the organization a private non-operating foundation, a private operating foundation, or a “public charity”? If it’s not a private foundation, but sure to select the best available category in question 5. Do not complete or sign question 6a – it’s outdated. Only complete line 6b and line 7 if in the organization has been in existence 5 or more tax years.

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Form 1023 Seminar

Part XI User Fee Information The fees shown are incorrect. The applicable fees are $400 or $850. Make sure to have the application signed, and note that a signed original is no longer required (your client can email the signature page to you). Form 1023 is executed under penalties of perjury and, if approved, becomes publicly available, so make sure that the client has reviewed, understands and agrees with everything in the application.


FORM 1023: SCHEDULES A-H

Rich Ruvelson, Green Hasson Janks


Schedule A. Churches

• There is a difference between a church, synagogue or mosque and other types of religious organizations.

- Churches must meet a number of the following non-exclusive requirements, in addition to other requirements for tax-exemption:

• Distinct legal existence

• Recognized creed and form of worship

• Definite and distinct ecclesiastical government

• Formal code of doctrine and discipline

• Distinct religious history

• Membership not associated with any other church or denomination

• Ordained ministers who have completed prescribed studies

• Established places of worship

• Regular congregations with regular services

• Religious schools, and

• Seminary

30


Schedule B. Schools, Colleges and Universities

• Not all educational organizations are schools

- In addition to meeting all of the other requirements of exemption private schools must:

• Adopt and maintain a policy of racial nondiscrimination

• Have a regularly scheduled curriculum

» Presentation of formal instruction

» Non-educational activities must be incidental

• Have a regular faculty

• Have a regularly enrolled student body attending class at a facility where classes are regularly carried on

31


Schedule C. Hospitals and Medical Research Organizations

•Community benefit factors;

-Community board

-Open medical staff

-Emergency room

-Non-emergency care

-Use of surplus funds

-Charity care required

-Other

•Affordable Care Act requirements:

-Written financial assistance and emergency care policies

-Limit amounts charged for emergency and other medically necessary care

-Reasonable efforts to determine whether individual eligible for assistance under hospital policies before collections actions taken

-Community health needs assessment and implementation plan performed and adopted once every three years

•MRO’s

32


Schedule D. Section 509(a)(3) Supporting Organizations

•Organizational test

-A supporting organization must be organized exclusively for the benefit of, to perform the functions of, or to carry out the purposes of one or more specified 509(a)(1) or 509(a)(2) organizations

•Articles must state name of supported organization

•Articles must not expressly empower the organization to engage in activities not in furtherance of these purposes or to operate to support or benefit any organization other than its specified supported organization(s)

•Operational test

-Activities must benefit or support the supported organization, including making grants and providing services and facilities

•Control test

•Relationship test

-Type I

-Type II

-Type III

33



Schedule E. Organizations Not Filing Form 1023 Within 27 months of Formation

•Reasonable cause

-Don’t miss 990 filing deadlines

35


Schedule F. Homes for the Elderly or Handicapped and Low-Income Housing

•Homes for the elderly

-Residential facilities

-Health care

-Financial assistance to those unable to pay and care at lowest cost

•Low-income housing

-Income eligibility

36


Schedule G. Successors to Other Organizations

•For obvious reasons the creation of successor organizations is looked at closely

-Can have legitimate business reasons such as creation of a new private foundation after a merger, restructuring of a family foundation or restructuring of a multiple entity nonprofit group

37


Schedule H. Organizations Providing Scholarships, Fellowships, Educational Loans, or Other Educational

Grants to Individuals and Private Foundations Requesting Advance Approval of Individual Grant Procedures

•How is scholarship, fellowship, educational loan or award program structured?

-Concerns over transactions with insiders

-This is the easiest way for private foundations to request advance approval

•Advance approval of award program not required, if award subject to IRC Section 74(b) and award winners selected from the general public

38


Publication 557 Tax-Exempt Status for Your Organization

39

EXPEDITE REQUESTS Ofer Lion, Hunton & Williams

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Form 1023 Seminar

Expedite Requests There are only a handful of viable rationales for an expedite request, so make sure you have one if you apply. It can be helpful to include documentation to back up your request. Send the request to the right place. You might include a copy of your Form 1023 submission with the expedite request, and a copy of your expedite request with your Form 1023, but these are filed in different places.

CLOSING REMARKS

Rich Ruvelson, Green Hasson Janks Ofer Lion, Hunton & Williams

Documents

Form 1023 and the Toughest Compliance Challengesmedia.straffordpub.com/products/form-1023-and-the-toughest-compliance... · on your screen. • Click on the tab labeled “Handouts”