Manny Nonprofit Organizations Fall 2009 2

8/7/2019 Manny Nonprofit Organizations Fall 2009 2

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BACKGROUND

BASIC CONCEPTS1. Nonprofit=state law concept

a. Meansthatorgabidesbythenondistributional constrainti. All profits mustgotowardtheexempt charitablepurposesoftheorg, cannot

inuretothosein control oftheorganization

ii. Dividing linebetweennonprofitsandfor-profitsb. Butnonprofitorgs CAN MAKEA PROFITconstraintisaboutwherethisprofitgoes,

mustbereinvestedandputtowardexemptpurposesratherthaninuringtoinsidersor

shareholders.2. Tax-exempt=federal law concept

a. Exemptfrom federal tax;butnottotally,i.e., UBITb. 501(a), (c)c. 501(c) meansbothtaxexemptAND taxdeductible.

3. SourcesofFundinga. Feesforservicesb. Governmentgrantsc. Donations/privatephilanthropyd. Investmentincome/endowmentse. Membershipfees/duesf. Incomefrom relatedactivities

LAWYERROLES1. Classic lawyerrole2. Ensureoperationswithin legal compliance3. Training,teaching,and creatinginformed client4. Audits

LAWYERING

1. Board membersdon'thaveahow-to manual aboutboardresponsibilities.2. Lawyers canwritethis. Afterwritingit,there mustbeatraining.3. Strategic plansshouldhavebenchmarks.

ADVISING

1. Businessplana. Purpose/missionb. Goalsc. Funding

i. Earned operationsii. Unearned contributions

d. Customersi. End usersii. Donorsiii. Public/Atty General

e. Typeofstructurei. Corpii. Trust;iii. Association

f. Governanceg. Management


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h. Programmingi. Marketing

Association (mostflexible)

Corporation (hybrid) Trust (leastflexible)

ChoiceofEntity Easy; cheap;flexible Familiarity;flexible Inflexible

Jurisdiction Limitedto localitywhereformed.

1. Mustregisteras corporation;AND2. Qualifyastax-exemptwithastate's

Tax Board.LawofInternal affairsofstateof

incorporationgoverns.

Civil courts

Tax Can qualifyas (c)(3)org. Regulatory

Liability All membersare liable. Limited liability Trusteeispersonally liable

Governance Informal; chaotic. BoardofDirectors (preferoddnumbersandstaggeredterms). Directors canchange missionofcorporation.

Funding membership 1. Earned;and/or2. Contributed.

2CATEGORIES

1. Public Servinga. Existstofurtherthegoalsofthepublic ingeneral.b. 501c3, c4,political orgs, 527,etc.c. Canhave members,butprimarypurposenottobenefitthose members,i.e., Moma

i. Membershavenoownershipinterestii. Membersdonthave muchofavoice,board manages

d. Upondissolution,assets mustgotoanothercharitablepurpose, cannotgoto members2. Mutualbenefit/memberserving

a. Groupswitheconomic orsocial nexusi. Rationaleforexemption:pool resourcestodotogetherwhattheywouldhave

donealonewhytaxsimplybecausetheygottogether?b. Existtobenefit membersc. 501c7, c6d. Presenceofmembersnotdispositive.e. Mayhaveaneconomic interest upondissolutionassets maygoto members

3. Third category: Religiousorganizations,including churchesa. Generally consideredtobepublic serving,yetoperateforthebenefitofmembers

EXEMPT PURPOSES UNDER501(C)

1. 501(c)(3)


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a. Purposes: Religious, charitable,scientific,testingforpublic safety, literary,educational,fosternational orintl amateursports competition,preventionofcrueltyto childrenoranimals

i. Theseareallpublic charitiesb. Benefitsof501(c)(3)status:

i. Donorsreceivehighestdeductioneasestheburdensoffundraisingii. Taxbenefits

1. Exemptionfrom fedtax2. Exemptionfrom stateand local taxes

iii. Postal ratereductioniv. Tax-exemptbonds/Lowinterestratesv. Noshareholderscrutinyand IRS lackofenforcementpowervi. Haloeffecttoencouragedonationsvii. Consumermighttrustorg morelessincentivetoraiseprice, cut quality (contract

failure)

viii. Ifpublic serving,assets cannotgoto members upondissolutionc. Consof501(c)(3)status:

i. Absoluteprohibitiononpolitical campaigninterventionii. Limitson lobbyingexpendituresiii. Noprivateinurementorprivatebenefitiv. Activities cannotbeillegal oragainstpublic policyv. Purposes mustfitdefinitionofcharitablevi. Makesithardertoraise capital

1. Contrasttoforprofitswhereyou cansell equitytoinvestorsvii. Cantreappersonalbenefitsviii. Lackofprofit motive might meanreducedefficiencyix. Subjectto moreregulation

d. Nonprofits canoperate verysimilarlyto forprofitsi. Compensationto managers/employees canbeonpartoforprofits

1. Therejust mightbe morescrutinyre:whetheramtisreasonableii. NPO can chargefees comparabletofor-profitsiii. NPOsnotobligatedtohelpthepoorinneed.

2. 501(c)(4)a. Social welfareorgspublic serviceorgs, civic leaguesb. Similarpurposesto 501c3c. Differences

i. No lobbying limitii. Donors cantget 170 deduction

3. 501(c)(5)-labor,agricultural,horticultural4. 501(c)(6)-business leagues, chambersofcommerce,real estateboards,boardsoftrade,

professional football leagues.5. 501(c)(7)-social clubs (recreational)6. Overall U.S. Policyre:exemptiona. Allowbroadrangeto qualifyforexemptionthe use lawstoensurethatorgsremain

public

ROLE OF THE TAX SYSTEM

1. Supportviataxrelief2. Equity3. Regulatory4. Borderpatrol


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THEORIES OF EXEMPTION1. Public benefit/traditional subsidytheory

a. Relievestheburdensofgovernmentbyprovidinggoodsorservicesthatindivuals maybeunwillingtopayfor,providinga communitybenefit

b. Financial supportintheform ofexemption2. Quidpro quotheory

a. Secondary communitybenefitsofNPOspluralism,innovators,efficient3. Taxfavors

a. Encourageinherently meritoriousactivities4. Income measurementtheory

a. NPOsnotthepropertargetofincometaxation5. Capital subsidytheory

a. Contract failure-NPOstypicallyariseasthemost efficientprovidersofgoodsandserviceswhere consumershavedifficultyevaluatingthe quantityand qualityofthe

productorservicei. NPOsworkbestwhere consumeris unableto locatebestbargainorunableto

enforcethebargainconsumerstrustNPOs more.

ii. NPOs lackincentivetoraisepriceand cut qualityiii. Producerasafiduciaryvisavis consumers.

b. Exemption=compensation6. Rewardingaltruism7. Donativetheory

a. Exemptionhelpstoovercome lackoffunding8. Pluralism

ORGANIZATION UNDER STATE LAW

THE PURPOSES OF A NONPROFIT ORGANIZATION MUST QUALIFY FOR EXEMPTION UNDER BOTH

STATE AND FEDERALLAW.1. Harderto qualifyatthefederal level thanthestate level.2. Draftpurposesas BROADLY aspossibletoallowformaximum flexibility

N.Y. STATELAW3. N.Y. NotforProfit Law 201

a. TypeA, B, C, Db. Trytogetas Type Bmostpreferred,similarto 501(c)(3)c. Alternative: RMNCA 17.07

4. N.Y. NotforProfit Law 404a. Sometimesoforganizationsrequirestateapproval

STEPS TO ORGANIZE1. Makesurepurposes qualify understate (NY 201)andfederal (501c3) law2. Inform foundersofrestrictionson 501c3 orgs,i.e., limited lobbying3. Selectstateofincorporation4. Pickname5. Draftarticlesofincorporate/charter6. Obtain consentsforcertainorgs (NY 404)7. Filearticlesofincorporationwiththestate8. Draftbylawsandappointdirectors9. Applyfortax-exemptstatus (Form 1023)10.FilewithAttorney General forstatetaxexemptions


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11.Annual filings (i.e., Form 990)

SUMMARY: 7 REQUIREMENTS OF A 501(C)(3)

FORM

1. Charitabletrust2. Unincorporatedassociation3. Nonprofit corporation

ORGANIZED AND OPERATED EXCLUSIVELY FOREXEMPT PURPOSES

1. Exempt Purposesa. Traditional exemptpurposes-religious, charitable,scientific,testingforpublic safety,

literary,educational,fosteringnational orintl amateursports competition,preventionofcrueltyto childrenoranimals

i. Traditionalpurposesrebuttablepresumptionofpublic charity,noaltruismrequired

b. Ifnottraditional charity, courtsexaminewhetherrational persons mightreasonablybelievethatpublic advantage mightaccrue,altruism required.

2. Organizationaltest satisfactiondependsonproperlydraftedorganizational docs3. Operationaltest --exclusively=primarily

a. Testisnot metonlyifmorethananinsubstantial amountofactivitiesisnotinfurtheranceofcharitablepurposes

4. *Mustpassbothorganizational andoperational testsinorderto qualifyforexemptionNO PRIVATE INUREMENT

1. Nopartofthenetearnings mayinuretothebenefitofanyprivateshareholderorindividuala. Privateinurementisthesubstantivedividing lineb/tNPsandfor-profits

2. Concerntopreventinurementtosomeonewho controlstheorg;purposetokeepapublic-benefitorgbenefitingthepublic

NO SUBSTANTIALPOLITICALACTIVITY

1. Nosubstantial partoforg can carryonpolitical activity,ortrytoinfluence legislation,exceptasprovidedinsubsectionh

a. Lobbyingisokay,as longasitisntsubstantiali. Substantialparttest

1. Penalty=lossofexemption + 4912 taxesii. 501(h)election

1. Penalty= 4911 intermediatesanctions/taxes2. Absoluteprohibitiononpolitical campaigning

a. Penalty= 4955 excisetax3. Alternative=501(c)(4)org

a. Unlimited lobbyingb. Lessthan 50% devotedtopolitical campaignactivity

CHARITABLE CLASS (non-statutorysee Regs)1. Scopeofbenefited class mustbePUBLIC (ratherthanprivate).2. Class mustbeindeterminabletoensurepublic benefitvs. privatebenefit.

FUNDAMENTALPUBLIC POLICY REQUIREMENT

3. Nopartofpurposes maybeillegal orviolatefundamentalpublic policy (Bob Jones)


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a. Notorganizedandoperatedforexemptpurposesifpurposeoforgviolatespublic policy.4. Stemsfrom common lawdefinitionofcharitable asdefinedby IRS and courts.5. Broaderconceptofcharityimpliesapublic benefit

a. Nopublic benefitifillegal purposesorcontrarytopublic policy.FORMS OF NONPROFITS

CORPORATIONS, AND ANY COMMUNITY CHEST, FUND, OR FOUNDATION.

CHARITABLE TRUSTS

1. Trusteeshavefiduciaryrelationshipwithrespecttoproperty managementforthebenefitofthebeneficiaries

a. Higherstandardthan corporatedirectors2. Differentfromprivatetrusts

a. Beneficiary=community,enforceablebyAGb. Assets mustbeirrevocablydedicatedtothe charitablepurpose (even upondissolution)

3. Advantagesa. Easeandswiftnessofformationb. Easier/lessexpensivetoadministerc. Control bygrantor

4. Consa. Hightaxratesb. Liability concernstrustees mightbepersonally liable,bestforholdingproperty

5. Trustee canbe ONEperson,buttradeoffisyou give up limited liability.a. Disadvantageistrusteeispersonally liable,inflexible,and unfamiliartotheoutside

world.

UNINCORPORATED ASSNS1. 2 ormorepersonsorganizedfora commonpurpose2. Offtheradarnoreportingrequirements3. Dissolutioneach membergetsproratashare4. Pros:informalityandflexibility5. But consoutweighthebenefits

a. Membersarepersonally liableb. Cantholdpropertyc. Probnotgoodfordonationsd. Agency lawapplies

NONPROFIT CORPORATIONS

1. Predominantform in U.S.2. Hallmark=nondistributional constraint3. CreaturesofSTATE law4. Formalities,yetflexibleinternal governance5. Indefiniteexistence6. Limited liability7. Centralized management8. Differentfrom afor-profit corporationbecauseAG cansueiftheresdiversionofassetsfrom

charitablepurpose9. Advantagesincludefundraisingexperience,etc.10.Corporations canhaveasingle member. It canevenbeatrust (hybridstructure). Trust canhave

righttoratify Boardresolutions.


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a. Corporation Boards canhavedifferent classesofBoard membersNONPROFIT CORPORATION BOARD ROLE

FISCALAGENT RELATIONSHIPS1. Unincorporatedassn canfinda largerorganizationwithsimilarpurposeandbootstrapitselfon.

Fiscal agentasa conduitforgroup2. Fiscal agents collecttaxesand contributionsforgroup3. Donorsgive moneytofiscal agentfiscal agentgives moneystogroup4. Proceedsontheunderstandingthatfiscal agentwill givetogroup

a. Grouppaysfiscal agentafeeb. Fiscal agenthasdominionand control ofmoney, cantforcethem togivetogroup

5. Advantagesa. Avoidsthetimeandexpenseofincorporatingandseekingexemptionb. Donors more comfortablegivingtoanestablishedorganization,will getdeductionfor

theircontribution

6. Limits: cantdothisifbudgetgreaterthan 5k/yrORGANIZED AND OPERATED EXCLUSIVELY FOR EXEMPT PURPOSES

EXEMPT/CHARITABLE PURPOSES1. 501c3s mustbeorganizedandoperatedfor1 ormoreexemptpurposes2. Traditional categories/perseexempt/explicitly listedin 501c3:

a. Religious, charitable,scientific,testingforpublic safety, literary,educational,fosteringnational orintl amateursports competition,preventionofcrueltyto childrenoranimals

3. Ifactivityfalls underatraditional exempt category,theorggetsarebuttablepresumptionthatitsvalidandaltruism isnotrequired.

a. Ifnotatraditional category, courtswill examinewhetherrationalpersonsingeneralmightreasonablebelievethatpublic advantages mightaccrue. Altruism isrequired.

4. Charitableisthebroadest categorya. Not usedinitsordinarysense (relieftothepoor)

i. Thereisnoredistributiverequirement.b. Legal definition-afunctiontopromotethegeneral welfarethatdoesnotviolatepublic

policyc. Congresshasneverdefined charitablebutregs (1.501c3-1d2) construetheterm

expansively:i. Relieftothepooranddistressed,social welfare,advancementofreligion,

educationandscience,health,public buildings/monuments/works, lessening

burdensofgovt,promotionofsocial welfare, lesseningneighborhoodtensions,

eliminatingdiscrimination, civil rights,juveniledelinquency,someadvocacyorgs

d. Evolving conceptmeaning changesovertime5. Whopolicespurpose?

a. Stateattorneysgeneral and IRSb. IRS more likelyto lookcloselyatpurposes

ORGANIZATIONALTEST

1. Enumeratedpurposesinproperlydraftedarticlesofincorporation2. Bestpracticeistohaveadissolutionprovision

a. Butnodissolutionprovisionisnotfatal, canbefilledinbystate law


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OPERATIONALTEST1. Focusesontheactivitiesoftheorganization2. Org mustbeoperatedexclusivelyforexemptpurposes,butthisreally meansPRIMARILY for

exemptpurposes(regs)3. Bob Jones University

a. 501c3 cantengageinillegal activitiesoractivitiesthatviolatefundamental publicpolicy.

b. In BJ, SCOTUS imbuesthe IRS withthepowertopolicethepolicyborder.i. However, IRS doesnt liketopolicethat line.

DISSOLUTION AND DISTRIBUTION OF ASSETS

DISSOLUTION AND DISTRIBUTION OF ASSETS

1. Besttodeterminethisattheoutset,intheorganizingdocuments.2. PioneerRule:

a. Public benefitorganizations musttransfertheirassets upondissolutionto charitableorsimilaruses

b. Mutual benefitorganizations maydistributetheirassetsto members upondissolutionorinaccordancewithsuchotherplanprovidedforinthearticlesorbylaws

3. Dissolutionof Trustsa. Statepurposesbroadlyorincludevariance clauseb. Cypresupondissolutionassets mustgotopurposesas near as possible

4. Dissolutionof Unincorporated Associationsand Fiscal Agent Relationshipsa. UAmembersgetproratashareb. FAassetswillprobablygotofiscal agentpursuantto contract

5. Dissolutionof Corporationsa. Procedure

i. Boardresolution1. Adoptplan2. Memberapproval3. Stateapproval

ii. Noticeto creditors,paymentofliabilities,distributionofremainingassets1. Assets mustbedistributedinaccordancewithstate law

a. Lessstrictthanfortrustsb. Ex.)NY Assets mustgotoanorgengagedinsubstantially

similaractivities (Multiple Sclerosis)

iii. File certificateofdissolutionwithsecretaryofstateiv. Wind upactivities

CHARITABLE TRUSTSCY PRES AND DEVIATION (THREAT OF DISSOLUTION)

1. Equitabledoctrinesthatapplywhen:a. Compliancewithtrusttermshasbecomeimpossibleorillegalb. Circumstanceshave changedsuchthatpurposeswill notbeaccomplished.

2. Rationale:the lawfavors charitabletrustsandwill doitsbesttosavefrom failure.3. Courtsare more likelytoapprovedeviationvs. cypres

a. Whenissueisarguable,alwaysaskfordeviation.4. Tension:respectingdonorintentvs. deadhand control5. Cy Pres

a. Modificationoftrusts PURPOSES and/orBENEFICIARIESb. Charitablepurposebecomesimpossible,inexpedient,impracticableoffulfillment,

alreadyaccomplished.


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c. Standardfordissolution morestringentthanforcorporations (asnearspossiblevs.substantiallysimilar[NY])

d. Courtswill generallypermitonlywhenfrustrationisgreatand changeissmalli. Ineffectiveorinefficientphilanthropydoesnt count.ii. Purpose musthave CEASED.

e. 3 parttest:i. Valid charitabletrustii. Settlorsspecific charitableobligationfrustrated,necessitating cypresto carry

outsettlorswishesiii. Settlorsgeneral intentnotrestrictedtoprecisepurposeintrustinstrument

1. Implicitly consentsto changef. Reasonstoapply:

i. Insufficientfundstoaccomplishpurposeii. Avoidanceofunconstitutional orillegal conditionsiii. Legateerefusesgiftsubjecttorestriction/strictimpossibilitynotrequired (Cerio)

g. Inefficiencyorwasteisnotareasontoapply cypres (BuckTrust, Hershey Trust)i. Some legislativeresponsestothisissue,butnotwidelyadopted.

h. Overall, courtswill strictlyadheretodonorintenti. Donorshouldputinprovisionsthatdeal withwhathappensifthings change,

variance clause,procedural clause.

6. Deviationa. Modificationofatrustsadministrative,procedural,ordistributiveprovisionsb. Complianceimpossibleorillegal; change circumstancesfrustratepurposec. Barnes Foundation-successful deviationsuitbytrustees

i. Artsubjectto manyrestrictions,runsoutofmoneyii. Courtauthorizes moveto Philadelphiatoincreasepublic access.iii. Barnesprimary missioneducationwill bepreserved,evenwithrelocationiv. Good lawyeringtoframethisasdeviationv. Quincy-trustforeducationofQuincygirls;insufficientfunds; courtallows

admissionofnon-Quincygirls

vi. Cypresnotapplicablepurposenotyetimpossibleand changeallowspurposetoremainintact.d. Ex.)Changinginvestmentvehicletogeneratefundsfororg

PRIVATE INUREMENT, PRIVATE BENEFIT, EXCESS BENEFIT

PRIVATE INUREMENT

1. Privateinurementisonlyabout INSIDERSa. Founders,directors,peopleingeneralpositiontoinfluencefinancial affairsoforgb. UCC-outsourcedfundraisersarenotinsiders;no PI issue.

2. Operational test:org mustbeoperatedprimarilyforpublic ratherthanprivateinterests3. Dividing linebetweennonprofitsandfor-profits4. Pre-4958:Absoluteprohibitionagainstprivateinurement

a. Subjecttohairtrigger: $1 isinurementb. Result: lossofexemptionc. Punishedthewrongpartiesorg,beneficiaries,donorsd. Rarelyinvokedbecauseofdraconianresulte. Result: mostprivateinurementgoes unpunishedf. Scientology-courtrevokedexemption, IRS reinstated

PRIVATE BENEFIT

1. Differentfromprivateinurement.


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2. Thisisaboutwhenpersons,otherthaninsiders,receive morethananincidentalprivatebenefit.Benefitgoestooutsider.

3. 1.501c3-1d1iisaysitisnecessaryfororganizationtoestablishthatitisnotorganizedoroperatedforbenefitofprivateinterestssuchasdesignatedindividuals, creatororhisfamily,shareholdersoforganization,orpersons controlled,directlyorindirectly,bysuchprivateinterests.

EXCESS BENEFIT TRANSACTIONS (4958)1. Intermediatesanctiononperpetratorsandknowing managers.

a. Ultimatesanctionreservedformostegregious cases (notevenappliedin Caracci),determinedbyfactsand circumstances (Reg. 1.501c3-1f2ii):

i. SizeandscopeofregularandongoingactivitiesthatfurtherexemptpurposesbeforeandaftertheEBT occurred.

ii. SizeandscopeofEBT inrelationtothesizeandscopeoftheorgsregularandongoingactivitiesthatfurtherexemptpurposes

iii. RepeatedEBTs?iv. Safeguards?v. Correction?

2. Excessive Benefit Transaction (4958(c)(1)(A))a. Economic benefitto DQP from org>valueofconsiderationreceivedforprovidingsuch

benefiti. Excessive Compensationii. Transactionbetween DQP andNPO that undulybenefits DQP,i.e., lease, loan,

sale3. OrderofOperations:

a. Dowehaveanapplicabletax-exemptorganization?i. 4958 appliesonlytopublic charities501c3, 501c4ii. Doesntapplyto:

1. Privatefoundations2. State universitiesthataregovernmentinstrumentalitiesstates candecide

whattodowiththeirmoney

iii. Istheorgrequiredtofile? Churchesnotrequiredtoreport,so mayslippasttheradarb. Arethere DQPs?

i. TypesofDQPs1. Statutory DQP

a. Substantial influenceb. Family membersc. 35% controlledentity

2. Deemed DQP (exercisessubstantial influence)a. Board membersb. Officersc. Anyothercapacitytoexercisesubstantial control

3. DeemedNon-DQPa. Other501c3 orgsb. Employeesthatarenothighly compensatednosubsinfluence

4. Factorsindicating DQPa. Founderb. Substantial contributorc. Revenue-based compensationd. Authorityto control ordeterminateasignificantportione. Managesadiscreteandsignificantsegmentoforg


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5. Factorsindicatingnon-DQPa. Bonafidevowofpovertyfororgb. Independent contractor(attny,accountant,investmentadvisor)c. Directsupervisornota DQPd. Nosubstantial influence

ii. Doesinitial contractexceptionapply?1. Onlyappliesifcompensationisfixed2. Automaticallynota DQP withrespecttoinitial contract,butpossible

problem forrenewal.iii. Evenifno DQPs,therestill mightbeaprivatebenefitissue

c. IsthereanEBT?i. Isita compensationissue? Questionoffact.

1. Reimbursementoftravel expensestoattendaboard meetingisdisregardedasaneconomic benefitforpurposesof4958.

a. Butpaymentofspouseexpenses mightbe compensationto DQP,notthebestideatodothis.

2. Include moneyfrom controlledentitiesa. Ex.)Universityemployee + alumniassn

3. Didorgpre-designateas compensation?a. Ifyes,proceedb. Ifno,automatic EBT

4. Ispaymentfixedordiscretionary?a. Ifdiscretionary,norebuttablepresumptionavailableb. Iffixed,org mayhavegottenrebuttablepresumptionof

reasonableness.5. Ispaymentrevenue-based?

a. Ifyes, 4958c4 saysthatrevenue-based compisanEBT underregsprescribedbythe Secretary

i. Buttherearenoregs!ii. Result:treatedsameasnon-revenuebased compensation

b. Ifno,proceed.6. Doesorghavearebuttablepresumptionofreasonableness?a. Termsapprovedinadvancebydisinterestedboardorcommittee?b. Didboard use comparabilitydata?

i. Lookatsimilarorgsii. Lookat qualificationsiii. Lookatjobdescriptioniv. *Whatsrequiredis unclear,sobestto coveryourbasis

1. Mightbebesttogeta compensation consultant,althoughexpensivesohardforsmallerorgs

c. Didboarddocumentbasisfordetermination?ii. Isitnon-compensationexcessbenefittransaction?

1. Didboardgetareasonedopinionofcounsel sayingthiswasnotanEBTbeforeengaginginthetransaction?d. Ifthereare DQPs/EBT,assessapplicablepenalty

i. Onlytheexcessivepartofthetransactionissubjecttopenalties.ii. Initial Penalties

1. DQP mustpay 25% ofEBT (onlyexcesspart)2. Knowing managermustpay 10%

a. Unless canshowparticipationnotwillful andduetoreasonablecause


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iii. Correctioniv. Ifno correction,secondtierpenalties200% on DQPv. IRS mayalsoabatethepenaltyvi. Ultimatesanctionisalways loominginthebackground,butprobablywontbe

applied (Caracci)

PRIVATE BENEFIT1. CanapplytoANYBODY,not limitedtoinsiders2. De minimisexceptionsnotsubjecttohairtrigger3. Penalty=lossofexemption

a. Nointermediatesanctionsb. Maybeimposediforgno longeroperatingprimarilyforexemptpublic purposes

4. UCC-PosnersuggestspossibilityofprivatebenefitissueduetooutsidefundraisersKwithnonprofitthat containedexcessivefavorableterms.

JOINT VENTURES

Nonprofitsparticipationinajointventuredoesnotnecessarily mean lossofexemption. Two-parttesttodetermineifjointventureshouldresultin lossofexemptionofnonprofit:

1. Does charitysparticipationinjointventurefurtheritsexemptpurpose?2. Does legal structureofjointventurepermit charitytooperateexclusivelyforexemptpurposeand

notforanimpermissibleprivatebenefit?Ifeitheranswerisno,thenexemptionisdenied.

Sometypes couldbe:1. Parent-subsidiary

a. Parentisa c3 exemptorganization. Parentreceivespassivedividends.i. Dividendsarenontaxable.

b. Subsidiaryistaxable. Subsidiarywouldpaytax.c. Butsubsidiary canpaytoparentthrough:

i. Rent;ii. Managementfees.

d. Butifthesubsidiaryshiftsadeductibleamounttoaparent, IRS will investigate.2. Subsidiary-parent

a. Parentisafor-profit corporation.i. Parentsfeeds moneytonon-profit,butparent canonlydeduct 10%.ii. Parent cantrytopaysub'srentandtrytodeductit.

b. Subsidiaryisnon-profit.i. Every corporation'sfoundationsisaprivatefoundation.

1. Recall,aprivatefoundationisany 501c3 unless 509(a)(1), (2),or(3)apply. Inthis case, (1)-(3)don'tapplytoa corporation'sfoundation.

ii. Thisrelationshipisfreeof"insider" inurement. Itis consideredself-dealing.c. Atransactionbetweenfor-profitanditsnonprofitfoundation cannotoccurifthereisa

disqualifiedperson,exceptforfair/reasonable compensation.3. Brother-sister

a. Oneisa corporation,theotherisa c3. both controlledbysamepeople.b. Say, c3 engagesinresearch,with 5 board members. Say, corphas 5 onboard. 4

membersserveonbothboards.


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TYPES OF EXEMPT ORGANIZATIONS

EDUCATIONALORGANIZATIONS1. Definition

a. Fortheadvancementofeducationb. Fortheinstructionortrainingoftheindividual forthepurposeofimproving/developing

capabilities

c. Instructionofthepublic onsubjects useful toindividualsandbeneficial tothe community2. Typesofeducational institutionsBROAD

a. Regular/traditional schools (170b1Aii)i. Regularfaculty,regularstudentbody

b. Public discussiongroupsc. Cultural institutionsd. Limits:

i. Animal trainingschoolsareNOT educationalii. Orgsthatengageinactivities contrarytopublic policyorillegal arenot

educational1. Ex.)Passivism orgthatengagesin civil disobediencenotexemptbecause

encouragesviolationoflocal ordinances (Rev. Rul. 75-384)

e. Advocacygroupsi. FFEii. Methodology

f. HategroupsRELIGIOUS ORGANIZATIONS

1. Churchesvs. regularreligiousorganizationsa. Bothtestsfuzzyb. IRS doesnt liketopolicethisareac. Churchat leasthasfactortest (Rev. Rul. 59-129)d. Churchaspreferred category

i. PresumptionofPCii. Exemptfrom filingreqsiii. Higher level ofdeductionsiv. Hardertoauditv. Lessstateregulation

2. Exemptionfrom statepropertytax (Walz)3. Testofreligiosity (Holy SpiritAssn)

a. Courtswill notinquireintothe contentofthedoctrine,etc.b. Beliefs mustbesincereingoodfaithandnotasham

HEALTHCARE ORGANIZATIONS

1. Promotionofhealthincludedindefnofcharitable 2. Redistributiverequirement: healthcareorgs mustalsoprovideacommunitybenefi3. Factsand circumstancestestdoesntreallyrequire commtybenefit

a. Governingboardb. Separationc. Openstaffpolicyd. Full timeemergencyroom opentoalle. Non-emergency caretoall who canpay

4. Resurgenceofredistributivereq?5. Non-traditiona l healthorgssubjectto morestringent communitybenefittest

a. IHC v. Commissioner-HMO notexempt


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i. Services mustbeavailabletothe communityii. PLUS communitybenefitsmustbeprimarypurpose

6. Pharmacies-needtohavea communitybenefita. SellinggoodsatadiscountisNOT a communitybenefit

MISCELLANEOUS ORGS

1. Redistributionelementrequireda. Public interest lawfirmsb. Communitydevelopmentorgsc. Lowincomehousing

2. Amateursportsorgsa. Fortheadvancementofeducation

3. Promotionofartsand culture4. Testingforpublic safety5. Scientific purposes6. Preventionofcrueltytoanimalsorchildren

LIMITS ON LOBBYING AND POLITICAL CAMPAIGN ACTIVITIES

NO SUBSTANTIAL PART OF ITS ACTIVITIES CONSISTS OF CARRYING ON PROPAGANDA OR OTHERWISE

ATTEMPTING TO INFLUENCE LEGISLATION

IRS 501(h)says charities canspendsomeon lobbyingwithoutpenalty,withsanctionsimposedafteracertainamount.

1. Privatefoundationsaresubjecttopunitiveexcisetaxesforany lobbying.2. Butnoncharitableexemptorganizations can lobby,as longasgermanetotheirpurposes.

Whatisinfluencing legislation?1. ActionorganizationsareNOT okbecausetheyinfluence legislation. See 1.501c3-1c32. Legislationincludesactionsby lawmakingbodies,notExecutivebranchor

administrativeagencies.3. Iforganization'sprimaryobjectiveisobtainableonlyby changing legislation,itwill NOT

getexemptstatus (itwillbeanactionorg)

WhatisNOT lobbying?1. Just communicatingwith membersonissues. BUT ifexhort membersto contact

legislators,thatisinfluencing legislation.2. MereresearchisNOT influencing legislation.3. GivingexperttestimonyisNOT lobbying,butan unsolicitedappearancebefore

congressional committee maybe lobbying.

1. Substantial Part Test (Default)a. Nooneknowsthe meaningofsubstantialb. Subjectivefactorbalancingtest

i. Expenditureswhat % devotedtoinfluencing legislation?ii. Time,efforts,spent lobbyingvs. doingotherstuffiii. Natureoftheorgiv. Messagearethere callstoaction?v. Intermittentvs. continuousvi. Controversialvii. Didorghavesubstantial influence?viii. 1.501(c)(3)-1(d)(2)saysit's OKtoadvocatesocial changeortakepositionson

BROAD public issues.

ix.


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c. Failurei. Actionorganizationii. Lossofexemption (nointermediatesanctions)iii. IRS canimpose 4912excisetaxontopofexemption

1. 4912(a)excisetax:a. 5% oflobbyingexpensesandappliestoall 501c3 organizations

(butnotprivatefoundations).iv. Cannot convertto 501(c)(4)status,but mayreapplyas 501(c)(3)

2. 501(h) Expenditure Test (Election)a. Requireselection (Form 5768)

i. Who canelect? Privatefoundationsand churches cannotelectii. Validstartingthefirstdayofthe calendaryrinwhichelection madeiii. Only 2% ofcharitieshave madetheelectioniv. Electif:

1. Lobbying controversial orvisible2. Lotsofvolunteers3. Memberorganization

v. Dontelectif:1. Small start-uporgthat cantafforda lawyer2. Largeorg

a. Ceilingamountsphaseoutat $17 millionEPEb. Asubstantialpartofa largeorgisbig

b. Objectivetest,detailedanddauntingrules,butextremelypermissivec. Enactedinresponsetotheinadequaciesofthesubstantialparttestd. Spending limits:

i. Lobbyingnontaxableamount (LNTA)is limitedto:1. 20% offirst 500kofexemptpurposeexpenditures2. 12% ofnext 500k3. 10% ofnext 500k4. 5% ofexcessof1.5mm

ii. LNTAis cappedat 1mm.iii. Grassrootsnontaxableamount (GNTA)is 25% ofLNTA. Violatingthisresultsin 25% excisetax. Seep. 499 forexample.

e. Penalties: 4911i. Mannyviewsthesepenaltiesasa costoflobbyingratherthanapunishmentii. 4912(a)excisetax:

1. 5% oflobbyingexpensesandappliestoall 501c3 organizations (butnotprivatefoundations).

f. Effectonabilitytoreceivegrants? Notreallyi. So longastheamountofeachsinglegrant cangotogeneral,non-lobbying

purposes,andso longasthegrantisnotearmarkedforlobbying,permissible

ii. Thisistrueevenifmultiplegrants,someofwhichwill necessarilybe usedforlobbying.

3. Directvs. GrassrootsLobbyinga. Direct

i. Communicationwithany memberoremployeeofa legislativebody,oranyothergovernmentofficial/employeewho mayparticipateintheformationofthelegislation

ii. Principalpurposeofthe communication mustbetoinfluence legislationiii. Mustrefertospecific legislationiv. Mustreflectaviewon legislation


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v. Note:ifreferendum (public vote),public canbecomea legislativebodyvi. Attemptingtoinfluence legislatorsorgov'tofficial,withprincipalpurposeof

changing legislation. See 4911(d)(1)(B).

vii. Mustrefertospecific legislation.b. Grassroots

i. Refertospecific legislationii. Reflectsaviewon legislationiii. Call toaction

1. Strong call toaction-communicationsthatdirectly encourageaction2. Weakcall toactionmerely encouragesactionspecificallyidentifies

oneormore legislatorswhowill voteonthe legislation3. Distinction mattersforpurposesof:

a. Membercommunicationsb. Distributionofresearchanalysisc. Otherwise,a call toactionisa call toactionandbetterto usea

strong call toactiontoget morebangforyourbuck.c. Mass Media Rule-GRL,evenifno call toaction

i. Within 2 weeksofvotebya legislativebodyii. Highlypublicizedpieceoflegislationiii. Communicationreflectsaviewiv. Refersto legislationorencourages membersofthepublic to communicatewith

their legislatorsonthegeneral subject matterofthe legislation.

v. Rebuttableiforg candemonstrate communicationisatyperegularly madebytheorginthe mass mediawithoutregardtotimingofthe legislation.

4. Excepted communicationsa. Thefollowingarenotinfluencing legislation:

i. Makingavailableresultsofnonpartisananalysis;ii. Discussionofbroadsocialproblems;iii. Technical advice (onrequestofgov'tbody);iv. Self-defensev. Membercommunications

1. Mustbeabonafide memberwith2. Morethananominal connectionwithorg (helpful tohavepaying

member).

5. 4911a. Exceptions (4911(d)(2))

i. Nonpartisananalysis,study,researchii. Providingadvicewhereinvitedtodosoiii. Appearancesorcommunicationsre: matterthat mightaffecttheexistenceofthe

organization (self-defenseexception)

iv. Communicationsbetweenorganditsbonafide memberswithrespecttolegislationorproposed legislationofdirectinteresttotheorgand members,otherthanasprovidedin 4911d3

1. D3A-directlyencourages memberstodirectly lobby2. D3B-direclyencourages memberstoengagein GRL

v. Communicationswithnon-legislativebranchgovernmentb. Orderofoperations

i. Eligibleorganization?1. 501h4-public charitiesareeligible2. 501h5-disqualifiedorgschurches, PFs


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ii. Determineexemptpurposeexpenditures (EPE) ( 4911(e)(1))iii. Calculate maximum nontaxableamounts

1. LNTA2. GNTA

iv. Calculateexcisetaxesdooverall grassroots lobbyingexceedthe LNTAorGNTA?

1. Affiliatedorgexpendituresarepooledv. Ultimatesanction? ImposedifLCAorGCAexceedednormally (4 yrperiod)

POLITICALCAMPAIGNLIMITATIONSRev. Rul. 2007-41

A. 501c3 saysyou can'tparticipateinpolitical campaignB. 1.501c3 saysanactionorg (anorgthat can'tgetnonexemptstatus)ifitparticipatesin

political campaignonbehalfofa candidateforpublic office.C. Whetheranorgisparticipatinginpolitical campaigndependsonfactsand circumstances

a. Providingaforum fordebates/educationsis OK;i. Butifshowedbias,itisnot OK(biased questions,etc.

D. Situationsa. Boothatastatefair;no mentionofcandidates. NOT engaged.b. Orgsets upphonebankforcandidate C. Ifvoterappearstoagreewith C,org

will remindvoteraboutelection. ENGAGED.c. Candidatespaysforad,naming CEO ofHospital. Candidatepaysforadand

CEO'sendorsementisinhispersonal capacity. NOT engaged.

d. PresidentofUniversitysaysinalumninewsletterhispersonal opinion candidatebereelected. ENGAGED,evenifPresidentpaysfornewsletter(itisofficialpublication).

e. Ministerofchurchsays candidateshouldbereelectedatanoff-church, unrelatedsite. NOT engaged.

f. Chairmanoforgsaid candidateshouldbeelected. Statements madeduringofficial org meeting. ENGAGED.

Candidate appearances

Factorsto considerwhen candidateappearsatorgevent:1. Doesorgprovideequal opporunitytoothercandidates2. Doesorgindicatesupportoropposition;3. Doespolitical fundraisingoccur.

Factorsto considerswhen many candidatesspeakataforum:1. Are questionsprepared/presentedbyindependentnonpartisanpanel;2. Will candidatestalkaboutbroadpublic topics;3. Iseach candidategivenequal chancetospeak;4. Are candidatesaskedtoagree/disagreeonplatform oforg;5. Does moderatorimplyapproval/disapproval ofcandidates6. Presidentoforginvites candidatestospeak. Hisannouncementdoesn'tmention qualificationorpreferences. NOT engaged.7. Sameasabove,exceptone candidatedeclinesinvitation. Presidentsays

candidatedeclined. NOT engaged.8. Ministerinvitesonlyone candidateandthe candidateasksvotersto

comeouttovote. Thiswasatofficial churchevent. ENGAGED.

Candidatesappearing asnon-candidates.

Factorsto consider:


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1. Whyheisspeaking;2. Doeshespeakinnoncandidate capacity;3. Doeshe make mentionofhis candidacy;4. Does campaignactivityoccurin connectionwith candidate'sattendance;5. Doesorganization maintainnonpartisanatmosphere;6. Doesorgindicateheisappearinginhisindividual capacity;

DOES NOT PARTICIPATE OR INTERVENE IN ANY POLITICAL CAMPAIGN ON BEHALF OF OR IN

OPPOSITION TO ANY CANDIDATE FOR PUBLIC OFFICE.

1. Absolute prohibitiona. Penalty=revocationofexemptionb. IRS tendstoignorede minimisviolations

2. Candidatea. Individualsofferingthemselvesorproposedbyothersfornational,state,orlocal elective

public office.i. Intention toruniskey

3. Attributable toa 501(c)(3) orga. Notexpressinghimselfinindividual capacity; IRS doesntintendto limitfreeexpression

4. Participationinapolitical campaignactivityFactor Test(Rev. Rul. 2007-41)a. Votereducation,voterregistration,getoutthevotedrivesb. Activitybyorganization leaders

i. Individual capacityii. Organizational capacity

c. Candidateappearancesd. Candidateappearanceswherespeakingorparticipatingasanon-candidatee. Issueadvocacyvs. political campaigninterventionf. Businessactivitiesg. Websitesh. Providing useofassets,i.e., mailing list

i. Mustbedoneonanequalbasistoall candidatesforregularprice, must usuallyrentout mailing list.5. Penalty: 4955 Excise Tax

a. Initial tax,opportunityforcorrection,secondarytaxb. Taxonknowing managersc. Canbeimposedin lieu oforinadditiontorevocation

6. 501(c)(4)affiliate alternative (Regan)a. Unlimited lobbying,significantpolitical campaignactivitiesb. 501c3 will createand control

i. 501c3 canthaveapolitical action committeec. 501c3 can makegrantto 501c4 forlobbying (hiring c4 to lobby)

i. Will countas c3s lobbyingexpendituresd. Canworktogether,shareall resourcese. Separatebankaccountantsf. Contributions madeto c4 notdeductibleg. Upondissolution, c3 assets maynotgoto c4h. Canalsoadd 527 orgi. Cantprovide mailing listforfreemust charge marketratej. Strategy:doas much lobbyingaspossiblewith c3, continueexcesswith c4

i. Allowsorgtotake maximum advantageoftaxdeductible contributions


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k. Ifa c3 org can't meetitsobjectiveoriffailssubstantial parttestor501(h)expendituretest,it canform arelated 501(c)(4)entity. Itgivestax-exemptstatusfororgspromotedforsocial welfare. But contributionsareNOT taxdeductible.

l. Social welfareisdefinedas (rev. rul. 71-530):i. Can qualifyifprimarilyengagedinsocial welfare,eveniftheorgisanaction

org.

ii. Actionorghas 2 characteristics:1. Mainpurposeattainedonlythrough legislation (ordefeatoflegislation);

and2. Itadvocates, campaignsforattainmentofsuchobjective.

m. Assistinglegislatorsbypresentingexpertwitnesses,thoughadvocating changingoflaw,stillpromotessocial welfare.

PRIVATE FOUNDATIONS

BACKGROUND

1. Afundofprivatewealthestablishedforcharitablepurposes,ofteninperpetuity2. Mostfoundationsareprincipallygrantmakinginnature (non-operating)3. Pros

a. Greaterindividual control overspending,investmentb. Abilitytoprovideforyourfamilyendowment/perpetuityc. Naming conventions

4. Consa. Dontgetbest 170 deductionb. 2% excisetaxonnetinvestmentincome,including capital gainsc. Tougherrestrictions/penaltiesonself-dealing,etc.d. Nointermediatesanctionsforprivateinurementjust lossofexemptione. Tougherreportinganddisclosurerequirementsf. Administration costs

5. Donationoptionsa. Donate moneytoapublic charity,askthem to useyourmoneytothisendb. Set upyourownprivatefoundationc. Createasupportingorganizationd. Donoradvisedfund.

6. TypesofFoundationsa. Independent

i. Usuallyestablishedby contributionsfrom individual orfamilyb. Corporate

i. Establishedby corporationbut legallyseparateentity.ii. Receiveportionofprofitsannually

c. Communityi. Mutlipledonorsii. Technically classifiedaspublic charity,so must meetpublic supporttest

d. Operatingi. Runsitsownprogramsandfundsthem

7. The 3 exceptions:a. Public charity

i. Mechanical test;orii. Factsand circumstancestest

b. Publiclysupportedorganizationi. Test:


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1. Public supporttest;and2. Investmentincometest

a. Total investmentincome < 1/3 oftotal supportc. Supportingorganization

i. Purposetest;and1. Mustbenefitorcarrypurposeofsupportedorganization

ii. Control test1. Supportedorganization must control supportingorganization.

GRANT-MAKING CRITERION

A. Core Grant Criteriaa. Mustbe adoptedby Boardb. Canlater change butmust followthe procedureslaidouttherein.

B. Founding Statements (comesfrom Missionstatement)a. Usually comesfrom Founder'swishesb. Reflects Founder's corevalues

C. Grant criteriaa. Must list minimum sizeb. Must listrequirementsofthereceivingorganizationc. Must listhowfundsaretobe usedd. Must listgrantagreementand conditions

D. Grantallocationa. How muchandwhenwill foundationgive money?

E. Following-upa. Org mustreportonhow moneyisspentinordertoreceivefuturegrants

PRIVATE OPERATING FOUNDATION1. Conductown charitableprograms. Definitioninsec 4929(j)(3)2. Advantages:

a. Morefavoredtaxtreatmentfordonationsb. 50% limitofAGI3. Tests:

a. Incometest: must usesubstantiallyincomeforcharitablepurpose (at least 85%)AND

i. Assetstest: 65% ofassets usedforactive conductoffoundationexemptfunction;or

ii. Endowmenttest: mustexpendfundsforexemptpurposesinamountofat least 3.5% ofFMV;or

iii. Supporttest:at least 85% frompublic4. Supporttest: at least 85% public supportAND 5 ormoreexemptorganizations5. Excisetaxeson:

a. Investmentincome- 2% oninvestmentincomeb. Selfdealing-- 10% penalty (onamtoftransaction)c. Minimum distributionrequirements-- must make 5% ofFMV distributions,or

30% penaltyofundistributedincome.d. Excessbusinessholding e. Jeopardyinvestments-- 10% penaltyifinvestmentthatjeopardizesexempt

purposesf. Taxableexpenditures


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DONORADVISED FUNDSA. Donoradvisedfunds (4966(d)(2)(A))

a. Definition:fundseparatelyidentifiedbyreferenceto contributionsofdonor(s).b. Twotypesoffundsexcluded:

i. Fundbenefittingdesignatedorgorgov'tentity;ii. Wheredonoroffersadviceongrantsfortravel orstudy

B. Excisetaxesa. 4966(a)(2)

i. 20% on SPORG and 5% on managerforanytaxabledistributions.1. Fund managersareofficers,directors,trustees,orsimilarresponsibility

ii. Taxabledistributionisgrantfrom DAF to (see 4966(c)(1)):1. Individual2. Entityotherthanpublic charityorgov't mentionedin 170(b)(1)(A)ifnot

forcharitablepurpose;3. Disqualified SO's, unless SPORG hasexpenditureresponsibility.

b. Prohibitedbenefits:i. Sec 4967 impose 125% taxonadvice leadingto morethanincidentalbenefit

from grantee.

ii. Ex:paying collegetuitionofadonorC. Othersanctions/penalties

a. Intermediatesanctionsi. Sec 4958 isexpanded

1. Anygrant, loan,paymentofcompensationby DAF todonorissubjectto25% excisetax. See 4958(c)(2), (f)(7)

b. Excessbusinessholdingsi. Sec 4943 holdsii. DAFshave 5 yearstodivestandanother5 yearsifDAF candemonstrate

hardshipc. Reportinganddisclosure

i. DAFs mustrequire SPORG tostateits contemporaneouswrittengiftacknowledgment. See 170(f)(18)(B).

1. SPORGs mustdisclosethenumberofDAFstheyadminister

SUPPORTING ORG (509(A)(3))1. See 1.509(a)-4(f)(2)forrelationshiprequirements.2. Unlikeprivatefoundation, most SO'sarenotrequiredtodisposedofexcessbusinessholdings,

butdonorwill give upsome control.3. Relationships

a. SO's maybeoperatedorcontrolledby,supervisedin connectionwith,oroperatedinconnectionwithpubliclysupported charities. Mustberesponsivetoneedsofpubliccharity.

4. Typesa. Type I -operatedsupervisedorcontrolledby. Majorityofofficers,directors,ortrusteesmustbeappointedorelectedbygoverningbodyorofficersofsupportedorg.

b. Type II -- "in connectionwith." Analogoustobrother-sisterrelationship. Musthavecommonsupervisionorcontrol. Control mustbevestedinsamepersonthat controls

public charity.c. Type III -- "operatedin connectionwith." Mostflexible. Must complywithastated

notificationrequirementandresponsivenesstestandintegral parttest.5. Organizational test


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a. Must lookatarticlesandbylaws. Purpose limitedtoexemptpurposes. Mustdesignatedsupportedorgbyname.

b. Operational testi. Requiressupportingorgsengage "solelyinactivitieswhichsupportorbenefit

publiclysupportedorgs". 1.509(a)-4(e)(1)c. Control test

i. See 1.509(a)-4(j)

TYPES OF PUBLIC CHARITIESNOT PRIVATE FOUNDATIONS

1. 509a4-testingforpublic safety2. 509a3-supportingorganization

a. Purpose test-Organizedandoperatedexclusivelyforthebenefitof,toperform thefunctionsof,orto carryoutthepurposesofa PUBLIC CHARITY

b. Controltest-Operated,supervised,orcontrolledbyorin connectionwithoneormorepublic charities

c. Isnot controlleddirectlyorindirectlybyoneormore DQPs (4946)otherthanfoundationmanagersandotherthan PUBLIC CHARITIES.

3. 509a2-publiclysupportedorg (seebelow)a. Normallyreceives morethan 1/3 supportfrom:

i. Giftsgrants, contributions,ormembershipfees,andii. Grossreceiptsfrom admissions,salesofmerchandise,performanceofservices,

orfurnishingoffacilities1. Inanactivitywhichisnotan unrelatedtradeorbusiness2. Notincludingsuchreceiptsfrom anyperson,bureau orsimilaragencyof

agovernmental unitinanytaxableyrtotheextentsuchreceiptsexceed

the GREATERof$5000 or1% oftheorgssupportinsuchtaxableyear.3. FrompersonsotherthandQPs4. From govt units5. From PUBLIC CHARITIES.b. Meetsthegrossreceipts/membershiptest

4. 509a1-orgdescribedin 170b1A(i)-(vi)a. Church

i. Orconventionorassnofchurchesb. Aregularschool

i. Regularfaculty, curriculum,studentbody,educational activitiesc. Providing medical orhospital careormedical educationormedical research

i. Medical research mustbein conjunction with a hospitald. Supportingstate collegesand universitiese. Govt unitsf. Grantreliantpubliclysupportedorgs (seebelow)

i. Mechanical testii. Orfactsand circumstancestest.DQP FORPFS (4946(A)(1))

1. Substantial contributor2. Foundation managers3. Ownersofsubstantial contributors4. Family members5. Relatedentities


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TESTS TO DETERMINE PUBLIC CHARITY STATUS/AVOID PFSTATUS1. Traditional Public Charities, 509a1/170b1Avitest

a. Mechanicaltest 1.170A-9T(f)(2)i. Public support

1. Includes:a. Gifts,bequests,grantsfrom general public

i. Butonlytotheextenttheydontexceed 2% oftotalsupport

1. Limitnotforgovtorpublic charitygrantsii. Quidpro quoexcludedfrom calculusonlyportionthat

representsa charitable contribution countsiii. Includesfrom DQPs

b. Govtsupportc. Membershipfees

2. Excluded:investmentincome,exemptpurposeincome, unusual grantsii. Total Support

1. Includesa. Gifts,grants,bequestsfrom indsorNP orgsb. Govtsupportc. Membershipfeesd. Netincomefrom unrelatedbusinessactivitye. Grossinvestmentincome

2. Excluded:exemptfunctionincome,valueofdonatedservices, unusualgrants

iii. TestingPeriod-4 yrsb. Factsand Circumstances Test

i. Orgsthatfail the mechanical test cantrytopassthistestii. Public support mustbeat least 10%

1. The closerto 1/3,thebetteriii. Mustbeorganizedandoperatedsoastoattractnewandadditional supportorgovtsupportona continuousbasis

1. Factorsa. % offinancial supportb. Sourcesofsupportc. Representativegoverningbodyd. Availabilityofpublic facilitiesorservicesandpublic

participation

e. Additional factorsformembersorgs2. Gross Receiptsand Membership Test, 509a2

a. Public supporttesti. Similarto 509a1 test,butdifferent

1. Includesexemptfunctionincome2. Excludesamountsfrom DQPs (2% capinothertest)3. Grossreceiptsfrom eachpersonforexemptfunctionsare cappedatthe

greaterof5kor1% oforgtotal support4. Excludes unusual grants

b. Investmentincome testi. Investmentincomeand unrelatedbusiness cannotnormallyexceed 1/3 oftotal

support3. Analysis


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a. Exemptfunctionincomeincludedina2 test,butnota1b. Orgsthatsell thingsdobetterunder509a2c. Orgsthataredependentonboard contributionswill dobetterunder509a1d. Orgwill neverpass 2ndprongof509a2 ifdependentoninvestmentincome

TAX ON NET INVESTMENT INCOME -4940

1. Imposes 2% onfoundationsnetincome.a. Netinvestmentincome= (grossinvestmentincome + capgainnetincome) related

expenses (sec 4940(c)(1)).i. Grossinvestmentincomeincludesdividends,interest,rents,royalties,etc. (see

4940(c)(2), (5))ii. Capgainnetincome= capgain lossfrom dispositionofproperty usedfor

productionofgrossinvestmentincome.

iii. Candeductordinaryandnecessaryexpensesforproductionofgrossinvestmentincome (see 53.4940-1(e)).

2. Ratereductiona. 4940(e)reducestaxrateto 1% iffoundationincreases qualifyingdistributionsb. Qual. distributions mustequal orexceedsum of:

i. Valueoffoundationsassetsforyearmultipliedbyaveragepercentage charitablepayoutforbaseperiodof5 years;and

ii. 1%netinvestmentincome.3. Otherrules

a. 4940(e)(3)(C)providesthatforanyyearinbaseperiodthattaxratewasreduced,theamountofqualifiyingdistributionsisalsoreducedbyamountofratereduction

b. Reductionnotavailableiffoundationhaspenalty under4942 formeeting minimumpayoutrequirements

FIDUCIARY DUTIES OF PRIVATE FOUNDATIONS

I. INVESTMENT MANAGEMENTa. Delegationofinvestmentresponsibilities

i. Allowed underUPMIFAand R3 Trustsii. Delegationisa matterofdiscretion,and R3 Trustssaystodelegateasaprudentinvestorwoulddelegate.

iii. Priortodelegation, mustdefineinvestmentobjectivesb. Prudentperson

i. Appliestotrusteesforprivatetrustsii. Definedbyprocessthroughwhichinvestmentstrategiesandtacticsdeveloped,

adopted,implemented,and monitored (ie. definedbyhowriskis managed)

iii. Factorsto consider:1. Roleinvestmentproductistoplayinentireportfolio;2. Whetherroleisdesignedtoservepurposesforwhichportfolioisbeing

held,takingintoaccountriskoflossandprofit;

3. Competenceoffiduciaryordelegatestoemployproductortechnique;4. Reasonablenessoftermsand conditionsofsuchdelegationc. UPMIFA

i. Appliesto charitableinstitutionsii. Standardofcareisthatfoundationexerciseordinarybusiness careandprudence

underfactsand circumstances. Can consider1. longandshortterm needs2. presentandfuturefinancial requirements3. expectedtotal return


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4. general economic conditionsiii. Foundation mustfollowdonorswrittenintent. Seesec 4(c)forconstruction

rules.

iv. 7% rule:1. Iffoundationspends morethan 7% ofendowmentinoneyear,then

presumednotprudent.

II. RISKMANAGEMENTa. Leaveenoughinendowmenttopreservepurchasingpowerandkeep upwithinflation.b. Payno morethan 35% ofoperatingbudgetfrom endowment.

III. ENFORCEMENT OF FIDUCIARY OBLIGATIONSa. Self-regulationb. Recordkeepingandfilingrequirements

i. Model Actrequireskeeping corporaterecordsii. Statefilingrequirementsiii. Federal requirements

c. Attorney Generali. Powertoinvestigateii. Powergatherinformationiii. Responsibleforcharitableoversight

d. Trustees/Directorshavestandingtosuee. Donors cannotsuef. Members cansue

SELF DEALING EXCISE TAXES -49411. Morestringentthanprivateinurementrestraintsonpublic charities

a. Eveniffavorabletothe PF and madeatanarms length,transaction maybe consideredselfdealing

2. 2 typesofself-dealinga. Inurementselfdealingshouldresultin lossofexemptionb. Non-inurementselfdealing4941 excisetaxes

3. ActsofSelfDealing (4941d1)a. Sales,exchanges, leasesofpropertyb. Loansc. Furnishinggoods,services,facilitiesd. Paymentofexcessive compensatione. Transferofassets

4. Knowledgerequirementa. See 53.4941(a)-1(b)(3)b. Personparticipatedknowingitwasselfdealingonlyif:

i. Actual knowledge;ii. Awaresuchactviolatestax law;andiii. Negligentlyfailstoascertainifitisindeedselfdealing

5. Exceptions (4941d2):a. Providedwithout chargeb. Compensationis:

i. Reasonableandnecessaryii. Notexcessiveiii. Norebuttablepresumptionavailablethoughiv. Reimbursementto DQP mayokay,so longas countedtoward compensation


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1. Reimbursementforfam membersprobablynotokaystayawayfromthis,eventhoughtherearewaystodoitattributeitas compensationtoDQP

6. Amountinvolveddeterminedatdateofself-dealing7. Penalties

a. Initiali. 10% oftransactionon DQPii. 5% onknowing managers

b. Second level (ifnot correctedwithinspecifiedperiod)i. 200% taxondqpii. 50% on manager

CHARITABLE DISTRIBUTION REQUIREMENT -4942

1. First level taxis 30% ofundistributedincome. Second-level is 100% ofUI (4942(a),(b))2. Undistributedincomedefinedin 4942(c)=distributableamount qualifyingdistributions

a. Distributableamount= minimum investmentreturn + UBIT (4942(d))i. minimum investmentreturn= 5% of(FMV ofall assets acquisition

indebtedness). 4942(e)(1).

b. Qualifyingdistribution (4942(g)(1),(3)) amountpaidtoaccomplish charitablepurpose.Paymentsto Type III SOsdonot count (4942(g)(4))

EXCESS BUSINESS HOLDINGS -49431. Excessbusinessholdingsareamountofstockthat mustbedistributedinordertohavepermitted

holdings. 4943(c)(1).

a. Permittedholdingsare 20% ofcorpsvotingstockminuspercentageheldby DQP.b. Butifeffective control resideselsewhere,thenitis 35%.

2. Foundationhas 90 daystodisposeofexcessholdingsfrom dateofdiscovery. 53.4943-2(a)(1)(ii)JEOPARDY INVESTMENTS -4944

1. First level oftaxis 20% (4945(a)(1)). Ifmanagerknows,thenhepays 5%, upto $10klimit.Additional sanctionsinclude 100% taxand 50% taxon manager, upto $20k.

2. Typesoftaxableexpendituresa. Propagandaand lobbyingi. Exceptions:

1. Notactionsbyexecutive,judicial,oradministrativebodies2. Nonpartisananalysis,study,orresearch3. Providingtechnical assistancetogovernmentalbody

b. Electionsandvoterregndrivesi. Exception

1. Nonpartisanandbroadlysupportedvoterregistrationdrives,ifcarriedonin 5 ormorestates

c. Grantstoindividualsi. Exception

1. Unlessgrantisascholarshiporfellowshipa. Numberofscholarshipshouldnotexceed 25% ofeligibleapplicants (10% ofemployees childrenin companyfoundation)b. Must monitoracademic performance

2. Prizeoraward3. Achievespecific objective

d. Grantstootherorgsi. Exception

1. Unlessexpenditureresponsibilityisestablished (4945(d)(4)and (h))a. Pregrantinquiry


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b. Writtenagreementc. Regularreportsd. Reportto IRS bygrantor

e. Expendituresfornoncharitablepurposes (catchall, 4945(d)(5))TAXABLE EXPENDITURES RESTRICTION ON PFS -4945

1. Prohibitsinappropriateexpenditures,evenifconsistentwith PFs charitablepurposea. Therearewaystogetoutoftaxfollow certainguidelines

2. TypesofTaxableExpenditures (4945d)a. Propagandaorlobbying (influencing legislation)

i. Exceptions:nonpartisananalysis,technical assistanceinresponsetowrittenrequest,selfdefense

b. Electionsandvoterregistrationdrivesi. 4945(f)-okayifnonpartisan,notonespecific electionperiodbroadlysupported,

morethan 5 statesc. Grantstoindividuals

i. OkayifPF follows 4945g1. Awardedonobjectiveandnon-discriminatorybasis,approvedin

advanceby Secretary

2. Scholarshipataregularschool3. Prizeorawardifselectedfromgeneral public4. Madetoachievespecific objective,producereport,improve/enhance

skilld. Grantstoorgsthatarenotpublic charities

i. OkayifPF exercisesexpenditure responsibilityunder4945h1. Pregrantinvestigation2. Writtenagreement3. Follow upprocedurestodeterminethatgrantappropriatespent4. Grantorreportto IRS

e. Expendituresfornon-charitablepurpose (Catchall)3. Penalties

a. Initial tax-20% onfoundation, 5% onknowing managerb. Secondarytaxifno correction-100% on PF, 50% on managers (10kcap)PFALTERNATIVES

1. Communityfoundations2. Donoradvisedfunds

ENDOWMENTS

A. Endowment1. It'sthereservethata Foundationhas.2. Types:

a. Unrestrictedi.Controlledby Board

b. Restrictedi.Donor limited

c. Temporarilyrestrictedi.Conditions underwhichendowment can (orcannot)be used.ii.

3. Anotherwayto lookatthiswouldbe:a. Permanent,basedonpercentofvalueorfixeddollarearningsamount.

y Can'tinvadeendowment


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Temporary,basedonpercentofvalueorfixeddollarearningsamount.

y Caninvadeprincipal onlywhen conditionsremoved."Quasi" isboard-controlledanddecided.

TERMINATION OF PFSTATUS

a. Sec 507i. Can give up PF status

1. Voluntarily;or2. Through willfulrepeated acts (507(a)(2)).

ii. Involuntary (507(c),(d))1. Termination tax is equal tolowerof:

a. Aggregate historical tax benefits ofexemption tofoundationandsubstantial contributors, plus interest; OR

b. Value ofnet assets forfoundation.2. IRS canabate a portionoftermination tax ifPF gives its assets to public charity

in existence forat least 5 years or corrective action taken (507(g)).

iii. Voluntary1. PF should transferassets toone or public charityand operate itselfas anorg

described in 509(a)(1), (2),or (3).

2. Or can transferall PF assets to public charity in existence forat least 5 years(507(b)(1)(1)). Best to give priornotice toIRS.

3. Conversion to public charityor SPORGa. Give notice toIRS and embarkon 5 year qualification period

(507(b)(1)(B)).

4. Abdicationa. Terminationofactivities. NotifyIRS ofintention. Assets donot transfer,

so PF must pay termination tax.

b. Notice toIRS must compute the tax penaltyand pay it when statement isfiled withIRS.

iv. Why PF would want to terminate activities:1. Family strife;2. Change legalform;3. Simplicity;4. Change to DAF or SPORG

a. Sunsettingi. Some foundations are voluntarily sunsetting bya clause in the Articles. To prevent the

Articles from being amended,you canmake amembership organization witha

perpetualmember that cannever die and willalways be interested in perpetuating

the founder's wishes.

ii. The member could be another 501c3, specificallya trust. The purpose ofthe trust isonly to vote on the articles ofthe corporation. In short, the member should have the

following characteristics:

1. Can't die2. Vested interest3. Inflexible

iii. Reasons forfoundation dissolution:1. Family discord


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2. Noone left3. Apathy4. Different visions5. Gets too small

b. Voluntaryi. Disperse all the moneyii. Reorganize into public charity, SPORG

iii. Merge intoanothernot-for-profit.c. Involuntaryd. Non-Taxable terminations

i. See 507(b)e. Termination tax

i. All the benefits you enjoyed must now be paid toIRS + value ofnet assetsii. Includes penalties and interest

iii. Penalties on substantial contributors (507(d)(2)).f. Construct afoundationknowing that family dysfunction is nearly inevitable:

i. Create clear dissolution procedures1. Iffoundation ceases, thenmoney goes toanotherorg. But ifthe org ever

changes in the slightest, there is always the questionofwhether it is the same

organization. What is it that reallymatters? Better to define the organization

by what it does rather than its name (ifyou take the name, go to Guidestaror

FoundationCenter tofind the actualname). These are questions toask the

donor.

ii. Designate orgs toreceive money.iii. Triggerreorganization instead ofdissolution.

1. Be carefulnot to create incentive to split up the foundation. Rather thangetting along, the familymight want to split up and go their separate ways.

g. For drafting advice, see book by Jodi Blazeki.

Drafting CLEs.v.

COMMERCIAL ACTIVITES AND UBIT

COMMERCIALACTIVITIES1. The Framework

Related Unrelated

Insubstantial OK OK(UBIT)Substantial OK NO

a. Nonprofits mayengageinbusinessactivitiesso longasi. Insubstantial andrelatedii. Substantial andrelated

b. Taxedifactivityisinsubstantial and unrelatedc. Lossofexemptionifactivityissubstantial and unrelated

i. Orgfailstheoperational testbeingoperatedprimarily forprivategain.2. Basedonsource ofincome test


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3. 2 issues:a. Should commercial activityjeopardizetheexemptstatusoftheorg?b. Iforgabletoretainexemption,willprofitsfrombusinessbetaxedas UBIT

4. Orderofoperationsa. Identifyprimarypurposeoforg,determineifitsanexemptpurposeb. Arethere commercial activities? Substantial?c. Arethe commercial activitiesrelated?

i. Primarypurposeoforgii. Subjectivebalancingfactsand circumstancestesttodeterminerelatedness (Reg.

1.501c3-1e)1. Sizeandextentoftradeorbusiness2. Sizeandextentofactivitiesinfurtheranceofexemptpurposes

d. Ensurethatorgstill passestheoperational test5. Example:NYUpizzarestaurant

a. Primarypurposediseducationb. Pizzarestaurantwontjeopardizeexemptstatusc. Pizzaprofitswill betaxedinsubstantial,but unrelated

6. 2 approachesa. Conventional wisdom/Commercialitydoctrine/sourceofincometest/Manny/Majority

(seeabove)b. Unconventional wisdom/commensurateinscopedoctrine/destination/minority

i. Comesfrom GCMsin 60sand 70sii. Suggeststhat 502 feederorgsareexemptbecausedestinationoftheirincomeis

forexemptpurposes1. Limit:beneficiaries cannotbepredetermined

iii. Exemptionso longas charitable contributioniscommensurate in scopewiththesizeoftheorganditsincome.

7. 502 FeederOrganizationsa. Noexempt,existsforprimarypurposeofprofiting,eveniffunds ultimatelygotoexempt

purpose

b. Classificationbasedonsourceofincometestc. Ex.)ShoestorethatturnsoverallprofitstoNYU,Sagrada Orden, MuellerCALCULATING UBI

1. UBI definedasall unrelatedbusiness minusdeductionsforexpensestoproducethatincome(512)

a. Ifexploitationofexemptactivities,expensesarenotdeductible. (1.512(a)-1(d)(1)).2. To calculate UBI,take % ofactual use,notavailable use.3. Incomefrom debt-financedpropertyisincludedin UBI.

a. See 512(c)(2)(B)forexceptions:i. Ifpropertyreceivedbybequestordevise,noacquisitionindebtednessforperiod

of10 yearsfollowingdateofacquisition.

b. Debt/Basis * UBI = UBIT4. Donotaggregate UBI. Takeitonitem-by-itembasis.CALCULATING UBIT

1. Ensurethatorgisstill operatingprimarilyforexemptpurposes (passesoperational test)2. UBIT asanintermediatesanction3. Statedpurpose:toprevent unfaircompetition

a. Butthisdoesntreallyhold up


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4. Definition (512a)-grossincomederivedfrom any unrelatedtradeorbusiness,regularly carriedonbytheorg, minus certainenumerateddeductions.

5. IRS takes FRAGEMENTATIONapproachinassessingtax.6. Framework:NYU Pizza Restaurant

a. Will itjeopardizeexemptstatus?i. Probablynot,NYU still operatedprimarilyforeducation.

b. WillNYUbetaxedonpizzaprofits?i. Yes,tradeorbusiness,regularly carriedon,andsellingpizzadoesnotrelateor

furthertheexemptpurposeofeducation.c. Butnote: lotsofescapehatches

7. 1950s-Congress movedfrom destinationofincometest (Sagrada Orden, Mueller)tosourceofincometest

8. 511a1-imposestaxon unrelatedbusinessat corporatetaxrates;truststaxedhigher9. Appliestoall 501aexemptorgsBROAD APPLICATION10.3 Conditions Mustbe Metto Impose UBIT (512a)

a. Tradeorbusinessi. Forproductionofincomefrom saleofgoodsorservices

b. Regularly carriedoni. Frequency, continuityii. "Safeharbor" isifyou have MOREthanathirdofincomewithregularly carried

onactivities,thenyou will PROBABLY LOSEexemptstatus.c. Notsubstantiallyrelatedtoorgsexemptpurposes

i. There mustbea causal relationship btwn commercial activityandachievementofexemptpurposesoftheorg

ii. Activity mustdirectly contributetopurposeiii. Factsand circumstancestest: sizeandscope

11.Exceptionsto UBIT (513a)a. Volunteersb. Convenienceexceptionc. Donated merchandise

12.Exemptionsfrom UBIT (512b)a. Passiveincomei. Dividends,rents,royalties, capital gains,derivatives, leaseagreements

b. Rentsi. Realproperty-fullyexcludableii. Personal property

c. Royaltiesi. Paymentsforrightto useintangibleproperty

d. Researchincomee. Paymentsfrom controlledorgs

13.Examplesa. Advertisingb. Hospitalpharmacyc. Sportingevents/facilitiesd. Travel tourse. Museum cafeteriaf. Museum giftshop

14.Excludedfrom UBITa. Bingo (513(f))b. Tradeshows, Statefairs (513(d))c. Certainhospital services (513(e))


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d. Polerentals (513(g))e. Distributing low costarticleswithnoobligationtobuy (513(h))f. Sponsorshippayments (513(i))

CORPORATE SPONSORSHIP

1. 513i: qualifiedsponsorshippaymentsa. There cannotbeasubstantialreturnbenefitb. De minimisexceptions (lessthan 2%)

2. SRBsa. Advertising (comparative, SRB)vs. valueneutral (displayoflogo)b. Contingentpayments

i. Amountofattendance-SRBii. Occurrence-not SRB

c. Exclusiveprovideragreementsi. Butexclusivesponsoragreementsare QSPs

d. Goods,facilities,servicesinexcessof2% ofpaymente. Exclusiveornonexclusiverightsto useanintangibleassetofanexemptorg

3.Statedpurpose

NONPROFIT GOVERNANCE

BY FORM

1. Corporationa. Managedatthediscretionofboardofdirectorswho maydelegatetoofficersb. General standardofcare:grossnegligencec. Committedtoorgs mission (vs. for-profitboardswhoare committedtoprofit

maximization)

d. Dutiesinclude:i. Selectandevaluate CEO;ii. Reviewandadopt long-term strategic directions;iii. Ensurenecessaryresourcesareavailable;iv. Monitorperformanceofmanagement;v. Nominatesuitable candidatesforelection.vi. Mergers,acquisitions,terminationsvii. Electdirectorsviii. Fundraising (foroperationsandendowment)ix. Budgetx. Managingendowment

1. Hiringandappointment money managers ("stewardingthe money")2. Raising money

xi. Branding/marketingxii. Bothforthe causeandtheorganization'svalidity. Trytotiethe causetothe

organization.

xiii. Compliance1. Form 990 mustbesubmittedto Boardbeforefiling (partofSarbOx)2. Charitieswithrevenuesof$2mm ormore musthaveauditedfinancial

statement.a. Musthaveanaudit committee.


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2. Trusta. Managedbytrusteeswhooweafiduciarydutytothebeneficiaries, mustdoall thatis

necessarytoadministerthetrust

b. Higherstandardofcarerequiredthan corporation;trustees liablefornegligencei. Cantabrogatetrustdutiesby movingto corporateform.

3. Unincorporatedassociationa. Governingstructuredeterminedbyarticlesofassociation,bylawsb. Members usuallyplaya largeroleingovernance

CORPORATE FIDUCIARY DUTIES (STATELAW)1. Dutyof Care

a. Includesdutyofattentioni. Directorshaveadutytoattendboard mtgs, listen,investigate,activelyparticipate

inorgsoperations,reviewfinancial statements,review mtg minutesb. Directordecisionsareprotectedbythebusiness judgmentrule (process)c. Issue: uniquenatureofnonprofitboard members

i. Typical managementfunctionii. Uniquefundraisingfunction

d. Whattodowithboard memberswhoaretheresolelybecauseoftheirfundraisingabilities?

i. Sinceboardisboundbydutyofcare,besttohaveabifurcatedboard,withanadvisory committeewhoisnotboundby lawtoexercise managementfunctions.

ii. Also makesuretoinformboard membersoftheirdutiesbeforetheyjoine. Canfail dutyofcareby:

i. Failingto manageorsuperviseproperly;ii. Failingto makeinformeddecisionaboutfundamental corporatedecision.

2. DutyofLoyaltya. Directormustactina mannernotharmful tothe corporation, cant useboardpositionto

obtainpersonalbenefitsoradvantagesthat moreproperlybelongtotheorganization.b. Howtodeal with conflictsofinterest/sanitizethetransaction

i. State lawapproaches (besttodo BOTH):1. Procedural approach-DISCLOSURE2. Substantiveapproach-FAIRNESS

a. Recognitionthat conflictsofinterest canbehelpfultopubliccharities (prohibitedforPFs,regardless)

ii. Federal lawapproach: prophylacticPROHIBITIONofall conflictofinteresttransactions.

c. New Form 990 askswhetherorghasa conflictofinterestpolicyd. Contextinwhichemployee learnsofopportunityisimportantindeterminingwhether

thereisabreachofthedutyofloyalty.

3. Dutyof Obediencea. Dutytofurtherthe missionoftheorganizationb. Uniquetononprofitsector

ENFORCEMENT OPTIONS1. Government

a. StateAttorney Generalb. Federal IRSc. Issue:notenough moneytoactuallydoagoodjobatthis.

2. Directorwithsufficientspecial interest3. Relators


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4. Donors cansueonlyiftheyveenteredintoaK5. Note:beneficiaries canalmostneversue.6. Shouldstandingtosuebeexpanded?

PENALTIES FOR BREACH OF FIDUCIARY DUTY1. Typically:

a. Badpublicityb. Removal ofdirector

2. Stateremedyisrarelyinjunction,restitution,personal liabilityofdirectors (Apollo)3. Possibilityoffederalpenalties:

a. 4958/EBT excisetaxesforpublic charitiesb. 4941 (selfdealing)/4945 (taxableexpenditures)excisetaxesforPFs

4. Requiresstateattorneygeneral orIRS tostepinrarea. Contrasttoforprofit corporationwhichisaccountabletoshareholders

CHARITABLE IMMUNITY1. Limitationondirectorliabilityif:

a. Actinginscopeofauthority;andb. Ordinarynegligence.c. NOTE:grossnegligencenot covered.

2. Federal VolunteerProtectionAct. Elements:a. Volunteerwithinscopeofduty;b. Volunteerproperly licensed;c. Harm not causedwillfully;d. Harm not causedbyvolunteeroperating motorvehicle

3. IndemnificationAVOID CONFLICTS OF INTEREST

1. You shoulddiscloseanypotential conflictsofinterests (ex:you owna companythatyousell servicestothe Boardyou siton).

2. Disclosuresdon'teliminatethe conflict,butyou dischargeyourduty. Failuretodiscloseisaviolation.3. You shoulddiscloseandhavetheremainderofthe Boardvote.4. You shoulddisclosefinancial orfamily conflicts.5. Everyorganizationshouldhavea conflictofintereststatement.6. Board membersshoulddiscloseeither:

a. Annually;andb. Orally.

EXPENDITURE REPONSIBILITY (SEE HANDOUTS)

Iffoundationgives moneytonon-US charity,it must meetthe criteriathattheNGO couldhavebeena

charityinthe US (thisis called "equivalency.")1. Lawyers maketheequivalencydetermination,following IRS guidelines. IRS either

approvesorrejects.2. IRS will requirethatyou trackthe moneyyou distributeandreportitbacktothe IRS on

990PF.

GrantstoNGO fromprivatefdnarenot qualifying unlesseither:1. Foreignorggets IRS determination letter;or2. US orgeither:


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a. Exercisesreasonablejudgmenttoensureequivalency (useaffidavit);orb. Exercisesexpenditureresponsibility (showto IRS thatNGO is charitable)

Expenditure responsibility1. FnddeterminesthatNGO isabletofulfillpurposeofgrant;2. WrittenagreementsignedbydirectororofficerofNGO thatNGO will

a. Submitannual reports;b. Maintainbooksandrecordsregardinggrants;c. Repaygrantsifnot usedinfurtheranceofcharitablepurposes;andd. Refrainfrom usingfundsforpurposesprohibited underUS law

3. NGO requiredtokeepdetailedrecordsregarding useofgrants.4. Fnd mustsupplementannual taxreturnsbyincludingspecific information

SCHOLARSHIPS (SEE HANDOUT)

Withregardtoscholarship,two mainissues:1. Istheexpenditureagrantpursuantto 4945(d)(3);and2. Doesitsatisfy 4945(g)?

Cangive moneytoindividualsbywayof(see 4945(d)(3)):1. Scholarships2. Individual awards3. Prizes/awards4. Emergency/crisis money

4945(d)(3)saystaxableexpendituresarenotallowed,but 4945(g)gives criterionforexception.1. See "SummaryofIRS Scholarship Program Requirements" handout.

a. Seepage 2 forspecific requirements.i. Objective,nondiscriminatorybasisii. Procedure mustbeapprovedby IRSiii. Usedforscholarshipiv. Aprizeorawardnotincludedingrossincometorecipient;v. Purposeofachievingaspecific objective,producingareportorothersimilar

productorimprovingaskill2. Twowaystogetapproval:

a. Thetimethefoundationisfirstformed. The IRS has 45 daystorespondorit'sautomaticallyapproved.

PLANNED GIVING

Closelyheld stock 170(b)(1)(A) 170c

Issues: Bad idea, but might make

sense ifcharityhad an

interested party to buy

the stock (but be careful

that charity doesn't file

form 8282).

Bad idea


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Valuation FMV - get appraisal Cost basis - what you paid for it.

Most closelyheld stockhas nearly 0

basis because they borrow money

to start the business.

Controlofcompany Iforg sells company, there

is a control premium

Same as 170(b)(1)(A). Greatly

impacts distributionrequirements.Also, PFs can't hold S corp stock.

Illiquid stock.

Minorityholding Iforg sells, there is a

discount.

Not marketable Iforg sells, there is

discount

Inaddition, there is excess biz

holding tax

I. Charitable Remainder TrustA. Definition (664(d)

a. Trustthatpayoutsbetween 5 and 50% tooneormorepersons (at leastoneisnotanorgdescribedin 170c

b.c.

II. Charitable Lead Trust

Documents

Manny Nonprofit Organizations Fall 2009 2