What Every Corporate Attorney Should Know About Nonprofit and Tax-Exempt

OrganizationsUtah State Bar Business Law Section

December 8, 2010

Christopher N. Nelson(801) 323-3305 cnelson@rqn.com

Tax-Exempt Organizations

Definitions “Nonprofit Corporation” – A corporation formed

pursuant to a state’s nonprofit corporation law

“Tax-Exempt” – An organization that exempt from Federal income taxes

“501(c)(3)” – A charitable organization that derives its tax-exempt status from Section 501(c)(3) of the Internal Revenue Code

“Nonprofit” and “Tax-Exempt” These terms are technically not synonymous A nonprofit corporation can be taxable Not all tax-exempt organizations are nonprofit

corporations “Tax-exempt” generally refers to an exemption

from Federal income tax State exemptions (property, sales, income)

typically follow Federal exemption but require separate application

Utah Nonprofit Corporations Governed by Utah Revised Nonprofit

Corporation Act, UCA 16-6a-101 et seq.

Similar in many respects to corporations under Utah Revised Business Corporations Act, UCA 16-10a-101 et seq.

Utah Nonprofit Corporations Similarities to for-profit corporations:

Both governed by Board of Directors Board delegates authority to officers Meeting, notice and registration requirements Similar registration and filing requirements

Utah Nonprofit Corporations Differences from for-profit corporations:

No shareholders - no class of persons with right to residual assets or profits of corporation

Prohibitions on distributions Profits remain in the corporation to be used in

furtherance of its purposes “Nonprofit” refers to distribution constraints,

not to inability to earn profits

Utah Nonprofit Corporations “Members”

Are optional Appoint directors (if no members, board of

directors is self-perpetuating) Have some informational rights Problems if class of members are ill-defined –

be careful!

501(c)(3) Overview

Tax-Exempt Organizations Generally Many kinds – 501(c)(1) through (28) 501(c)(3) organizations are most common

Organized for charitable or other benevolent purposes

Donors may receive tax deductions for contributions

501(c)(3) Overview Advantages

No Federal income tax (except “unrelated business income”)

Donations deductible to donor

Disadvantages Strict operational restrictions Limits on lobbying activities; support of political

candidates prohibited Net earnings may not inure to the benefit of any

private individuals

501(c)(3) Overview

How does an organization become a tax-exempt organization? File IRS Form 1023 or Form 1024 Application is detailed and comprehensive Process can take anywhere from one month

to one year Application contains “pitfalls” for the

uninitiated

Private Inurement & Private Benefit Doctrines Severely restrict ability to use 501(c)(3)

organization in conjunction with a for-profit organization.

Consult competent counsel before proceeding with any arrangements between related for-profit and 501(c)(3) organizations.

501(c)(3) Overview

Two primary classifications of 501(c)(3) organizations:

Private Foundations

Public Charities

501(c)(3) Overview

501(c)(3) Overview

All 501(c)(3) organizations are presumed to be private foundations until proven otherwise

Public Charities Most advantageous tax status Normally receive broad financial support from

public Many parties have an interest in the

organization’s activities Difficult to obtain IRS recognition But once recognized, fewer IRS restrictions

501(c)(3) Overview

Private Foundations Receive narrow financial support (e.g.,

wealthy individual or family) Fewer parties have an interest in activities Easier to obtain IRS recognition Many IRS restrictions, including strict self-

dealing prohibitions

501(c)(3) Overview

“Supporting Organizations” are a special sub-category of public charities

Are subject to additional and complex IRS restrictions

501(c)(3) Overview

Why Do I Care? All 501(c)(3) organizations are subject to

strict IRS requirements Be fully aware of requirements and

guidelines before making governance changes or entering into transactions

Why Do I Care? If a “private foundation”

Very strict self-dealing requirements (no self-dealing even if terms are favorable to private foundation)

Distribution requirements Restrictions on investments Other restrictions

Why Do I Care? If a “supporting organization”

Relationship to another 501(c)(3) organization is very important

Congress has imposed additional restrictions

How Do I Know What Type of Organization I am Working With?

Look at IRS determination letter If “Public Charity Status” mentions 509(a)(1),

509(a)(2) or 170(b)(1)(A)(vi), then organization is a public charity

509(a)(3) means a supporting organization Otherwise, the organization is a private

foundation

Look on IRS Form 990, Schedule A

(Forms 990 are generally available online at www.guidestar.org)

How do I know what type of organization I am working with?

Charitable Raffles

Elements of illegal gambling in Utah:

(1) Risking something of value;

(2) Outcome is based on chance; and

(3) Potential to receive something of value UCA 76-10-1101

Charitable Raffles

How are charitable raffles different from illegal gambling?

Charitable Raffles

Take home point –

Just because a raffle is for a charitable cause does not make it legal!

Public Inspection Requirements

501(c)(3) organizations must make the following documentation open for public inspection: Complete Form 1023 Application and any

attachments All correspondence with the IRS concerning

Form 1023 Determination Letter Annual information returns (i.e. Form 990)

Public Inspection Requirements (cont’d) Documents must be available for

inspection without charge at organization’s principal office during regular business hours.

Must provide copies of documents If requested in person, on same business day If requested in writing, within 30 days

Public Inspection Requirements (cont’d) May charge a “reasonable fee” for making

copies. Exceptions if documents are made “widely

available” (i.e. on website or on guidestar.org) however must still have documents available for public inspection

Public Inspection Requirements (cont’d) Penalties

$20 per day for failure to allow public inspection of annual returns (capped at $10,000)

$5,000 for willful failure

Public Inspection Requirements (cont’d) Take home point –

Be sure that organization makes its records publicly available

Annual Electronic Filing Requirement for Small Organizations

Tax-exempt organizations whose annual gross receipts are normally $25,000 or less must generally electronically file Form 990-N

Organizations failing to file for three consecutive years will automatically lose tax-exempt status

October 15, 2010 marked end of first three-year period Many Utah organizations lost their tax-exempt status Make sure clients file tax returns!

Charitable Solicitation Requirements

The solicitation of charitable contributions is regulated on a state-by-state basis

In Utah, charitable solicitations are regulated by the Division of Consumer Protection.

Charitable Solicitation Requirements Unless an organization has previously registered with

the Utah Division of Consumer Protection, or is otherwise exempt from registration requirements, Utah law prohibits it from knowingly soliciting, requesting, promoting, advertising or sponsoring the solicitation of charitable contributions if the charitable solicitation is: originated in Utah; received in Utah; or caused to be made by business operations in Utah.

Charitable Solicitation Requirements

Must amend registration and notify Division within 30 days when engaging a Professional Fundraiser, Fund-Raising Counsel or engaging in a Charitable Sales Promotion.

Also be aware of internet fundraising issues

Charitable Solicitation Requirements

Division of Consumer Protection interprets requirements VERY broadly

Take home points – Do not solicit contributions until you have a

permit Remember – engaging professional

fundraiser, fund raising counsel or participating in charitable sales promotion triggers reporting requirement

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