Tax Exempt Organizations; Non-Profit; Attorney

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					Section 501(c)(3) Organizations

                 Presented by Tomer J. Inbar
Section 501(c)(3) Organizations Generally

• There are five basic components to qualifying and maintaining tax-
  exempt status under Section 501(c)(3):
    – an organization must be organized exclusively for charitable purposes,
    – it must be operated exclusively for charitable purposes,
    – no part of its net earnings may inure to the benefit of any private shareholder
      or individual,
    – it may not conduct more than an insubstantial amount of lobbying activities,
    – it may not intervene in a political campaign.
The Operational Test

• The organization must be operated for one or more of the following
  enumerated charitable purposes: (1) religious, (2) charitable, (3)
  scientific, (4) testing for public safety, (5) literary or (6) educational

• Its activities or purposes may not be contrary to established or
  fundamental public policy

• It must act in a manner consistent with its charitable purposes to
  continue to satisfy the operational test
The Organizational Test

• An organization’s constitutive documents must, at a minimum,
    – limitation to “charitable” purposes
    – proper dissolution clause

• Satisfaction of the organizational test is ultimately a drafting issue

• Be cognizant of scope of permissible activities
Prohibition on Private Benefit/Inurement

• Private inurement targets “insiders”, i.e., those in a position to
  control the organization’s activities
• Private benefit applies to third parties as well as insiders
• An organization may pay “reasonable” compensation to both
  insiders and non-insiders
• Violation of these prohibitions may result in the loss of an
  organization’s tax exemption
• The related concept of “Intermediate sanctions” under Section 4958
Lobbying Limitations

• “No substantial part of the activities” of an organization may
  constitute “carrying on propaganda, or otherwise attempting, to
  influence legislation”

• Two tests:
    – a subjective “no substantial part” test that looks at the substantiality (size &
      scope) of the activity
    – the “lobbying election” which looks only at expenditures

• Private foundations are prohibited from lobbying
Prohibition on Political Intervention

• There is an absolute prohibition against participating or intervening
  in any political campaign (including publishing or distributing
  statements) on behalf of, or in opposition to, any candidate for public

• If an organization violates this prohibition it will lose its tax-exempt

• Recent IRS compliance initiative
Public Charity/Private Foundation Status

• Section 501(c)(3) organizations are classified as either
    – public charities (broad public support)
    – private foundations (limited sources of support, e.g., single individual, family,
      or corporation)

• Private foundations face higher degree of regulation
    –   Self dealing
    –   Mandatory distributions
    –   Jeopardy investments
    –   Excess business holdings
    –   Taxable expenditures
Unrelated Business Income Tax

• Exempt organizations are subject to tax on income derived from an
  “unrelated trade or business”

• Three basic criteria: the activity must be (1) a trade or business; (2)
  regularly carried on; and (3) not substantially related to the
  organization’s exempt purpose

• Too much UBIT may indicate a substantial non-exempt purpose and
  jeopardize exemption

• Directors are charged with overall management responsibility

• Fiduciary obligations: duties of (1) care, (2) loyalty, & (3) obedience

• Day-to-day management duties are delegated to officers and
  employees under the board’s supervision
Impact of Sarbanes-Oxley

• Sarbanes-Oxley principles are increasingly being applied in the non-
  profit context.
• Basic concerns underlying SOX are applicable to exempt
    – governance
    – conflicts of interest
    – inadequate attention to financial matters
    – crisis in public confidence
Important SOX Emphases

• Avoiding conflicts of interest
• Ensuring independence of audits
• Improving decision-making procedures for executive compensation
• Providing for a code of ethics for senior financial officers
• Requiring accountability for signing financial statements
• Enhancing document retention policies
• Protecting whistleblowers
  Pressure Points

• Transactions with Insiders
    –   Compensation
    –   Transfer of property
    –   Extension of credit
    –   Provision of services

• Transactions with For-Profit Entities
    – Compensation
    – Financial guarantees & other incentives
    – Control
  Pressure Points (con’t.)

• Lobbying & Political Activities
    –   Monitor, track & report
    –   Know your limits
    –   Contrast public education
    –   Don’t endorse candidates
    –   Appearances matter

• New Activities
    – Act in a manner consistent with scope of exemption
    – Notify IRS (as appropriate)
 Pressure Points (con’t.)

• IRS Reporting
   – Forms 990, 990EZ, 990-PF & 990-T are “public” documents
   – Expanded compensation disclosure
   – Know your audience:
       •   The IRS
       •   State regulators
       •   Sector/industry watchdog groups
       •   The general public (contributors, the media, issue enemies)
   – IRS compliance initiatives
   – Late filing penalties
  Pressure Points (con’t.)

• Business Activities

   – Substantiality

   – Liability concerns

   – UBIT (it’s a tax, not an allergy)

   – Form 990-T is now subject to public disclosure

   – Establishing a for-profit subsidiary
  Pressure Points (con’t.)

• State Regulation

   – Charitable solicitation

   – State registrations & filings

   – Focus on many of the same issues as above

   – The Attorney General typically cares and is watching

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