1. law, govt and politics
2. legal issues
3. legislation
4. tax laws

HOW TO KEEP YOUR NONPROFITS
OUT OF TROUBLE WITH THE IRS
by
LISA A. RUNQUIST
Revised January, 2001
1. Introduction
Nonprofit organizations are big business. Because of this, and because of their
unparalleled growth, nonprofits are receiving attention like they never have
before, both from Congress, and because of this, from the Internal Revenue
Service.
Another more disturbing reason is the spate of highly publicized scandals
involving individuals profiting at a charity's expense. While nonprofits may be
big business, we, as a society, have very different ethical expectations of
them:
"I think I have one message for you today and that is -- I may put it loosely -the horse is out of the barn, and it is trampling on the crops. ... The problems
are enormous.... if something is not done very soon the public, the donors, and
the Treasury will continue to be ripped off. ... while there have always been
some bad apples, over the last 10 or 20 years, their numbers have swelled, and
their brazenness has grown." -- Mr. Ormstedt, Assistant Attorney General for the State of
Connecticut, at the August 2, 1993 hearing of the House Ways and Means Subcommittee on
Oversight.
Under these circumstances, anyone who participates in the oversight of a
nonprofit organization would be well advised to pay close attention to its
operations. There is one standard I would recommend be used to evaluate
every activity of the nonprofit is: How will this look on the front page of your
local newspaper, in an article written by someone unsympathetic to the cause?
2. The Tax Exempt Status of Nonprofit Corporations
2.1 The Structure of Tax Exemption For Nonprofits, Generally.
2.1.1 Numerous Categories of Exemption Exist. Under Section 501(c) of the
Internal Revenue Code there are 27 possible tax exempt categories, each with
its own special rules (the last two were added as part of the Health Insurance
portability and Accountability Act of 1996). Other exemptions are available
under other sections of the Code for certain instrumentalities of government,
religious and cooperative corporations, homeowners associations, and political
organizations. All federally tax-exempt organizations do not pay taxes on some
or all of their income. But only exemption under Section 501(c)(3) of the
Internal Revenue Code not only exempts the organization from tax on the
broadest range of sources of income, but also gives the organization's financial
supporters (i.e., contributors and benefactors) a personal tax deduction for
their contributions. Otherwise, contributors to a nonprofit are generally only
entitled to a personal tax deduction if the contribution is deductible under
some other tax rule (such as a business expense deduction). For this reason,
even though gaining and maintaining Section 501(c)(3) status imposes
substantial restrictions on a nonprofit's operations, most charitable
organizations seek exemption under Section 501(c)(3) of the Internal Revenue
Code. Section 6 of these materials focuses on them.
Other than Section 501(c)(3), the most common nonprofits are exempt under
Section 501(c)(4) as social welfare organizations, Section 501(c)(5) as trade
unions, Section 501(c)(6) as chambers of commerce or trade associations, and
Section 501(c)(7) as social clubs. No one is sure whether the assignment of
Section 501(c)(13) to cemetery associations is coincidence or note.
Organizations exempt under each of these sections, as well as the other
categories of Section 501(c), must each adhere to the special rules and
requirements of their tax exempt status, although the rules are generally less
strict and pervasive than for charities exempt under Section 501(c)(3).
2.1.2 Most Organizations Must Apply For Determination of Exempt Status. As
noted in paragraph 2.2 above, merely incorporating an entity under the
California Nonprofit Corporation Law does not automatically confer exempt
status for State or Federal tax purposes. There are a few categories of
organizations that can elect a particular nonprofit tax treatment when the
organization files its tax return (e.g., nonprofit community associations filing
under Section 528 of the Internal Revenue Code). However, with the exception
of churches and some very small charities, charities and most other nonprofit
corporations do not qualify for special tax exemptions unless and until the
corporation applies for tax exemption under a particular classification of tax
exempt organization and receives a favorable determination of exempt status
from the IRS. All organizations wishing to be exempt in California must apply
with the State Franchise Tax Board; many other states do not require separate
filing, but recognize the IRS determination as being controlling. For
corporations desiring a federal determination of exempt status as a section
501(c)(3) charitable organization, the application for determination of tax
exempt status is made by filing Form 1023, "Application For Recognition of
Exemption" with the IRS within 15 months following the end of the month in
which the entity was organized if the organizers desire the exemption to relate
back to the date of formation (can be automatically extended to 27 months),
and filing California form FTB 3500 with the Franchise Tax Board within 12
months of the date of incorporation.
3. Charitable Tax Exempt Status Under Section 501(c)(3)
3.1 Basic Requirements for Exemption. Section 501(c)(3) of the Internal
Revenue Code defines the category of tax-exempt charitable organizations to
be:
" . . . organized and operated exclusively for religious, charitable, scientific,
testing for public safety, literary or educational purposes . . . 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, and which does not attempt to
participate or intervene in any political campaign."
3.2 Charitable Organizations Must Carefully Observe Technical
Requirements To Maintain Their Exemption. To qualify as a charity an
organization must satisfy the following six requirements:
3.2.1 A charity must have one or more exempt purposes. Among the
multiple exempt purposes listed in Section 501(c)(3), the terms charitable,
educational, and scientific are amplified generously by the Regulations. The
Regulations define charitable broadly. The term includes not only relief of the
poor and distressed (the traditional common law definition of charity) but the
advancement of education, religion, or science; lessening the burdens of
government; and promoting social welfare by activities which are designed "(i)
to lessen neighborhood tensions; (ii) to eliminate prejudice and discrimination;
(iii) to defend human and civil rights secured by law; or (iv) to combat
community deterioration and juvenile delinquency." Advocacy activities do not
preclude 501(c)(3) status unless the nature or level of such activities rises to
the point where the organization is an "action" organization. Educational
activities, for purposes of Section 501(c)(3), include both the instruction of
individuals in order to improve their abilities, and "the instruction of the public
on subjects useful to the individual and beneficial to the community."
"Scientific" in the context of 501(c)(3) refers to the conduct of scientific
research efforts in the public interest. Scientific research will be considered as
being carried on in the public interest if (1) the results of the research
(including any intellectual property resulting from it) are made available to the
public on a nondiscriminatory basis, or (2) the research is performed for a
federal government agency or a state or a political subdivision of a state, or (3)
the research is "directed toward benefiting the public." The Regulations give
four examples of scientific research in which the purpose is considered to be in
the public interest: educating college or university students; discovering a cure
for a disease; seeking scientific information which is then published in some
"form that is available to the interested public" such as a thesis or journal; and
"scientific research carried on for the purpose of aiding a community or
geographical area by attracting new industry to the community or area or by
encouraging the development of, or retention of, an industry in the community
or area."
3.2.2 A charity must be organized exclusively for exempt purposes. An
organization satisfies this test only if its governing document (here called
"articles") limits its purposes to one or more exempt purposes within the scope
of Section 501(c)(3) and does not "expressly empower the organization to
engage, otherwise than as an insubstantial part of its activities, in activities
which in themselves are not in furtherance of one or more exempt purposes."
In practice, the IRS requires charities to include in their articles language
limiting their political activities. Furthermore, a charity's assets must be
irrevocably dedicated to one or more exempt purposes. Thus, either the
articles or applicable state law must provide that the assets must be
distributed upon dissolution either to a governmental entity for a public
purpose, or to another charity or charities for "the general purposes for which
the dissolved organization was organized."
3.2.3 A charity must be operated exclusively for exempt purposes. This
heading, which is derived from the language of Section 501(c)(3) itself, is in
fact deceptive. The statute uses the word exclusively, but the Regulations
make clear that it is sufficient to be operated primarily for exempt purposes
and that an "insubstantial part" of the charity's activities may be devoted to
non-exempt purposes. If the organization changes either its purposes or its
activities, the organization must let the IRS know of the change. One method is
to attach a statement explaining the change to Form 990. The organization
should point out the change from the activities/purpose originally described in
the exemption application.
3.2.4 No net earnings or assets of the charity may inure to the benefit of
any private person. Section 501(c)(3) contains the specific requirement that
"no part of the net earnings of [the organization] inures to the benefit of any
private shareholder or individual . . . ." This is, in effect, a bar on the unjust
enrichment of a charity's insiders -- its founders, members of its governing
body, senior employees, indeed anyone in a position to exert significant
influence on the charity. The IRS Chief Counsel's office has stated: "Inurement
is likely to arise where the financial benefit represents a transfer of the
organization's financial resources to an individual solely by virtue of the
individual's relationship with the organization, and without regard to
accomplishing exempt purposes." Where the benefit to the insider (or any other
private party) is an unavoidable byproduct of actions taken for the
organization's exempt purpose, however, there is no inurement. The IRS has
taken the position that "all persons performing services for an organization
have a personal and private interest [in that organization] and therefore
possess the requisite relationship necessary to find private benefit or
inurement." But the Tax Court has taken a narrower view. Rather than assume
that all employees are insiders for purposes of the inurement rule, the Tax
Court has stated that an insider is one who has a unique relationship to the
organization, by which the insider, by virtue of his or her control or influence
over the organization, can cause the organization's funds or property to be
applied for the insider's private purposes.
Private inurement in the form of excessive executive compensation and other
excess insider benefit transactions is discussed at Paragraph 6 below, along
with recent legislation giving the IRS a new enforcement tool in this area.
3.2.5 A charity may not support or oppose candidates for public office. The
IRS considers this prohibition to be absolute. The Chief Counsel's office has
stated that "an organization described in Section 501(c)(3) is precluded from
engaging in any political campaign activities." However, a variety of activities
by charities relating to elections have been found not to constitute prohibited
electioneering. For example, where students in a political science course were
required to participate in political campaigns of their own choosing as part of
their course work, or where the college provided facilities and faculty advisors
for a student newspaper that published student-written editorials on political
matters, the IRS has ruled that the college was not itself participating in a
political campaign. Furthermore, certain nonpartisan voter education activities
are permitted. In Revenue Ruling 78-248, the IRS described various voter
education activities and indicated when they did and did not constitute
prohibited participation in political campaigns. Where all members of Congress
are included in a summary of voting records on legislation on a wide range of
topics, and neither the content nor the presentation of the publication implies
or expresses an opinion as to the member or the vote, the publication does not
constitute prohibited political activity. However, where the publication limits
its focus to particular issues of importance to the organization, "its emphasis on
one area of concern indicates that its purpose is not nonpartisan voter
education." A charity publishing such a voter guide would lose its tax-exempt
status for participation in a political campaign. A charity may, however, solicit,
and publish in a voter guide, statements of the positions of all candidates on a
wide variety of issues which are selected "solely on the basis of their
importance and interest to the electorate as a whole. Neither the
questionnaire nor the voters guide, in content or structure, evidences a bias or
preference with respect to the views of any candidate or group of candidates."
However, if the questions "evidence a bias on certain issues," the charity is
considered to be participating in a political campaign in violation of Section
501(c)(3).
Charities are subject to an excise tax targeted at political expenditures under
IRC Section 4955. The tax, equal to 10% of the political expenditure, may be
imposed in addition to revocation. A further a 2.5% tax may be imposed on the
organization's manager who knowingly agrees to the expenditure. Final
Regulations implementing Section 4955 were published on December 5, 1995.
Thereafter, this political excise tax was imposed, perhaps for the first time, in
1996 (see TAM 9609007).
Political campaign intervention by 501(c)(3) charities is a hot topic with the IRS
and increasingly with Congress. Political activities are likely to result in not
just warnings, but revocations. This is an area that the IRS has repeatedly
indicated is of special interest. One case has already resulted in a revocation.
In 1992, the Church at Pierce Creek placed an ad in the Washington Times
which stated: "Christians Beware: Do not put the economy ahead of the Ten
Commandments. Did you know that Gov. Bill Clinton -- supports abortion on
demand -- supports the homosexual lifestyle and wants homosexuals to have
special rights -- promotes giving condoms to teenagers in public schools? Bill
Clinton is promoting policies that are in rebellion to God's laws ... HOW, THEN,
CAN WE VOTE FOR BILL CLINTON?" After auditing the church, the IRS revoked
the church's tax exemption. The U.S. District court upheld the IRS's revocation
of exempt status, stating, "While plaintiffs probably are correct that the
revocation has imposed a burden on their ability to engage in partisan political
activity .. they have failed to establish that the revocation has imposed a
burden on their free exercise of Religion." Branch Ministries Inc., et al., v.
Charles O. Rossotti, No. 95-0724 (PLF) (D.D.C. March 30, 1999). On appeal the
United States Court of Appeals upheld this decision on May 12, 2000.
And in March of 1998, the Christian Broadcasting Network announced that it
had reached an agreement with the IRS whereby it would retain its exempt
status as a 501(c)(3) organization, but because it intervened in partisan
politics, it would lose its exempts status for 1986 and 1987, would make a
significant payment to the IRS, agree not to take part in prohibited campaign
activities, and take other steps, such as increasing the number of outside
directors, to ensure tax compliance.(1)
Other churches and religious organizations that take steps to become publicly
involved in partisan politics can expect to be reported to the IRS by Americans
United for Separation of Church and State, which has made complaints about
several churches recently, and is expected to continue its vigilance in this
area.
Issues concerning political activity by charities is not limited to religious
organizations. In 1999, it was discovered that 53 PBS TV and radio stations had
exchanged or rented mailing lists to various Democratic groups. Minnesota
Public Radio reported on its website on 12/28/99 that it was being sued by the
Minnesota Attorney General's office for having swapped donor lists with the
Democratic National Committee and other political organizations.
3.2.6 A charity may not devote a substantial part of its activities to
attempting to influence legislation. Put another way, a charity (other than a
private foundation) may engage in legislative lobbying without risking its taxexempt status, so long as lobbying is an insubstantial part of its overall
activities. Public charities other than churches may avoid being subject to the
vague term "insubstantial" by taking advantage of the provisions of Sections
501(h) and 4911. The former defines substantiality with reference to a charity's
expenditures on lobbying using a sliding scale of expenditures, and the latter
defines precisely what is and is not lobbying in the context of Section 501(c)(3)
organizations. Even under the insubstantiality rule, much advocacy commonly
conducted by charities does not rise to the level of lobbying. A charity can
attempt to influence the action of government officials aside from legislative
decisions, advocate its views through public interest litigation, convene
conferences on public policy issues even if those issues are controversial, and
express its views on those issues through advertisements, all without
necessarily engaging in lobbying as the IRS understands the term.
3.3 Public Charity Status. Federal tax law divides charities into two
categories: public charities and private foundations. Because private
foundations are subject to extensive regulations, and because donors to public
charities may claim more generous tax benefits than donors to private
foundations, an organization which has been classified as a public charity must
monitor its operations to ensure that it retains its privileged status. Under
Section 509(a), a charity is presumed to be a private foundation unless it can
prove that it is a public charity.
3.3.1 Statutory "Public Charities" (Non Private Foundations). Some charities
qualify as public charities regardless of the source of their income or their
relationship with other charities. The most frequently encountered charities of
this type are:
(a) Churches. The Internal Revenue Manual states that at least some of the
following factors must be present (though all are not required, and no single
factor is determinative) if an organization is to qualify as a church for tax
purposes: a distinct legal existence; a recognized creed and form of worship;
an internal ecclesiastical government; a formal code of doctrine; a distinct
religious history; a membership not associated with any other church or
denomination; ordained spiritual leaders who have completed a prescribed
course of study; a literature of its own; a congregation which meets regularly;
regularly held religious services; a program of religious instruction for young
people; an established place of worship; and schools for the preparation of
ministers.
(b) Schools. Section 170(b)(1)(A)(ii) defines a school as "an educational
organization which normally maintains a regular faculty and curriculum and
normally has a regularly enrolled body of pupils or students in attendance at
the place where its educational activities are regularly carried on."
(c) Hospitals. A charity whose principal purpose is providing medical or hospital
care, medical education, or (in limited circumstances) medical research is a
public charity.
(d) Governmental Units. A donation to a state, the District of Columbia, a
possession of the U.S., or any political subdivision of these is treated as a
donation to a public charity, so long as the gift is made for exclusively public
purposes.
3.3.2 Public Charities Supported Through Donations. A charity may qualify as
a public charity under Sections 170(b)(1)(A)(vi) and 509(a)(1) because it
receives financial support from a sufficiently broad base of donors. The charity
must satisfy one of two mathematical public support tests, both of which
exclude from the calculation income from the performance of exempt
functions.
(a) One-third Test. To satisfy this test, the charity must derives at least one
third of its revenues from donations, but the denominator of that fraction may
only include a limited portion of funds received from individual and corporate
donors and private foundations ("includible public support"). This test is most
appropriate for charities with a relatively large pool of smaller donors and/or
with substantial government and public charity support.
(b) Ten Percent Facts/Circumstances Test. This test requires the charity to
derive at least 10% of its revenues from includible public support. In addition,
the charity must offer evidence of facts and circumstances showing that it is,
in fact, supported by the general public and not dominated by a small group of
donors.
3.3.3 Public Charities Receiving Exempt Function Income. A charity may
qualify as a public charity under Section 509(a)(2) if it derives at least a third
of its total support from a sufficiently diverse group of consumers of its
exempt-purpose goods or services and it derives not more than a third of its
total support from investment income.
3.3.4 Supporting Organization Public Charities. A charity may qualify as a
public charity under Section 509(a)(3) by virtue of its relationship with one or
more other public charities which it is organized and operated to support, even
if it cannot satisfy any of the mathematical public support tests.
6.3.5 Private Foundations. If an organization does not meet one of the tests
set forth above, the organization will be a private foundation. It remains
exempt under Section 501(c)(3), but is subject to a 2% excise tax on net
investment income, may be subject to additional excise taxes,(2) and is subject
to increased scrutiny in any operation that involves its substantial contributors.
Any organization that may be considered a private foundation should seek
experienced legal counsel.
3.4 For Profit Entities as Exempt Organizations.
In a number of instances, state law has required an organization to be formed
as a for-profit entity. In at least several instances, the IRS has been willing to
overlook the formal "profit" nature of the entity, and recognize the exempt
substance of the entity. for example, on December 10, 1998, the IRS issued an
exemption to Alliance Medical Group P.C. of Mount Holly, N.J., on the basis
that the professional corporation was controlled by its 501(c)(3) parent and
provided medical care, on a charitable basis, to the community.
Similarly, a trust company, which is required in California to be formed as a
business corporation, has also received an exempt determination from the IRS.
And the IRS, in its 2000 FY 2001 Continuing Professional Education publication
found that if a Limited Liability Company was formed in a state that only
allowed the LLC to be a business entity, that LLC could still be an exempt
organization, if it otherwise qualified.
In all these cases that involve substance over form, it is necessary that there
be restrictions in the formation documents sufficient to assure the IRS that
what would otherwise be a for profit entity is under the control of an exempt
organization.
3.5 Restrictions on Contributions - Donor Advised Funds.
Donor advised funds continue to be one of the fastest growing developments,
and one of the least understood areas. There is no reference to donor advised
funds in the Internal Revenue Code, and only a few cases that use the term.
However, it is being used as a viable alternative to either a private foundation
or a supporting organization. The principal issue for the IRS is whether or not
the donor has surrendered enough control to warrant a current donation, or
whether the donor is not entitled to a donation until there has been a
distribution from the donor advised fund to its final distributee.
A principal case in this area is The Fund for Anonymous Gifts v. IRS (D.C.
Circuit 4/12/99), No. 97-5142. In 1997, the denial of the exempt status of The
Fund for Anonymous Gifts by the IRS was upheld by the district court, because
its governing instrument allowed donors to place "conditions subsequent" on
their donations, permitting them to retain investment control. The Fund
appealed, and retroactively amended its governing instrument to delete this
provision. On this basis, the D.C. Circuit court granted the exemption in 1999,
and remanded it to the district court to determine if it was publicly supported.
In a private letter ruling issued in August of 2000, the IRS determined that
contributions to an internet based donor advised fund could be considered
support from the general public. The organization represented that it will
confirm that each recommended recipient is a qualified public charity listed in
its database, and that no questions as to public accountability have been
raised. It was determined by the IRS that the due diligence that would be
performed by the organization in reviewing recommendations from donors
using its database would be a clear exercise of dominion and control over the
funds.(3)
4. Conflicts of Interest
One area of corporate law that has become increasingly important in the
nonprofit arena, is that of conflicts of interest. Directors of a nonprofit
corporation are expected to adhere to a fiduciary standard, when exercising
their responsibilities.
4.1 What Is Meant By "Fiduciary Duty"?
4.1.1 General Definition. Modern usage of the concept of a fiduciary includes
any person who has a duty to act primarily for the benefit of others in matters
connected with the undertaking. The cases speak of a "special confidence
reposed in one who, in equity and good conscience, is bound to act in good
faith and with due regard to the interests of the person who has reposed that
confidence." The type of persons who are commonly referred to as fiduciaries
include trustees, attorneys and corporate directors.
4.1.2 The Strict Trustee Standard of Duty. Cases involving strict fiduciary
relationships, such as cases involving claims against trustees, also impose the
rule that the fiduciary cannot exert pressure or influence on the party the
fiduciary is serving or take any selfish advantage of his or her trust. Trusteefiduciaries are also prohibited from dealing with the subject matter of the trust
in a way which benefits the interests of the trustee or prejudices the
beneficiary, unless the fiduciary is acting in the utmost good faith and with the
full knowledge and consent of the beneficiary.
4.1.3 The Standard Applied to Directors of Nonprofit Corporations. The
directors of both business and nonprofit corporations have been described in
numerous cases as owing a fiduciary duty to their shareholders or members, as
well as to the corporation. However, it is well established that a strict trustee
standard of duty, which would prohibit any self-dealing with the corporation,
regardless of the benefit conferred, is generally not what is intended or
required (at least not in California). "A trustee is uniformly held to a high
standard of care and will be held liable for simple negligence, while a director
must have committed 'gross negligence' or otherwise be guilty of more than
mere mistakes in judgment." (Stern v. Lucy Webb Hayes School, 1974,
381 F.Supp. 1033.) There was substantial concern among the drafters of
California's Nonprofit Corporation Law that, if too strict a standard was
imposed on directors by the Corporations Code, it would be difficult, if not
impossible, to get qualified individuals to serve. There was also concern that
application of the strict trustee standard would require charities to decline to
participate in transactions in which the organization's directors were willing to
provide goods or services at below market rates. (See H. Oleck, Nonprofit
Organizations' Problems (1980).) The statutory resolution of these issues
reflects these concerns.
4.2 Statutory Definition of the Directors' Standard of Conduct (The "Duty of
Care").
The standard of conduct prescribed for directors of nonprofit public benefit
corporations is essentially the same standard that the Legislature has imposed
on business corporations under Corporations Code Section 309. That standard,
as applied to public benefit, mutual benefit and religious corporations, is found
in Corporations Code Sections 5231, 7231, and 9241 and is generally referred to
as the directors' "duty of care." The basic rule reads as follows:
"A director shall perform the duties of a director, including duties as the
member of any committee of the board, . . . in good faith, in a manner the
director believes to be in the best interests of the corporation, and with such
care, including reasonable inquiry, as is appropriate under the circumstances."
Directors are authorized to rely on information, opinions, reports or
statements, including financial statements, prepared or presented by:
(a) One or more officers or employees of the corporation whom the director
believes to be reliable and competent in the matters presented;
(b) Counsel, independent accountants and other persons as to matters which
the director believes to be within such person's professional or expert
competence; or
(c) A committee of the Board upon which the director does not serve as to
matters within the committee's designated authority.
and for religious corporations,
(d) Religious authorities and ministers, priests, rabbis or other persons whose
position in the religious organization the director believes justify reliance.
In relying on the opinions or reports of others, the director must, of course, act
in good faith and conduct reasonable inquiry when the need for such inquiry is
indicated by the circumstances. The director must also be free of any
knowledge which would cause reliance on data received from others to be
unwarranted.
4.3 The Directors' Duty of Loyalty
4.3.1 Generally. The admonition found in Sections 5231, 7231 and 9241 that a
director must act in a manner that the director believes to be in the best
interests of the corporation has often been termed the "duty of loyalty." The
duty of loyalty has generally been construed as an obligation of the corporate
directors to act in the best interests of the corporation and all of its members,
including the members of minority factions, and to administer their corporate
powers for the common benefit. See Remillard Brick Co. v Remillard-Dandini
Co. (1952) 109 Cal.App.2d 405. This is in keeping with the fundamental nature
of a nonprofit, to advance and achieve the corporate purpose, rather than to
benefit the interests of any private individuals. Directors are to champion the
best interests of their organization (which may include their constituents),
rather than personal or selfish interests.
To help ensure that persons with selfish interests are not making corporate
decisions, CCC § 5227 requires that at least half of a California nonprofit public
benefit corporation's directors must not be compensated by the nonprofit for
services (other than nominal payments to directors for serving as such).
Amendments to this section in 1996 give it teeth, by giving certain persons
standing to sue to enforce it.
4.3.2 The Corporate Opportunity Doctrine. A common law component of the
director's duty of loyalty is referred to as the "corporate opportunity doctrine".
Under this doctrine, if a director becomes aware of an opportunity or
transaction that would be of interest or benefit to the corporation he or she
serves, the director is bound to disclose the opportunity to the corporation and
permit it to take advantage of the opportunity if it so desires. If a full
disclosure of the opportunity is made and the corporation declines to act, the
director is then free to pursue the transaction for his or her own advantage.
The basis for the doctrine is the "unfairness on the particular facts" of the
director taking personal advantage of an opportunity that should rightfully
accrue to the corporation. See Industrial Indemnity v. Golden State Company
(1953) 117 Cal.App.2d 519.
4.3.3 Statutory Regulation of Self-Dealing Transactions. In speaking of a
director's duty of loyalty, the thought is that a director should avoid
participating in, or seeking to influence, any transaction involving the
corporation where the director has a conflict of interest. The California
Nonprofit Corporation Law contains no such bright line rule, although the
Attorney General's representatives argued in favor of a complete ban on any
self-dealing by nonprofit directors. Instead, Corporations Code Sections 5233
and 9243, and to a lesser degree, 7233 present a complicated statutory scheme
for approval of "self dealing transactions", defined as any transaction to which
the corporation is a party, and in which one or more of its directors has a
material financial interest. Failure to follow proper procedures can result in
strict sanctions on directors of public benefit and religious corporations, and to
some degree mutual benefit corporations who engage in self-dealing
transactions.
The complexity of the statutory prohibition on "self-dealing transactions",
especially with regard to public benefit and religious corporations, reflects an
attempt by the Code's drafters to accommodate most of the concerns
expressed by the Attorney General, while permitting some types of
transactions between a corporation and one or more of its directors which
might be of substantial benefit to the corporation. Most of the sections'
complexity revolves around the attempt to define what transactions are
included and excluded from the term "self-dealing". In addition, there is no
attempt in the statute to define the term "financial interest" or the word
"material". It is also unlikely that the prohibitions of these sections extend to
most transactions involving relatives of a director (other than the director's
spouse) or to transactions between the corporation and another corporation in
which the director is merely an officer. The following specific situations are
excluded (Corp. Code §§ 5233(b), 9243(b)):
(a) Actions of the Board fixing director or officer compensation;
(b) Transactions which are part of the corporation's public, charitable or
religious program which are approved by the corporation in good faith and
without unjustified favoritism, even if one or more directors or their families
are benefited as part of a class of persons intended to be benefited by the
program; and
(c) Any transaction of which the interested director or directors have no actual
knowledge, and which does not exceed the lesser of one percent of the gross
receipts of the corporation for the preceding fiscal year or $100,000.
Finally, there are several ways which the Code permits a transaction which
otherwise would be prohibited as falling within the definition of a self-dealing
transaction. Such participation is permitted if it is approved or validated in any
one of the following ways (Corp. Code §§ 5233(d), 9243(d)):
(a) The Attorney General can approve the transaction, either before or after it
is consummated;
(b) If a religious corporation, the transaction may be approved by the members
of the corporation who are not directors, after disclosure of the material facts
and the director's interest;
(c) The transaction can be validated by proving that: (i) the corporation
entered into the transaction for its own benefit; (ii) the transaction was fair
and reasonable as to the corporation; (iii) the Board approved the transaction
in advance with knowledge of the director's interest and by a majority vote
(without counting the vote of the interested director(s)); and (iv) that prior to
approving the transaction the Board considered and in good faith determined,
after reasonable investigation under the circumstances, that the corporation
could not obtain a more advantageous arrangement with reasonable effort; or
(d) The transaction can be validated by approval of the transaction by a
committee or person authorized by the board so long as it is established that:
(i) the approving committee or person utilized the standards that the Board
must follow under (b), above; (ii) it was not reasonably practicable to obtain
prior Board approval; and (iii) the Board, after determining that the
requirements for committee approval had been satisfied, ratifies the
transaction at its next meeting by a vote of a majority of the directors
(excluding the vote of any interested director).
Note that under California law, a self-dealing transaction, itself, is not void,
voidable or invalid. Instead, the focus is on making the interested director
disgorge his or her profits in the matter and making the organization whole.
The Court can order the director to make an accounting and pay the profits to
the corporation, require the interested director to reimburse the corporation
for the value of any corporate property used in the transaction, or require the
interested director to return or replace corporate property lost in the
transaction or to account to the corporation for the proceeds of any property
sold and to pay those proceeds, plus interest, to the corporation.
4.4 IRS' Position on Conflicts of Interest
The duty of loyalty requires that when a director is making a decision on behalf
of the corporation, he/she must be looking out for the corporation's best
interests, rather than his/her own. When a decision could benefit or harm the
director personally, then the director is considered to have a conflict of
interest. This has become a particular concern to the IRS, especially with
regard to private benefit and private inurement issues. In the 1995 (for 1996)
Exempt Organizations CPE Technical Instruction Program Textbook, the IRS
addresses this concern over possible private benefit or private inurement issues
"that may arise because of the relationship between an exempt organization ...
and its physician employees/contractors, Officers, Directors and key
employees. In most situations, the best protection for a charitable trust is a
well-defined,written policy governing conflicts of interest."
This concern over conflicts of interest continued in the 1996 (for 1997)
Exempt Organizations CPE Technical Instruction Program Textbook, in an
article entitled, "Community Board and Conflicts of Interest Policy. The IRS
describes the purpose of a conflicts of interest policy as being:
"to protect the exempt organization's interest in transactions or arrangements
that may also benefit an officer's or director's private interest. The primary
benefit of a conflicts of interest policy is that the board can make decisions in
an objective manner without undue influence by persons with a private
interest. The presence and enforcement of a conflicts of interest policy can
also help assure that an exempt health care organization fulfills its charitable,
properly oversees the activities of its directors and principal officers, and pays
no more than reasonable compensation to physicians and other highly
compensated employees." FY 1997 CPE Textbook Chapter C, p.18-19.
Both of these articles focus specifically on the health care industry. However,
it must be noted that everything set forth in these articles are equally
applicable to non-health care exempt organizations.
Although not required, either by California law or the Internal Revenue Code to
be in the bylaws, the IRS "favorably views organizations having policy
statements in their by-laws which clearly identify situations where a conflict
might arise." FY 1996 CPE Textbook Chapter P, p.386-7.
This discussion has been more fully enunciated in the 1997 Textbook. To begin
with,
"A substantial conflicts of interest policy should include the following
provisions:
A. Disclosure by interested persons of financial interests and all material facts
relating thereto.
B. Procedures for determining whether the financial interest of the interested
person may result in a conflict of interest.
C. Procedures for addressing the conflict of interest after determining that
there is a conflict:
1. Requiring that the interested person leave the meeting during the discussion
of, and the vote on, the transaction or arrangement that results in the conflict
of interest;
2. Appointing, if appropriate, a disinterested person or committee to
investigate alternatives to the proposed transaction or arrangement;
3. Determining, by a majority vote of the disinterested trustees present, that
the transaction or arrangement is in the organization's best interests and for its
own benefit; is fair and reasonable to the organization; and, after exercising
due diligence, determining that the organization cannot obtain a more
advantageous transaction or arrangement with reasonable efforts under the
circumstances; and
4. Taking appropriate disciplinary and corrective action with respect to an
interested person who violates the conflicts of interest policy.
D. Procedures for adequate record keeping. The minutes of the board meeting
and all committees with board-delegated powers should include:
1. The names of the persons who disclosed financial interests, the nature of
the financial interests, and whether the board determined there was a conflict
of interest; and
2. The names of all persons present for discussions or votes relating to the
transaction or arrangement; the content of these discussions, including any
alternatives to the proposed transaction or arrangement; and a record of the
vote.
E. Procedures ensuring that the policy is distributed to all trustees, principal
officers and members of committees with board-delegated powers. Each such
person should sign an annual statement that he or she:
1. Received a copy of the conflicts of interest policy;
2. Has read and understands the policy;
3. Agrees to comply with the policy;
4. Understands that the policy applies to all committees and subcommittees
having board-delegated powers; and
5. Understands that the organization is a charitable organization that must
engage primarily in activities that accomplish one or more of its tax-exempt
purposes to maintain its tax-exempt status.
F. Procedures for applying the policy to a compensation committee should
include:
1. Restrictions barring physicians who receive, directly or indirectly,
compensation from the organization, for services as employees or as
independent contractors, from membership on its compensation committee;
and
2. Restrictions precluding a voting member of a compensation committee who
has a conflict of interest in the organization from which the member receives
compensation, directly or indirectly, from voting on matters pertaining to that
member's compensation. FY 1997 CPE Textbook Chapter C, p. 21-23
The textbook goes on to suggest that the nonprofit, as part of its system of
controls, conduct periodic reviews of the activities to ensure that the
organization is operating in a manner consistent with accomplishing its
charitable purpose, and does not result in private inurement or impermissible
private benefit. It also includes a Sample Conflict of Interest Policy (revised
again by the IRS in 1999), a copy of which is attached as Exhibit A, hereto.
Adopting and complying with a conflict of interest policy will assist the
organization in carrying out its responsibilities to avoid private inurement or
private benefit, addressed in the intermediate sanctions rules (see below).
5. Private Inurement, Excessive Compensation, Intermediate Sanctions, and
Control
5.1 Basis for Revocation of Exemption
Probably the most common reason today for revocation of exemption is
inurement. This is also the area that appears to make it to the front page of
the newspaper most quickly. As a result, the compensation paid to executives,
insiders, directors, and officers, should be carefully reviewed. If the
organization is reluctant to have this information made public, it is likely that
the IRS will find it to be unreasonable, and thus in violation of the requirement
that no funds of a nonprofit inure to the benefit of any private individual.
Inurement has also been the principal concern raised by Congress as a reason
for providing for additional regulation of exempt organizations:
"What concerns us today is the fact that some charitable organizations have
abused the public trust and have allowed tax-deductible contributions to inure
to the benefit of select privileged insiders. Our Subcommittee looked at the tax
returns for the 250 largest tax-exempt organizations and the salaries of the top
2,000 executives at these organizations. We found that 15 percent of these
executives were paid more than $200,000 per year and that there are 38
individuals making more than $400,000. In addition, review of these returns
causes me to continue to ask myself: (1) `Is it appropriate for a charitable
organization to shift $5 million, tax-deductible dollars to its for-profit
subsidiary; (2) should a medical school vice president be allowed to borrow $1
million, interest free, to buy and renovate his house; (3) should charitable
contributions be used to pay a $1 million salary to the chairman of an
educational organization; and (4) should the administrator of a small pension
plan be paid $500,000 in salary.' Also, press reports call into question whether
tax-deductible donations should be used to provide charity officials with
extravagant perks, like luxury cars, servants, chauffeurs, country-club
memberships, and extremely lucrative severance packages." -- J. J. Pickle,
Chairman, at the 6/15/93, hearing of the Oversight Subcommittee of the House Ways and
Means Committee.
And at the second 1993 hearing on the subject of exempt organizations,
Congressman Pickle continued with additional examples:
"We have learned of the following examples where charities used charitable
assets for personal gain.... with assets from one charitable organization, an
executive paid his child's college tuition, leased a luxury car for his wife, had
his kitchen remodeled, and rented a vacation house at the beach. The charity
permitted him to charge almost $60,000 in personal expenses to the
organization's American Express Card. ... at a tax-exempt hospital, the CEO
used charitable assets to pay for such personal items as liquor, china, crystal,
perfume, airplane, and theater tickets. The hospital also picked up the tab for
the CEO's country club charges, and catered lunches to the tune of
approximately $20,000. ... another charity paid $200,000 for its executive
director's wedding reception, and tropical island honeymoon. The charity also
plunked down $90,000 for the downpayment on the director's home, and had
enough left over to pay for his trip to a desert health spa....
"Moreover, the contributors may never learn exactly how their donations are
being spent by such charities. Many of the abuses I just cited were not
reflected on the Forms 990 filed by the charities with the Internal Revenue
Service." --J.J. Pickle, Chairman, August 2, 1993 hearing of the House Ways and Means
Subcommittee on Oversight.
The determination of reasonableness of compensation, as well as what benefits
are taxable to the individual are the same for exempt organizations as it is for
taxable corporations. Section 162 and its regulations apply to exempt
organizations and their employees.
Any private benefit received by an individual, in addition to being reasonable,
must also be incidental to the benefits received by the organization.
In December of 1997, the Tax Court ruled in United Cancer Council v.
Commissioner, 109 T.C. 17 (1997) that the IRS properly revoked the exempt
status of the organization, retroactively to when it first entered into an
arrangement with a fundraiser, Watson and Hughey Company, to conduct direct
mail fundraising solicitations. During the five years of the contract, UCC
received $29 million in contributions, of which it netted $2 million in profits.
W&H, directly and indirectly, received $8 million for its services. The court
found that W&H, even though it was a third party and not an officer or
director, exercised exclusive control over the fundraising activities, and had
substantial control over UCC's finances. Therefore, because of this control,
W&H was found to be an insider, and received an impermissible private
benefit. Because the net earnings were found to have inured to the benefit of a
private individual, the revocation of exemption was proper. This case was
reversed and remanded on appeal by the 7th Circuit on the basis is that there
was no inurement; an independent contractor without other relationships to
the nonprofit would not be considered an insider based on a contract
negotiated at arms length. the court indicated that the IRS may have been able
to prevail on a private benefit analysis, and remanded it for further
consideration. A settlement was reached in April, when the IRS and UCC
entered into a closing agreement that provided for loss of exempt status for
the UCC from 1986 - 1989, and granted exempt status from 1990 and beyond.
However, UCC also agreed not to raise any additional funds from the general
public, and to limit its activities to accepting charitable bequests and
transmitting such bequests to other exempt cancer councils to provide direct
care to cancer patients; any assets remaining in its bankruptcy estate, after
paying the IRS and other creditors will be used for the same purposes. Further,
the IRS agreed not to disallow the deductibility of any contributions made
during 1986-1989 on the grounds that UCC was not a qualified recipient of
charitable donations.
In another Tax Court case, the court upheld the 1990 revocation of a charitable
organization's status, retroactive to 1983, on the basis that all or part of the
net earnings (from operating bingo games) inured to the benefit of several
insiders. Payment of attorney fees, when the specified indemnification
procedures were not followed, was inurement, as were rent payments, as there
was little evidence that rent was paid on a fair market basis. Interestingly
enough, embezzled funds were not found to constitute inurement, as this was
not an "intentional conferring of benefits". Variety Club Tent No. 6 Charities
Inc. v. Commissioner, TC Memo 1997-575 (12/31/97).
And in KJ's Fund Raisers, Inc. v. Commissioner, TC Memo 1997-424 (9/22/97),
an organization raising funds to support bowling leagues was also found not
exempt on the basis of private benefit; the owners of the facility where pull
tabs were sold had substantial control over the operation of the exempt
organization.
Another case, Anclote Psychiatric Ctr. Inc. v. Commissioner, T.C. Memo 1998273, (July 27, 1998) upheld a revocation of the exempt status of an
organization, after its assets were purchased by a for-profit corporation owned
by its directors for less than fair market value. Because the organization
allowed its assets to inure to the benefit of its directors (total sale price - $6.6
million; fair market value - $7.8 million), the court found that its exempt
status was properly revoked. This was appealed to the 11th Circuit.
In the Estate of Bernice Pauahi Bishop, also known as Kamehameha Schools
Bishop Estate was reached in principle on August 18, 1999. The IRS had
proposed revocation of the exempt status of the Bishop Estate retroactive to
July 1, 1989, based on findings of substantial evidence of private benefit and
inurement to private individuals including the Trustees (who were being paid
$800,000 per year), evidence that the organization was operated for a nonexempt purpose, evidence of political campaign intervention, and unrelated
business income not being properly reported. The Bishop Estate agreed to a
reorganized structure, removal of all the incumbent trustees, and payment of
$9 million plus interest, in lieu of Federal taxes or deficiencies for the period
ending 6/30/96. The Agreement was approved by the Hawaii Circuit Court,
First Circuit on 12/1/99, and final approval was then given by the IRS on
February 23, 2000. However, the closing agreement does not extend to the
Estate's taxable subsidiaries, and does not cover personal liability of the
trustees. Nor does it cover state issues of imprudent management and selfdealing.(4) A settlement was reported (September 22, 2000) in the Honolulu
Advertiser that the Estate would receive $14 million from the former trustees'
insurance company, contingent upon the IRS releasing the former trustees from
intermediate sanctions penalties.(5) Apparently at least one trustee decided not
to wait for the IRS to agree to such a settlement; on August 1, 2000, one of the
trustees filed in tax court, challenging an assessment of the excess benefit
transactions tax for 1995-99, denying that his compensation was excessive.(6)
5.2 Intermediate Sanctions
5.2.1 Introduction. Perhaps the most important change in the last 30 years in
the area of nonprofit law occurred on July 30, 1996, when the Taxpayer Bill of
Rights 2 added section 4958 to the Internal Revenue Code. Section 4958 adds
intermediate sanctions as an alternative to revocation of the exempt status of
an organization when private persons benefit from transactions with a
nonprofit organization. Intermediate sanctions allow the Internal Revenue
Service to impose excise taxes (i.e., penalties) on certain persons who
improperly benefit from transactions with an exempt organization.
Intermediate sanctions penalize the person(s) who benefit from an improper
transaction, rather than the organization.
Section 4958 applies to all organizations exempt under section 501(c)(3) other
than private foundations, and to those exempt under section 501(c)(4).
Because section 4958 represents a major change in nonprofit tax law, it is
important that you and your board fully understand what the law is, how it
works and what you and your organization can do to limit the possibility of
penalties being incurred under the new law.
Proposed regulations for Section 4958 were issued on July 30, 1998. On January
10, 2001, Temporary Regulations were issued, effective for three years until
January 9, 2004 (unless final regulations are issued earlier). Because of the
number and complexity of comments to the Proposed Regulations received by
the IRS from attorneys and other practitioners, as well as the compexity of the
area, the Regulations were issued as temporary rather than final and the IRS
will review some areas further. Of course, even in the areas that the IRS has
not asked for comments, there may be further modifications before the
regulations are issued in final form. However, unlike proposed regulations,
Temporary Regulations are binding during their effective period.
5.2.2 History. Prior to section 4958, if a transaction with an exempt
organization resulted in private inurement or private benefit, the only option
available to the Service was to revoke the organization's 501(c)(3) exemption.
Because this is an extreme penalty, most often hurting the beneficiaries of the
organization more than the recipient of the improper benefit, the penalty has
rarely been used. For several years prior to the passage of section 4958 in
1996, attempts were made to provide a less severe penalty. This goal was met
in section 4958 with the adoption of what are commonly referred to as
intermediate sanctions. Intermediate sanctions may be imposed in lieu of, or in
addition to, revocation of an organization's exempt status.
Although the intermediate sanctions law is retroactive to September 14, 1995,
the effective date of the law should not be confused with the effective date of
regulations adopted by the Internal Revenue Service to implement the law.
Further, the force of the law (Section 4958) is different from the IRS'
interpretation of it (the regulations).
5.2.3 What Organizations Are Covered? Section 4958 applies to all
organizations which are or were described in Section 501(c)(3) or Section
501(c)(4) of the Internal Revenue Code at any time during the last five years,
except for private foundations (which are already subject to their own excise
tax law), governmental entities that are exempt from taxation without regard
to section 501(a), and foreign organizations which receive substantially all of
their support from non-US sources.
Because most organizations are required to establish their exempt status with
the IRS, an organization is considered described in Section 501(c)(3) only if it
has made the requisite filing, unless it is exempt from filing under Section 508
(e.g. churches and small organizations). An organization is considered
described in Section 501(c)(4) if it has applied for and received exemption from
the IRS as such an organization, or has filed for recognition under 501(c)(4) or
has filed an annual return as a 501(c)(4) organization, or has otherwise held
itself out as being a 501(c)(4) organization, exempt from tax under Section
501(a). The organization is not described in Section 501(c)(3) or (c)(4) during
any period for which a final determination or adjudication that the
organization is not exempt has been made (so long as the determination or
adjudication is not based on private inurement or excess benefit transactions).
5.2.4 What Individuals are Affected? Intermediate Sanctions may be imposed
on any "disqualified person" who receives an excess benefit from a covered
organization and on each "organization manager" who approves the excess
benefit transaction. Note: Although being a disqualified person is a prerequisite
to finding an excess benefit transaction, being a disqualified person does not
automatically result in a finding that a transaction involves an excess benefit.
If a person is not a disqualified person, then there can be no excess benefit
with regard to that person.
Who is a Disqualified Person? A disqualified person is any person (whether an
individual, organization, partnership or unincorporated entity) which, during a
five year period beginning after September 13, 1995, and ending on the date of
the transaction in question, was in a position to exercise "substantial influence"
over the affairs of an exempt organization.
Where there are affiliated organizations, whether a person has substantial
influence must be determined separately for each organization. A person may
be a disqualified person for more than one organization.
Disqualified Persons. Section 4958 identifies certain persons as having
substantial influence as a matter of law; these persons are conclusively
presumed to be disqualified persons. In addition, the temporary regulations
identify additional categories of persons who have substantial influence, and
are thus considered by the IRS to be presumptively disqualified.
Under the statute, the following are disqualified:
a. A family member (spouse, siblings and their spouses, ancestors, children,
grandchildren, great grandchildren, and spouses of children, grandchildren and
great grandchildren) of a disqualified person. A legally adopted child is a child
of said individual.
b. An organization (corporation, partnership, trust or estate) owned 35% or
more, directly or indirectly, by a disqualified person or his or her family
member(s). This does not include voting rights held only as a director, trustee,
or other fiduciary, without any stock, profit or other beneficial interest.
Other persons defined by the regulations as having substantial interest include:
a. Members of the governing board of the organization who are entitled to vote
on matters over which the governing body has authority (e.g., directors,
elders, trustees, etc.).
b. Executive officers of the organization, such as the president, chief executive
officer, and chief operating officer. Regardless of the actual title used, this
category includes any individual who has ultimate responsibility for
implementing board decisions, or for supervising the management,
administration or operation of the organization. This responsibility may rest
with more than one individual. Unless a person demonstrates otherwise, any
person who has a title of president, chief executive officer or chief operating
officer will be considered to have this authority.
c. The treasurer or chief financial officer. This category includes anyone who
has or shares ultimate responsibility for managing the organization's financial
assets, regardless of actual title. Again, there may be more than one individual
with this responsibility, and any person with the title of treasurer or chief
financial officer will be considered to have this ultimate responsibility unless
he/she demonstrates otherwise.
d. If a hospital participates in a provider-sponsored organization, any person
who has a material financial interest in the organization (e.g., a person
involved in a joint venture with the organization).
Not a Disqualified Person. Conversely, there are categories of persons who,
under the temporary regulations, are deemed not to have substantial
influence. These include:
a. 501(c)(3) organizations.
b. With respect to a 501(c)(4) organization, another organization described in
501(c)(4).
c. Employees who do not fit into one of the categories listed above, provided
they are not highly compensated employees (as defined in section
414(q)(1)(B)(i) - compensation in excess of $80,000, as adjusted by the IRS) or
substantial contributors (as defined in section 507(d)(2)(A), taking into account
only contributions received during the current and the four preceding taxable
years).
Facts and Circumstances Test. In all other cases, whether or not an individual
or organization is a disqualified person is determined by a facts and
circumstances test. The temporary regulations include two lists of facts and
circumstances. The first includes facts and circumstances that tend to show an
individual has substantial influence. The second includes facts and
circumstances that tend to show a person does not have substantial influence.
a. Facts and circumstances which tend to show a person has substantial
influence include:
1. The person founded the organization.
2. The person is a substantial contributor to the organization (as defined in
section 507(d)(2)(A), taking into account only contributions received during the
current taxable year and the four preceding taxable years).
3. The person's compensation is primarily based on revenues derived from an
activity of the organization that the person controls (see further discussion
about percentage payments, below).
4. The person has or shares authority to control or determine a substantial
portion of the organization's capital expenditures, operating budget, or
compensation for employees.
5. The person manages a discrete segment or activity of the organization that
represents a substantial portion of the organization's activities, assets, income
or expenses, as compared to the organization as a whole. For example, a
person who manages one department that contributes significantly to the
whole may be a disqualified person.
6. The person owns a controlling interest (measured either by vote or value) in
an organization (corporation, partnership, trust) that is a disqualified person.
7. The person is a non-stock organization (such as a social club, homeowners
association, etc.) controlled, directly or indirectly, by one or more disqualified
persons.
b. Facts and circumstances which tend to show a person has no substantial
influence include:
1. The organization is a religious organization and the person has taken a "bona
fide" vow of poverty as an employee, agent, or on behalf of the organization.
2. The person is an independent contractor (e.g. an attorney, an accountant,
or investment manager or advisor) whose sole relationship to the organization
is providing professional advice (without having decision-making authority) with
respect to transactions from which the independent contract will not
economically benefit, either directly or indirectly, apart from customary fees
received for the professional advice rendered.
3. The direct supervisor of the individual is not a disqualified person.
4. The person does not participate in any management decisions affecting the
organization as a whole or a discrete segment or activity of the organization
that represents a substantial portion of the organization's activities, assets,
income or expenses, as compared to the organization as a whole.
5. Any preferential treatment a person receives which is based on the size of
the person's donation, is also offered to all other donors making a comparable
contribution as part of a solicitation intended to attract a substantial number
of contributions.
Donor Advised Funds. The IRS has not addressed the issue of donor advised
funds in the temporary regulations. It did note in its Explanation of disqualified
persons, that although donors "cannot properly have legal control over the
segregated fund, they nonetheless are in a position to exercise substantial
influence over the amount, timing, or recipients of distributions from the
fund." The IRS also requested comments concerning the issues raised by
applying the fair market value standard of section 2958 to distributions from a
donor advised fund to (or for the use of) the donor or advisor
Organization Manager. An organization manager who participates in an
excess benefit transaction, knowing that it is such a transaction, is liable for
penalties unless the participation was not willful, and was due to reasonable
cause.
Who is an Organization Manager? An organization manager is any officer,
director, trustee, or person having similar powers or responsibilities, regardless
of his or her title. A person is an officer if specifically so designated under the
articles or bylaws of the organization, or if he or she regularly exercises
general authority to make administrative or policy decisions for the
organization. If a person only makes recommendations, but cannot implement
decisions without approval of a superior, that person is not an officer.
The temporary regulations make it clear that an "independent contractor who
acts solely in a capacity as an attorney, accountant, or investment manager or
advisor is not an officer."(7)
An organization manager also includes anyone serving on a committee of the
board (or board designee, whether or not a member of the board), if the
organization is claiming that the rebuttable presumption of reasonableness (see
discussion below) is based on the committee's (or the designee's) actions. In
other words, if the committee is responsible for determining the
reasonableness of a transaction, and this determination is relied upon by the
organization, every member of the committee will be considered an
organization manager.
When Does an Organization Manager Participate in a Transaction? Participation
includes silence or inaction by the organization manager, when the manager is
under a duty to speak or act, as well as any affirmative action. Therefore,
abstention is considered consent to a transaction. However, if a manager has
opposed the transaction in a manner consistent with his/her responsibilities to
the organization, the manager will not be considered to have participated in
the action.
Knowing Participation. "Knowing" means that the manager 1) has actual
knowledge of sufficient facts which indicate, based solely on those facts, the
transaction is an excess benefit transaction, 2) is aware that the transaction
may violate the law, and 3) negligently fails to make reasonable attempts to
ascertain whether the transaction is an excess benefit transaction or is, in fact,
aware that it is such a transaction. Although knowing does not mean having
reason to know, under the Temporary Regulations, evidence that a manager
has reason to know is relevant to determine whether the manager has actual
knowledge. It is up to the IRS to prove that the manager knowingly
participated. If an organization manager relies on a reasoned written opinion of
an appropriate professional, his or her participation will ordinarily not be
considered knowing. See "Opinion of Professional", below. In addition, an
organization manager's participation is ordinarily not considered knowing if the
requirements of the rebuttable presumption of reasonableness are satisfied.
See "Rebuttable Presumption of Reasonableness", below.
Willful Participation. Participation by an organization manager is willful if it is
voluntary, conscious and intentional. It is not willful if the manager does not
know (see above discussion) that the transaction is an excess benefit
transaction.
Due to Reasonable Cause. Participation is due to reasonable cause if the
manager exercised responsibility on behalf of the organization with ordinary
business care and prudence.
5.2.5 Opinion of Professional. If an organization manager, after full disclosure
of all relevant facts to an appropriate professional, relies upon the advice of
such professional that a transaction is not an excess benefit transaction, the
person's participation will generally not be considered to be knowing and willful
and will be considered due to reasonable cause, even if the transaction is
subsequently determined to be an excess benefit transaction. However, to
qualify, the advice must be contained in a reasoned written opinion with
respect to elements of the transaction within the professional's expertise. An
opinion must apply the specific facts relative to the transaction to the
applicable standards and reach a reasoned conclusion. The opinion is not
reasoned if it simply recites the facts and expresses a conclusion.
Under the preliminary regulations, reliance was limited to opinions rendered by
attorneys. However, the temporary regulations have expanded the
professionals on whose written opinions an organization manager may rely to
include attorneys, certified public accountants or accounting firms with
expertise regarding the relevant tax law matters, and independent valuation
experts (appraisers and compensation consultants). Independent valuation
experts must hold themselves out to the public as appraisers or compensation
consultants, perform the relevant valuations on a regular basis, be qualified to
make valuations of the type of property or services involved, and include in
their written opinion, a certification that these requirements are met.
5.2.6 What is an Excess Benefit Transaction?
Excess Benefit Defined. Generally, an "excess benefit transaction" occurs
anytime a disqualified person receives an economic benefit from an exempt
organization which exceeds the value (not the cost) of the benefit provided to
the organization by the disqualified person. All benefits from the organization
to the disqualified person are taken into account, including every transaction
which benefits a disqualified person, whether the benefit is direct or indirect,
and whether the benefit is provided directly by the exempt organization or
through an organization controlled by the exempt organization. Similarly, all
benefits from the disqualified person to the organization are also taken into
account. For example, when a pension plan benefit vests, the services
performed for the years leading up to the year of vesting may be considered in
determining reasonableness.
The excess benefit is the difference between the value of what is received by
the organization and the value of what is given by the organization to the
disqualified person.
With a transaction involving property, the fair market value (e.g. what would
be paid between a willing buyer and a willing seller, neither being under
compulsion to enter into the transaction, and both having knowledge of the
relevant facts) must be examined to determine if an excess benefit has been
received. [Question: what if the organization must sell, and the disqualified
person offers the best price?]
Reasonable Compensation. Probably the single most likely area for an excess
benefit transaction involves compensation arrangements with officers,
directors, and key suppliers. Any disqualified person who receives a salary in
excess of reasonable compensation may be subject to penalties and operation
managers participating in the approval and payment thereof may also be
subject to penalties.
What is Reasonable Compensation? Compensation is reasonable if the amount
paid would ordinarily be paid for like services, by like enterprises, under like
circumstances. Section 162 standards apply in determining what is reasonable,
taking into account most benefits. The fact that a state or local legislative or
agency body or court has authorized or approved a compensation package is
not dispositive of whether the compensation is reasonable
a. Certain benefits will not be considered in determining excess benefits.
These include:
1. Nontaxable fringe benefits (excluded from income under § 132), except
certain liability insurance premiums, payments or reimbursements by the
organization(8)
2. Economic benefits provided to a volunteer if such benefits are normally
provided to the general public in exchange for a membership fee of $75 or less
per year.
3. Economic benefits provided solely on account of payment of a membership
fee or of a deductible contribution if a) any non-disqualified person paying such
fee or making a contribution above a specific amount is given the option of
receiving substantially the same economic benefit; and b) the disqualified
person and a significant number of non-disqualified persons, in fact, make a
payment or contribution of at least the specified amount.
4. Economic benefits provided to a disqualified person solely as a member of a
charitable class.
5. Economic benefits to a governmental unit, if the transfer is made exclusively
for public purposes.
b. In determining the value of compensation for purposes of section 4958, all
items of compensation must be considered, including:
1. All forms of cash and noncash compensation including salary, fees, bonuses,
severance payments, and deferred and noncash compensation at the time it
vests or is not subject to substantial forfeiture (see Effective Dates, below).
2. Unless excludable as a de minimus fringe benefit, the payment of certain
liability insurance premiums for, or payments or reimbursement by the
organization not excludable under a.1, of this section (see footnote #2).
3. All other benefits, whether or not included in gross income for income tax
purposes, including but not necessarily limited to medical, dental, and life
insurance, severance pay, disability benefits, expense allowances,
reimbursements, and forgiveness of interest on loans. A determination of
whether an item is included in gross income should be made without regard to
whether the item must be taken into account in determining reasonableness of
compensation for purpose of intermediate sanctions.
Must be Treated As Compensation. Any benefit received by a disqualified
person must be in exchange for some type of service or other benefit provided
to the organization by the disqualified person, and the organization must treat
it as such. Otherwise, it is treated as an excess benefit, without further
consideration, and without regard to any claim of reasonableness of the total
compensation package.
An economic benefit will not be treated as payment for the performance of
services rendered by the disqualified person unless the organization providing
the benefit clearly indicates its intent to treat it as such when the benefit is
paid. Except for nontaxable benefits, an exempt organization will be treated as
clearly indicating its intent to provide an economic benefit as compensation for
services only if the organization provides written substantiation that is
contemporaneous with the transfer of the economic benefit. If an economic
benefit is reported by the organization (on a Form W-2, 1099 or 990) or by the
disqualified person (on Form1040) before any IRS examination is begun, this
will satisfy the requirement. There may be other written contemporaneous
evidence used to demonstrate this intent, such as an executed and approved
written employment contract. If the failure to report was due to reasonable
cause (i.e. the exempt organization can establish that there were significant
mitigating factors, or that the failure arose from events beyond its control) and
the organization otherwise acted in a responsible manner, the organization will
be treated as having clearly indicated its intent. If there has not been the
requisite withholding or reporting and the failure to report was not due to
reasonable cause, then the economic benefit will be considered an excess
benefit transaction.
Percentage Payments. Some nonprofit organizations use revenue-sharing
methods to pay for certain services. For example, a fundraiser might agree to
conduct a fundraising event in exchange for a percentage of the overall
revenues generated. Such arrangements have always been disfavored by the
IRS.
The proposed regulations issued in 1998 provided that, unlike other
compensation arrangements, a revenue-sharing transaction may constitute an
excess benefit transaction even if the economic benefit does not exceed the
fair market value of the consideration provided in return if, at any point, it
permits a disqualified person to receive additional compensation without
providing proportional benefits that contribute to the organization's
accomplishment of its exempt purpose.(9) In other words, the benefit can
increase only in proportion to the actual services being rendered. The proposed
regulations also provided that if an excess benefit is found in a transaction
where the economic benefit is based on revenues, the excess benefit consists
of the entire economic benefit provided in such a transaction. This means that
if the proposed regulations were to be adopted as final, and any of the
compensation was determined to be an excess benefit, all compensation
received by the disqualified person would be treated as an excess benefit, and
not just that portion that exceeds the fair market value of the
consideration/services provided.
Because of the extensive controversy over this position, and the many, often
conflicting suggestions made to resolve the issue, the IRS has reserved a section
in the new temporary regulations to cover revenue-sharing transactions, and
will continue to consider this area further. The IRS has also noted that any
revised regulations issued in the future on this matter will be issued again in
proposed form, and will become effective only after being published in final
form. In the meantime, these transactions will be evaluated under the general
rules defining excess benefit transactions.
The only item of guidance contained in the temporary regulations concerning
this type of transaction is that the fact that a bonus or revenue-sharing
arrangement is subject to a cap will be a relevant factor in determining the
reasonableness of compensation. For example, an agreement to pay 20% of the
income received, up to a total of $50,000, will more likely be found to be
reasonable than will an agreement simply to pay 20% of the income.
Indirect Economic Benefit. The temporary regulations provide that a
transaction that would be an excess benefit if the exempt organization
engaged in it directly will still be an excess benefit transaction if it is
accomplished indirectly through either of the following ways:
a. Through a Controlled Entity: If the exempt organization owns more than a
50% interest in an organization (or controls at least 50% of the directors of a
non-stock organization) that organization will be a controlled entity. If it is a
controlled entity, then economic benefits provided will be treated as though
they were provided by the exempt organization.
b. Through an Intermediary: An intermediary is any person (including another
tax-exempt entity) that participates in a transaction with a disqualified person
of the exempt organization. Economic benefits provided by the intermediary
will be treated as being provided by the exempt organization when 1) the
exempt organization provides an economic benefit to the intermediary, and 2)
in connection with receipt of the benefit by the intermediary, there is
evidence of an oral or written agreement or understanding that the
intermediary will provide benefits to or for the use of the disqualified person,
or the intermediary provides benefits to or for the use of the disqualified
person without a significant business or exempt purpose of its own.
5.2.7 What happens if an excess benefit is paid to a disqualified person?
What is the penalty?
Correction: Return of Benefit Plus Interest. The cost of receiving an excess
benefit is severe. In all cases, the excess benefit must be corrected. Correction
requires the excess benefit to be undone to the extent possible, and the taking
of any additional steps necessary to restore the organization to a financial
position not worse than where it would be if the disqualified person had dealt
under the highest fiduciary standards.
The correction amount equals the sum of the excess benefit, plus interest on
the excess benefit a rate that equals or exceeds the applicable Federal rate,
compounded annually. The period from the date the excess benefit transaction
occurred to the date of correction determines whether to use the Federal
short-term rate, mid-term rate, or long-term rate.
Repayment of Correction Amount. An excess benefit is corrected only by the
disqualified person making a payment in cash or cash equivalents, excluding
payment by a promissory note, equal to the correction amount. The
disqualified person may not engage in a series of transactions to attempt to
circumvent this section. Notwithstanding this requirement, if the excess
benefit transaction results, in whole or in part from the vesting of benefits
under a nonqualified deferred compensation plan, then to the extent the
benefits have not yet been distributed, the disqualified person may correct the
portion of the excess benefit resulting from the undistributed deferred
compensation by relinquishing any right to receive the benefits (including
earnings thereon).
If specific property was transferred in the excess benefit transaction and the
exempt organization agrees, the disqualified person may make a payment by
returning the property. The payment will be considered to be the lesser of i)
the fair market value of the property on the date the property is returned to
the organization, or ii) the fair market value of the property on the date the
excess benefit transaction occurred. If the payment is less than the correction
amount, the disqualified person must make an additional cash payment. If the
payment exceeds the correction amount, the organization may make a cash
payment to the disqualified person equal to the difference. The disqualified
person may not participate in the exempt organization's decision as to whether
or not to accept the return of specific property.
Excise Penalties. In addition to correction, the penalty on the disqualified
person is an amount equal to 25% of the excess benefit. If the monies are not
returned "within the taxable period", an additional tax equal to 200% of the
excess benefit may be imposed. If more than one disqualified person is liable
for the tax, all are jointly and severally liable.
The taxable period is the period beginning on the date the excess benefit
transaction occurs and ending on the earlier of the date the notice of
deficiency is mailed or the 25% penalty is assessed. However, if the excess
benefit is corrected within 90 days after the mailing of the notice of
deficiency, the 200% penalty shall either not be assessed or shall be abated. If
less than the full correction amount is paid, the 200% penalty will be imposed
only on the unpaid portion.
Tax on Organization Manager. A tax equal to 10% (up to $10,000 per
transaction) of the excess benefit may also be imposed on each organization
manager who participates in the transaction, knowing that it is an excess
benefit transaction, unless the participation is not willful and is due to
reasonable cause. The $10,000 is an aggregate figure; all organization
managers participating in the transaction are jointly and severally liable.
If the disqualified person receiving the excess benefit is also an organization
manager, the 25%, the 200%, and the 10% tax can all be imposed on said
person.
No Need To Terminate Contract. If the contract under which the excess
benefit has occurred has not been completed, termination of the employment
or independent contractor relationship between the organization and the
disqualified person is not required. However, the terms of compensation may
need to be modified to avoid future excess benefit transactions.
Correction in Case of No Longer Existing Organization. If the exempt
organization no longer exists, the disqualified person must still correct the
excess benefit transaction by paying the correction amount to another
qualified organization, provided that organization is not related to the
disqualified person. With a 501(c)(3) organization, the funds must be paid to
another 501(c)(3), in accordance with the dissolution clause of the
organizational documents of the exempt organization. With a 501(c)(4)
organization, the correction amount must be paid to a successor 501(c)(4)
organization or, if there is no successor, to another 501(c)(3) or (c)(4)
organization.
5.2.8 Rebuttable Presumption of Reasonableness. In determining reasonable
compensation, although Section 4958 does not contain the same, the legislative
history indicated that Congress intended that there be a rebuttable
presumption of reasonableness, or a "safe harbor." Under the safe harbor,
compensation is presumed to be reasonable, and a property transfer is
presumed to be at fair market value if (1) the compensation arrangement or
terms of transfer are approved, in advance, by an authorized body of the
exempt organization, composed entirely of individuals without a conflict of
interest, (2) the board or committee obtained and relied upon appropriate data
as to comparability in making its determination; and (3) the board or
committee adequately documented the basis for its determination,
concurrently with making the decision. The disqualified person/organization
manager normally has the burden of proving that the compensation was
reasonable. However, if the three criteria above are met, the burden of proof
shifts to the IRS and the IRS must prove that the compensation was
unreasonable. The IRS may rebut the presumption by furnishing sufficient
contrary evidence to show that the compensation was not reasonable, or that
the transfer was not at fair market value.
Approval by Authorized Body. In order to be considered disinterested, the
authorized body, which is made up of the board of directors, a committee of
the board if authorized by state law, or to the extent permitted by local law,
other parties to whom the board has delegated this duty, must not include
anyone with a conflict of interest with regard to the transaction.
A person will not be considered included if the person attends only to answer
questions and otherwise recuses himself or herself from the meeting and is not
present during the debate and voting on the transaction or compensation
arrangement.
A conflict of interest is present if a member is the disqualified person, is
related to the disqualified person, economically benefits from the transaction,
is in an employment relationship subject to the direction or control of the
disqualified person, receives compensation or other payment subject to
approval by the disqualified person, has a material financial interest affected
by the transaction, or approves a transaction providing economic benefits to a
disqualified person, who in turn has approved or will approve a transaction
providing economic benefits to the member.
Appropriate Data as to Comparability. An authorized body has appropriate
data as to comparability if, given the knowledge and expertise of its members,
it has information sufficient to determine that the compensation is reasonable
or the property transfer is at fair market value. Relevant information might
include compensation levels paid by similar organizations (both taxable and
nontaxable) for functionally comparable positions, the availability of similar
services in the geographic area, current compensation surveys compiled by
independent firms, and actual written offers from similar institutions
competing for the services of the disqualified person. For property, relevant
information might include current independent appraisals of the property to be
transferred, and offers received as part of an open and competitive bidding
process.
For organizations with annual gross receipts (including contributions) of less
than $1 million (calculated based on the average of the 3 prior taxable years),
it is sufficient that the governing body acquires and relies upon data of
compensation paid by three comparable organizations, in the same or similar
communities, for similar services. No inference is intended with respect to
whether circumstances falling outside this safe harbor will meet the
requirement with respect to the collection of appropriate data. For example,
there may not be 3 comparable organizations providing similar services, and
the board may select another method to meet the objective data requirement.
If the exempt organization controls or is controlled by another entity, the gross
receipts of both entities must be aggregated to determine if this special rule is
applicable.
Note: Although obtaining this comparable data allows the organization to rely
on a presumption that a transaction is reasonable, the failure to obtain the
data does not, in itself, imply that the transaction is unreasonable. In addition,
the organization may compile its own data rather than obtain an independent
survey.
Documentation. Adequate documentation requires that the written or
electronic records of the authorized body state: 1) the terms of a transaction
and the date it was approved; 2) the members of the authorized body present
during the debate on the transaction, and those who voted; 3) the
comparability data relied upon, and how the data was obtained; and 4) any
actions taken with respect to consideration of the transaction by members of
the authorized body who had a conflict of interest. If the authorized body
determines that reasonable compensation/fair market value is actually higher
or lower than the comparables obtained, the basis for this determination must
be recorded.
To be documented concurrently, records of the meeting must be prepared
before the later of the next meeting of the authorized body, or 60 days after
the final action or actions of the authorized body with regard to this decision
are taken. Records must be reviewed and approved by the authorized body as
being reasonable, accurate and complete within a reasonable time period after
they are prepared.
The fact that a transaction between the exempt organization and a disqualified
person has not met the safe harbor requirements and therefore is not subject
to the presumption that the compensation is reasonable, does not create an
inference that the transaction is an excess benefit transaction, nor does it
exempt or relieve any person from compliance with any federal or state law
that imposes any higher obligation, duty, responsibility, or other standard of
conduct with respect to the operation or administration of the exempt
organization.
5.2.9 Effective Dates.
Date of Occurrence. An excess benefit transaction occurs on the date the
disqualified person receives the economic benefit for Federal income tax
purposes. If the contract provides for a series of payments over a taxable year,
any excess benefit transaction resulting from the payments will be deemed to
occur on the last day of the taxable year (or the date of the last payment, if
only for part of the year). With qualified pension, profit-sharing or stock bonus
plan benefits, the transaction occurs on the date the benefit vests. With a
transaction involving substantial risk of forfeiture, the transaction occurs on
the date there is no longer any substantial risk of forfeiture.
Effective Date of Law. The effective date of the intermediate sanctions is
retroactive to September 14, 1995. The Act will not apply to written contracts
in effect as of September 13, 1995, so long as the contract remains binding and
there is no material change to the contract. If a contract may be terminated or
cancelled by the organization without the disqualified person's consent and
without substantial penalty, it is not considered binding as of the earliest date
the termination or cancellation would be effective. A material change includes
extension or renewal of the contract, or a "more than incidental" change to any
payment thereunder.
Initial Contract - When Intermediate Sanctions Apply. An initial contract is a
binding, written contract between the exempt organization and a person who
was not a disqualified person immediately prior to entering into the contract.
Intermediate sanctions do not apply to any fixed payment (as defined below)
pursuant to this initial contract, unless the person fails to substantially perform
his or her obligations under the contract.
A fixed payment is defined in the temporary regulations as the amount of cash
or property specified in the contract or determined by a fixed formula
specified in the contract, in exchange for the provision of specified services or
property. A fixed formula may incorporate an amount that depends upon future
specified events or contingencies, provided that no person exercises discretion
when calculating the amount or deciding whether to make a payment.
Contributions to a qualified pension plan or nondiscriminatory employee
benefit program are treated as fixed payments.
Similarly as to a written contract effective September 13, 1995, if the contract
may be terminated or cancelled by the organization without the other party's
consent and without substantial penalty to the organization, it will be treated
as a new contract as of the earliest date that any such term or cancellation, if
made, would be effective. If the parties make a material change to the
contract, it is treated as a new contract as of the date the material change is
effective, and if the party is a disqualified person at the time the contract is
treated as a new contract, it may constitute an excess benefit transaction.
Any non-fixed payments pursuant to an initial contract (e.g. an arrangement
where discretion in payment is exercised) is not covered by the exception and
must be evaluated to determine whether it constitutes an excess benefit
transaction. In making this determination, all payments and consideration
exchanged, including fixed payments made pursuant to an initial contract, are
taken into account.
Determination of Reasonableness of Other Contracts/Payments. For all
contracts other than initial contracts, reasonableness of a fixed payment (as
defined above) is determined based on the facts and circumstances existing as
of the date the parties enter into the contract. However, if there is substantial
non-performance, reasonableness is determined based on all facts and
circumstances from the date of entering into the contract up to the date of
payment. If a payment is not a fixed payment under a contract, then the
determination must be made, based on all facts and circumstances, up to and
including circumstances as of the date of payment. However, the organization
cannot argue that the compensation is reasonable, based on facts and
circumstances existing at the time a contract is questioned.
Again, if a written binding contract may be terminated or cancelled by the
organization without the other party's consent and without substantial penalty
to the organization, it will be treated as a new contract as of the earliest date
that any such termination or cancellation, if made, would be effective. And if
the parties make a material change to the contract, it is treated as a new
contract as of the date the material change is effective.
Date for Rebuttable Presumption. For a fixed payment, the requirements for
the rebuttable presumption of reasonableness must be satisfied prior to the
effective date of the contract. If this is done, the rebuttable presumption
applies to all payments made or transactions completed in accordance with the
contract.
If the payment is not a fixed payment, the organization can rely on the
rebuttable presumption described below only after the exact amount of the
payment is determined or a fixed formula is specified, and the requirements
for the presumption are subsequently satisfied.
If a contract contains a nonfixed payment subject to a specified cap, the
authorized body may establish a rebuttable presumption at the time the
contract is entered into if: i) prior to approving the contract, appropriate
comparability data indicating that a fixed payment to the disqualified person of
up to a certain amount would be reasonable compensation; ii) the maximum
amount payable (both fixed and nonfixed) will not exceed this total; and iii)
the other requirements to establish a rebuttable presumption of
reasonableness are satisfied.
5.2.10 Application to churches. The intermediate sanctions law applies to
churches. It should be noted, however, that section 7611, which controls the
process for initiating and conducting a church audit, also applies to any inquiry
into whether an excess benefit transaction has occurred between a church and
a disqualified person. If there is a reasonable belief that a section 4958 tax is
due from a disqualified person, this will satisfy the reasonable belief
requirement needed to initiate a church audit.
5.2.11 Revocation may still occur. The intermediate sanctions law does not
affect the substantive standards for tax exemption under section 501(c)(3) or
(c)(4). Therefore, even if a transaction is not an excess benefit transaction
under the intermediate sanctions laws, it may still be found to be illegal. The
ability of the IRS to revoke the exempt status of an organization that engages
in private inurement or private benefit has not been modified. Intermediate
sanctions simply provide another weapon in the arsenal of the IRS. The IRS may
use either or both weapons.
If an excess benefit transaction occurs and the IRS is not convinced that it will
not happen again, the exempt status of the organization is likely to be in
jeopardy. The first set of cases in 1999 resulted in penalties being assessed in
excess of $83 million, plus loss of exempt status. Petitions have been filed in
the Tax Court for redetermination of deficiencies, with the first set for trial in
September of 2000.(10)
Currently, all intermediate sanctions cases are being coordinated with the
National Office, both on the technical side and the chief counsel side.(11)
5.2.12 State Regulators. Although the intermediate sanctions law is a federal
law, the Service has pointed out that intermediate sanctions may also bring
state regulation problems. See EOTR Weekly, Vol. 12, No. 4, 10/26/98, page 1.
5.3 Control of Organization/Operation for Exempt Purposes/Joint Ventures.
A related issue, which has been addressed principally in the area of health care
entities is how much control the exempt organization has in a joint venture
with for-profit entities. If the exempt has insufficient control, the joint venture
can put the exemption at risk. On March 4, 1998, Rev. Rul. 98-15, 1998-12 IRB
was issued to provide some guidance in this area. Two situations are discussed
therein; in the first, the exempt status of the hospital is retained because it
continues to operate exclusively for a charitable purpose, with only incidental
benefits to the for-profit. In the second, however, the nonprofit fails to
establish that it will continue to operate exclusively for exempt purposes. In
the "good" scenario contained in the revenue ruling, the charity elected the
majority of the directors of the joint entity, and the agreement provided that
charitable interests overrode any fiduciary duty to maximize profits. In the
"bad" scenario, the charity elected one-half of the directors of the joint entity,
and the management of the day-to-day operations was contracted to a
subsidiary of the for-profit, and was renewable indefinitely by the subsidiary.
Although it addresses the specific area of whole hospital joint ventures, the IRS
has pointed out that this ruling is designed to carry out Congress's intent that
charities use their funds for appropriate charitable purposes, and not to
provide a substantial private benefit to another entity, and should be reviewed
by any entity intending to enter into a joint venture arrangement with a forprofit.(12)
A recent Tax Court Case, Redlands Surgical Services v. Commissioner of Internal
Revenue, 113 T.C. No. 3, filed July 19, 1999, held that the nonprofit had ceded
effective control over the operations of the partnerships, and thus conferred an
impermissible benefit. As a result, it is not operated exclusively for exempt
purposes. It is currently being appealed.(13)
In recent letter ruling, LTR200041038, issued July 20, 2000, the IRS determined
that the participation of a 501(c)(3) organization, as the member/manager of a
limited liability company taxed as a partnership, with the remaining members
being for-profit entities, would not impair the exempt status of the
organization, as the purpose was substantially related to the accomplishment
of the organization's purposes (long term conservation efforts). Because the
limited liability company elected to be taxed as a partnership, the service
determined that the activities of the LLC would be attributed to the (c)(3)
organization. The letter ruling does not contain any determination of whether
unrelated business income would result.(14)
6. Disclosure /Reporting Requirements.
As further described in the following paragraphs, charities that provide benefits
to their donors must disclose the value of those benefits to the donors; donors
who wish to claim charitable income tax deductions must obtain records from
the charitable recipient to substantiate the gift; and charities must make
certain information available to the general public on request. The IRS issued
final Regulations on some of these matters, effective December 16, 1996.
6.1 Donor Substantiation. Under Section 170(f)(8), donors who claim a
deduction for a charitable contribution of $250 or more are responsible for
obtaining from the donee charity, and maintaining in their records,
substantiation of that contribution. The document substantiating the
contribution must be a contemporaneous written acknowledgment from the
charity -- that is, it must be received by the earlier of (a) the date the donor
actually files the tax return for the year in which the gift was made, or (b) the
due date (including extensions) of the return. The IRS does not require any
particular form. However, the notice must contain the following information:
(a) The amount of cash paid and a description (but not necessarily the value) of
any non-cash property transferred to the charity;
(b) Whether or not the charity provided any goods or services in consideration
for the cash or property;
(c) A description and good faith estimate of the value of any goods or services
provided by the charity in consideration for the cash or property; and
(d) If applicable, a statement indicating that the charity has provided
intangible religious benefits as described below.
Separate contributions of less than $250 will not be aggregated, although abuse
of this rule (such as a donor writing multiple checks to a single charity on one
day to avoid triggering the substantiation requirement) will be addressed by
Regulations. If the goods and services consist solely of intangible religious
benefits, the charity is not required to describe or value those benefits. It is
sufficient merely to state the fact that only intangible religious benefits were
provided. Intangible religious benefits are those provided by an organization
which is organized exclusively for religious purposes and which generally are
not sold in a commercial transaction. However, tuition for education leading to
a recognized degree, goods available commercially, and the like are not
considered intangible religious benefits even if provided by an exclusively
religious organization.
Many taxpayers contribute to charities through payroll deductions. The IRS's
recent Regulations clarify the substantiation rules for such donations.
Specifically, taxpayers may substantiate donations made by payroll deduction
by a combination of two documents:
(a) A pay stub, IRS Form W-2, or other employer-source record showing the
amount withheld from the taxpayer's compensation, and
(b) A pledge card or other document prepared by the charitable recipient,
which states that the charity did not provide any goods or services in return for
the taxpayer's payroll deduction contributions.
Donors to charitable remainder trusts and charitable lead trusts need not
obtain substantiation for their contributions. However, substantiation is
required for gifts to pooled income funds.
Where a taxpayer incurs out-of-pocket expenses in the course of donating
services to a charity, the recipient charity typically has no independent
information as to those expenses. If the expenses are large enough to require
substantiation in order for the taxpayer to claim a deduction, the IRS will
accept a combination of two records:
(a) The taxpayer's normal records of the expenses in question, and
(b) The charity's written acknowledgment describing the services provided by
the taxpayer, the date on which they were provided, whether or not the
charity gave the taxpayer any goods or services in return and, if so, a
description and good faith estimate of their fair market value.
If a partnership or S-corporation makes a charitable gift of $250 or more, that
entity -- not the partners or shareholders -- is treated as the taxpayer for
purposes of the substantiation and disclosure rules. The partnership or Scorporation must obtain the receipt for gifts of $250 or more, and the charity
must disclose quid pro quo benefits to the partnership or S-corporation, not to
the individual partners or shareholders.
Once applicable Regulations have issued, charities will have the option of filing
a form with the IRS setting forth the information required to be provided to
donors, in lieu of providing it to the donor.
6.2 Disclosure Regarding Quid Pro Quo Contributions. A charitable
contribution is only deductible to the extent that it exceeds the fair market
value of any goods or services provided by the charity to the donor.28 This
comports with the requirement that the donor must intend to make a
charitable gift. Until 1995, charities had no obligation to inform donors of this
limitation on the deductibility of these gifts. Now, Section 6115 requires each
charity that receives a quid pro quo contribution in excess of $75 to provide a
written disclosure statement to the donor. A quid pro quo contribution is one in
which the charity provides the donor with goods or services in return for the
donor's contribution. The charity must disclose in writing, in connection with
the solicitation or receipt of funds in connection with return benefits, the
following information:
(a) The disclosure statement must make clear that the deductible portion of
the donor's gift is limited to the excess of the amount of any money (or the
value of any property) transferred to the charity over the value of the goods or
services provided by the charity to the donor.
(b) The disclosure statement must also contain a good faith estimate of the
value of the goods or services provided by the charity.
If there is no disclosure statement from the charity, the donor will find it
difficult, if not impossible, to rebut the presumption that what the donor paid
for the goods or services was what the donor believed their value to be -- and,
thus, that there is no charitable gift.
Certain goods and services are excluded by the Regulations from the disclosure
obligation, for ease of administration or to make the compliance burden on
charities reasonable. For example, in either of the following two instances,
goods are considered too insubstantial to reduce the value of a charitable gift:
(a) Benefits may be disregarded if they have a fair market value of less than 2%
of the amount of the contribution and the fair market value is less than $67 for
1996 (adjusted annually for inflation).
(b) Goods may be disregarded if the cost of the item to the charity (as opposed
to its market value) is $6.70 or less for 1996 (adjusted each year for inflation).
Some membership benefits are so difficult to value that the Regulations permit
both charities and donors to disregard them. Member benefits may be
disregarded for purposes of donor substantiation and charity reporting, only if
the benefits are given as part of an annual membership; offered in return for a
payment of $75 or less, even if the donor decides to contribute more; and fall
into one of the following two categories:
(a) Low-Cost Events. This category covers admission to events open only to
members, where the cost to the charity per person (excluding allocable
overhead) is not more than $6.70 in 1996. The figure will be adjusted for
inflation annually.
(b) Rights That Members Can Exercise Frequently. This category includes free
admission to a facility (such as a museum), free parking during performances,
gift shop discounts, and the right to purchase tickets before the general public
may do so. Note, however, that rights and privileges available only to donors of
more than $75 may not be disregarded.
These member benefit rules also apply to company contributions where the
goods or services are provided to company employees.
A charity may use any reasonable method to make a good faith estimate of the
value of goods and services. However, the donor may not rely upon an estimate
if the donor knows, or has reason to know, that the estimate is not reasonable
(for example, if the donor is a dealer in the type of goods or services in
question). An estimate is not in error if it is within the typical range of retail
prices for the goods or services. If the goods or services are not available in a
commercial transaction, the charity may make a good faith estimate by
reference to the fair market value of similar or comparable goods or services.
Some opportunities, such as the right to have dinner with a celebrity, have no
actual dollar value for purposes of the substantiation rules. Thus, valuation is
not required.
6.3 Disclosure Obligations for Non-Cash Gifts.
A donor must file Form 8283 for non-cash gifts for which a deduction is claimed
in excess of $500; if the deduction exceed $5,000, the donor must obtain a
qualified appraisal, and the donee charity is required to sign the donor's Form
8283, verifying its receipt of the donated property. Donors are subject to
penalties for overvaluation of donated property.
If the charity was required to sign a donor's Form 8283, then if the charity
disposes of some or all of the contributed property within two years after
receipt, other than by using the property or distributing it for free in
furtherance of its exempt purposes, it must file Form 8282.
6.4 Disclosure Obligations to the General Public. Federal tax law requires
tax-exempt organizations to make certain documents available for public
inspection.
6.4.1 Exempt Organizations in General. Currently, exempt organizations are
required to make their federal application for tax exemption (Forms 1023,
1024, etc.), and their federal informational returns (Forms 990, 990-EZ, 990PF, etc.) available for inspection by anyone who requests to see them. This is
still the law. However, in addition to this requirement, beginning June 8, 1999
(March 13, 2000 for private foundations), exempt organizations must also
provide copies of these documents (or any part of them), without charge,
other than a reasonable fee for reproduction, and actual postage costs to
anyone who requests them, either in person or in writing.
The following is a summary of these new requirements. Please note that this is
a summary, and that there are still many areas which will require clarification.
What type of organization does this apply to?
It applies to every organization that has received an exempt determination
from the IRS under any section of 501(c) or 501(d). This includes churches that
have established their exempt status. Even though they do not have to file
Form 990 and thus do not have to make these forms available for inspection,
they must still make the Form 1023 available for inspection, and make copies
available if requested. It also applies to non-exempt private foundations and
nonexempt charitable trusts described in Section 4947(a) that are subject to
Section 6033 information reporting requirements.
Although the April, 1999 regulations putting these requirements into effect
specifically exclude private foundations, the final regulations for private
foundations were issued in January of 2000, effective March 13. In addition,
the requirement that 3 years of 990-PF's must be furnished begins with the
2000 filing.
Where can someone come to inspect/get copies of the documents?
What if we have more than one office?
What if we do not have a regular office?
The documents must be made available for inspection at the organization's
principal office, and (if the organization has more than one office) any regional
or district offices, during regular business hours. A regional or district office is
any office that has either full or part-time paid employees, whose aggregate
number of weekly working hours is normally at least 120 (e.g. three full time
employees or their part-time equivalents). However a site is not a regional or
district office if the only services provided are to further the exempt purposes
of the organization (such as a day care center, clinic, etc.) and the site does
not serve as an office for management staff, other than those involved solely in
managing the exempt function activities at the site.
An organization with regional or district offices has 30 days from the date its
informational return is filed with the IRS to provide copies to the regional or
district offices.
The organization may have a representative in the room during the inspection.
However, the person inspecting must be allowed to take notes freely, and if
he/she has brought along a copier, to copy the document.
If the organization does not have a permanent office, or has limited office
hours, it may comply with the public inspection requirements by making the
documents available for inspection at a reasonable location, within a
reasonable time period after receiving the request (within 2 weeks), and at a
reasonable time of day. It may mail copies of the requested documents in lieu
of allowing an inspection, but may not charge the requester unless he/she
consents to pay the charge.
How much can we charge if they want copies?
The organization can charge a reasonable fee, which the regulations define as
no more than the fee charged by the IRS for providing copies. This currently is
$1.00 for the first page, and $.15 for each additional page. In addition, it may
charge the actual postage costs incurred in providing the copies.
The organization may require the individual to pay the fee before providing the
copies. If payment is required before the copies are provided and the
organization receives a written request, it must advise them of the amount due
within seven (7) days from the date of receipt of the initial request. The
organization must also respond to any questions from potential requesters
concerning the fees for copying and postage of each document, with and
without attachments, so that payment may be included with the request.
If prepayment is not required, consent from the requester must be obtained
before the copies are provided if the charge for copying and postage will
exceed $20.00.
The organization must accept any payment made by cash or money order; it
may accept payment in another form. If the request is made in writing, an
option to pay either by personal check or by credit card (one or the other)
must be provided.
If the requester is advised as to what the fee is and they do not pay the fee
within 30 days, or if they pay by check and the check does not clear, you may
disregard the request.
Note: If the individual brings a copier to the inspection, he/she must be
allowed to make copies directly, at no charge.
How soon do we need to provide copies of the requested documents?
Requests Made In Person. If the request is made in person at the principal,
regional or district offices during regular business hours, copies of the
documents should be provided on the day the request is made.
If there are unusual circumstances where fulfilling the request will place an
unreasonable burden on the organization, copies must be provided no later
than the next business day after the unusual circumstances cease to exist, or
the fifth business day after the request, whichever occurs first. Unusual
circumstances would include such occurrences as receipt of requests that
exceed the organization's daily capacity to make copies, requests received
shortly before the end of the business day that involve substantial copying, or
requests received on a day that the managerial staff capable of fulfilling the
request are involved in a special assignment.
A local agent may be retained to process requests made in person for copies of
the documents. However, the agent must be located within reasonable
proximity of the office, the name, address and telephone number must be
immediately provided to the requester, and the agent must timely furnish the
copies.
Requests Made In Writing. An organization receiving a written request for a
copy of its application or annual report(s) shall mail each copy within 30 days
of receiving the request. However, if payment is required in advance, it must
mail the copy within 30 days from the date it receives payment, as long as it
has notified the requestor, within 7 days from the date it received the initial
request, of its prepayment policy and the amount due.
If the requester consents, the document may be furnished by electronic mail; it
will be considered to be furnished on the date the document is successfully
transmitted.
A local agent may be retained to process written requests for copies. However,
the agent is bound by the terms and conditions (including deadlines) that apply
to the organization itself.
Exactly what part of the Exemption Application can someone inspect/ obtain
copies?
The application for tax exemption must include any prescribed form (e.g. Form
1023 or Form 1024), all documents and statements filed as a part of the
application or as part of any follow-up correspondence in support of the
application, and any letters or documents issued by the IRS in regard to the
application, including additional questions about the application.
If there is no prescribed form (for example, with an application for a group
exemption), the application includes the application letter, copy of the articles
of incorporation, bylaws, financial statements, statements describing the
organization, its purpose and its activities, and statements showing the sources
of the organization's income and the disposition thereof, and any other
documents required by the IRS or submitted in support of the application.
Note that if an application is still pending with the IRS and an exempt status is
not yet determined, nothing need be furnished. In addition, if there is a part of
the application that the IRS is required to withhold from public inspection, the
organization need not make that part of the application available.
We don't know where our Exemption Application is. What do we do?
If the application had been filed before July 15, 1987, and the organization did
not have a copy of the application on July 15, 1987, it does not have to be
made available.
However, if the application was filed on or after July 15, 1987, or if the
organization had a copy available on that date, you must find the application.
What Informational Returns have to be provided?
What must be provided as part of the Return?
An exact copy, as filed with the IRS, of any federal informational return (Forms
990, 990-EZ, 990-PF, 990-BL, and Form 1065) must be made available, including
all schedules, attachments and supporting documents. This includes any
amended return.
Except for private foundations, you may delete the name and address of any
contributor (make sure they are on a separate schedule, easily redacted, so
that the IRS does not inadvertently release this information). You also do not
have to make available form 990-T (unrelated business taxable income),
Schedule A of Form 990-BL, Schedule K-1 of Form 1065, Form 1120-POL, or 990PF.
Each form must be made available for a period of three (3) years from the later
of the date the return is required to be filed (plus extensions), or the date it is
actually filed. Any amended return also must be made available for three (3)
years from the date it is filed with the IRS.
What if the requester only wants part of the document?
If the requester clearly identifies the requested part or schedule, then that
part must be furnished. The organization may not charge the requester for the
entire Form 990 if only Schedule A is requested.
What if I think there is a harassment campaign against my organization?
If the IRS district director for the key district in which your organization's
principal office is located determines that your organization is the subject of a
harassment campaign (requests are part of an effort to disrupt the operations
of your organization, rather than to collect information), and that compliance
with these requests are not in the public interest, you are not required to
provide copies. Facts supporting the finding of a harassment campaign would
include a sudden increase in the number of requests, an extraordinary number
of requests made through form letters or similarly worded correspondence,
requests that contain language hostile to the organization, evidence that the
organization has already provided the requested documents, and the like. If
you believe that you may be the target of a harassment campaign, you should
contact our office so we can assist you in determining what steps you may want
to take, which may include applying for a determination that you are the
subject of a harassment campaign, and suspending compliance.
It would be appropriate to keep a log of all requests, whether in person or
written, so that if a harassment campaign is instituted against your
organization, you will have evidence of the type and number of requests
normally being received, and documentation of the increased burden.
You may disregard any request for copies of all or part of any document beyond
two received within a 30 day period, or four received within a one year period,
from the same individual or the same address, without a determination of
harassment from the district director.
What if we are under a group exemption?
Application for tax exemption. If your organization did not file its own
application for tax exemption, you must still, upon request, make available for
inspection or provide copies of the application as filed by your parent
organization, including any documents submitted to include your organization
under the group exemption letter. If your parent organization submits a
directory of organizations covered by the group exemption letter, you only
need furnish the application itself, and the pages of the directory that
specifically refer to your organization.
Annual information return. If your organization does not file its own annual
information return, you must upon request, make available for inspection or
provide copies of the group returns filed by the parent organization. If the
return has a separate schedules for each organization covered, you may omit
schedules that relate only to other organizations.
General. You have a reasonable amount of time (generally no more than two
weeks) to comply with the request made in person for public inspection or
copies. Where the requester seeks inspection, you may mail a copy of the
documents within this same time period instead of allowing an inspection; in
such a case you may charge for copying and postage only if the requester
consents to the charge.
For requests for copies made in writing, you must comply with the same time
limits that are discussed elsewhere in this letter.
The requester may also request, from the parent organization at its principal
office, inspection or copies of the application for group exemption or the group
returns, and the material submitted to include the local organization specified
by the requester.
If I post these documents on my website,
do I still have to make them otherwise available?
If you have made the documents widely available, you do not have to provide a
copy of the documents; however, you must still make the documents available
for public inspection as described above. You must also notify any individual
requesting a copy where the documents are available (including the website
address). If the request is made in person, the notice must be given
immediately. If the request is made in writing, notice must be provided within
7 days of receiving the request.
To be widely available, you must comply with the following: 1) The
document(s) must be posted to your website or as part of a database of similar
documents on another website; 2) the website clearly informs readers that the
document is available and provides instructions for downloading it; 3) the
document is posted in a format that exactly reproduces the document as it was
originally filed with the IRS, except for information permitted by statute to be
withheld from public disclosure; 4) any individual with access to the Internet
can access, download, view and print the document without any special
hardware or software (other than software that is readily available to members
of the public without payment of any fee), and without payment of a fee to
your organization or to the entity maintaining the website; 5) there must be
procedures in place to ensure the reliability and accuracy of the document
posted. If the posted document is altered, destroyed or lost, it must be
corrected or replaced.
Currently, the only format that complies with the requirements set forth above
is the PDF format. However, this may change, and the IRS is not mandating a
specific format, as long as the requirements above are met.
You should note that even if you do not post your 990 on the web, it may be
posted for you. See, e.g., http://www.guidestar.org/, and
http://nccs.urban.org/. Some state attorneys general have also indicated that
they may be posting 990's and other information that is filed with them.
Although this might eventually fulfill the requirement that your organization
furnish copies, it does not currently, as the requirement is for both the 1023
and 3 years of 990's (except for private foundations where the 3 year
requirement begins with the 2000 filing).
What is the penalty if I do not make the documents available?
An individual who has been denied inspection or a copy of an application for
tax exemption or an annual information return may notify the IRS of the
possible need for enforcement action. The penalty for failure to comply with
the public inspection or copying requirements is $20 per day during the time
the failure continues. For the annual information returns there is a maximum
penalty of $10,000 per return.
6.4.1 Requirements for Private Foundations. As noted above, although the
regulations discussed above specifically exclude private foundations from their
coverage, the Tax and Trade Relief Extension Act of 1998 extended the same
public disclosure requirements to private foundations. Final regulations were
issued in January, and were effective March 13,2000. The law only applies to
returns filed after that date; therefore, prior 990's do not have to be produced
(which means that it will be 2002 before 3 years worth of 990-PF's will be able
to be obtained. Private foundations will no longer be required to publish a
notice each year, in a newspaper of general circulation, to advise the public
that its tax returns are available for inspection, although in one state there has
been an attempt to require this publication to comply with state statutes.
Private foundations cannot redact information about their donors from the
disclosed form.
6.4.2 State Law May Require Other Disclosures. In California, charities (other
than religious corporations) whose annual gross receipts are normally more
than $25,000 must file Form CT-2 each year with the Attorney General's
Registry of Charitable Trusts. Form 990 must be attached. Any member of the
public may review these records.
6.4.3 Turning a Requirement Into an Opportunity. Since the public, including
a potentially hostile press, has the legal right to see a charity's tax returns, it is
important to prepare the returns with this disclosure in mind. Advisors should
view the returns as public relations documents and attempt to highlight the
organization's strengths and put in context any information which might
otherwise put the organization in a bad light. For this reason, we recommend
Board-level review of Form 990 prior to filing.
It should be noted that even if the organization itself is not making its Forms
990 available on the web, at least one organization is now doing so. See
http://www.guidestar.org. Guidestar is currently generating approximately 1
million hits per week, according to Debra Sinclair, spokesperson for
Philanthropic Research(15), which owns and operates the guidestar site.
6.5 Form 990 - General.
Forms 990 are required to be filed by almost every organization exempt under
Section 501(c)(3) of the Internal Revenue Code. As set forth above, they must
also be made available for inspection to anyone who requests them. They are
also used as the principal document required to be filed in approximately 35
states.
One item to note is that the 990 now reflects the accounting standards
contained in FASB Statements No. 116 and 117: an organization that has used
the accrual method of accounting, is now obligated to follow the FASB
standards in completing the 990.
Under Statement 116, nonprofits are required to recognize contributions when
the pledges are received, rather than when the contribution is actually made,
unless it is a conditional pledge, in which case it is recognized when the
condition(s) are substantially met. It also requires nonprofits to distinguish
between contributions that are permanently restricted, temporarily restricted,
and unrestricted.
At the 11th Annual Health Care Tax Law Institute held 4/25/95, and again at a
Practicing Law Institute held on 7/17/95, Marcus Owens, director of the IRS
Exempt Organizations Division, noted that the IRS Exempt Organizations
Division has been told by the Justice Department Tax Division that not enough
criminal referrals were coming its way. According to the Justice Department
and the FBI, failure to file a complete Form 990 is an indication that the
organization might be engaged in unlawful activities. In addition, failure to file
a complete and accurate form may be considered fraud. If an incomplete or
inaccurate Form 990 is filed, the officers and directors may now be facing, not
only civil but criminal penalties (i.e. jail).
It should be noted that the IRS is concerned about the correctness of the
information being reported on the 990. For example, IRS Exempt Organization
Review Branch Chief David Jones has noted that a significant number of "fairly
large and important institutions were going out and raising significant amounts
of money and were not reporting fund-raising expenses on their Forms 990,"
although many of these organizations did report fund raising expenses on their
audited financial statements.(16)
7. Deductibility of Contributions
7.1 What Not to Disclose: Don't Give Donors Tax Advice.
Any detailed discussion of the rules applicable to a donor's ability to deduct a
gift to a charity as a charitable contribution are beyond the scope of this
material. The rules are complex and extensive. More importantly, while a
charity naturally needs to understand the regulatory scheme applicable to its
donors, and how that scheme may affect their giving, charities should avoid
giving donors tax advice. Deductibility depends on a variety of factors relating
to the individual donor's tax situation that are generally beyond the knowledge,
and not the business, of the charity. The risks to a charity of giving donors
incorrect advice far outweigh the benefits of helping donors with their personal
tax planning - donors should be advised to seek their own tax counsel's advice.
We include a few of the most common general rules here, with emphasis on
recent changes.
7.2 What is a Contribution?
Contributions must be voluntary. If a "contribution" is required, it is not
deductible. Any restriction on the use of donated property lowers the value of
the gift.
If an event is sponsored, recognition of the sponsor is allowed but if the
recognition extends to promotion of a product, it is considered advertising. See
"Unrelated Business Income, Corporate Sponsorship Issues."
To the extent the donor receives a benefit back, no deduction is allowable.
However, de minimis guidelines as set forth in Rev. Proc. 90-12, 1990-1 C.B.
471, as amplified by Rev. Proc.. 92-49, 1992-1 C.B. 987, and as modified by
Rev. Proc. 92-102, 1992-2 C.B. 579, provide that insubstantial benefits received
by the contributor may be disregarded in certain situations.
7.3 Donations of Services; Volunteer Expenses.
A donation of services - of the donor's volunteer time - is not deductible.
However, expenses of the volunteer incurred to render volunteer services are
deductible as charitable contributions. For charitable use of an automobile, the
standard mileage rate after 1/1/98 is $.14 per mile ($32.5 per mile for business
use). If the expenses are for personal travel, if there is any significant amount
of personal pleasure associated with the travel, the charitable deduction is
denied, and no deduction is available for travel by a volunteer's spouse as such.
7.4 What Gifts of Property Can Be Deducted?
Gifts of inventory, property that would produce ordinary income on sale, are
deductible only to the extent of basis. Gifts of capital assets, in general, are
deductible to the extent of full fair market value when given to the public
charity (not private foundation). A gift of tangible personal property to a
publicly supported organization is deductible to the extent of fair market value
if the property is of a kind that would generate long term capital gain if it were
sold, as long as it is reasonable to anticipate that the charity will use the
property for a purpose related to its exempt function.
7.5 Contributions of Appreciated Property.
Sections 56 and 57 were modified by the 1993 tax law changes to provide that
the difference between fair market value and adjusted basis of donated
appreciated property will not be treated as a tax preference item for purposes
of determining alternative minimum tax. This allows donors to deduct the fair
market value of gifts of appreciated property, the use of which is related to
the exempt organization's tax exempt purpose (excluding inventory, etc.). It
does not repeal the related use rule for gifts of tangible personal property (the
taxpayer is limited to basis unless the property is used by the donor to carry
out its exempt purpose), and the donor must have held the appreciated
property more than one year.
7.6 Gifts of Appreciated Property to Private Foundations.
Section 170(e)(5), which allows individuals to deduct the fair market value of
appreciated stock contributed to a private foundation has been expiring every
year; the last reinstatement was through the Small Business Job Protection Act
which reinstated the provision for gifts made on or after July 1, 1996, through
May 31, 1997. A provision in the $80 billion tax cut package approved 9/17/98
by the House Ways and Means Committee proposed to make this permanent.
7.7 Donations of Mortgaged Property.
There are several issues that arise from the contribution of mortgaged property
to a charity. First, from the exempt organization's viewpoint, a mortgage on
property not used by the nonprofit in the exercise of its exempt purposes will
result in the property being considered to be debt financed. This may result in
unrelated business income. If, however, the nonprofit does not assume the
mortgage or make payments on it, the liability may be avoided for up to 10
years. Of course, if the property is not used for exempt purposes, then there
may not be an exemption from property taxes available.
From the donor's standpoint, there may be additional concerns. One is
determining what the value of the donated property actually is (full fair market
value where the sale would have generated long-term capital gain, reduced by
any amount which would have generated short-term gain or ordinary income if
sold). Special rules such as those regarding depreciation recapture, may also
convert what otherwise would be capital gain into ordinary income. In
addition, the value of the gift is reduced by the amount of the mortgage, even
if the mortgage is non-recourse, and the donor agrees to pay it. Standard rules
concerning substantiation and acknowledgment continue to apply. The
donation will also be treated as a bargain sale, which is triggered by the
property being sold for less than fair market value. This results in the donor
being able treat, as a charitable contribution, the difference between fair
market value and the price paid by the nonprofit. However, the donor's
adjusted basis in the property is divided between the sale portion and the gift
portion, and the donor is treated as having received income equal to the
difference the amount paid by the nonprofit and the portion of the donor's
adjusted basis allocable to the sale portion.
7.8 Travel
There is no charitable deduction allowed for travel expenses incurred when
performing volunteer services unless there is no significant amount of personal
pleasure.
No deductions are allowed for spousal travel.
7.9 Gifts of Partial Interests
Fractional Undivided Interests, -- the charitable donee must have exclusive
possession for a portion of each year representing its interest. (Cannot retain a
life estate interest and get a deduction, unless it is personal residence or farm
- Sec. 170(f)).
7.10 Club Membership Fees.
Section 274(a)(3) was added to the Internal Revenue Code in 1993 to eliminate
the ability to deduct "amounts paid or incurred for membership in any club
organized for business, pleasure, recreation, or other social purpose. This
section, which did not receive much publicity prior to the 1993 tax law
changes, has become a significant issue with a number of clubs, such as the
Rotarians, etc., who have requested that they be exempted from the law. It is
clear that this section affects clubs organized under Section 501(c)(7), and
perhaps others as well.
7.11 Nonprofits May Now Own S Corporations
The Small Business Job Protection Act of 1996 now allows tax-exempt
organizations described in Section 401(a) or 501(c)(3) to be shareholders of S
Corporation stock.
The tradeoff, is that such an ownership interest shall be treated as an interest
in an unrelated trade or business, and will therefore be taxable to the
nonprofit.
8. Unrelated Business Income
8.1 General.
Although, as discussed above, tax-exempt organizations are generally exempt
from taxes on their income, they are generally taxable on income generated by
commercial-type activities engaged in for fundraising purposes. The logic of
this position is that, in engaging in such activities for profit, they compete with
non-exempt businesses, and tax-exemption would be an unfair and
unwarranted advantage. IRC Sections 511 through 514 and the accompanying
Regulations set forth the scope of the unrelated business income tax (UBIT) and
its exemptions and exclusions. An exempt organization must report unrelated
business income in excess of $1,000 per year by filing IRS Form 990-T,
regardless of whether any tax is actually owed on such income.
8.2 Definitions. Section 511 imposes a tax on unrelated business taxable
income, which is defined in Section 512 as the gross income derived by any
exempt organization from any unrelated trade or business regularly carried on
by it, less allowable deductions which are directly connected with the conduct
of that trade or business.
8.3 Relatedness. Section 513 defines an unrelated trade or business to mean a
trade or business whose conduct is not substantially and causally related to the
accomplishment of the exempt organization's purposes, other than through the
production of funds. In other words, to be related, the operation of the
business must make an important contribution (other than financial) to the
nonprofit's exempt-purpose program.
8.4 Exemptions. Section 513 exempts from the definition of "unrelated trade
or business" any trade or business-(a) which is substantially conducted by volunteers, or
(b) which is conducted for a charity primarily for the convenience of its
members, students, patients, employees, and the like, or
(c) which consists of selling donated merchandise.
Section 513 also contains special rules for a number of activities, including the
sale of advertising, the operation of trade shows and conventions, and the sale
or exchange of mailing lists.
8.5 Examples of Exclusions. Section 512(b) contains numerous modifications
to the definition of unrelated business taxable income, including these:
8.5.1 Passive Investment Income. Dividends, interest, and similar passive
investment income are excluded from the reach of the unrelated business
income tax, as are gains from the disposition of investment property. However,
interest and annuities (but not dividends) received from a controlled
organization are taxable as unrelated business income. Control, for this
purpose, means an 80% interest, reflected either in stock ownership or in an
interlocking of directors, trustees, or other representatives.
8.5.2 Royalties. Section 512(b)(2) excludes "all royalties (including overriding
royalties) whether measured by production or by gross or taxable income from
the property, and all deductions directly connected with such income."29
However, royalties from controlled organizations, as defined above, are
taxable. The IRS has begun to look closely at whether a nonprofit is being paid
for the use of intellectual property (a tax-free royalty) or for services provided
to a commercial entity (a taxable fee for service). For example, payments for
the use of a nonprofit's mailing list have been the subject of much litigation,
most recently in the context of affinity credit cards. See Paragraph 9.10 for
further details.
8.5.3 Rent. Section 512(b)(3) excludes income received from the rental of real
property. However, there are numerous exceptions to this general rule, and
transactions should be structured carefully to ensure that the income can
properly be excluded from tax. For example, if the tenant is a controlled
organization, as defined above, the rental income is taxable. If the property is
debt-financed, a proportion of the rental income will be taxable, as discussed
below. Income from the rental of personal property is taxable unless the
personal property is leased with real property and the rent attributable to the
personal property is no more than 10 % of the total rent from all the property
leased. Rent may be computed based on a fixed percentage of sales or
receipts. However, if the determination of the rent amount depends wholly or
partly on the income or profits derived by any person from the leased property,
the income is taxable. A nonprofit landlord may provide normal maintenance
services; however, if the nonprofit landlord provides services primarily for the
convenience of the tenant, the rental exclusion no longer applies.
8.5.4 Research. Sections 512(b)(7) and (8) exclude income and deductions
related to the conduct of research for a governmental agency or by a college,
university, or hospital. Section 512(b)(9) excludes income and deductions "in
the case of an organization operated primarily for purposes of carrying on
fundamental research the results of which are freely available to the general
public," regardless of the person or entity for whom the research was
performed.
8.6 Debt-Financed Income. Exempt organizations, like other entities,
sometimes borrow money to acquire income-producing property. Section 514
provides that income from debt-financed property is taxable in the proportion
that the organization's acquisition indebtedness bears to its equity in the
property. The taxable proportion of the income diminishes as the debt is paid
off. If the property is sold while indebtedness remains, the capital gains on the
sale are taxed proportionately. Intricate technical rules apply, and there are
several exceptions. For example, if at least 85% of the property is used for
purposes substantially related to the organization's own exempt purposes, the
rental income is not taxed. The tax on unrelated debt-financed income also
does not apply where the exempt organization acquires real estate in the
neighborhood of its own facilities, which it plans to use for exempt purposes
within 10 years of acquisition, and the organization rents the property to
others in the interim.30
8.7 IRS Concerns.
The IRS is extremely concerned about the level of UBIT noncompliance. There
are at least three problems: 1) Many organizations that should be filing Forms
990T are not doing so. 2) Many of the Forms 990T filed are incomplete. 3) Many
of the Forms 990T filed contain incorrect or misleading information. In fact,
"... a recently released publication called "The IRS Research Bulletin.' the 1992
issue ... one article ... it's kind of the first official analysis of the unrelated
business income tax/taxpayer compliance measurement program that was done
on a sample of 1986, calendar '86 and fiscal year '87 990-T's a couple of years
ago. ... The study calculates something called the `voluntary compliance level'
which is a ratio that basically is derived from how much you fessed up to on
your 990-T, and then how much you fessed up to one the dust of the audit had
settled, and the difference between those two, this ratio, is the voluntary
compliance level and for public charities, it's around 56 percent. ..." -- Marcus
S. Owens, IRS, Director, Exempt Organizations Technical Division at the 6/7/93
Spring meeting of the American Bar Association Tax Section, Exempt
Organizations Committee.
In other words, when the IRS performs an audit on a 990-T, it can expect that
almost half of the forms will result in more tax being owed than was disclosed
and paid. And this was among the organizations that were voluntarily filing.
Even when UBIT is paid, the amounts are generally small. An analysis of IRS
records shows tat of 1.1 million tax exempt organizations that generate some
1.1 trillion a year in revenues, only 44,890 organizations claimed UBIT,
resulting in a tax of $373.4 million.(17)
8.8 Cost Allocations.
The regulations say that cost allocations (between exempt activities and
activities subject to tax) must be done on a reasonable basis, and must be
consistently followed. However, there are no guidelines for this, and the
burden of proving reasonableness is on the practitioner. Only that portion of
expense proximately related to business activity can be deducted. Several
items to consider, is how would the method look described on the front page of
the newspaper? Secondly, if you have losses each year on an unrelated
business, the Service will be concerned about why you are engaging in it.
Document everything you do. And unrelated business income as shown on the
Form 990, should match the figures on Form 990-T.
8.9 Corporate Sponsorship Issues
In addition to the standard types of income, marketing opportunities for
exempt organizations continue to multiply. Much of this is in the area of cause
related marketing, where a business solicits business by appealing to the
charitable tendencies of the purchaser. As a result, we have seen affinity
credit card arrangements, long distance telephone services, sale of grocery
store script, and the like. We have also seen corporate sponsorship of exempt
activities continue to expand. For example, the Cotton Bowl is now the Mobil
Cotton Bowl. The issue raised is whether the money paid to the exempt
organization is a donation which is nontaxable to the organization, or whether
it is advertising, which is taxable as unrelated business income.
After some 15 years of litigation, proposed regulations, revised proposed
regulations, and continuing discussion on the matter, the issue of corporate
sponsorship appeared to be resolved by a provision in the Taxpayer Relief Act
of 1997 (the "Act"), which sets forth new corporate sponsorship standards which
basically follow the 1993 proposed regulations, with some exceptions. Although
the law was not retroactive, the IRS stated that it would apply the standards to
old corporate sponsorship cases as well. If the message goes beyond display of
the corporate name and logo, and includes a qualitative or comparative
language, this will be found to be advertising, subject to unrelated business
income tax.
It now appears that the issue continues to be still alive and well. New proposed
regulations were recently released that contain several controversial measures.
The 1993 regulations focused on the nature of the services provided by the
exempt organization rather than the benefit received by the sponsor. However,
the Act provided that qualified sponsorship payments (payments made by a
person engaged in a trade or business with respect to which there is no
arrangement or expectation that such person will receive any substantial
return benefits other than the use or acknowledgment of the name or logo) are
not subject to UBIT. Under the proposed regulations, a substantial return
benefit is found to mean any benefit other than (1) use or acknowledgment of
the payor's name or logo; or (2) goods or services having an insubstantial value
under existing IRS guidelines (e.g. fair market value of not more than 2 percent
of the payment or $74, whichever is less). Even more controversial is the
provision that the right to be the exclusive sponsor of an activity is generally
not a substantial return benefit.
8.10 Mailing Lists/ Affinity Cards
Section 513(h) allows exempt organizations to rent or exchange lists with other
exempt organizations. For a number of years, the IRS took the position that this
means that the rental of mailing lists to nonexempt organizations gives rise to
UBIT. The position taken by the exempt organizations is that payment for the
mailing lists is simply a payment of a royalty, which is excluded from UBIT. The
IRS, on the other hand, took the position that services were also provided by
the organization. The organization may exercise quality control over the use of
the name (see LTR 7841001). Clearly it is necessary that the use of the
organization's name in conjunction with its mailing lists be done in such a way
as to not violate the organization's integrity. However, the issue is when does
the exercise of quality control turn into performance of service?
In the Sierra Club Inc. v. Commissioner Internal Revenue Service cased decided
by the Ninth Circuit on June 20, 1996, the court accepted the argument of the
Commissioner that tax exempt royalties must be passive in character; however,
it found the steps taken by the Sierra Club with regard to the rental of its
mailing list to be sufficient to find that no active involvement had occurred. On
the matter of its affinity card program, the summary judgment was reversed,
and was sent back to the district court for further consideration. On remand,
Sierra Club Inc. v. Commissioner, T.C. Memo 1999-86, the Tax Court decided
that income from the affinity credit cards constituted nontaxable royalties. In
so doing, the court took the same position as it has inprior cases, such as
Mississippi State Alumni Association v. Commissioner, T.C. Memo 1997-397.
This case was followed by decisions in two additional tax court cases decided
June 22, 1999 - Common Cause v. Commissioner, 112 T.C. Memo 23, No. 1392127 and Planned Parenthood Federation of America, Inc. v. Commissioner, T.C.
Memo 1999-206, No. 13922-97, where the court found that payments received
for mailing lists are nontaxable royalties, and thus not subject to UBIT.
Finally, on October 4, 1999, the Ninth circuit, ruling on the merits of an affinity
card case, determined that income earned by two alumni associations through
affinity card programs, was nontaxable income. It found that a little bit of
service (about 12 hours per year per association) did not convert royalty
payments into unrelated business income. Shortly thereafter, Marcus S. Owens
announced that the service would probably stop litigating such arrangements,
and suggested that reasonable allocation would be an appropriate approach.
And on December 16, 1999 a memorandum from Jay Rotz, then an official in
the IRS' exempt Organizations Division, clearly stated that further litigation in
similar cases should be closed.
It should be noted that in all of these situations, the charity took steps to make
sure it was not directly providing services along with the mailing list. In fact, in
the memorandum from Jay Rotz he noted that:
"In the cases decided in favor of the taxpayer, the facts showed that the
involvement of the exempt organization was relatively minimal, and the
organizations generally hired outside contractors to perform most services
associated with exploitation of the use of intangible property."
Therefore, it is possible that future cases could be brought if the IRS found
significant services to be provided by the charity. Therefore, suggestions to
avoid being the test case in future litigation include:
Clearly state in the agreement that the income being received is royalty
income and refer to the agreement as a licensing agreement.
Any agreement should be clear that no services are being provided by the
nonprofit; in addition, specific services should not be rendered, other than
reviewing materials for purpose of quality control. Services needed should be
rendered by an organization other than the nonprofit (perhaps a for-profit
subsidiary), or a separate agreement setting forth such services should be
drafted. In either case, the nonprofit or its subsidiary should plan to pay taxes
on the funds generated from the service agreement.
As part of this, no improvements/updates should be made to the mailing list by
the nonprofit in excess of those that are needed for use by the exempt
organization itself, nor should the organization send out mailings or otherwise
solicit for the for-profit entity (especially not using the nonprofit postal
privileges).
The charity should not bear any financial risk. The agreement should also make
it clear that this is not a joint venture or partnership of any kind.
8.11 Travel Tours
Travel tours being sponsored by colleges, universities, churches, museums and
other nonprofits continue to be challenged by for-profit tour groups, who claim
that they are being unfairly competed with. The question is whether the tour is
substantially related to the purpose of the nonprofit, and whether it is
educational, etc. or is really a disguised vacation. As stated by Jere W. Glover
of the Small Business Administration in a letter to the Treasury Department
(6/27/96):
"Unfortunately, the inherently subjective nature of the 'substantially related'
test, difficulties in its administration, and extremely limited guidance have
contributed to a perception of fundamental unfairness by the small business
community, particularly in the travel industry... Rather than enabling
nonprofits to serve traditional educational tour markets for which exemption is
appropriate, small businesses complain that this exemption has emboldened
tax-exempts to maintain and expand into those market segments with the
highest disposable income, the largest number of professionals, the most
educated customers, and the least need for tax exemption."
A formal educational program, emphasized in the solicitation materials, is
recommended for any organization desiring to put on such a tour. Organizations
should be prepared to provide documentation on the purpose and intent of the
tour, including such facts as the number of hours allotted for instruction and
the amount of educational material included.
Effective February 7, 2000, the IRS released final travel tour regulations (T.D.
9974). The final regulations adopt a general facts and circumstances approach.
Although no specific factors determine relatedness, there are a number of
indicators, such as why a particular tour was chosen, how it is promoted, and
its operation. Some factors that may be looked at are whether academic credit
is given, the presence or absence of lectures, the percentage of time spent on
instruction, whether written reports are required, and instructor qualifications.
Contemporaneous documentation is helpful.
8.12 Gaming Activities
The IRS has been making a study of how much an organization makes from
various gaming activities, such as casino nights, pull tabs and pickle cards (a
game of chance authorized by some state statutes). The proceeds from these
are generally subject to UBIT unless operated by volunteers. See IRS Pub. 3079.
It should be noted that there are exceptions: In TAM 199941043 (June 28, 1999)
that addresses a situation involving pull-tab revenues in the State of
Washington, it was noted that the 1973 Gambling Act for the State of
Washington requires that the entire net income of any gambling activity be
used for the lawful (exempt) purpose of the organization.(18) Because of this,
the IRS found that these payments were not voluntary charitable contributions,
but were ordinary and necessary business expenses. As such, they would be
deductible under Section 162 at the time the expenditure is actually made, to
offset any unrelated business income.(19)
It should also be noted that the IRS is actively auditing gaming activities. See
Section 17.2.3, below.
In addition to resulting in UBIT, if all of the income of the organization is
derived from such activities, the organization will be found to be a private
foundation. See, e.g. Education Athletic Association Inc., v. Commissioner, Tax
Court No. 6396-98x (3/10/99).
Another recent development in California has to do with raffles. Raffles have
been illegal in California. The California Constitution was amended by
initiative, to allow the Legislature to authorize private, nonprofit, eligible
organizations to operate raffles to provide funding for beneficial and charitable
works, subject to specified requirements. SB 639 was passed on August 30,
2000, was enrolled and signed by the governor in September of 2000. It will be
effective July 1, 2001. Any entity that wishes to use raffles as a means of
raising funds should review this law, as it has specific requirements, including a
requirement that it register annually with the Department of Justice (Attorney
General).
8.13 Associate Member Dues
Associate members are those individuals who join an organization in order to
receive certain membership benefits, but who generally are not otherwise
involved with the purpose of the organization. Often these individuals are nonvoting. For example, an associate member may join to take advantage of an
insurance program offered by the nonprofit to its members. The IRS did
consider dues from associate members to be unrelated business income. See,
e.g. Rev. Proc. 95-21, 1995-1 C.B. 868; National League of Postmasters of the
U.S. v. Comm'r, T.C. Memo 1995-205. However, this view appears to have
changed, at least in part; in TAM 9742001, associate member dues in a trade
association context were determined to be related and not taxable.
8.14 Operation of a Trade or Business
In a recent Technical Advice Memorandum, it was determined that an
organization that operated a tea room and a gift shop in conjunction with a
consignment shop, would continue to be exempt under Section 501(c)(3), but
that income from the tea room and gift shop would be subject to UBTI.
The organization had a purpose of assisting needy women to earn a living by
means of their own handiwork, and the consignment shop provided a place
where items produced by needy women would be exhibited and sold. The
organization determined that having a gift shop, that sold items purchased
from for-profit vendors for resale, is necessary to draw the clientele, and that
the tea room, only accessible through the gift/consignment shop, also
enhances the experience, thus attracting more customers.
Section 1.501(c)(3)-1(e) of the Regulations holds that an organization may be
exempt even if it operates a trade or business as a substantial part of its
activities if the trade or business is in furtherance of the organization's exempt
purposes, and the organization is organized and operated for a substantial
exempt purpose, and not with a primary purpose of carrying on an unrelated
trade or business. In this case, the organization clearly had an exempt purpose,
and the unrelated trade or business was not the primary purpose of the
organizations. However, for the operation to be exempt from UBIT, the activity
"from which the gross income is derived, must contribute importantly to the
accomplishment of those purposes." This requirement was not met. Therefore,
although the organization continued to be exempt, it was required to pay taxes
on the income derived from the tea room and gift shop.
9. Political Activity
As is discussed above, political activity is strictly prohibited by 501(c)(3)
exempt organizations. However, other exempt organizations are not subject to
the same restrictions. For example, if a 501(c)(4) is primarily organized and
operated to do something other than partisan candidate politics, it can carry
on candidate activity as a secondary activity. Rev. Rul. 81-95. Under 527(f), an
exempt organization (e.g. a 501(c)(4)) must also pay taxes on investment
income to the extent of its political expenditures.
Federal campaign finance law prohibits corporations from using general
treasury funds to make contributions in cash or in kind to candidates for
federal office, but permits expenditures related to a federal campaign as long
as the expenditures do not pay for express advocacy. On July 30, 1996, the
Federal Election Commission filed a suit against the Christian Coalition, which
applied for but had not received exemption under Section 501(c)(4) of the
Internal Revenue Code, alleging that it has violated campaign finance laws by
promotion of Republican candidates and distribution of partisan voter guides.
In 1999 it was reported that its application for exemption was denied by the
IRS. The Christian Coalition was more successful in convincing a federal judge
that its voters guides did not violate the Federal Election Laws, although the
judge did find the Coalition responsible for penalties for express advocacy of
Newt Gingrich in his 1994 reelection campaign, and for sharing a mailing list
with Oliver North's 1994 campaign for senate. On February 25, 2000, the
Christian Coalition filed suit against the IRS, alleging that they were
discriminated against with the denial of their exemption.
Primarily political organizations are organized under Section 527, adopted in
1975. Under Section 527, income consisting of contributions, dues, exempt
function-type activity from political events and bingo is tax exempt. Everything
else is probably taxable - either as UBIT, or investment tax. If you have $100 or
more of investment income, you must file 1120-POL, and pay tax at the 34
percent corporate tax rate. A 527 organization cannot do anything nonpolitical.
There has been significant activity in the area of Section 527 organizations
recently. This was the result of several factors. First, Section 527 organizations
do not have to file an exemption application as do 501(c)(3) organizations.
Secondly, because Section 527 organizations are generally highly regulated by
federal election law disclosures, there has been no separate reporting required
by the IRS. Thirdly, In the late 1990's the IRS issued several private letter
rulings holding that in an organization engages in "voter education" activities
that are intended to influence the outcome of an election, the organization
may qualify as a political organization under Section 527. Finally, a 1996
district court case held that an organization that developed ideas and
circulated them generally to candidates and supporters, this was not to be
considered a direct contribution to any particular federal candidate. As a result
such an organization was not subject to the disclosure rules of the federal
election law. The confluences of these factors has resulted in a number of
organizations that have worked to indirectly influence elections without
directly contributing to a political candidate did not have to report to anyone.
When this was publicly disclosed, Congress put campaign reform on the fast
track, and on July 1, 2000, Clinton signed into law a new disclosure law that
required these "secret" Section 527 organizations to register with the IRS within
30 days. This information would be made public by the IRS within 15 days after
receipt. Disclosure reports must be filed every three months during an election
year, with additional reports required 12 days before, and 30 days after an
election. These reports must include the name, address and occupation of
persons receiving $500 from or more, or contributing $200 or more to the
organization. The IRS quickly began to make these reports available through
the internet, as required by the law.
10 Lobbying
Lobbying expenses are no longer deductible. If a tax-exempt organization
engages in lobbying, the portion of dues allocable to lobbying are
nondeductible, and members must be notified of the portion projected to be
used for such lobbying. Alternatively to such notification, a tax may be paid by
the organization on the amounts used for lobbying at the highest corporate tax
rate. If this tax is paid, the entire membership dues are deductible.
In addition, a gift to a charitable organization may not be dedicated as a
charitable gift if the organization is engaged in lobbying on matters of direct
financial interest to the donor's trade or business.
This change in the law has attracted a substantial amount of attention, in large
part because of the difficulty in applying the law. In addition, there have been
numerous requests for clarification of the law, including suggestions that the
definition of lobbying be limited.
In 1995, a revenue procedure that would explain when an organization meets
the requirements of section 6033(e)(3) for exemption from the notice and
reporting requirements relating to lobbying activities was issued.(20)
In addition, final lobbying regulations were issued. T.D. 8602, EOTR, vol. 12,
no. 2, p. 399 (Aug. 1995)
10.1 Lobbying Disclosure Act
The Lobbying Disclosure Act went into effect at the beginning of 1996. This Act
requires charities that lobby to register and file semi-annual reports if it
employs a lobbyist, and expects to or does incur lobbying expenses of $20,000
or more in a six-month period. A lobbyist is defined as someone who makes at
least two lobbying contacts in a six month period and spends at least 20% or his
or her time lobbying. Once an organization registers, it must file semi-annual
reports, even if it does not meet one or both of these requirements during the
six month period, unless and until it terminates its registration. And
registration may not be terminated unless the organization has stopped all
lobbying efforts, and does not intend to resume the same.
11 Exempt Organization Pension Plans.
11.1 401(k) Plans.
One of the changes made by Congress in 1996 through the Small Business Job
Protection Act is that tax-exempt organizations are now eligible to use Section
401(k) plans as a part of their retirement program (Section 1426). The principal
advantage of this is that many people are familiar with Section 401(k) plans
and will thus be comfortable using them for their nonprofit. In addition,
403(b)'s are only available for 501(c)(3) organizations; 401(k)s are available for
all exempt organizations. However, it should be noted that there may be more
benefits available through the use of a 403(b) plan, so nonprofits should not
automatically assume that a 401(k) plan should be used. The 401(k) plans do
have the advantage that the employer does not have to offer the plans to all
employees, they are portable, have more investment options and fewer
administrators.
It should be noted that an organization that has a 403(b) plan cannot transfer
the funds to a 401(k), and generally cannot distribute the funds to participants.
Therefore, if an organization has a 403(b) plan in existence, it will have to
continue to maintain it, even if it "terminates" it by withholding additional
contributions.
11.2 403(b) Plans.
403(b) plans continue to have other advantages, including the fact that the
section 415 limit is twice as high, and an employer can avoid ERISA with a
salary -reduction only plan.
11.2.1 Section 403(b) Plans - Tax Sheltered Annuity Voluntary Compliance
Program
One of the surprises to come out of the CEP program was the number of
exempt organizations that have Section 403(b) plans that are considered by the
IRS to be out of compliance.
The most common problem appears to be excess contributions. Specifically,
sponsors exceed the maximum exclusion allowance (approximately 20 percent
of includible compensation under code section 403(b)(2), they claim elective
deferrals in excess of the $9,500 limit of code section 402(g); and they exceed
the 415 limitation on allocations of $30,000. Other common problems are with
the salary reduction agreements, and violations of access restrictions on funds.
Other problems such as employers not making the required amount of matching
contributions, violations of nondiscrimination requirements, or mistakes in the
design and operation of the plan, which are planwide, have also been found. In
addition, 403(b) plans are only available for 501(c)(3) organizations; apparently
some 501(c)(6) organizations have also attempted to use this form of pension
plan. These problems can be summarized as being operational, demographic,
and eligibility failures.
Although the ultimate consequence of noncompliance is that the entire
contribution may be includible in each employee's gross income if the plan
loses its status as a 403(b) plan, the consequences to the organization can also
be painful. Robert Architect of the IRS Employee Plans Technical and Actuarial
Division, speaking at a 6/1/95 meeting of the IRS Baltimore Key District
Benefits Conference in Philadelphia noted that in one case, a teaching
university with an affiliated hospital misclassified working students as students
rather than employees, and was forced to pay $6.5 million for
nondiscrimination violations, including the inability of students to make salary
reduction agreements.
As a result of the large numbers of exempt organizations not in compliance
with the law, the IRS has taken a number of steps to educate its agents as well
as the exempt organizations. However, because the initial response of the IRS
to institute a Tax Sheltered Annuity Voluntary Correction Program, which went
into effect May 1, 1995, and permits an employer with a tax sheltered annuity
program to voluntarily identify and correct defects, also required the payment
of sanctions, many organizations decided simply to close down their plans. This
was not the result that the IRS was looking for, and they have since issued Rev.
Proc. 99-13 which provides for other alternatives: If the self-correction option
is exercised, there are no fees or sanctions; if there is a service approved
correction, there are fees but no sanctions. However, if the resolution is as a
result of an examination by the IRS, then sanctions will be imposed. The
service will not pursue individual inclusion or employer's federal income tax
liability if one of these procedures is followed. See also new exam guidelines
for 403(b) plans which were finalized in April of 1999, contained in 7.7.1:
Employee Plans Exam Guidelines Handbook Chapter 13: 403b plans.
See also Rev Proc 2000-16 which includes changes in methodology and in formal
requirements in the Tax Sheltered Annuity area.
According to Robert J. Architect, senior tax specialist in the IRS's EP Division,
the Service will continue examinations in this area. In addition to the
Coordinated Examination Procedure exams discussed below, specific exams
were to be done in each geographic region in fiscal 2000. Therefore, nonprofits
can expect continued activity concerning 403(b) plans.
11.3 Section 457 Plans.
There are several problems concerning 457 plans that have been frequently
discovered by the IRS, according to Catherine L. Fernandez, an attorney in
Branch 1, IRS Office of Associate Chief Counsel (EP-EO), speaking at a health
care organization tax conference on 10/9/97. One is that when an employer
maintains both a 457 and a 403(b) plan, the $7500 deferral limit (now $8,000,
effective 1/1/98 - see Notice 97-58) is often violated, and the catch-up
provision that allows an employee to exceed this limit in the three years
leading up to retirement often is not administered properly. Further,
distributions may not be made for reasons other than death, disability or
retirement.
Probably the most significant change in this area is that Section 457 Plans are
now under the oversight of the new TE/GE division of the IRS. See discussion of
IRS reorganization. As a result, it can be expected that there will be
heightened scrutiny. The IRS is currently working on new regulations. Robert J.
Architect of the TE/GE Employee Plans Division reported that, in addition to
the 403(b) plan audits his division will continue to conduct, it will be reviewing
457 arrangements as well.(21)
12. Worker Classification: Employees v. Independent Contractors.
Whenever an organization is audited, the IRS will review the issue of
misclassification of employees. The GAO estimates that the government loses
1.6 billion dollars annually as a result of the misclassification of employees as
independent contractors. The IRS finds exempt organizations to contribute
more than their fair share to this loss.
If your exempt organization has individuals being paid as independent
contractors, you should look carefully at this area and determine if, following
the common law guidelines, the individual qualifies. A written contract would
be highly recommended. If the individual is not clearly an independent
contractor, the organization can expect to be challenged in this area.
Section 530 of the 1978 tax act continues to provide some relief in this area.
However, this requires that the worker must have been consistently treated as
an independent contractor, the organization must have treated others in a
similar position in the same manner, the organization must have filed all
required federal tax forms (including Forms 1099), and the organization must
have a reasonable basis for treating the worker as an independent contractor.
However, changes to the Small Business bill have modified Section 530 to
provide more protection to the employer.
If the organization cannot function without the individual, the IRS will view the
individual as an employee.
Workers compensation programs are also auditing organizations in this area,
and assessing back payments based upon their findings.
The Service is now willing to look at employment tax issues on a special,
expedited basis under a classification settlement program announced in March
of 1996 (Announcement 96-13). Revised instructions have recently been
released. Under the CSP, graduated settlement offers are available, which are
intended to simulate the results that would be obtained if the business/
nonprofit had exercised its right to an administrative and/or judicial appeal.(22)
13. IRS Audits of Exempt Organizations
13.1 Coordinated Examination Procedure.
After many years of auditing exempt organizations on a "hit and miss" type
basis, the IRS developed a coordinated examination procedure that it began
using in 1991 to audit exempt organizations. As explained by IRS Commissioner,
Honorable Margaret Milner Richardson, at the 6/15/93, hearing of the Oversight
Subcommittee of the House Ways and Means Committee on the federal tax laws
applying to tax-exempt organizations:
"Several years ago, we assessed the effectiveness of our traditional exempt
organization audit efforts, and we determined that our traditional approach of
using an exempt organization agent to examine a large exempt organization
was not adequate to audit conglomerates and other systems that included
taxable subsidiaries, joint ventures and other complex arrangements and
transactions.
"Consequently, we began using a new examination approach to strengthen our
exempt organization enforcement program. This new approach, which we refer
to as the coordinated examination program or CEP, sometimes it's called, was
designed and implemented to enable our field agents to audit effectively
increasingly complex activities of large exempt organizations such as hospital
systems and universities. ...
"Before we implemented this coordinated examination program, exempt
organization audits were typically limited to reviewing the activities of tax
exempt organizations and verifying the accuracy of the information that was
reported on the Form 990 information return and any Form 990T, which is the
exempt organization business income tax return. ... We concluded that these
audits were simply not adequately examining transactions that included related
or affiliated taxable entities, such as taxable subsidiaries, joint ventures,
partnerships and related individuals."
One reason for the coordinated audit program is, as is mentioned above, to
provide a method of adequately examining the large tax-exempt organizations.
Another outcome of the program is to allow the IRS to develop and improve
guidelines for the audit of different types of exempt organizations. By having a
concentrated audit program in specific areas, the IRS is able to determine the
types of problems that most commonly occur in an area, so that future audits
can be more specifically directed. This is expected to provide greater
consistency in the audit process and to permit a more effective allocation of
resources.
Less than two years later, Marcus Owens, director of the IRS's Exempt
Organizations Division, reported that the CEP audits in the EO area "have been
successful in all ways." In a speech given by Mr. Owens on 11/15/95 to the
Capital Area Chapter of the Maryland Association of CPA's, one audit closed
with a $130 million unrelated business income tax deficiency. Owens noted in
October of 1999 that the average assessment of recently settled cases is $2.5
million, discounting a couple of extraordinarily large settlements.(23)
The FY 2000 EP/EO Workplan issued August 18, 1999 reported that: " From FY
1991 through March 31, 1999, 130 CEP cases were closed nationwide." As of
October, 1999, there were 83 CEP examinations in progress. Of these, 40 were
of health care entities, and 20 involved colleges and universities. A number of
audits are of joint ventures, and control continues to be the important
factor.(24)
The CEP exams will continue to occupy a large part of the IRS examination
activities. However, according to Thomas R. Burger, IRS Director of
Employment Tax Administration and Compliance, fewer cases are randomly
selected. Rather, most CEP audits now result from leads or from tax returns
that "don't pass the smell test." The concentration are those with "a high
probability of error." (25)
13.2 Consequences of CEP and Other Audits/Areas of Continued Audit Focus
With the CEP audits, the IRS has been focusing on several specific areas,
principally health care and colleges and universities. The results continue to
justify expansion of large-case audits. At least one health care provider has had
its exempt status revoked as a result of a CEP audit. The reason for such
revocation appears to be as a result of inurement resulting from the purchase
and sale of physician practices, and from excessive compensation. Additional
revocations are likely. In addition to the complete CEP audits, it is expected
that correspondence examinations, office audits, and targeted issue
examinations will be pursued in the EO area.
13.3 Audit Guidelines.
The IRS has been issuing audit guidelines that set out what the auditors will be
looking for in their CEP audits. Because they set forth clearly the concerns of
the IRS, they should be reviewed, even by entities that are not directly
affected. These guidelines should be examined, as they indicate the types of
concerns the IRS has, along with the position being taken by the IRS on the
various matters.
13.4 Advice to Directors and Officers
When an organization is facing an audit, officers and directors must be advised
of the possible consequences up front. As noted by former IRS commissioner
Lawrence B. Gibbs, now with Miller and Chevalier, Washington, at the 11th
Annual Health Care Tax Law Institute on 4/25/95, "You can't imagine what it's
like with officers and directors that have not been kept up to speed, to have
you walk in and tell them there is a proposed revocation ... [or] an agent shows
up, shows his badge, reads a Miranda warning, and wants to talk."
If someone does show his badge, taxpayers would be well advised to refrain
from making any statements, and retain criminal legal counsel immediately.
In responding to an audit, the organization should focus on rules and procedure
as well as substance. Keep a detailed log of what the IRS is asking for and what
you are giving to them. If the IRS states that it has destroyed certain original
records, ask if the IRS has such documents on microfilm or microfiche. If an
extension of time for assessments is requested, the organization may limit the
application of Form 872 to a particular tax.
APPENDIX A - IRS SAMPLE CONFLICTS OF INTEREST POLICY (Revised 1999)(26)
Article I
Purpose
The purpose of the conflicts of interest policy is to protect the Corporation's interest when it is
contemplating entering into a transaction or arrangement that might benefit the private
interest of an officer or director of the Corporation. This policy is intended to supplement but
not replace any applicable state laws governing conflicts of interest applicable to nonprofit and
charitable corporations.
Article II
Definitions
1. Interested Person
Any director, principal officer, or member of a committee with board delegated powers who
has a direct or indirect financial interest, as defined below, is an interested person. If a person
is an interested person with respect to any entity in the health care system of which the
Corporation is a part, he or she is an interested person with respect to all entities in the health
care system.
2. Financial Interest
A person has a financial interest if the person has, directly or indirectly, through business,
investment or family -a. an ownership or investment interest in any entity with which the Corporation has a
transaction or arrangement, or
b. a compensation arrangement with the Corporation or with any entity or individual with
which the Corporation has a transaction or arrangement, or
c. a potential ownership or investment interest in, or compensation arrangement with, any
entity or individual with which the Corporation is negotiating a transaction or arrangement.
Compensation includes direct and indirect remuneration as well as gifts or favors that are
substantial in nature.
A financial interest is not necessarily a conflict of interest. Under Article III, Section 2, a person
who has a financial interest may have a conflict of interest only if the appropriate board or
committee decides that a conflict of interest exists.
Article III
Procedures
1. Duty to Disclose
In connection with any actual or possible conflicts of interest, an interested person must
disclose the existence of his or her financial interest and must be given the opportunity to
disclose all material facts to the directors and members of committees with board delegated
powers considering the proposed transaction or arrangement.
2. Determining Whether a Conflict of Interest Exists
After disclosure of the financial interest and all material facts, and after any discussion with
the interested person, he/she shall leave the board or committee meeting while the
determination of a conflict of interest is discussed and voted upon. The remaining board or
committee members shall decide if a conflict of interest exists.
3. Procedures for Addressing the Conflict of Interest
a. An interested person may make a presentation at the board or committee meeting, but after
such presentation, he/she shall leave the meeting during the discussion of, and the vote on,
the transaction or arrangement that results in the conflict of interest.
b. The chairperson of the board or committee shall, if appropriate, appoint a disinterested
person or committee to investigate alternatives to the proposed transaction or arrangement.
c. After exercising due diligence, the board or committee shall determine whether the
Corporation can obtain a more advantageous transaction or arrangement with reasonable
efforts from a person or entity that would not give rise to a conflict of interest.
d. If a more advantageous transaction or arrangement is not reasonably attainable under
circumstances that would not give rises to a conflict of interest, the board or committee shall
determine by a majority vote of the disinterested directors whether the transaction or
arrangement is in the Corporation's best interest and for its own benefit and whether the
transaction is fair and reasonable to the Corporation and shall make its decision as to whether
to enter into the transaction or arrangement in conformity with such determination.
4. Violation of the Conflicts of Interest Policy
a. If the board or committee has reasonable cause to believe that a member has failed to
disclose actual or possible conflicts of interest, it shall inform the member of the basis for such
belief and afford the member an opportunity to explain the alleged failure to disclose.
b. If, after hearing the response of the member and making such further investigation as may
be warranted in the circumstances, the board or committee determines that the member has
in fact failed to disclose an actual or possible conflict of interest, it shall take appropriate
disciplinary and corrective action.
Article IV
Records of Proceedings
The minutes of the board and all committees with board-delegated powers shall contain
1. the names of the persons who disclosed or otherwise were found to have a financial interest
in connection with an actual or possible conflict of interest, the nature of the financial
interest, any action taken to determine whether a conflict of interest was present, and the
board's or committee's decision as to whether a conflict of interest in fact existed.
2. the names of the persons who were present for discussions and votes relating to the
transaction or arrangement, the content of the discussion, including any alternatives to the
proposed transaction or arrangement, and a record of any votes taken in connection therewith.
Article V
Compensation
1. A voting member of the board of directors who receives compensation, directly or indirectly,
from the Corporation for services is precluded from voting on matters pertaining to that
member's compensation.
2. A physician who is a voting member of the board of directors and receives compensation,
directly or indirectly, from the Corporation for services is precluded from discussing and voting
on matters pertaining to that member's or other physicians' compensation. No physician or
physician director, either individually or collectively, is prohibited from providing information
to the board of directors regarding physician compensation.
3. A voting member of any committee whose jurisdiction includes compensation matters and
who receives compensation, directly or indirectly, from the Corporation for services is
precluded from voting on matters pertaining to that member's compensation.
4. Physicians who receive compensation, directly or indirectly, from the Corporation, whether
as employees or independent contractors, are precluded from membership on any committee
whose jurisdiction includes compensation matters. No physician, either individually or
collectively, is prohibited from providing information to any committee regarding physician
compensation.
Article VI
Annual Statements
Each director, principal officer and member of a committee with board delegated powers shall
annually sign a statement which affirms that such person -a. has received a copy of the conflicts of interest policy,
b. has read and understands the policy,
c. has agreed to comply with the policy, and
d. understands that the Corporation is a charitable organization and that in order to maintain
its federal tax exemption it must engage primarily in activities which accomplish one or more
of its tax-exempt purposes.
Article VII
Periodic Reviews
To ensure that the Corporation operates in a manner consistent with its charitable purposes
and that it does not engage in activities that could jeopardize its status as an organization
exempt from federal income tax, periodic reviews shall be conducted. The periodic reviews
shall, at a minimum include the following subjects:
a. Whether compensation arrangements and benefits are reasonable and are the result of
arm's-length bargaining.
b. Whether acquisitions of physician practices and other provider services result in inurement
or impermissible private benefit.
c. Whether partnership and joint venture arrangements and arrangements with management
service organizations and physician hospital organizations conform to written policies, are
properly recorded, reflect reasonable payments for goods and services, further the
Corporation's charitable purposes and do not result in inurement or impermissible private
benefit.
d. Whether agreements to provide health care and agreements with other health care
providers, employees, and third party payors further the Corporation's charitable purposes and
do not result in inurement or impermissible private benefit.
Article VIII
Use of Outside Experts
In conducting the periodic reviews provided for in Article VII, the Corporation may, but need
not, use outside advisors. If outside experts are used their use shall not relieve the board of its
responsibility for ensuring that periodic reviews are conducted.
1. EOTR Weekly, Vol. 9, No. 13, march 30, 1998, page 1.
2. The following is a summary of the excise taxes on private foundations contained in the Internal
Revenue Code:
§ 4940 -- 2% tax on net investment income; this may be reduced to 1% if a sufficient amount is
donated to qualified charities.
§ 4941 -- 5% tax on any disqualified person participating in an act of self dealing; 2.5% on the
foundation manager.
§4942 -- 15% tax on undistributed income that should have been distributed during the year
(must distribute 5% of FMV of assets).
§4943 -- 5% excise tax on excess business holdings (20% - or 35% if the foundation does not
control the entity, less the % held by a disqualified person).
§4944 -- 5% excise tax on jeopardizing investments.
§4945 -- 10% tax on foundation, 2.5% tax on foundation manager on amounts paid that are not in
furtherance of the exempt purposes (taxable expenditures). Grants by private foundations to
individuals (scholarships) must be awarded on an objective and nondiscriminatory basis, with the
procedure approved beforehand by teh IRS, to avoid a taxable expenditure classification. See
Rev. Proc. 76-47 (1976-2 C.B. 670).
3. Exempt Organization Tax Review, November, 2000, Vol 30, No. 2, p. 166-8.
4. Exempt Organization Tax Review, September, 2000, Volume 29, No. 3, p. 398-9.
5. Exempt Organization Tax Review, October, 2000, Volume 30, No. 1, p. 16.
6. Henry Haalilio Peters v. Comm'r, Tax Ct. Dkt. No. 8446-00, reported in Exempt Organization
Tax Review, November, 2000, Volume 30, No. 2, p. 204.
7. Reg. § 53.4958-1T(d)(2)(i)(B).
8. Unless it is excludable as a de minimis fringe benefit, a payment of liability insurance premiums
for or the payment or reimbursement by the organization will be included in compensation if said
payment or reimbursement is: (i) of any penalty, tax or expense of correction owed as a result of
an excess benefit payment, or (ii) is of unreasonable expenses incurred in a civil judicial or civil
administrative proceeding arising out of the person's performance of services on behalf of the
exempt organization, or (iii) is an expense resulting from the person's willful and unreasonable act
or failure to act. Reg. § 53.4958-4T(b)(1)(ii)(B)(2).
9. Reg. Section 53.4958-5(a).
10. See EOTR, Vol. 27, No.2, February 2000, page 317 for complete list of these cases.
11. Exempt Organization Tax Review, November, 2000, Volume 30, No. 2, p. 126.
12. See discussion in EOTR Weekly, Vol. 10, No. 9, June 1, 1998, p. 1-2.
13. For an historical review of this area, see "Joint Ventures With For-Profits After Revenue
Ruling 98-15", by ___________________, EOTR, March, 2000, Volume 27, No. 3, p. 441, et.
seq.
14. See EOTR, November, 2000, Vol 30, No.2, p. 164.
15. The Exempt Organization Tax Review, January 2000, Vol. 27, No. 1, p. 21.
16. EOTR Weekly, Vol. 20, No. 2, 10/9/00, p. 9.
17.
18. WAC 230-12-110.
19. See also South End Italian Independent Club, Inc., v. IRC, 87 T.C. No. 11 (7/22/86) and
Women of the Motion Picture Industry, et. al. v. IRC, T.C. Memo 1997-518.
20.
21. EOTR Weekly, 11/6/00, Vol 20, No. 6, p. 36.
22. See Vol. 15, No. 3, EOTR p. 444 (December 1996)
23. See Volume 26, No. 3, The Exempt Organization Tax Review, page 367 (December, 1999)
24. See Volume 26, No. 3, The Exempt Organization Tax Review, page 362 (December, 1999).
25. EOTR Weekly, Vol. 16, No. 11, December 13, 1999, page 2.
26. Continuing Professional Education Exempt Organizations Technical Instruction Program for FY 2000
Copyright © 2001 Runquist & Zybach LLP