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NEW or Recent Additions or Updates:  *  Connecticut Toughens Charitable Solicitation Rules *  Disclosure Requirements for Charities *  Know Your Fractions:  The Public Support Test *  Sure You Really Want to...Start a 501(c)(3)? *  Compliance list for CT 501(c)(3)s CLICK for a full list of nonprofit related Articles

ALERT:  Pension Protection Act creates NEW DANGERS for small nonprofits! read more by clicking on the link
updated 7/21/07

NONPROFIT ORGANIZATIONS PAGE

  The law affecting charitable organizations, in particular, changes as the pendulum of Congressional opinion swings from support for the "thousands points of light" that provide so much support to the American community, to fear that charlatans and opportunists will use our tax-deductible dollars for selfish gain.  Most recently, the pendulum has swung first towards increased regulation (money penalties for "excess benefit transactions" between charities and those that control them) to reduced regulation (a softening of the rules interpreting these new statutes).

Some recent and not-so-recent developments of interest to different types of tax-exempt organizations:

For newbies and small organizations:  the IRS is gearing up for the "e-postcard" that must be  filed annually (starting in 2008) by organizations exempt from filing Form 990 because revenues don't reach $25,000 per year.  The IRS has just released a FAQ explaining the new Form 990-N, which still (July 2007) does not exist.   This requirement was part of the Pension Protection Act of 2006 -- read more HERE.

   Worry Less about "excess benefit" penalties?  NEWS FLASH -- in July 2006 a U.S. Court of Appeals reversed the Tax Court's decision in the Caracci (pdf) case that had found $5 million in excess benefits when a nonprofit home health agency sold its assets to a for-profit created by the nonprofit's principals.  The Court lambasted the IRS for numerous factual errors  and for refusing to admit its errors over years of litigation.  The Court was particularly dismissive of the IRS appraiser's methodology and experience, concluding that he had ignored the reality of the organization's financial difficulties and the implication of Medicare reimbursement rules, and had instead created fictional value for "good will."  (It was the lack of payment for the "good will" that had created the alleged excess benefit.)  Instead of $18 million in penalties, the home health agency principals have zero to pay.  Consider, however, the legal fees they may have incurred in defending this suit. 

... But it is still wise to worry about "excess compensation" as an "Excess Benefit.   The 2004 "continuing professional education" manual for IRS field agents discusses "automatic excess benefit transactions."  In effect, when a "disqualified person" receives a benefit, even if the organization intended it as compensation for services, and even if the overall benefit the person receives was reasonable in proportion to the services provided, there may still be an "excess benefit transaction" under the regulations if there was no contemporaneous documentation of the organization's intent.  Documentation might be reporting on a W-2, recipient reporting on Form 1040, reporting as compensation on Form 990, etc.  The manual includes several scary examples about how a relatively innocuous payment could create massive penalties.  You can read the IRS mind online on the website - click for the latest manuals (although they have apparently been discontinued, which is a pity).  This area is not as simple as it seems.  My article on "how to stay out of trouble under the excess benefit rules," published in the October 2002 edition of Connecticut Lawyer  (the magazine of the Connecticut Bar Association), explains the excess benefit rules and provides a checklist for reference.  (The Caracci case, however, which I refer to, has now been overturned, as discussed above.)  Instead of "whenever possible," consider the documentation requirements an "always" when compensation to board members or officers is involved.  I've now created a "user-friendly," non-lawyer version for your convenience.  Because the penalties can be severe -- 25% if the "excess" is returned in time, but up to 200% if not -- charities need to review these regulations carefully.  Strong conflict-of-interest policies will go far to protecting an organization against claims of "excess benefit" transactions. 

Changes to Connecticut's Charitable Solicitation Act.  Various changes to the Charitable Solicitation Act were enacted in 2005 -- one of the most important being a $25 per MONTH late fee for late filings.  Read more here.

Congress TRASHES car donation programs.  2004:  The American Jobs Creation Act, signed into law by President Bush, says that donors of cars may only deduct the actual value the charity got when the car was sold -- effectively eliminating the appeal to donors, who will at least know what they are getting when they trade in the car to the dealer.  This overturns a ruling in November 6, 2002, when the IRS issued official guidance (Revenue Ruling 2002-67) approving car-donation programs operated through private agencies.  Stay tuned as to whether the "C.A.R.E." Act, which would permit tax-free rollovers of IRAs into charitable remainder trusts, will get through as an offset.  

Checklists Available:  As part of my work as a faculty director for the Yale Law School Nonprofit Law Clinic, I have prepared a ten-step guide to forming a nonprofit 501(c)(3) corporation in Connecticut, a guide to compliance obligations for such organizations, and a detailed explanation of disclosure requirements.  However, read with caution:  (1) these do not constitute "legal advice," and (2) many factors relate to how they will apply in your situation.

Risky Business:  Trading Securities on Margin is "Unrelated Business Income."    The federal appeals court for the Second Circuit (covering New York, Connecticut, and Vermont) has held that income from securities purchased on margin is income from "debt-financed property" and therefore constitutes unrelated business income.  Bartels Trust for the Benefit of the University of New Haven v. USA (April 11, 2000).  What does this mean?  Additional reporting requirements; income tax on gains under state and federal law; and ultimately, if the amount of such income exceeds required percentages, potential loss of tax exemption.

For information on administering your own charitable remainder trust, information about Connecticut's Charitable Solicitation Act, or information on compliance with the laws governing substantiation and disclosure relating to charitable donations, email me at davis@sharinglaw.net.

Click HERE for a list of sites and resources of interest 

Articles of Interest on this Site:

* ALERT:  Pension Protection Act imposes NEW BURDENS on SMALL NONPROFITS!  (8/2006)
* Connecticut Toughens Charitable Solicitation Rules
* Disclosure Requirements for Charities
* Know Your Fractions:  The Public Support Test
* 10 steps to form a nonprofit 501(c)(3) corporation in CT
* SURE YOU REALLY WANT TO....start a Nonprofit, Tax-exempt Corporation in Connecticut?
* Magic Words Necessary for Your Organization to be Recognized as Tax-Exempt by the IRS
* Compliance list for CT 501(c)(3)s
* Excess Benefit rules, with checklist
* Excess Benefit rules:  user-friendly version, with checklist
* Indemnification Requirements and Liability Risks for a Connecticut Organization Exempt under Section 501(c) of  the Internal Revenue Code

DISCLAIMER:
THIS INFORMATION IS NOT PROVIDED AS  LEGAL ADVICE AND CREATES NO ATTORNEY-CLIENT RELATIONSHIP.  NO ENDORSEMENT IS INTENDED BY ANY REFERENCES HEREIN.  PLEASE CONSULT YOUR OWN LEGAL AND FINANCIAL ADVISORS BEFORE TAKING ANY ACTION. 

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Lisa Nachmias Davis
Attorney at Law
205 Church Street, Third Floor
New Haven, CT 06510
Phone: 203-776-4400
Fax: 203-774-1060
email:  davis@sharinglaw.net