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link to Nonprofit "Links" Page
"Tax-exempt" nonprofit organizations range from charities, to trade or professional organizations; from organizations prohibited from substantial lobbying, to organizations devoted to lobbying; from organizations prohibited from providing benefits to members and private individuals, to organizations required to provide social benefits to members. Their problems may range from incorporation and compliance with state consumer protection and trust laws, to the establishment of trusts that provide tax deductions to wealthy donors, to the appropriate tax treatment of sales and advertising revenue.
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
to the American community, to fear that charlatans and opportunists
use our tax-deductible dollars for selfish gain. In the late
pendulum has swung first towards increased regulation (money penalties
for "excess benefit transactions" between charities and those that
them) to reduced regulation (a softening of the rules interpreting
new statutes). In 2008, congressional rules mandating
"three strikes" and you're out (failure to file Form 990 or
comparable document each year for 3 years = loss of exemption); in
2014, a new IRS Form 1023EZ that makes it frighteningly easy to obtain
tax-exempt status (which may then be lost just as easily in 3 years)!
Some recent and not-so-recent
developments of interest to different types of tax-exempt organizations:
New CT law -- organizations that don't file annual reports for 3+ years may get dissolved. Per Public Act 14-154, if an organization is delinquent in filing, it can be notified that unless the filing is done within 3 months it will be "administratively dissolved." If that happens, it CEASES TO EXIST -- unless it reinstates and pays a large fee.
New Form 1023 EZ In 2014, the
IRS released Form 1023 EZ, an online-only exemption application form
available only to an organization that expects to to have less than
$50,000 income in each of the next three years (and has not had
$50,000/year income in the past 3 yearst), has less than $250,000 of
assets, is not a church, school, hospital or certain other specified
organizations, The applicant is required to affirm various
requirements of tax-exempt organizations, but need not submit any
documents or detailed information. The fee is $400 at pay.gov.
Presto, tax exemption! The catch: for those organizations that
take this easy way in too lightly and fail to appreciate the
obligations of a tax-exempt organization (such as annual filings)
loss of tax-exempt status and a much tougher form (1023) for
about "excess benefit" penalties? 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 also 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.
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.
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
corporation in Connecticut, a guide
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. I also have checklists for
organizations to analyze their liability
risks and ways to deal with them and another checklist of employer obligations --
but do check with an accountant and good insurance agent, please!
Risky Business: Trading
Securities on Margin is "Unrelated Business
Income." The federal appeals court for the
Circuit (covering New York, Connecticut, and Vermont) has held that
from securities purchased on margin is income from "debt-financed
and therefore constitutes unrelated business income. Bartels
for the Benefit of the University of New Haven v. USA (April 11,
What does this mean? Additional reporting requirements; income
on gains under state and federal law; and ultimately, if the amount of
such income exceeds required percentages, potential loss of tax
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 firstname.lastname@example.org.
for a list of sites and resources of interest
Pension Protection Act imposes NEW BURDENS on SMALL NONPROFITS!
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