Nonprofit Law Matters

Senate Judiciary Oversight Subcommittee Hearing on IRS and Political Tax Law

Posted in Private Foundations, Public Charities, Tax Treatment of Lobbying & Political Activities, Unions, Associations, Clubs & Other Tax-Exempt Organizations

I had the honor of testifying in Washington, D.C., on July 29, 2015, before the Senate Judiciary Subcommittee on Oversight, Agency Action, Federal Rights and Federal Courts, chaired by Senator Ted Cruz, about the current IRS work on developing regulations to define political campaign activity for tax-exempts.  (The picture below shows us, the witnesses, being sworn in.)


(Chip Somodevilla/Getty Images)

My written statement as Chair of the Drafting Committee of the Bright Lines Project, sponsored by Public Citizen, is posted here.

Here is the video.

If they interest you, here are some passages to which you could scroll:

* IRS Commissioner Koskinen, describing the political rulemaking underway in his opening statement, 41:10 to 42:10 minutes

* Senator Coons’ question to Commissioner Koskinen and his answer on the benefits of the rulemaking, and the rationale for covering all tax-exempts, 53:50 to 55:47 minutes

* My opening statement for the Bright Lines Project, 2:44:23 to 2:48:30 minutes

* Senator Coons’ question to me, and my answer on drawing lines between (c)(3) and (c)(4) activity, etc., followed by a quip by Senator Cruz, 3:38:20 to 3:43:00 minutes.

FASB Proposes Significant Changes to Nonprofit Accounting Standards

Posted in Charitable Gift Planning, Private Foundations, Public Charities

The Financial Accounting Standards Board (“FASB”) recently issued a Proposed Accounting Standards Update (“ASU”) specific to Not-for-Profit Entities (Topic 958) and Health Care Entities (Topic 954).  The ASU seeks to improve net asset classification reporting requirements, as well as require expanded information on liquidity, financial performance, and cash flow.  The full scope of proposed changes is too extensive to address here. We highlight three categories of changes that could have a significant impact on the way nonprofits report (and think about) their finances.

Revised Net Asset Classifications

FASB’s current standards require that net assets be divided into three categories:

  1. Permanently restricted assets, meaning assets whose use is limited by donor-imposed stipulations that will not expire by passage of time and cannot be fulfilled or removed by the organization. Endowments are the classic example of permanently restricted assets.
  2. Temporarily restricted assets, meaning assets whose use is limited by donor-imposed stipulations that may expire by passage of time or can be fulfilled or removed by the organization. Funds that are restricted to a particular purpose are an example, as once the organization spends the funds for the purpose, it has fulfilled the restriction.
  3. Unrestricted assets, meaning assets that are neither permanently nor temporarily restricted.

The ASU proposes replacing these categories with two classifications only:

  1. Assets with donor restrictions, which would include both permanently and temporarily restricted assets; and
  2. Assets without donor restrictions, which include unrestricted assets and assets restricted internally by Board designation.

FASB asserts that eliminating the distinction between resources with permanent restrictions and those with temporary restrictions will reduce complexity, while requiring enhanced disclosures in the notes (explained below) will allow nonprofits to detail the types and effects of the different donor-imposed restrictions.  FASB also notes that “[t]he currently required distinction … has become blurred by changes in state laws that diminished its relevance and rendered that distinction less useful ….”  (see the discussion of UPMIFA below).

Enhanced Expense Disclosures

The ASU provides several opportunities for nonprofits to report more effectively on their expenses.

  • The ASU would require organizations to report functional expenses by both nature (salaries, grants, occupancy, etc.) and function (program, fundraising, management, etc.). Although many nonprofits already do this, current rules allow reporting by either nature or function or both.
  • The ASU would require enhanced disclosures as to the method(s) used to allocate costs among “program” and “support” on the statement of functional expenses. Currently, nonprofits have no clear and consistent guidance about how to allocate costs among program and support functions. The Form 990 Instructions, for example, indicate that “the organization can use any reasonable method of allocation.” The new disclosures would presumably increase transparency and promote consistency in classification methods across organizations.

Given that many charity “watchdog” and rating services, like Charity Navigator or the Better Business Bureau, measure nonprofits’ success based on their functional expense reporting, these enhanced disclosure requirements may shed light on why one organization’s reported expenses differ from another’s.

Underwater Endowment Disclosures

An endowment is “underwater” when the fair value of the fund has fallen below the original, permanently restricted gift amount. The Uniform Prudent Management of Institutional Funds Act (UPMIFA), which has been adopted in almost every state, now permits a charity to appropriate for expenditure so much of an endowment fund as the charity determines is prudent for the purposes for which the fund was established, taking into account certain factors.  Under UPMIFA, an organization is not bound to preserve the original “historic dollar value” of the fund in all circumstances (this was the rule before UPMIFA), and may instead continue to spend from an underwater fund if the organization determines it is prudent to do so.  The ASU would require nonprofit organizations to disclose the aggregate amount by which funds are underwater, as well as the original gift amounts, and any governing board policies or decisions to spend or not spend from such funds.

If you feel strongly about any of these proposed changes, we urge you to read the ASU in its entirety, and send any comments and suggestions to FASB to ensure that it takes into account the practical impact of these changes on nonprofit organizations.  FASB has requested public comment on the proposed guidance, no later than August 20, 2015.


Exempt Organizations Can Redact Donor-Identifying Information From IRS Form 990, Schedule B Before Public Disclosure

Posted in Private Foundations, Public Charities, Unions, Associations, Clubs & Other Tax-Exempt Organizations

Last week, a political-spending watchdog group sent a potentially misleading written request to many exempt organizations (they say over 100) involved in political activities, seeking copies of Form 990, Schedule B for past tax years, including filings that are more than three years old.

The request does not explicitly acknowledge the exempt organizations’ right to redact donor-identifying information, or inform the recipient that the disclosure requirement generally does not apply to filings that are more than three years old.  As a result, some organizations that received that request might believe that they must publicly disclose donor information that the law permits them to withhold.

We summarize below federal tax law governing disclosure of Form 990 (including schedules and attachments), and provide recommendations for how to respond to any request for disclosure.

Disclosure Requirements in General

Form 990 (including its schedules and attachments) is, for the most part, a public document.  Both the IRS and the filing organization are required to provide a copy of most of the Form 990, as filed, upon request.  (California organizations also generally file Form 990 with the California Attorney General (and sometimes with the California Franchise Tax Board).  The Attorney General makes the Form, without Schedule B, available on its website.)  This general disclosure requirement applies to Forms 990 that were due or filed (whichever is later) during the three years preceding the request.

If the request is made in person at the exempt organization’s principal office during regular business hours, the organization must, absent unusual circumstances, provide a copy the same business day.  If the request is made in writing, the organization has 30 days to provide a copy.  No fee may be charged, but the exempt organization may require advance payment of reasonable copying (currently no more than $0.20/page) and postage costs; for written requests, it must notify the requester of the amount of these costs within seven days of receiving the request.

Limitation on Schedule B Disclosure

Most organizations exempt under Internal Revenue Code (“IRC”) Section 501(c) are not required to publicly disclose the identities of their donors.  (Private foundations, and political organizations exempt under IRC Section 527, on the other hand, must do so.)  Donor-identifying information is disclosed to the IRS on Form 990, Schedule B, but is excepted from the general public disclosure requirement that otherwise applies to Form 990.

The IRS is required to redact donor-identifying information from Schedule B before releasing an exempt organization’s Form 990, and the filing organization is permitted to do so.  (Copies of Form 990 obtained from Guidestar do not include Schedule B.)

Responding to a Disclosure Request

Before responding to any request for disclosure of Form 990 or any of its schedules or attachments, an exempt organization should:

  • Redact from Schedule B the names, addresses, and any other potentially identifying information (which, in some cases, such as gifts of stock or other property, may include details of the contribution) of any Form 990 it determines must be disclosed;
  • Promptly determine whether it wishes to require the requester to pre-pay copying and postage costs, and, for written requests, notify the requester of the amount within seven days of the request; and
  • Consider consulting with knowledgeable counsel to review the intended disclosure to prevent the undesired release of information that could legally be withheld.

Since an in-person request at the organization’s principal office requires same-day disclosure, every exempt organization subject to these disclosure obligations should maintain, at its principal office, a disclosure-ready copy of Forms 990, including redacted versions of Schedule B, that were due or filed (whichever is later) within the preceding three years.

Finally, any staff likely to receive such requests should be trained to respond appropriately.

Greg Colvin named 2015 Outstanding Nonprofit Attorney

Posted in Uncategorized

Adler & Colvin is proud to announce that Greg Colvin has been named the 2015 Outstanding Nonprofit Attorney by the Nonprofit Organizations Committee of the American Bar Association’s Section on Business Law.  The Business Law Section gives the Outstanding Nonprofit Lawyer Awards annually in several categories to those who have made outstanding contributions to the nonprofit sector and/or the development of nonprofit law.

Greg’s award was for distinguished service as outside counsel to nonprofit organizations.  His practice includes a special focus on political and lobbying activities of nonprofit organizations, fiscal sponsorship, donor advised funds, anonymous giving, grantmaking, and other issues that arise between individual donors and charities.

Congratulations to Greg for receiving this honor in recognition of the important role he continues to play in protecting and promoting the interests of exempt organizations nationwide.

New Domain Names Available for Nonprofits

Posted in Formation & Tax Exempt Status, International Charitable Transactions & Operations, Nonprofit Governance & Ethics, Nonprofit Structures, Relationships & Transactions, Private Foundations, Public Charities

As of May 7, 2015, nongovernmental organizations that meet certain eligibility requirements can purchase two new web domains – “.ngo” and “.ong.”

Public Interest Registry, the nonprofit that manages the .org web domain, launched the new domains exclusively for nonprofits, unlike the .org domain which is available to both nonprofits and for-profits.  The new domains are intended to allow organizations to be immediately identifiable as nonprofits through their web addresses.  Because the domains are meant to be available only to organizations that have been validated as nonprofits, they are presumably less susceptible to purchase by unrelated third parties with the intent to sell them back to the named organization for a profit, a practice that is common with other domains.  Whether this is a practical concern for the new domains is not immediately clear, but an organization wishing to control the use of its name in website addresses should consider registering the desired name(s) before another party – either an unrelated third party wishing to make a profit, or another nonprofit with a similar name – gets it first.

The domain “.ngo” stands for “non-governmental organization,” and the domain “.ong” reflects the translated equivalent for regions where Romance languages are most prevalent.  The domains are sold as a package, so when an organization reserves a name under one of the domains it also automatically reserves the name under the other domain.  More information, including links to registries selling the domains, can be found on Public Interest Registry’s website.

Public Interest Registry also launched a new online platform called OnGood that offers a suite of online services to organizations using the .ngo or .ong domains.  Brian Cute, CEO of Public Interest Registry, described OnGood as being a sort of “Facebook for NGOs” with .ngo or .ong domain names.  It offers a searchable directory with a customizable online profile for organizations using the new web domains, and is intended to help organizations connect with supporters, funders, and other nonprofits.  More information can be found here.

Fiscal Sponsorship Survey Seeks Responses by May 8th

Posted in Grantmaking & Social Investing, Nonprofit Network Affiliations, Nonprofit Structures, Relationships & Transactions, Public Charities

The National Network of Fiscal Sponsors (NNFS) has released a new field survey designed to gather current, relevant information on organizations engaged in fiscal sponsorship.  Click HERE to complete the survey no later than May 8, 2015.

We encourage all fiscal sponsors to participate in the survey to ensure that the resulting report represents a broad cross-section of fiscal sponsorship models and practices around the country.  As an added benefit to participation, fiscal sponsors who participate in the survey will receive the full survey report once released; organizations who do not participate will only have access to the aggregated, public version of results.

Mexico’s Anti-Money Laundering Law Affects U.S. Donors

Posted in Grantmaking & Social Investing, International Charitable Transactions & Operations, Private Foundations, Public Charities

A number of our clients have asked about Mexico’s Ley Federal para la Prevención e Identificación de Operaciones con Recursos de Procedencia Ilícita (Mexico’s Anti-Money Laundering statute or the “AMLL”), which became effective July 17, 2013.  The AMLL identifies specific transactions that require a Mexican entity that engages in these activities to identify and verify the identity of its customers and clients.  The AMLL treats the receipt of donations (cash or property) with value equal to, or greater than, 1,605 times the Mexican minimum daily wage (currently approximately $7,463.25 USD) by nonprofit entities as an activity that requires identification obligations for the Mexican entity.  For these purposes, an organization that donates money to a Mexican charity is treated as a “customer and client.”  Further, the AMLL requires Mexican charities that receive donations with value equal to, or greater than, 3,210 times the Mexican minimum daily wage (currently approximately $14,766 USD) to report these transactions to Mexican authorities.

Because the reporting requirements are obligations of the Mexican entity, this discussion will focus on the identification requirements, which have a more direct impact on US donors.

Las Reglas de Carácter General to the AMLL (the “General Rules”), which became effective September 1, 2013, provide that organizations receiving donations from foreign entities must obtain (and keep for 5 years) the following information:

  • Legal Name of the Entity
  • Date of Formation
  • Country of Origin
  • Nature/Purpose of Activity
  • EIN/Tax ID Number
  • Address
  • Phone Number (including long distance code)
  • Email Address
  • Name, Date of Birth, and Federal Identification Number (if applicable) of the individual representative of the organization entering into the transaction in the name of the entity

Further, the General Rules state that an organization must ask for and keep a copy of the following documents:

  • Formation documents, such as Articles of Incorporation (or other document evidencing formation)
  • Proof of address (e.g., utility bill, bank statement with the entity’s address, etc., which must not be older than three months from the date it is submitted, or copy of a currently-effective lease)
  • Affidavit or proof of the named representative’s authority to act on behalf of the entity and proof of identification of the named representative (if not in the entity’s governing documents). Any proof submitted must be official and have some legal authority (e.g., notarized).
    • Note: The General Rules require that any proof of identification must include the photo, signature, and address of the named representative. For these purposes, the named representative may provide a copy of his/her passport or driver’s license. However, the General Rules allow for any form of identification, so long as it is issued by a state/federal government and includes the named representative’s photo, signature, and address.
  • Proof of entity’s EIN/Tax ID
  • Proof that the entity asked the donor whether the donor knew who would ultimately receive the donated funds (i.e., the ultimate beneficiary of the funds).

An organization that does not comply with the identification and reporting requirements may be subject to monetary and criminal penalties. Again, both the identification and reporting requirements are obligations of the Mexican organization that receives donations above the threshold amounts. Nevertheless, U.S. donors should understand that a Mexican organization may ask its U.S. donors to provide the above information in order for it to comply with the AMLL. U.S. donors should carefully consider what information they are willing to provide.

IRS FY 2014 Data Book Reveals Dramatic Increase in Exempt Organization Approvals

Posted in AG, IRS, FTB, & Property Tax Proceedings, Formation & Tax Exempt Status, Public Charities

Last week the Internal Revenue Service released its Fiscal Year 2014 Data Book, reporting on IRS operations, enforcement, revenue collection and related activities during the period of October 1, 2013, through September 30, 2014, (the IRS fiscal year).  The Data Book included a table on “Closures of Applications for Tax-Exempt Status, by Organization Type and Internal Revenue Code Section,” which revealed a marked increase in the total number of IRS approvals for organizations applying for recognition of exemption, and particularly those seeking exempt status under section 501(c)(3).  The IRS noted the following:

The total number of approved applications for tax-exempt status increased from 44,274 in Fiscal Year (FY) 2013 to 110,656 in FY 2014. This increase is attributable to the introduction of a streamlined application process in FY 2014 for all determination applications and the implementation of the electronic Form 1023–EZ, a streamlined three-page version of the 26-page Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code.

Last July, we reported on the Internal Revenue Service’s release of the new streamlined Form 1023-EZ application for recognition of exemption under Section 501(c)(3).  Given the newness of the Form 1023-EZ, the potential implications for new charities of using this streamlined form are still not settled.  However, it appears that the form has accomplished at least one of the IRS’s stated goals:  decreasing the extensive backlog in IRS review of exemption applications.

Hundreds of Thousands of Nonprofits Affected by Security Breach Related to Electronic Filings

Posted in Formation & Tax Exempt Status, IRS, FTB & Attorney General Controversies, Public Charities

The Urban Institute’s National Center for Charitable Statistics (“NCCS”) reported this week that hackers tapped into its online filing system for Forms 990, 990-EZ, 990-N, and 8868 (Application for Extension), as well as state filings for Hawaii, Michigan, and New York.  According to the report, information including e-mail addresses, usernames, passwords, individual names, and IP addresses of filing nonprofits all were accessed and retrieved by the hackers.  As many as 700,000 organizations might have been affected, according to The Hill.

The hacked files did not include Social Security numbers or credit card information, according to the Urban Institute, and The Hill reports that “there is apparently no evidence that tax filings themselves were compromised.”

Any organization that has used the NCCS system to submit any of the filings identified above should (if it has not already) change its password on the system, and login information on any other system using the same username and/or password that was used at NCCS.

New Year’s Treasure? AB 1712 Clarifies that Nonprofits May Claim Unclaimed Property of Certain Dissolved Affiliates in California

Posted in Nonprofit Structures, Relationships & Transactions, Private Foundations, Public Charities, Unions, Associations, Clubs & Other Tax-Exempt Organizations

This past August, Governor Jerry Brown signed into law AB 1712, which amends the California Code of Civil Procedure to clarify that certain nonprofit organizations whose affiliates have dissolved may claim the unclaimed property of those dissolved entities under the state’s unclaimed property system.

Unclaimed Property Law in California

California’s Unclaimed Property Law provides a mechanism for persons to file claims with the state Controller to collect financial assets (other than real estate) that are rightfully theirs, but that “escheated” (or, reverted) to the state because no one claimed them.  The purpose of unclaimed property laws is to prevent businesses from retaining unclaimed consumer assets and using them as business income.  Such unclaimed assets are required to be deposited with the state Controller.

The Unclaimed Property Law provides that the Controller has 180 days to respond to a request from a person claiming to be the owner of a particular unclaimed property.  Only “owners” – as defined in the statute – have the right to file claims and receive property.  Previously, “owner” was defined as “the person who had legal right to the property prior to its escheat, his or her heirs or estate representative, his or her guardian or conservator, or a public administrator….”  In other words, while the heirs of a deceased individual could claim unclaimed property of a deceased, it was unclear that any person had similar rights with respect to an organization that had dissolved, leaving the state with assets that were both unclaimed and “unclaimable.”

AB 1712

AB 1712 seeks to restore charitable dollars to the nonprofit sector by expressly allowing certain parent organizations to claim property belonging to dissolved affiliates.  The new law adds the following sentence, expanding the meaning of owner to include nonprofits that granted a charter, sponsorship, or approval of the dissolved entity’s existence in the first place and are the named beneficiary to a dissolved entity’s remaining assets:

An “owner” also means a nonprofit civic, charitable, or educational organization that granted a charter, sponsorship, or approval for the existence of the organization that had the legal right to the property prior to its escheat but that has dissolved or is no longer in existence, if the charter, sponsorship, approval, organization bylaws, or other governing documents provide that unclaimed or surplus property shall be conveyed to the granting organization upon dissolution or cessation to exist as a distinct legal entity.

According to AB 1712’s Bill Analysis, of the approximately $600 million that escheats every year to the State Controller’s office, it is unknown how many owner accounts

belong to nonprofit organizations, but a cursory search by the Committee of some common examples suggests the number could be in the thousands.  (For example, the term ‘AYSO,’ short for American Youth Soccer Organization, yields over 100 records; ‘Girl Scouts’ yields over 200 records; ‘Boy Scouts’ over 100 records.)

So if an organization ever approved the creation of an affiliated or subordinate organization that is no longer in existence, then it’s possible it could be the recipient of a new year’s surprise.  The Controller’s unclaimed property site may be searched here.