Nonprofit Law Matters

Every Nonprofit with a Website Needs to Know: New Requirements to Gain and Keep Online Copyright Infringement Liability Protections

Posted in Formation & Tax Exempt Status, Nonprofit Governance & Ethics, Private Foundations, Public Charities, Religious Institutions, Uncategorized, Unions, Associations, Clubs & Other Tax-Exempt Organizations

Does your nonprofit have a website?  Does the website include a blog that allows viewers to post comments?  Does it include a discussion forum or other online community component where people can post videos, pictures, or other text or media?  Do you have social media channels?  If your nonprofit uses this type of online outlet as part of its digital communications with its constituents, there are several things your nonprofit should be doing to protect itself from copyright infringement liability under the procedural safe harbors of the Digital Millennium Copyright Act of 1998 (the “DMCA”) (17 U.S.C. 512(k)(1) (2012)).  This post describes the DMCA and how your organization can take advantage of its protections now, or maintain protection under the new rules recently issued by the United States Copyright Office (the “Copyright Office”).

Background of the DMCA.  Any organization that has a website that includes content created by others, or that allows users to post their own content, is likely conducting an activity eligible for protection under the DMCA.  An organization with such a website may need protection under the DMCA because it is considered the publisher of the content on its website, including the content of user posts, even if the organization does not control or possibly even know about the content posted by the users.  Therefore, an organization could be liable for any infringing content or activity, such as photos, videos, text or other unattributed work, posted by any user.  Congress passed the DMCA to allow an organization to limit its liability for copyright infringement by following the specific procedures outlined in the DMCA and its accompanying regulations, essentially creating safe harbors for complying organizations.

The steps required for protection under the DMCA’s safe harbors depend on the online activities of the organization, so you may need to contact counsel for additional advice.  Most organizations seeking protection under the DMCA must designate an agent to receive complaints from copyright owners who believe their rights are being infringed by online content attributable to an organization.  After designating an agent, organizations seeking protection must make information about the agent available on the organizations public website, most commonly in the website “terms of use.”

The rules to make this designation changed on December 1, 2016.  Why?  Since the DMCA was adopted, the designation process has been paper-based:  an organization would send a printed designation form to the Copyright Office, which would scan it, and add it to an online directory.  With a filing cost of $105, plus additional fees, the slow processing times, and no requirement to update the agent on a regular basis, nor a system for reminding organizations to do so, the Copyright Office’s own studies show the online directory has become sorely out of date.  This undermines the purpose of the DMCA and the directory because copyright holders may be unable to contact valid agents.  As a result, organizations that were at one time protected by the DMCA, and that may believe themselves still to be protected, may actually be exposed to liability.

To correct this issue, the Copyright Office developed online software and proposed new regulations, resulting in a final rule issued November 1, 2016, to change how the Copyright Office accepts and processes online registration and designation of agents.

Basic Steps Under the New Rules to Take Advantage of the DMCA.  Whether your organization previously designated an agent or not, you can take advantage of the protections offered by the DMCA under the new rules.  The Copyright Office now requires online registration and designation of agents, and will no longer accept paper forms.

Any organization that previously designated an agent with the Copyright Office and wishes to maintain its protection must register online by December 31, 2017, to avoid a lapse in coverage under the DMCA.  (If your organization previously registered but your designated agent information is out of date, we recommend you designate your new agent as soon as possible to ensure coverage under the safe harbor, rather than wait until the end of the year.  To see your organization’s current agent information in the old directory, go here.)

The steps below outline how to register and designate an agent online under the new rules for all organizations, whether or not an organization has previously designated an agent with the Copyright Office.

Step 1: Create a Registration Account

An organization must register with and use the Copyright Office’s DMCA Designated Agent Directory (the “New Directory”) online here.  To register an account, an organization must provide:

  • Its full legal name.
  • Any alternate names the organization uses. Alternate names includes other names under which the organization is doing business, as well as names the public would be likely to use to search for the organization’s designated agent in the New Directory, such as website names and addresses (with .org, .com or .edu endings, for example), software application names, and other commonly used abbreviations and names.  Separate legal entities are not considered alternate names, however.  See below for additional discussion of registering multiple legal entities.
  • Its physical street address (not a post office box unless an exception is granted by the Copyright Office). This physical address will be public on the New Directory.
  • Two individuals to serve as representatives on the account, including their names, positions or titles, organizations, physical mail addresses, telephone numbers and email addresses. These individuals will receive automated confirmation and reminder emails generated by the online system and correspondence from the Copyright Office regarding the agent designation and account.  The identities of these individuals will not be public. Importantly, identifying someone as a “representative” is not the same as identifying them as the designated agent. That happens in the next step.

Each legal entity must have its own separately registered agent designation, but may not need its own account.  Legal entities that are related to a parent or sibling entity may but need not manage their own online accounts.  For example, a registrant (an organization or a third party hired by an organization) can manage multiple entities through a single online account, and separately designate agents for the appropriate legal entities.  In addition, an organization may choose a third party to create, manage or serve as the representatives for the online account.

Step 2: Designate an Agent

Once registered, an organization must designate an agent by providing the name, address (post office box is acceptable), phone number, and electronic mail address of the agent.  The agent can be a natural person within the organization or a third party hired by the organization.  The agent may be designated by any of the following:

  • name ( e.g., “Sally Jones”)
  • position or title (e.g., “Chief Marketing Officer”)
  • department within the organization or within a third party (e.g., “Copyright Compliance Department”) or
  • third party entity generally (e.g., “XYZ Takedown Service”)

The new cost to designate (or amend or renew) an agent online is only $6.

Step 3: Update Website Terms of Use

In addition to notifying the Copyright Office through the online designation process, an organization must also provide its designated agent’s information on its public website, usually in its terms of use.  Website terms of use must also include provisions that reasonably implement and inform subscribers and account holders of a policy for the termination of subscribers and account holders who are repeat copyright infringers.  For more information on website terms of use, contact intellectual property counsel.

Step 4: Maintain and Renew the Designation

Designations will be valid for three years, so long as they are up to date (and accurately noticed to the public via the organization’s website).  An organization must keep its agent information up to date, and at the very least must renew its designation every three years.  Any time an organization updates its agent designation with new information, a new three-year period begins.  The online system will send a series of reminder emails well before the renewal deadline to the representatives named on the account.  However the organization is responsible for its account and agent designation, regardless of whether it actually receives any reminders.  Keep in mind that the New Directory account and agent designations may require attention and updates when an organization experiences corporate changes, such as a name change, merger or acquisition, in order to avoid conflicting accounts or designations in the directory.

California Franchise Tax Board and Secretary of State Publish First Batch of Delinquent Nonprofits to be Automatically Dissolved or Surrendered.

Posted in AG, IRS, FTB, & Property Tax Proceedings, Formation & Tax Exempt Status, FTB, Nonprofit Governance & Ethics

The California Franchise Tax Board (FTB), in conjunction with the California Secretary of State, published on March 1 the first batch of approximately 5,000 nonprofit corporations that will be administratively dissolved (for California nonprofit corporations) or administratively surrendered (for foreign nonprofit corporations registered in California) exactly 60 calendar days after March 1 (which falls on Sunday, April 30) if they do not take certain steps to address the situation.  (We blogged about the law authorizing these administrative procedures in 2015.)  The list includes only nonprofit corporations that have been suspended or forfeited by the FTB for 48 continuous months.  It is not clear how frequently the FTB and the Secretary of State will update the Notice of Pending Administrative Dissolution/Surrender.

As detailed on the web page maintained by the Secretary of State, corporations on the list have two ways during the 60-day period to avoid administrative dissolution/surrender after the period has elapsed:  the entity can satisfy all current obligations with the FTB (e.g., by paying accrued taxes, penalties, and interest with the FTB and presumably filing past returns that were never submitted) and make sure it has a current Statement of Information on file with the Secretary of State; or it can submit an objection in writing to the FTB’s Exempt Organizations Unit at the address given on the website and obtain up to two 90-day extensions to resolve the situation.

In addition to publishing the notice on the Secretary of State’s website, the FTB sends a letter to the last mailing address on file of each affected nonprofit corporation to notify it of the pending administrative dissolution or surrender.  If the FTB has no valid address on file for an entity, it is not legally required to provide notification beyond the publicly posted notice.  Consequently, if your organization has been delinquent for at least four years, it is critical to check the publicly posted list even if you have not received any notice from the FTB.

Automatic dissolution/surrender results in abatement of the nonprofit’s California taxes, interest, and penalties, but it does not relieve the former corporation–or, crucially, its directors–from liability to creditors or from Attorney General enforcement measures.

The Election Is Over. Now What?

Posted in Tax Treatment of Lobbying & Political Activities

Before the election on November 8, you were well aware that your 501(c)(3) charity could not endorse candidates for public office or otherwise intervene in any election.  You carefully monitored your organization’s activities over the course of the campaign to comply with this requirement of your charity’s tax-exempt status.  The election is over, and Donald Trump is president-elect.  What can you do now?

Must the charity still avoid saying anything that might appear to favor or oppose a candidate or political party, even though the 2016 election is finally over?

While the prohibition against “campaign intervention” — taking actions that may help elect or defeat a candidate — cannot be ignored after Election Day, a charity need not avoid communications that address the 2016 election or mention previous candidates.

Some safe things that a charity might do:

  • congratulate a candidate or say thanks for all of his or her hard work;
  • focus on policy issues you’d like to see a winning candidate address now that he or she has been elected to office;
  • comment on the results of the past election — what happened and why (but be careful not to comment too generally on anyone who might be a future candidate — see first bullet point under Things a charity should still avoid, below);
  • advocate for changes in the election process (e.g., modifying voter identification laws; modifying or abolishing the Electoral College); and
  • engage with the current presidential transition team about policy issues or nominations.

Some of these activities might involve legislation, so organizations that wish to avoid lobbying should consider this possibility in advance and if necessary consult legal counsel.

Things a charity still should avoid:

  • supporting or opposing a former candidate or a political party in a way that might carry forward to a future election (rather than, for instance, focusing on what a winning candidate should or shouldn’t do while in office);
  • taking credit for an election result, which could suggest intended intervention in the past election that may undermine the organization’s nonpartisan status in the future; and
  • indicating that the organization intends to hold the elected candidate accountable in a way that is susceptible to being interpreted as a reference to a future election.

The same federal tax rules apply to the charity the day after the election as the day before.  It is just less likely that candidate intervention will occur.  With the 2016 campaign completed so recently, we are no longer close in time to a pending election.  Similarly, it is far less likely (although not impossible) that an individual has already been identified as a future candidate for public office or that the charity is going to refer to voting in a future election that is still years away.

Another key factor the IRS considers is whether the timing of the charity’s communication is related to an event other than an election (e.g., a legislative vote).  With new terms on the horizon for Congress and state legislatures, there are countless policy and legislative matters between now and the next election that a charity might address.

In addition, a charity can begin to create a solid record now of focusing on its important issues, independent of any pending election.  Building this track record can help the organization years later when it wants to continue to highlight these issues as a future election approaches.

System Outages Cause Delays for Filing Form 8976; IRS Offers to Help Affected Organizations

Posted in AG, IRS, FTB, & Property Tax Proceedings, Formation & Tax Exempt Status, IRS, Nonprofit Governance & Ethics, Tax Treatment of Lobbying & Political Activities, Uncategorized

The initial deadline for new self-declared 501(c)(4) organizations to notify the IRS of their existence was September 6.  However, system outages on that day, and since, caused delays that may have prevented organizations from filing on time.

The IRS released a statement today promising to “work with you to ensure that you are not subjected to any penalties as a result of system outages. ”  The IRS encourages organizations affected by the outages to contact the Service at (877) 829-5500 for assistance.

Nonprofits: Amplify Your Voice in the November Election with these Helpful Tips

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

Our friends at California Association of Nonprofits have some creative tips for how nonprofits can make their voices heard on Election Day, and some resources to help.  Check it out!

Good News for CRATs!

Posted in Charitable Gift Planning, IRS

A charitable remainder annuity trust (“CRAT”) is a trust that pays a fixed amount to a beneficiary (typically the donor) for his/her life or a term of years, and then pays the remainder to one or more charities.  The fixed amount is generally defined as a percentage of the initial value of the asset(s) contributed to the trust, and cannot be less than 5%.  The donor receives a charitable contribution deduction upon formation of the CRAT, based on the present value of the expected distribution to charity.  To qualify as a CRAT, the trust has to pass two tests, measured at the date of creation, related to the expected charitable interest:  (1) the 10% minimum remainder requirement (which requires that the present value of the future charitable interest be at least 10% of the amount contributed to the trust), and (2) the 5% probability test (which requires that the probability that the trust will run out of funds before it terminates in favor of the charity be less than 5%).  The former can be satisfied with even a relatively young beneficiary, but the latter test is very hard to satisfy with today’s low interest rates.  Consequently, many trusts pass the 10% remainder test but fail the 5% probability test – for example (using an AFR of 1.8%), a CRAT paying 5% of its initial asset value will satisfy the 10% test with a beneficiary as young as 52, but won’t pass the 5% probability test unless the beneficiary is at least 73 (at which point the remainder interest is a whopping 47%, almost five times the required minimum!).

Two members of the ACTEC Charitable Planning Committee, Chip Parks and Bill Finestone, met with the IRS and proposed an alternate approach to addressing the 5% probability test:  rather than measure the probability of exhaustion at the time the trust is created, add an early termination to the trust, tied to the actual value of the trust, such that the trust would terminate early if it was about to run out of assets (so it would never “exhaust”).  They argued that such a provision should be considered a qualified contingency – IRC section 664(f) provides that if a trust would, but for a qualified contingency, meet the requirements for a CRAT, then the trust will not be deemed to fail by virtue of containing the qualified contingency.

Well, sometimes good things happen.  The IRS just issued Rev. Proc. 2016-42, which adopts the general idea proposed by Chip and Bill.  It includes sample language that can be included in a CRAT document which the IRS will respect as a qualified contingency and will not cause the trust to fail to qualify as a CRAT.  If the language is included, the trust does not need to meet the 5% probability test.

A few cautions, though.  First, the sample language only applies to trusts created after August 8, 2016.  Second, the ruling only applies if the drafter uses the “precise language” set forth in the ruling – any deviation will not necessarily disqualify the trust, but it will not be assured of treatment as a qualified contingency.  Finally, the sample language is not a straightforward calculation (as proposed by Chip and Bill), but instead a rather complicated formula.  It would appear that the IRS wanted to guarantee that the charity gets the 10% minimum remainder value; this is more than the amount actually required to satisfy the 5% probability test, which only looks to whether the trust would “exhaust” before it terminates in favor of the charitable beneficiary).  Still, this ruling should be a welcome development.

Section 501(c)(4) Notice Requirement: IRS Implements New Notice System for Organizations Claiming Exemption Under Section 501(c)(4), Announces Updated Compliance Deadlines

Posted in AG, IRS, FTB, & Property Tax Proceedings, Formation & Tax Exempt Status, IRS, Nonprofit Structures, Relationships & Transactions, Tax Treatment of Lobbying & Political Activities

The IRS has finally caught up with Congress with respect to the new notice requirement for new organizations claiming exemption under Section 501(c)(4).  Narrowly (?) missing its self-imposed July 1 deadline for implementing this requirement, the IRS last week released new temporary (and proposed) regulations, a Revenue Procedure (Rev. Proc. 2016-41) explaining the notification system, and an online, electronic-only form, Form 8976 (Notice of Intent to Operate Under Section 501(c)(4)) for providing the required notice (along with a $50 User Fee).

Compliance Deadlines

A social welfare organization’s obligations under the new rules depend on when it was (or will be) formed and whether it has already told the IRS of its claim to exemption under Section 501(c)(4):

An organization formed on or before July 8, 2016 must:

  • Do nothing if the organization has either a) filed Form 1024 requesting recognition of exemption under Section 501(c)(4), or b) submitted Form 990 (any variant) claiming exemption under Section 501(c)(4), on or before July 8, 2016.
  • Complete Form 8976 (including payment of the User Fee) by September 6, 2016 if the organization has neither filed Form 1024 requesting recognition of exemption under Section 501(c)(4), nor submitted Form 990 (any variant) claiming exemption under Section 501(c)(4), on or before July 8, 2016.

An organization formed after July 8, 2016 must complete Form 8976 (including payment of the User Fee) within 60 days of formation, even if the organization first submits a Form 1024 or any version of Form 990.

Providing notice under this system does not constitute an application for recognition of exemption, and the IRS’s acknowledgment of receipt of the notice does not constitute a determination that the organization is exempt.


Failure to submit Form 8976 exposes the organization to a penalty of $20/day, up to a cap of $5,000.  If an organization fails to provide notice, the IRS may demand that the organization do so by a specified date, and failure to comply with such a demand can expose managers personally to the same penalties.  Penalties may be subject to abatement upon proof of reasonable cause.

Watch for Changes

The IRS has requested comments on the temporary/proposed regulations and Rev. Proc. 2016-41, and there are some concerns about the application and enforcement of the new notice requirement under certain circumstances, so it is possible that the rules will change before the regulations become final.  We’ll be watching for developments.

IRS to Roll Out New Section 501(c)(4) Notice System on July 1?

Posted in AG, IRS, FTB, & Property Tax Proceedings, Formation & Tax Exempt Status, IRS, Nonprofit Structures, Relationships & Transactions, Tax Treatment of Lobbying & Political Activities

A while back, we blogged about a new notification requirement for organizations claiming exemption under Section 501(c)(4) imposed by Congress’s adoption last December of the PATH Act of 2015.  The Path Act created a new section of the Internal Revenue Code, Section 506, which requires new and certain existing (see below) Section 501(c)(4) organizations to notify the IRS of their existence and claimed exempt status within 60 days of the date of formation.  However, the new statute did not establish any procedures for that notification to occur.  The IRS subsequently extended all of the relevant deadlines pending issuance of further guidance about the notification procedure.

You’ll be . . . pleased? . . . to know that the wait may soon be over.  A well-placed source tells us that the IRS has publicly indicated, through an IRS representative’s comment at a recent meeting,  its intention to roll out the new notice system on July 1.

According to what we have heard, the notification system will be online only.  The IRS has previously indicated that the system will include instructions for organizations for whom the statutory deadline for notification has already passed.

Newly formed Section 501(c)(4) organizations, as well as those that have not yet either a) voluntarily applied for recognition of exemption or b) filed a Form 990 claiming exemption under Section 501(c)(4) will need to notify the IRS under the new system, so if your organization falls into one of those categories, keep an eye out for more information on July 1.

Coming Changes to Federal Overtime Rules Will Affect Nonprofit Employers

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

The US Department of Labor has issued new regulations, effective for most employers in December 2016, that will affect how employers, including nonprofits, determine which employees are exempt from certain wage and hour rules.

Since we’re not employment lawyers, these new rules fall outside of our areas of expertise, but our friends at California Association of Nonprofits recently released a very helpful summary that they prepared with the help of knowledgeable counsel.

Take a look, and consider consulting your own employment counsel to see what you need to do to prepare for the new rules. The CAN post also includes links for information about some upcoming webinars that might be helpful.

Final PRI Regulations Released

Posted in Grantmaking & Social Investing, Private Foundations, Social Enterprise

The Treasury Department and Internal Revenue Service yesterday released final regulations on private foundation program-related investments.

These regulations put in final form nine examples of investments that qualify as PRIs, initially proposed by the IRS in 2012.

The White House has been enthusiastic about impact investing as a tool to further social and charitable objectives, including the use of PRIs, and issued this blog post announcing the final regulations.

The nine examples in the final regulations illustrate the wide range of possible PRIs and reflect the following general principles:

  • Charitable goals that may be accomplished through a PRI are broad; they include purposes such as combating environmental deterioration, promoting the arts, and advancing science.
  • PRIs may fund activities both domestically and abroad.
  • Many different kinds of investments may qualify as PRIs, including loans to individuals, loans to tax-exempt organizations (e.g., a 501(c)(4) social welfare organization), guaranties and other forms of credit enhancement, and equity investments in for-profit organizations.
  • A potentially high rate of return does not automatically prevent an investment from qualifying as program-related.

These final regulations follow guidance issued last September by the Treasury Department and IRS (Notice 2015-62) clarifying that private foundations could consider the relationship between an investment and the foundation’s charitable purposes, even when making ordinary investments that are not PRIs, and that foundation managers are not required to select only investments that offer the highest rates of return, the lowest risks, or the greatest liquidity.  (See our blog post on this topic.)

A few points from the Treasury Department and IRS written comments that accompanied the final regulations:

  1. Treasury and the IRS confirmed that the examples are intended as illustrations of investments that qualify as PRIs but that other fact patterns also may qualify, for instance, ones that are similar to but that do not contain all of the elements in any particular example.  The examples therefore provide guidance but are not intended to be restrictive.
  2. Treasury and the IRS removed from the fact pattern of one example that the foundation would liquidate its stock investment if it became profitable, which is helpful to avoid a conclusion that a foundation must sell the equity it acquires in a business once it becomes profitable for the investment to qualify as a PRI.  This is not a PRI requirement in the regulations.  However, the comments did note that the establishment of an exit condition when making an investment that is “tied to the foundation’s exempt purpose in making the investment can be an important indication of” the foundation’s primary charitable purpose.
  3. We’ve previously commented that it would be helpful if we had an example of an equity PRI in an LLC (as opposed to a loan), which is a fairly common investment structure.  However, we understood that the IRS viewed the complexity of such an investment to be outside the scope of these examples.  The comments confirmed that this is the case, but also stated that the IRS and Treasury are considering issuing a revenue ruling addressing investments in partnership/LLC interests.  We look forward to that future guidance.