Nonprofit Law Matters

Goodbye Flexible Purpose Corporation, Hello Social Purpose Corporation: Governor Brown Signs S.B. 1301

Posted in hybrid corporations, Social Enterprise

On September 27, Governor Brown signed into law an amendment to the Corporate Flexibility Act of 2011, which had established the flexible purpose corporation (“FPC”) as a hybrid corporate form then unique to California.  The amendment, S.B. 1301, changes existing law (found under Corporations Code Sections 2500-3503) to emphasize the social-purpose nature of the FPC, most notably by changing its name to the “Social Purpose Corporation.”

A working group of California attorneys originally designed the FPC as an alternative to both a traditional corporation and the other hybrid corporate form adopted at the same time in California, the benefit corporation.  While both the flexible purpose corporation and the benefit corporation were intended as a way to hardwire a social purpose into an otherwise traditional for-profit corporate structure, the FPC offers more flexibility in balancing profitability and the pursuit of a social purpose, as its name implied.  Unlike benefit corporations, FPCs can, but are not required to, pursue the creation of a general benefit for society and the environment; they can focus instead on the specific purposes in their articles, which can be broadly or narrowly defined.  Also, FPCs are not required to measure their performance towards their social purposes against a third-party standard, as benefit corporations are required to do.  Unlike directors of a benefit corporation (at least until S.B. 1301), FPC directors could, but again were not required to, factor into their decision-making considerations other than profitability, such as the corporation’s social purposes.  Since the FPC became available in California on January 1, 2012, other states such as Washington and Florida have enacted laws that establish roughly similar corporate forms.

S.B. 1301 left most of the provisions of the Corporate Flexibility Act intact, introducing the following significant changes:

  • The “Flexible Purpose Corporation” has been renamed the “Social Purpose Corporation” (“SPC”) to more accurately reflect the social-purpose motivations intended.
  • Directors of a FPC/SPC are now required to take into account factors such as the overall prospects of the corporation and the social purposes set forth in its articles, as they deem relevant in their decision-making.
  • Previously, FPCs with under 100 shareholders that followed certain procedures could avoid the requirements to prepare special-purpose annual reports (including an MD&A discussion of the company’s operations and performance with respect to its special purposes) and special-purpose current reports after events specified in Corporations Code Section 3501.  S.B. 1301 eliminates this exemption.

The bill also makes some procedural clarifications and corrections.

S.B. 1301 takes effect on January 1, 2015.  On that date, existing FPCs will automatically continue their existence as SPCs.  They may, but are not required to, amend their articles of incorporation or reissue share certificates to reflect their new status as SPCs.

South Carolina Creates New Requirements for Commercial Co-Venturers; Deadline Tomorrow (October 4, 2014) for Commercial Co-Venturers Currently Running Solicitation Campaigns

Posted in Public Charities, Revenue Generating Activities

Earlier this year, South Carolina enacted House Bill 3367 (H. 3367), a bill aimed at addressing concerns of the community and enforcement issues with the state’s Solicitation of Charitable Funds Act (the “Act”). H. 3367 amended the Act, including adding new requirements for commercial co-venturers.

As of March 13, 2014, the effective date of H. 3367, the new requirements of commercial co-venturers include:

  • Registering with the Secretary of State by submitting an application and $50 application fee prior to a solicitation campaign.
  • Filing with the Secretary of State a joint financial report within 90 days of the conclusion of a solicitation campaign, or within 90 days after the anniversary of a solicitation campaign lasting more than one year, on the form prescribed by the Secretary of State and with the requisite financial information.

These new requirements do not affect the previously-existing requirements of commercial co-venturers, which still apply. Those requirements include filing a Notice of Solicitation form and a copy of any contract or agreement with a charitable organization with the Secretary of State at least ten days before the commercial co-venturer begins any solicitation activity or any other activity contemplated by the contract or agreement.

The South Carolina Secretary of State’s Office has informally indicated that commercial co-venturers currently running solicitation campaigns have until October 4, 2014, to submit an application for compliance with the new registration requirement.

The South Carolina Secretary of State registration application and other forms for commercial co-venturers can be accessed here.

The South Carolina Secretary of State’s Office released a brief summary of the amendments in H. 3367, available here.

CalNonprofits Releases Report on Impact of California’s Nonprofit Sector

Posted in Grantmaking & Social Investing, Private Foundations, Public Charities, Religious Institutions, Revenue Generating Activities

On August 5, 2014, CalNonprofits, a statewide alliance of nearly 10,000 nonprofit organizations promoting the interests of California’s nonprofit sector, released a report, Causes Count: The Economic Power of California’s Nonprofit Sector, “the first report of its kind to examine the nonprofit sector’s scope, activities and economic impact” in California.

If you don’t have time to read the full 60-page report, at least check out the Key Findings. There’s something for everyone: Grantees will appreciate that California foundations make nearly $2 billion in grants in California annually; economists will love that nonprofits represent 1/6 of California’s gross product; unions will take note that nonprofits are the fourth largest industry by employment in California; politicians will eye the $37 billion nonprofits pay in taxes; and those who benefit from the work of nonprofits (after all, who doesn’t?) will smile at the 75,000 plus organizations working to make the world a better place.

Best news: Californians overwhelmingly trust nonprofits to act on behalf of the public and deliver quality services.

Worst news (well, it’s hardly news): Resource disparities across rural/urban, racial, and socioeconomic status communities are significant and persistent.

Kudos to CalNonprofits for producing this report.


IRS Debuts Streamlined Form 1023-EZ Application for Recognition of Exemption Under Section 501(c)(3)

Posted in Formation & Tax Exempt Status, Public Charities

In hopes of reducing the long backlog of exemption applications and ostensibly freeing up resources for more robust enforcement, the Internal Revenue Service released on Tuesday a new short-form tax exemption application, Form 1023-EZ, for certain small charities.  The release also includes instructions for completing the form.

To be eligible to use the new form, an applicant must not have had annual gross receipts exceeding $50,000 in any of the past 3 years; must project that its annual gross receipts will not exceed $50,000 in any of the next 3 years; and must not have total assets in excess of $250,000.  Other restrictions apply: churches, schools, hospitals and medical research organizations, foreign entities, supporting organizations, and a host of other specialized entities are ineligible to use the abbreviated application.  The instructions include a 7-page “Eligibility Worksheet” with 26 questions; if the answer to any is “Yes,” then the organization is not eligible to use Form 1023-EZ.

An applicant must submit Form 1023-EZ electronically.  Submission requires payment of a user fee of $400, reduced from $850 for many applicants using the full Form 1023.

Unlike its much more detailed sibling, the Form 1023-EZ asks the applicant to attest to a series of conclusory statements about its governing documents, purposes, and activities, but does not require elaboration or attachments.  Applicants using the new form do not have to provide any details about, for example, their relationships with insiders or their finances.

Certain organizations whose exempt status is automatically revoked for failure to file annual returns for three consecutive years can use the new form to apply for reinstatement.  This option is available only for organizations that otherwise meet the Form 1023-EZ eligibility requirements and that seek either retroactive reinstatement within 15 months of revocation or reinstatement only from the postmark date of the reinstatement application.  (These eligibility requirements correspond to the reinstatement procedures set forth in Sections 4 and 7, respectively, of Rev. Proc. 2014-11.)

We may have more to say about the implications, for individual charities and for the nonprofit sector as a whole, of the approach the IRS has taken to “streamlining” the exemption application process.  For now, though, small charities that are looking for a faster path to exemption, or that want to recover after automatic revocation, should be aware of this new option.

Revised Rules on 501(c)(4)s and Political Activity Expected in Early 2015

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

Earlier this week, IRS Commissioner John Koskinen explained in an interview with the Center for Public Integrity that the IRS expects to complete revised proposed regulations defining political activity for 501(c)(4) (and possibly other types of 501(c)) organizations by early 2015.  The Center for Public Integrity reports that Koskinen elaborated on the nature of the revised rules by explaining that they would address three issues concerning political activity by such organizations:  “What should be the definition, to whom should it apply and how much . . . can you do before you jeopardize your exemption?”  The latter two issues were left unaddressed in the first round of proposed regulations.

We hope the IRS will look carefully at the comments already highlighted in a series of 25 articles posted on this blog in April and May titled Top 25 Comments on IRS Proposed Political Activity Rules.  All 25 posts were submitted to the IRS as an independent comment on the proposed rulemaking in order to call attention to particularly noteworthy comments already submitted, and to analyze the strength and weaknesses of the arguments raised within them.  A copy of this submission can be downloaded on, here.


IRS Postpones Summer Hearings on Political Rules, Will Do Second Draft

Posted in Unions, Associations, Clubs & Other Tax-Exempt Organizations

On May 22, 2014, the IRS announced that “it is likely that we will make some changes” to the heavily-criticized regulation proposed last November by Treasury and the Service to govern 501(c)(4) political activity.  The announcement continued:  “Given the diversity of views expressed and the volume of substantive input, we have concluded that it would be more efficient and useful to hold a public hearing after we publish the revised proposed regulation. Treasury and the IRS remain committed to providing updated standards for tax-exemption that are fair, clear, and easier to administer.”

This appears to mean that hearings will not be held this summer.  Further, we can assume that the publication of a revised regulation will trigger another period for the receipt of written public comments before such hearings occur.

My reaction?

Obviously, the IRS and Treasury need to identify safe harbors for nonpartisan voter engagement and voter education, including registration, GOTV, debates, and voter guides, in view of all the public concerns expressed that these were classified in the first draft of regs as political even if the programs were perfectly neutral.  Also, the provision should be softened that treats any mention of a candidate’s name as political if it occurs (or is present on the organization’s website) within 30 days before a primary or 60 days before a general election.

Perhaps less obviously, Treasury and the IRS must revisit the question of where to draw the line on communications outside of the 30- and 60-day periods prior to elections.  Will it hold to its first draft and regard as political only those messages that expressly advocate election or defeat of a candidate, as some have argued?  If so, the integrity of the nonprofit sector will go down the drain as undisclosed money pours into tax-exempt organizations to pay for so-called “issue ads” that bash or praise candidates and suggest that people “lobby” them on their positions.  We need a rule that legitimizes genuine grass roots lobbying, but states a general rule that captures and examines all paid mass media communications that reflect a view on a candidate any time during the election year.

The Bright Lines Project (BLP) has stepped forward with an alternative set of clear, predictable, universal rules to define political campaign activity—developed over four years before the IRS scandal broke.  The BLP “Six Rules” were recently elaborated in a thorough Explanation.  I serve as the chair of the BLP Drafting Committee, and we are committed to “see the thing done” (movie reference:  True Grit).

The biggest questions are:

(1)  Will the IRS and Treasury realize that it was unfair and unworkable to define political intervention only for 501(c)(4) social welfare groups, and now move to propose rules that apply to all 501(c) categories, including charities, unions, and business associations?

(2)  Will the government state “how much is too much” and set a clear percentage limit, at 40% or lower, for the annual political expenditures of non-charitable 501(c) organizations?

If the new regulations don’t address these two issues, the long nightmare of confusion that has plagued the IRS’s enforcement of the political rules, inserted by Congress in the tax code, will never come to an end.


Top 25 Comments on IRS Proposed Political Activity Rules: #1 — American Bar Association Section of Taxation

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

“Promulgating regulations with clear rules regarding political intervention or candidate-related political activity could help the government to avoid constitutional attacks on the grounds of vagueness. . . . Such regulations are not unconstitutional.  Quite the contrary, they help remove doubts as to the constitutionality of Service guidance in this important area.”

Our countdown closes with comments by the nation’s most prominent and longstanding association of lawyers and law students:  the American Bar Association.

Posting the ABA Section of Taxation’s commentary today is significant.  The Tax Section’s Exempt Organizations (EO) Committee is meeting today in Washington, D.C.  This is the same meeting that, one year ago, featured the admission of internal review bias by Lois Lerner, then EO Director at the IRS, that began the upheaval resulting in this long-overdue rulemaking process.

On April 2, IRS Commissioner John Koskinen described the uniquely overwhelming response to this particular rulemaking:

During the comment period, which ended in February, we received more than 150,000 comments. That’s a record for an IRS rulemaking comment period. In fact, if you take all the comments on all Treasury and IRS draft proposals over the last seven years and double that number, you come close to the number of comments we are now beginning to review and analyze.

In this context, it is no wonder we struggled over the selection and order of our list.  In the interest of full disclosure, you should know that the drafting group for the ABA Tax Section’s comments was headed by a member of our firm — Rosemary Fei, as Co-Chair of the Subcommittee on Political & Lobbying Activities & Organizations of the EO Committee.  The Section’s comments are so incisive and technically rigorous that we believe they justify the #1 spot if for no other reason than the thoroughness of the 57-page response.  They combine succinct summaries of recommendations with detailed legal arguments evidencing the expertise and collaboration that went into the submission.

We highlight a few of the many points raised:

  • The comments note that if 501(c)(4)s are only permitted to engage in an insubstantial amount of candidate activity, then many social welfare organizations would be stuck in non-exempt limbo between section 501(c)(4) and section 527, which requires that political organizations engage primarily in political intervention:  “ . . . we recommend the minimum level of political intervention required for section 527 exemption be adjusted to approach or mirror the maximum under section 501(c)(4):  we see no public policy justification for withholding tax-exempt status from nonprofit organizations that fall in the gap.”  (The Bright Lines Project also raised this point.)
  • The comments examine the role that section 501(c)(4) organizations play in multiple-exempt-entity structures, and the impact that the rules would have on tandem nonprofits:  “Section 501(c)(4) social welfare organizations form the critical link and the essential buffer between section 501(c)(3) charitable organizations and section 527 political organizations.  They allow the unique voice and perspectives of a charity to be heard in public debates, including the most important debate, about who will lead our country, while preserving the charity’s section 501(c)(3) status.  These families of organizations of various tax-exempt classifications sharing a common nonprofit mission are vital to our society and our democracy, and provide an important counterweight to private profit-seeking interests.  Operating them requires close attention to boundaries, and the boundaries can be difficult and expensive to administer properly.  In practice, structuring these families so they can function requires one standard for political intervention to apply across the family.”
  • The comments delve into myriad problems with the 60/30-day election blackout period.  Examples of specific dilemmas are provided with respect to internet archives, and the proliferation of online posting and re-posting:  “ . . . once deleted it will be impractical and burdensome to restore such references after the pre-election window has passed.  As a result, interesting and thoughtful conversations provoked by a months-old or even years-old post may be entirely lost through an organization’s need to avoid or minimize its ‘candidate-related political activity.’”

We urge our readers to read the Tax Section’s comments in their entirety for a comprehensive survey of the proposed regulations and their impact.  Like the comments from the AICPA, the Tax Section’s comments represent neither the views of an affected organization nor the agenda of a particular constituency; the Section submits comments on nearly every IRS Notice of Proposed Rulemaking.

We urge Treasury/IRS to use these comments as a starting point for revised rules that will be informed by the experiences of thousands of nonprofit groups, attorneys, accountants, academics, politicians, and members of the general public, to arrive at political tax rules under the Internal Revenue Code that provide consistency, clarity, and functionality.


Top 25 Comments on IRS Proposed Political Activity Rules: #2 — Bright Lines Project

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

“We don’t want a bad political definition for 501(c)(4) organizations, rather we want a good definition for everybody.”

So, we admit to a bias on this one.  Greg Colvin is chair of the Bright Lines Project (“BLP”) Drafting Committee, whose nine members include Rosemary Fei, also a principal in our firm.  Having said that, here are a few reasons we think the Bright Lines Project’s comments merit such a high place on our list:

We understand that any day now, perhaps today, the Bright Lines Project will issue a full explanation of its six rules, submit it to the IRS to accompany its February 27 comments, and post the explanation on its website.



Top 25 Comments on IRS Proposed Political Activity Rules: #3 — Center for Responsive Politics (

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

“Over the last four election cycles, the amount of spending by 501(c)(4) social welfare organizations in particular has grown dramatically.  In 2006, just $1.3 million in political spending was reported to the Federal Election Commission (FEC) by 501(c)(4) organizations, while by the 2010 cycle, that total had risen to $92 million.  In 2012, the number more than doubled, to $256 million, and so far in the 2014 cycle, spending by 501(c)(4) organizations already outpaces totals at the same point in the previous cycle — even though this is not a presidential election year.”

The Center for Responsive Politics’ comments stand out for their inclusion of rigorous data analysis in the form of charts and summaries of the amount of “dark money” that has funneled through 501(c)(4) entities in recent years.  CRP emphasizes technical, data-related challenges that the IRS must consider, “whatever the outcome of the larger debate,” and also suggests that the IRS provide better public access to data relating to 501(c) organizations, noting that the internal data at the IRS is currently insufficient to enforce the proposed rules.  CRP notes it has endorsed the Bright Lines Project’s call for clearer IRS rules on political activities, based on the fact that tax-exempt nonprofit electoral campaigning is not going away, but steadily increasing.


Top 25 Comments on IRS Proposed Political Activity Rules: #4 — NAACP and NAACP-National Voter Fund

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

“ . . . much of the work that the NAACP did in the early years to combat racial discrimination in the administration of our nation’s voting laws would be illegal under the proposed regulations.”

The concise and eloquent comments by the NAACP and its 501(c)(3) affiliate, the NAACP-National Voter Fund, are among the most moving. They place the proposed rules in a powerful historical context:  “The NAACP fought to register people to vote when government-sanctioned voter suppression laws and tactics (e.g., poll taxes, ID laws, literacy tests, grandfather clauses, whites-only primaries, etc.) and violence kept African Americans from exercising their Constitutional right to cast a ballot.”  They also discuss decades of precedent indicating that nonpartisan voter education is an appropriate charitable and educational activity for both 501(c)(3) and 501(c)(4) organizations, and argue that it should remain so.

While the NAACP and its Voter Fund applaud the IRS and Treasury for attempting to clarify the rules concerning nonprofit political activity, they call for the proposed regulations to be withdrawn.  Instead, they say, “Any new rules proposed by the IRS and Treasury should be narrowly tailored to address actual abuses without restricting or discouraging legitimate nonpartisan public engagement activities.”  Their comments also point out problems with importing terminology from federal election laws, which would lead to inconsistent interpretations by the IRS and the FEC of the same terms.