Nonprofit Law Matters

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.

New Political Rules for 501(c)s in March 2015?

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

We daren’t get our hopes up, but…

We heard through the grapevine that March 2015 is the release date for a second round of proposed rulemaking concerning Section 501(c) regulations relating to political campaign intervention.  Indeed, an online calendar at the Office of Information and Regulatory Affairs at the Office of Management and Budget now indicates “03/00/2015” as the date for the “Second NPRM.”  Wishful thinking?  Stay tuned.

Taxation of Exempts Publishes “Comments on Proposed Regulations Show Exempt Organizations’ Concerns” by Martha Lackritz

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

Taxation of Exempts recently published Martha Lackritz’s article Comments on Proposed Regulations Show Exempt Organizations’ Concerns.  In her article, Martha surveys a sample of the over 170,000-plus comments eventually submitted by the public to the IRS in response to its proposed regulations on candidate-related political activities of social welfare organizations.  If you have yet to read all 170,000-plus comments, or if you missed Martha’s five-week series of 25 posts on the top comments, this article is a nice summary of where the comments agree and diverge.  Martha also shares her insight on principal points of agreement and unresolved issues that should play a key role in the IRS and Treasury’s second draft of proposed regulations, anticipated to be released early next year.

“Comments on Proposed Regulations Show Exempt Organizations’ Concerns” by Martha Lackritz is available in the Taxation of Exempts, September/October 2014 issue (subscription required) and our website.

Date of Gift Rules for Charitable Contributions

Posted in Charitable Gift Planning, Private Foundations, Public Charities

The end of the year is nigh, and timing is crucial to determining the year of a donor’s income tax deduction, the value of a donor’s fluctuating asset, and the characterization of the donor’s asset as short-term or long-term.  In general, a gift is complete when the donor relinquishes control over the asset and delivers it to the charity.  It sounds simple, but there are many special rules about what constitutes “delivery.”  The following summarizes some common scenarios:

In-Person Delivery:  Donor hands cash, check, or a properly-endorsed stock certificate to charity’s representative.

  • Date of Gift:  Date charity’s representative receives the cash, check, or certificate.  (Treas. Reg. 1.170A-1(b))

Mail or Delivery Service:  Donor mails a check or properly-endorsed stock certificate to one charity via U.S. Postal Service and another check to a second charity via a private delivery service (e.g., FedEx or UPS).

  • Date of Gift:  The check or certificate sent by U.S. Postal Service is deemed delivered, pursuant to the “mailbox rule,” when the donor places the envelope in the mail.  (Treas. Reg. 1.170A-1(b)).  The mailbox rule does not apply, however, to items sent by private delivery service.  Items sent by private delivery service are deemed delivered on the day they arrive at the charity’s office.

Reissued Stock: Donor instructs the corporation that issued the stock or the transfer agent to transfer ownership of the donor’s stock to the charity.

  • Date of Gift:  Date on which the issuer or transfer agent, as applicable, changes the ownership records to reflect the transfer.  (Treas. Reg. 1.170A-1(b))  Note that “irrevocable” instructions to the transfer agent are not sufficient.

Street Name Stock:  Donor’s stock is held in “street name” on the books of a central clearing house.

Credit Cards:  Donor makes a charitable contribution via credit card.

  • Date of Gift:  Date the charge occurs, regardless of when the donor pays the credit card company.  (Rev. Rul. 78-38)

Real Estate:  Donor transfers real estate to charity.

  • Date of Gift:  State law controls when real property is deemed delivered.  In some cases, the delivery of the deed is sufficient, while in other cases, recording is required.  In California, the gift of real estate is complete when the deed is delivered.  (California Civil Code Section 1054)

Tangible Personal Property:  Donor contributes tangible personal property to the charity.

Text Message:  Donor responds to a charity’s request for funding via text message.

Bottom Line for Charities:  These rules are complicated, and in many cases, the charity may not know the exact date on which the donor’s gift was complete for his or her deduction purposes (e.g., date stock ownership is transferred on corporate records).  The charity must provide, in its receipt to the donor, the date on which it received the gift (which may be later than the donor’s date of gift).  For example, the charity could state in the receipt that “your stock gift was received in our brokerage account on [date],” or “your check was received in our offices on [date].”  Finally, remember that the date of the gift for purposes of the donor’s deduction, and how the gift is valued for deduction purposes, is a separate issue from when the gift is booked by the charity, and how much is booked.

Bottom Line for Donors:  These rules are complicated, so plan ahead to avoid frantic year-end gifts, and consult your tax advisor.

Additional Resources:

Conrad Teitell, Charitable Gifts: Date of Delivery Rules

Do’s & Don’ts: Public Charities in an Election Year

Posted in Public Charities, Tax Treatment of Lobbying & Political Activities

You’re a public charity.  Maybe you’re brand new; or maybe you’ve existed for years but suddenly have an issue your constituents need to know about on the ballot this year.  Maybe one of your Board members is a candidate for elective office.  Maybe you’d like to host a debate.  Maybe you want to register your underserved population to vote.  Whatever your situation, to run an effective and legally compliant organization, you need to be familiar with the rules surrounding advocacy and elections for public charities.

The following list of do’s and don’ts focuses on a few common issues affecting 501(c)(3) public charities.  Public charities are strictly prohibited from endorsing or opposing candidates for elective office, but not from engaging in truly nonpartisan, educational activities.  Each of the activities discussed below may be safely conducted by a charity, provided IRS rules are carefully followed.  This post does not address the rules specific to private foundations, social welfare organizations, or other tax-exempt entities.  Moreover, this list does not address election law issues, such as campaign finance limits and disclosures.  Charities should seek election law counsel to navigate the rules that apply beyond the realm of tax law.

Voter Registration

Do:  Offer information on how and where to vote in a strictly nonpartisan manner, in both the content of your messaging and the way that you target geographic areas or populations.  Refer to Revenue Ruling 2007-41, Situations 1 and 2, for relevant examples.

Don’t:  Target voters or refuse to register voters based on how they expect to vote, or use particular issues to encourage registration by those only on one side of those issues.

But . . . targeting those historically underrepresented in the democratic process (e.g., homeless, poor, racial minorities), or an organization’s natural constituency (e.g., patients at a local drop-in clinic), will generally not, without more, convert a nonpartisan activity to a partisan one, even if the targeted group is statistically more likely to vote for candidates of one party than the other.

Publishing or Distributing Voter Guides from Candidate Questionnaires

Do:  Publish the responses of all candidates in a particular race, and cover a wide variety of issues based on their importance and interest to the electorate as a whole.  Refer to the safe harbor rules in Revenue Ruling 78-248 (Situations 2 and 3).


  • Indicate any bias or preference (in the wording of questions, or in the content or format of the voter guide) for or against any candidate or group of candidates;
  • Publish rankings or ratings of candidates, even if the ratings were determined without regard to political affiliation and resulted from a neutral and unbiased process.

But . . .  be aware that these rules apply regardless of whether the charity itself prepares the voter guide, or distributes one prepared by someone else.

 Candidate Forums and Debates


  • Invite all legally-qualified candidates;
  • Cover a broad range of issues prepared and presented by a nonpartisan, independent panel of experts;
  • Provide each candidate with an equal opportunity to present views;
  • Include a moderator to assure that ground rules are followed, and have the moderator explain that the sponsoring organization does not endorse any candidate;
  • Refer to Revenue Ruling 86-95 for the framework required to ensure nonpartisanship.

Don’t:  Comply with only some but not all of the above requirements.

But . . . the IRS has indicated that fewer than all candidates may be invited if reasonable, objective criteria are consistently and non-arbitrarily applied to decide whom to invite, especially if inviting all candidates is impractical.

Ballot Measures


  • Familiarize yourself with the tax rules concerning legislative lobbying to understand the limits on permissible ballot measure activities, since ballot measures are considered legislation for federal tax purposes.
  • Verify whether your organization has filed Form 5768, electing to have its lobbying expenditures measured under Internal Revenue Code Section 501(h).  For more information on the 501(h) lobbying rules, refer to Greg Colvin’s article here.

Don’t:  Refer generically to election outcomes when you talk about ballot measures – such language can imply endorsement for, or opposition to, candidates on the ballot.

But. . . ballot measures entail a number of issues that don’t arise with other forms of legislation, since the voters, not legislators, decide the issues.  Don’t engage in ballot measure activity without a solid understanding of the applicable campaign finance and disclosure rules.

This is only a small sample of the many issues that arise for charities during an election year.  Seek counsel if you are considering engaging in an election-related activity and are unsure how the rules apply, including inviting candidates to speak at an event, providing website links to potentially political content, lobbying for or against legislation, engaging in advocacy on wedge issues that distinguish the candidates in a race, or building coalitions with other tax-exempt organizations, to name a few common scenarios not covered above.

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

Posted in 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.