Nonprofit Law Matters

IRS Provides Some Limited Guidance on Donor Advised Funds

Posted in Charitable Gift Planning, Grantmaking & Social Investing, IRS, Private Foundations, Public Charities

On December 4th the IRS issued Notice 2017-73, which provides some key insights into how the IRS is thinking about three distinct areas involving donor-advised funds.  The public is invited to provide input and comment by March 5, 2018.  Some organizations may not like where the IRS is headed on at least two of the three areas, but these are three important issues that clients ask about frequently.

Issue 1:  Tickets, Dinners and Other Benefits.  IRC Section 4967 imposes a hefty excise tax on a donor who receives more than an “incidental benefit” in connection with an advised gift from a donor-advised fund, but what is an “incidental benefit?”  Very typically, a donor asks his or her donor-advised fund to make a donation to the local charity’s annual fundraising event.  By advising the gift, the donor receives a ticket to the event.  For example, if a donor advises a $1,000 gift from a donor-advised fund and receives a ticket worth $200, then has the donor received something that is more than incidental?  In Notice 2017-73, the IRS suggests yes, and also that there would be a more than incidental benefit even if the donor-advised fund paid $800 and the donor separately purchased the ticket for $200.  IRS argues that the same analysis would apply where a donor receives membership benefits as part of a donor-advised fund’s gift.  The IRS position follows the approach used with private foundations, but Section 4967 is even more strict than the private foundation rules, because a private foundation could receive a ticket and have the donor attend as a representative of the private foundation.  Here, the donor could not attend on behalf of the donor-advised fund.

Issue 2:  The Pledge.  Interestingly, and not entirely consistent with its proposed treatment of tickets, the IRS is suggesting that, in most cases, where a donor makes a pledge to a charity, the donor can ask his or her donor-advised fund to fulfill that pledge, and doing so is not more than an incidental benefit to the donor under Section 4967.  Similarly, where a charity relieves a donor of a pledge obligation after receiving a gift from the donor advised fund, there would be no excise tax under Section 4967.

Issue 3:  Public Support Treatment of Grants from a Donor-Advised Fund.  Finally, the IRS and Treasury believe that some charities are able to maintain their public support status only by receiving gifts from donor-advised funds, whereas if the donor had given directly to the charity, the charity would be a private foundation.  For example, Donor A is the only donor to Charity B.  If Donor A gives Charity B 100% of its funding, Charity B will be a private foundation.  If Donor A asks his or her donor-advised fund to give Charity B 100% of its funding, then Charity B will be a public charity because it is supported by another public charity, the sponsoring charity of the DAF.  The IRS is proposing that in the future, for public support purposes only, that we look through the DAF to its donor and treat that donor as though he or she were the direct donor to the charity.  This change, if implemented, will significantly affect a number of charities who may no longer be considered to be publicly supported.

The Notice also asks for public feedback on a few other select topics, and we look forwarding to reading the flood of comments that will no doubt be delivered.

Keeping Churches and Charities Nonpartisan – House Vote This Week, Senate Soon

Posted in Formation & Tax Exempt Status, IRS, Public Charities, Religious Institutions, Tax Treatment of Lobbying & Political Activities

As everyone has heard, Congress is moving rapidly on a tax reform bill.  Parts of it do affect nonprofit organizations and their donors:  some minor, some major, a few good, mostly bad.

A central concern for many of our clients involves maintaining the absolute prohibition in the Internal Revenue Code on partisan engagement in elections, for or against candidates for public office.

Sponsored by then-Senator Lyndon Johnson in 1954, this “Johnson Amendment” has been in place for most of our lifetimes, and it has prevented tax-deductible funding from flowing through the charitable sector to influence our elections.

The US House of Representatives is voting this week on a tax reform package that would blow a big loophole in the Johnson Amendment, allowing endorsements and other partisan oral and written statements to become part of the “regular, customary” activities of all charities, including churches.  Who wants this?  We saw, during the 2016 campaign, Donald Trump frustrated in Flint, Michigan that he couldn’t use the pulpit in a black church to bash his opponent, Hillary Clinton.  He vowed, if elected, to repeal the Johnson Amendment, joining a small contingent of conservative evangelical pastors who have sought for many years to endorse or oppose candidates from the pulpit on religious grounds.

So far, the Senate version of the tax reform bill, which has not yet been formally introduced, does not currently contain the same loophole that the House version does.  But that could change at any time.  (Late breaker: The Senate Finance Committee has released a list of modifications to the draft, available here.)

Leaders of the nonprofit sector and many religious groups actively oppose this change, seeing it as an invasion of partisanship that threatens our tax-exempt civil society with division and political manipulation.  The Joint Committee on Taxation estimates that if the Johnson Amendment is repealed, the federal government will lose $2.1 billion over the next five years as newly-deductible campaign money flows into those 501(c)(3) organizations willing to intervene in elections, while shielding politically-motivated donors from public disclosure.

This is big.  It would affect our politics at the federal, state, city, and county levels, as churches, foundations, universities, hospitals, community groups, and others with nationwide or local influence start to promote or disparage political candidates.  Imagine the heavy hand of a pastor’s support of or opposition to a mayoral candidate in a small town with one church, or a university president in a college town.

For more on the potential risks of repeal, see this joint statement of the Council on Foundations and the National Council of Nonprofits.

For private foundations and those public charities that choose to lobby under Section 501(h) of the Code, expressing your views to Congress on these tax proposals should fall under the exception for self-defense lobbying in Sections 4945 and 4911, because the proposals include provisions that would affect the powers, duties, or tax-exempt status of these organizations, or the deductibility of contributions to them.

Tax Reform Affects Exempt Organizations

Posted in Charitable Gift Planning, Private Foundations, Public Charities, Religious Institutions, Revenue Generating Activities, Tax Treatment of Lobbying & Political Activities

The House Ways and Means Committee on Thursday introduced its highly anticipated tax legislation, called the Tax Cuts and Jobs Act.  The Act proposes major changes to the Internal Revenue Code, including lowering the number of tax brackets, increasing the standard income tax deduction, and repealing or limiting other deductions.  You may have read about how tax reform is likely to affect your personal tax situation, for better or worse.

Here are a few provisions in the Act directed specifically at tax-exempt organizations:

  • The net investment income tax imposed on private foundations would be fixed at a flat 1.4%, replacing the current 2% tax that can be reduced to 1% under certain circumstances.
  • Certain private colleges and universities also would be subject to a 1.4% tax on net investment income.  The tax would apply to educational institutions with at least 500 students and assets of at least $100,000 per student (at least $50 million in the aggregate), not including assets used directly in carrying out the institution’s exempt purpose.
  • Churches for which political activity is otherwise impermissible would be allowed to include content regarding political candidates in sermons or other presentations made during religious services or gatherings, provided the preparation and presentation of such content is in the ordinary course of the organization’s activities and results in only de minimis incremental expenses.
  • Donor advised fund (DAF) sponsors would be required to provide additional reporting on the average amount of grants made from DAFs during the year and indicate if the sponsor had a policy with respect to frequency and minimum level of DAF distributions.
  • An exception from the private foundation excess business holding tax would be created for a business enterprise that is wholly owned by a private foundation, if all net operating income is distributed to the foundation and the business meets certain requirements for being independently operated.  The foundation’s ownership interest also could not be acquired by purchase.  (This provision provides a legislative solution to Newman’s Own Foundation’s well-publicized excess business holding woes.)
  • The exclusion from unrelated business income tax for income derived from research would be limited to research the results of which are freely available to the general public.
  • An organization which operates an art museum as a substantial activity would not qualify as a private operating foundation unless the museum is open during normal business hours to the public for at least 1,000 hours during the taxable year.

More generally, many are concerned that charitable giving overall will decrease as a result of the proposal.  Although the Act retains the charitable contribution deduction, fewer people may claim the deduction because the Act also significantly increases the standard deduction available.  Many taxpayers as a result may stop itemizing their deductions and therefore no longer benefit from the itemized deduction for charitable contributions.

Expect the legislation to be heavily negotiated, and the Senate will weigh in with its own version of tax reform.  We will be tracking tax reform legislation in the coming months, which President Trump and House Speaker Ryan ambitiously intend to enact before the end of the year.

IRS Releases Revenue Procedure 2017-53 on Foreign Public Charity Equivalence Determinations

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

Yesterday, September 14, 2017, the IRS released Revenue Procedure 2017-53, which international grantmakers and their tax advisors have eagerly awaited.  As background, private foundations making grants directly to foreign organizations generally must use one of two grantmaking procedures―expenditure responsibility or foreign public charity equivalency.  (The latter is known as “FPCE” for short, and also sometimes “equivalency determination,” or “ED”).  In FPCE or ED, a grantor makes a good faith determination and reasonable judgment, usually based on written advice of a qualified tax practitioner, that the foreign charity meets 501(c)(3) and public charity requirements.  Having done this, the private foundation can typically count a grant to the foreign entity toward its qualifying distribution requirement and not have the grant constitute a taxable expenditure.  The information to make an FPCE determination is usually gathered via an affidavit, the basic template for which was set forth in a revenue procedure issued in 1992, Rev. Proc. 92-94.

Over the years, however, the law and regulations affecting both public charities and FPCE procedures themselves have changed in various respects.  As one example, the U.S. Department of the Treasury released final regulations in 2015 that:  (1) broadened the class of qualified tax practitioners on whom private foundations could rely for this purpose; (2) eliminated, for purposes of the special rule (kind of a safe harbor), the ability of private foundations to rely directly on grantee affidavits without written advice from a qualified tax practitioner; and (3) clarified the reliance period for advice, including aligning the period with prior changes to public support regulations.  As a result, practitioners had long felt that Rev. Proc. 92-94 was outdated and sought more relevant guidance.

Revenue Procedure 2017-53 addresses many of these issues and sets forth the components of “preferred written advice,” a safe harbor on which private foundations may ordinarily rely in making a reasonable judgment and good faith determination that a grantee meets Section 501(c)(3) and public charity requirements.

You can read Revenue Procedure 2017-53 for yourself here, but here is a list of some of Rev. Proc. 2017-53’s more important points:

  • English.  Preferred written advice from a qualified tax practitioner for this purpose, along with all attachments, must be in English.
  • More attachments explicitly required.  Preferred written advice should attach the grantee’s organizing document (translated to English if needed).  As described below, it should also attach other information, such as support schedules, and translated foreign law relied on.
  • Foreign laws.  The grantor and qualified tax practitioner may rely on translations of and public information concerning foreign laws.
  • Terrorism.  Preferred written advice should verify that the grantee has not been designated a terrorist organization by the U.S. government.  While not required for preferred written advice, the private foundation should also confirm that the grantee and certain related individuals are not foreign persons whose property and interests are blocked pursuant to Executive Order or OFAC regulations.
  • Hospitals.  Rev. Proc. 2017-53 confirms that a hospital FPCE grantee need not comply with Section 501(r), extensive requirements on domestic hospitals imposed in 2010.  Preferred written advice need not address this point.
  • Schools.  Preferred written advice regarding a school FPCE grantee must confirm that the grantee does not discriminate on the basis of race, color, or national or ethnic origin, both by policy and in practice.  The grantee may fulfill the first part of this requirement via a policy in its governing documents or adopted by its governing body.  While the procedures of Rev. Proc. 75-50 need not be followed, this remains an avenue by which a grantee may demonstrate that it actually operates in a racially nondiscriminatory manner.
  • “Incubating” or new foreign charities.  Confirms that a foreign grantee in its first five years of existence may be treated as publicly-supported if the preferred written advice determines that, as of the time of the determination, the grantee can reasonably be expected to meet the applicable public support test.
  • Must attach public support schedule.  If the grantee has been existence for more than five years and is publicly-supported within the meaning of Section 170(b)(1)(A)(vi) or 509(a)(2), preferred written advice should attach support schedules.
  • Treatment of foreign charity and government gifts in public support test.  Confirms that a foreign grantee’s public support includes contributions and grants from charities described in Section 509(a)(1), whether domestic or foreign.  Grants from a domestic or foreign government, or international organization designated as such under 22 U.S.C. 288, also constitute public support.
  • Simplified update affidavits permitted.  Rev. Proc. 2017-53 confirms that where a grantee has previously supplied an affidavit, an updated affidavit describing only material changes (along with the previously-supplied affidavit) may be relied upon.
  • Applies to DAFs.  Until further guidance is issued, sponsoring organizations of DAFs may also follow this guidance.

RERI Holdings I, LLC and the Importance of Form 8283

Posted in Charitable Gift Planning, IRS, IRS, FTB & Attorney General Controversies

A recent Tax Court case, RERI Holdings I, LLC et al. v. Commissioner, 149 T.C. 1 (Jul. 3, 2017), should remind charities and their donors of the importance of full compliance with the substantiation rules and the potential costs of aggressive tax planning.

Facts of RERI Holdings

To over-simplify the complex facts in RERI Holdings:

·         A partnership owned an LLC that in turn owned real property.

·         The partnership effectively split that LLC interest into two pieces:  (1) a term of years interest (i.e. ownership of the LLC until December 31, 2020) and (2) a remainder interest (i.e. ownership of the LLC beginning January 1, 2021).

·         The partnership sold the remainder interest to the donor (another partnership) for $3 million.

·         The following year, the donor then gave the remainder interest to a university and claimed a $33 million tax deduction.

It does not take a tax expert to understand the IRS’s skepticism when a donor takes a deduction for $30 million more than the donor just paid for the donated property.  Perhaps that explains why, when the donor filled out Form 8283, it left blank the line for “donor’s cost or adjusted basis.”  Typically, this line shows what the donor paid to acquire the property.  Intentional or not, that omission became extremely costly.

Substantiating a Charitable Contribution Deduction and Form 8283

All charities and their donors need to be aware of the substantiation rules that impose certain procedural requirements before a donor can claim a charitable contribution deduction (for more information, see Publication 1771).  As part of these rules, if a donor claims a deduction in excess of $500 for a noncash gift, the donor must file Form 8283.  If the gift exceeds $5,000 and is a noncash gift other than publicly traded securities, the donor, in addition to obtaining a qualified appraisal (with limited exceptions), must completely fill out Section B of Form 8283 and have the charity sign the Form 8283 acknowledging the gift.

In RERI Holdings, the donor satisfied all requirements except reporting the basis on Form 8283.  For the IRS and the Tax Court, that omission alone was enough to cost the donor its entire $33 million deduction.  While the “substantial compliance” doctrine will sometimes save a taxpayer from such a harsh response to a minor procedural error, the Tax Court found that doctrine did not apply because the omission hid a critical “red flag” (i.e. that the donor had just purchased the property for 1/11th of what it claimed was the actual value).

Imposition of Penalty for Overvaluation

The IRS has often used a breach of the substantiation rules to deny a questionable deduction while avoiding an expensive fight over valuation.  Here, however, the IRS still attacked the donor’s valuation in order to impose a Section 6662(h) “gross valuation misstatement” penalty.  This penalty applies when a taxpayer claims that property is worth 400% or more of its actual value and is equal to 40% of the underpayment resulting from the overvaluation.

Here, the IRS suspected an inflated value because the underlying property had been previously valued at $47 million while being subject to approximately $43 million of debt.  Although there were other factors to consider, these numbers alone suggest a net value for the entire property closer to $4 million, while the taxpayer claimed that the remainder interest alone was worth $33 million.  The Tax Court settled on an actual value of approximately $3.4 million for the remainder interest (meaning the taxpayer’s overstatement triggered the Section 6662(h) penalty), for several reasons, including:

(1) The taxpayer used the “7520 tables” to value the remainder interest (these tables are used in the context of a remainder interest in a trust, but not when the person retaining a present interest has no fiduciary obligation to preserve the value of the property); and

(2) The taxpayer used what the IRS’s experts and the Tax Court considered an exceedingly optimistic projection of cashflow.

Reasonable Cause Exception

Even after losing on the question of value, the taxpayer argued that the penalty should not apply due to “reasonable cause.”  In this context, the reasonable cause exception requires both a qualified appraisal and the donor’s own “good-faith investigation” of the property’s value.  Even accepting as true the donor’s representation of what it actually investigated, the Tax Court found that at most, the donor had reviewed an 18-month old appraisal, which was not sufficient to satisfy the good-faith investigation requirement.

Bottom Line:  No Deduction and Harsh Penalties

So, the donor not only lost a $33 million deduction but also had to pay millions of dollars in penalties for even trying to claim the deduction in the first place.  RERI Holdings stands as a reminder to all to satisfy the substantiation requirements and that the IRS and courts may be unforgiving of a donor caught trying to get away with an unwarranted deduction.

CalNonprofits Seeking Input on California Raffle Laws by June 30

Posted in AG, IRS, FTB, & Property Tax Proceedings, IRS, FTB & Attorney General Controversies, Nonprofit Governance & Ethics, Public Charities, Revenue Generating Activities

CalNonprofits recently announced that new raffle regulations are being proposed and discussed this year in California.  CalNonprofits is asking nonprofits to weigh in on this discussion through a short survey, as explained in their announcement (reprinted in part below):

In California, only nonprofits can conduct raffles. And raffle laws are under discussion for changes. To help guide CalNonprofits as we develop and take positions on raffles, we need to know what nonprofits are doing and thinking about them. This survey will take only a few minutes to fill out, but it is crucial to the development of public policy and legislation on raffles. Please go here now to weigh in!

The survey closes this Friday, June 30.

More information about California raffle laws is available on the California Attorney General’s website.

Board of Equalization Restructured: What You Need to Know

Posted in AG, IRS, FTB, & Property Tax Proceedings

On June 15, 2017, the California legislature passed Assembly Bill 102 (the “Bill”), which substantially restructures the State Board of Equalization (“BOE”), affecting two key functions most significantly:  (a) collecting and administering various state taxes and fees, and (b) administering tax appeals.  The Bill, largely a response to a scathing report by the California Department of Finance regarding the BOE’s operations, creates two new agencies to oversee these responsibilities.  (Download the report here; enter “2017” in the “Year Issued” box and “Board of Equalization” in the “Agency/Entity” box.)  Governor Jerry Brown is expected to sign the Bill as part of the 2017-18 budget.

California Department of Tax.  The Bill establishes the California Department of Tax and Fee Administration (the “CDTFA”) to administer and collect certain taxes currently administered by the BOE.  The new CDTFA will be managed by a director, subject to Senate confirmation, a chief deputy director, and a chief counsel, all appointed by the governor.  Beginning July 1, 2017, the CDTFA will primarily administer state and local sales and use taxes, and a variety of other taxes and fees.

More importantly to our exempt organization clients, the BOE will remain responsible for overseeing property taxes, including the issuance of Organizational Clearance Certificates.  This authority is established under the California Constitution, and cannot be altered without a Constitutional amendment.

Office of Tax Appeals.  The Bill also creates an Office of Tax Appeals (“OTA”) to oversee appeals currently handled by the BOE, except those issues relating to matters over which the BOE will retain jurisdiction (such as property tax issues).  The OTA is authorized to create tax appeals panels consisting of three administrative law judges, with offices in Sacramento, Fresno, and Los Angeles.  The OTA will start hearing appeals on January 1, 2018.

With the Bill’s statutory effective date of certain provisions less than two weeks away, questions remain regarding the actual timing of the transition and its impact on taxpayers, including exempt organizations.  In the weeks to come, we expect more information about the new agencies and the appeals process, so watch this space for more news!

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.