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What Every Corporate Attorney Should Know About Nonprofit and Tax-Exempt Organizations

What Every Corporate Attorney Should Know About Nonprofit and Tax-Exempt Organizations Utah State Bar Business Law Section December 8, 2010 Christopher N. Nelson (801) 323-3305 cnelson@rqn.com. Tax-Exempt Organizations. Definitions.

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What Every Corporate Attorney Should Know About Nonprofit and Tax-Exempt Organizations

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  1. What Every Corporate Attorney Should Know About Nonprofit and Tax-Exempt Organizations Utah State Bar Business Law Section December 8, 2010 Christopher N. Nelson (801) 323-3305 cnelson@rqn.com

  2. Tax-Exempt Organizations

  3. Definitions • “Nonprofit Corporation” – A corporation formed pursuant to a state’s nonprofit corporation law • “Tax-Exempt” – An organization that exempt from Federal income taxes • “501(c)(3)” – A charitable organization that derives its tax-exempt status from Section 501(c)(3) of the Internal Revenue Code

  4. “Nonprofit” and “Tax-Exempt” • These terms are technically not synonymous • A nonprofit corporation can be taxable • Not all tax-exempt organizations are nonprofit corporations • “Tax-exempt” generally refers to an exemption from Federal income tax • State exemptions (property, sales, income) typically follow Federal exemption but require separate application

  5. Utah Nonprofit Corporations • Governed by Utah Revised Nonprofit Corporation Act, UCA 16-6a-101 et seq. • Similar in many respects to corporations under Utah Revised Business Corporations Act, UCA 16-10a-101 et seq.

  6. Utah Nonprofit Corporations • Similarities to for-profit corporations: • Both governed by Board of Directors • Board delegates authority to officers • Meeting, notice and registration requirements • Similar registration and filing requirements

  7. Utah Nonprofit Corporations • Differences from for-profit corporations: • No shareholders - no class of persons with right to residual assets or profits of corporation • Prohibitions on distributions • Profits remain in the corporation to be used in furtherance of its purposes • “Nonprofit” refers to distribution constraints, not to inability to earn profits

  8. Utah Nonprofit Corporations • “Members” • Are optional • Appoint directors (if no members, board of directors is self-perpetuating) • Have some informational rights • Problems if class of members are ill-defined – be careful!

  9. 501(c)(3) Overview • Tax-Exempt Organizations Generally • Many kinds – 501(c)(1) through (28) • 501(c)(3) organizations are most common • Organized for charitable or other benevolent purposes • Donors may receive tax deductions for contributions

  10. 501(c)(3) Overview • Advantages • No Federal income tax (except “unrelated business income”) • Donations deductible to donor • Disadvantages • Strict operational restrictions • Limits on lobbying activities; support of political candidates prohibited • Net earnings may not inure to the benefit of any private individuals

  11. 501(c)(3) Overview • How does an organization become a tax-exempt organization? • File IRS Form 1023 or Form 1024 • Application is detailed and comprehensive • Process can take anywhere from one month to one year • Application contains “pitfalls” for the uninitiated

  12. 501(c)(3) Overview • Private Inurement & Private Benefit Doctrines • Severely restrict ability to use 501(c)(3) organization in conjunction with a for-profit organization. • Consult competent counsel before proceeding with any arrangements between related for-profit and 501(c)(3) organizations.

  13. 501(c)(3) Overview • Two primary classifications of 501(c)(3) organizations: • Private Foundations • Public Charities

  14. 501(c)(3) Overview All 501(c)(3) organizations are presumed to be private foundations until proven otherwise

  15. 501(c)(3) Overview • Public Charities • Most advantageous tax status • Normally receive broad financial support from public • Many parties have an interest in the organization’s activities • Difficult to obtain IRS recognition • But once recognized, fewer IRS restrictions

  16. 501(c)(3) Overview • Private Foundations • Receive narrow financial support (e.g., wealthy individual or family) • Fewer parties have an interest in activities • Easier to obtain IRS recognition • Many IRS restrictions, including strict self-dealing prohibitions

  17. 501(c)(3) Overview • “Supporting Organizations” are a special sub-category of public charities • Are subject to additional and complex IRS restrictions

  18. Why Do I Care? • All 501(c)(3) organizations are subject to strict IRS requirements • Be fully aware of requirements and guidelines before making governance changes or entering into transactions

  19. Why Do I Care? • If a “private foundation” • Very strict self-dealing requirements (no self-dealing even if terms are favorable to private foundation) • Distribution requirements • Restrictions on investments • Other restrictions

  20. Why Do I Care? • If a “supporting organization” • Relationship to another 501(c)(3) organization is very important • Congress has imposed additional restrictions

  21. How Do I Know What Type of Organization I am Working With? • Look at IRS determination letter • If “Public Charity Status” mentions 509(a)(1), 509(a)(2) or 170(b)(1)(A)(vi), then organization is a public charity • 509(a)(3) means a supporting organization • Otherwise, the organization is a private foundation

  22. How do I know what type of organization I am working with? Look on IRS Form 990, Schedule A (Forms 990 are generally available online at www.guidestar.org)

  23. Charitable Raffles Elements of illegal gambling in Utah: (1) Risking something of value; (2) Outcome is based on chance; and (3) Potential to receive something of value UCA 76-10-1101

  24. Charitable Raffles How are charitable raffles different from illegal gambling?

  25. Charitable Raffles Take home point – Just because a raffle is for a charitable cause does not make it legal!

  26. Public Inspection Requirements • 501(c)(3) organizations must make the following documentation open for public inspection: • Complete Form 1023 Application and any attachments • All correspondence with the IRS concerning Form 1023 • Determination Letter • Annual information returns (i.e. Form 990)

  27. Public Inspection Requirements (cont’d) • Documents must be available for inspection without charge at organization’s principal office during regular business hours. • Must provide copies of documents • If requested in person, on same business day • If requested in writing, within 30 days

  28. Public Inspection Requirements (cont’d) • May charge a “reasonable fee” for making copies. • Exceptions if documents are made “widely available” (i.e. on website or on guidestar.org) however must still have documents available for public inspection

  29. Public Inspection Requirements (cont’d) • Penalties • $20 per day for failure to allow public inspection of annual returns (capped at $10,000) • $5,000 for willful failure

  30. Public Inspection Requirements (cont’d) • Take home point – Be sure that organization makes its records publicly available

  31. Annual Electronic Filing Requirement for Small Organizations • Tax-exempt organizations whose annual gross receipts are normally $25,000 or less must generally electronically file Form 990-N • Organizations failing to file for three consecutive years will automatically lose tax-exempt status • October 15, 2010 marked end of first three-year period • Many Utah organizations lost their tax-exempt status • Make sure clients file tax returns!

  32. Charitable Solicitation Requirements • The solicitation of charitable contributions is regulated on a state-by-state basis • In Utah, charitable solicitations are regulated by the Division of Consumer Protection.

  33. Charitable Solicitation Requirements • Unless an organization has previously registered with the Utah Division of Consumer Protection, or is otherwise exempt from registration requirements, Utah law prohibits it from knowingly soliciting, requesting, promoting, advertising or sponsoring the solicitation of charitable contributions if the charitable solicitation is: • originated in Utah; • received in Utah; or • caused to be made by business operations in Utah.

  34. Charitable Solicitation Requirements • Must amend registration and notify Division within 30 days when engaging a Professional Fundraiser, Fund-Raising Counsel or engaging in a Charitable Sales Promotion. • Also be aware of internet fundraising issues

  35. Charitable Solicitation Requirements • Division of Consumer Protection interprets requirements VERY broadly • Take home points – • Do not solicit contributions until you have a permit • Remember – engaging professional fundraiser, fund raising counsel or participating in charitable sales promotion triggers reporting requirement 1114415

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