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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 [email protected]
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”
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
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. 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. 501(c)(3) Overview
13. Two primary classifications of 501(c)(3) organizations:
Public Charities 501(c)(3) Overview
14. 501(c)(3) Overview
All 501(c)(3) organizations are presumed to be private foundations until proven otherwise
15. 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 501(c)(3) Overview
16. 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 501(c)(3) Overview
17. “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)
Restrictions on investments
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
24. Look on IRS Form 990, Schedule A
(Forms 990 are generally available online at www.guidestar.org)
How do I know what type of organization I am working with?
26. 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
27. Charitable Raffles How are charitable raffles different from illegal gambling?
28. Charitable Raffles Take home point –
Just because a raffle is for a charitable cause does not make it legal!
29. 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
Annual information returns (i.e. Form 990)
30. 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
31. 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
32. 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
33. Public Inspection Requirements (cont’d) Take home point –
Be sure that organization makes its records publicly available
34. 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!
35. 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.
36. 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.
37. 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
38. 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