Current Nonprofit Tax, Corporate, and Compliance Issues

1. Current Nonprofit Tax, Corporate, and Compliance Issues March 24, 2017 2017 NCHER Winter Legal Meeting Janice M. Ryan Venable LLP jmryan@Venable.com 202.344.4093

2. Today’s Discussion • Nonprofit Corporate Fundamentals and Trends • Sources and Hierarchy of Governing Rules • Board Roles and Responsibilities • Duty of Care • Duty of Loyalty • Duty of Obedience • Key Governance Policies • Tax-Exempt Status Fundamentals and Trends • Sources of Tax-exemption • 501(c)(3) Fundamentals • Lobbying and Political Activities Restrictions

3. Nonprofit Corporate Fundamentals and Trends

4. What is a Nonprofit Organization? • Governed by state law (statutes and common law) • Nonprofit Corporation Laws • Unincorporated Association Laws • Non-distribution constraint is fundamental characteristic • Nonprofit status is not synonymous with tax-exempt status

5. Governance—State Nonprofit Corporation Law • State nonprofit corporation statutes set forth: • Requirements for maintaining corporate status • Rights and obligations of board • Rights and obligations of members, if any • Default provisions if not self-addressed • Internal affairs of a corporation are governed by the law of the state in which the corporation was formed • Registration as a “foreign corporation” may be required in other states where the corporation does business

6. Governance—Sources and Hierarchy of Rules

7. Governance—Role of the Board of Directors • Board of directors is the ultimate decision-making body under state law • Board sets the mission and policy of the organization and exercises strategic direction and oversight, not day-to-day management • Delegation to officers, committees, or staff is permissible (and important!), but oversight is required • Boards generally are only allowed to act in a meeting or by unanimous written consent

8. Board Member Fiduciary Duties • Authority to govern the corporation comes with duties • State statutory and common law requires that corporate board members fulfill: • Fiduciary duty of care • Fiduciary duty of loyalty • Fiduciary duty of obedience

9. Fiduciary Duty of Care • Standard is that of “ordinary and reasonable care” – what would an ordinarily prudent director do in the same or similar circumstances? • Business judgment rule – bad decisions are more easily defended than ignorance • Courts will not view decisions from benefit of hindsight, but, rather, from the perspective of the directors making the decisions at that time (was it an informed, reasoned decision?) • Due diligence process matters most

10. Fiduciary Duty of Care • Compliance with fiduciary duty of care: • Attend meetings • Review all materials provided to you in advance of meetings • Ask questions • Be familiar with the organization’s articles, bylaws, and policies and procedures • Maintain confidentiality of information and documents • Rely on experts when appropriate (but such reliance does not excuse willful ignorance) • Review all meeting minutes (particularly recorded votes) to ensure accuracy • Insist on legal/accounting/other expertise when necessary and appropriate

11. Fiduciary Duty of Loyalty • Duty of undivided allegiance to the corporation • Duty to avoid conflicts of interest (actual, potential and apparent) • Examples: • Business dealings with the corporation • Dealings with competitors • Corporate opportunities doctrine • Remedies: • Disclosure; recusal or resignation • Confidentiality

12. Fiduciary Duty of Loyalty • Compliance with fiduciary duty of loyalty: • Adhere to written conflict of interest policy • Disclose actual, apparent and potential conflicts of interest, both annually and as they arise during the year • Deliberate as a board or through a committee of the board to determine appropriate responses to and management of actual, apparent and potential conflicts of interest (conflicts policy process)

13. Fiduciary Duty of Obedience • Articles of incorporation, bylaws, and other governing documents and policies and procedures must be followed • Applicable laws and regulations must be followed • Be faithful to the organization’s mission

14. Governance Summary—Keys to Fulfilling Board Responsibilities • Meet and deliberate • Be prepared • Actively participate • Ask questions • Act in the best interest of the organization at all times • Provide strategic direction and oversight • Set direction, but delegate execution • Engage in strategic thinking and planning • Tend to the mission • Provide oversight and accountability

15. Governance Trends • Form 990 Focus on Governance (2008) • Increased charitable sector enforcement and oversight by states • Charitable fundraising/consumer protection • Protection of charitable assets for public purposes • Legislation • California Nonprofit Integrity Act (2004) • Audit and audit committee requirements • Executive compensation review • New York Nonprofit Revitalization Act (2013) • Audit and audit committee requirements • Conflict of interest policy requirements • Whistleblower policy requirements

16. IRS Form 990 and Governance • Questions Regarding Board and Management • Are minutes taken at board and board committee meetings? • Does the board receive a copy of Form 990 before filed? • Questions Regarding Governance Policies • Maintain a written conflict of interest policy • Maintain a compensation review policy—follow the procedures for the “rebuttable presumption” • Maintain a written whistleblower policy • Maintain a written document retention and destruction policy • Maintain a joint venture policy to govern transactions with taxable entities

17. Key Governance Policies • Conflict of interest policy • Why? • Facilitates tax compliance, according to IRS • Facilitates compliance with corporate duty of loyalty • Key elements are: • Defining a conflict • Defining who is covered • Creating a disclosure and resolution process • Annual disclosure of conflicts form • Form 990 asks in particular about annual disclosure of conflicts by directors, officers, and key employees

18. Key Governance Policies • Whistleblower policy • Sarbanes-Oxley has limited application to nonprofit organizations, but the whistleblower protection provisions do apply • Important to have a process for receiving, investigating, and resolving whistleblower claims • Document retention and destruction policy • Considered a best practice and asked about on the Form 990 • Can help manage risks associated with not having records that are legally required to be retained or maintaining records that could have been destroyed or deleted

19. Key Governance Policies • Compensation policy • Excessive compensation=private inurement • IRS rebuttable presumption of reasonableness

20. Tax-Exempt Status Fundamentals and Trends

21. Sources of Tax Exemption • Federal Tax Exemption • Internal Revenue Code provides exemption from federal income tax to qualified nonprofit organizations • Recognition by IRS obtained through application (Form 1023) • State Tax Exemption • State statutes may provide exemption from state income or franchise tax, as well as state property, sales, and use taxes • May be conditioned upon recognition of federal tax exempt status but not always tied together or automatically granted—application to state revenue agency may be required

22. Section 501(c)(3) Tax-Exempt Status • Tax-exempt purpose—educational, scientific or charitable • Contributions tax-deductible by donors as charitable contributions (minus value of benefits received in return) • No “private inurement” or impermissible “private benefit” • No “substantial” lobbying • No political campaign activities • Taxation of unrelated business income (“UBIT”)

23. 501(c)(3) Lobbying and Political Activities—Basic Do’s and Don’ts • A 501(c)(3) may not • Support or oppose candidates for public office (absolute prohibition); or • Lobby on legislation in substantial part or, under Section 501(h), beyond a certain percentage of its expenditures • A 501(c)(3) may • Lobby on legislation within the Code’s lobbying limits • Conduct certain non-partisan, unbiased election-related activities • Get-out-the vote and voter registration drives • Legislative voting records, provided not limited campaign season • Candidate debates

24. Section 501(c)(3) Lobbying Rules • What is Lobbying? • Basic general concept—attempts to influence legislation at the federal, state, or local levels through direct or grassroots communications • Two options for measuring compliance with (c)(3) limitation on lobbying activities: • No substantial part test • 501(h) expenditure test

25. Section 501(c)(3) Lobbying Rules • No substantial part test: • Vague, facts and circumstances test • Strict sanctions • revocation of exempt status • excise tax on organization and its managers (5% of lobbying expenditures) • 501(h) expenditure test: • Lobbying activity measured solely by the amount of money spent on lobbying • Lobbying will not be considered “substantial” provided organization does not exceed expenditure cap • Clear definitions of lobbying and exclusions for specific activities • Must affirmatively elect to use by filing IRS Form 5768 • Flexible sanctions • 25% tax on amount spent over the cap • No tax penalties imposed on organization managers for exceeding the limits • Revocation of exempt status results only if the organization exceeds 150 percent of the cap over a 4-year consecutive averaging period

26. Section 501(c)(3) Lobbying Rules—501(h) Caps NOTE: Grassroots lobbying expenditures limited to no more than 25% of the total amount permitted for lobbying in a year.

27. Definition of “Lobbying” under 501(h) Election • Direct Lobbying: attempts to influence legislation through communications with covered officials that refer to specific legislation and reflect a point of view on the legislation • any member or employee of a legislative body • any government official or employee who may participate in the formulation of legislation • the public in a referendum, initiative or constitutional amendment • Grassroots Lobbying: attempts to influence the general public through communications that refer to specific legislation, reflect a point of view on the legislation, and include a “call to action”

28. Definition of “Lobbying” under 501(h) Election • Specific exclusions from the definition of lobbying: • Communications with members regarding specific legislation • Point of view okay • No call to action • Nonpartisan analysis, study, or research • Discussions of broad social and economic problems • Efforts to change regulations • Requests for technical advice • Conducting self-defense activity • Volunteer time • The excluded activities are not counted against a 501(h) electing organization’s annual lobbying expenditure cap

29. 501(c)(3) Lobbying Rules—Form 990 Reporting • Tax-exempt organizations report lobbying activities on Form 990, Schedule C • Effective compliance requires careful tracking of time and money spent on lobbying • Include allocable staff time and compensation, overhead, and administrative costs • Time and money spent on research, planning, drafting, reviewing, publishing, and mailing in support of lobbying is included

30. Lobbying Activities—Other Applicable Laws • Lobbying registration and reporting laws • Federal, state, and local • Different definitions of lobbying may apply (e.g., lobbying may include attempts to influence not just legislation but also executive branch activities) • Ethics laws for public officials and employees • Federal, state, local, and agency governing acceptance of gifts, etc. • Restrictions on use of federal funds

31. Tax-exempt Status Trends • IRS oversight capacity is limited • Streamlined determinations • Low audit rates • Tea Party scandal repercussions • Proposed repeal of “Johnson Amendment” • Tax reform may affect charitable deduction

32. Questions and Discussion Janice M. Ryan, Esq. Venable LLP 600 Massachusetts Avenue, NW Washington, DC 20001 jryan@Venable.com t 202.344.4093 To view Venable’s index of articles, presentations, recordings, and upcoming seminars on nonprofit legal topics, see: • Articles: www.venable.com/nonprofits/publications • Monthly Webinars: www.venable.com/nonprofits/recordings • Upcoming and Past Events: www.venable.com/nonprofits/events