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Qualifying for 501(c)(3) Status as an Arts Organization

Posted on by bentakis

For anyone contemplating starting an arts nonprofit, I have drafted a comprehensive guide to qualifying for 501(c)(3) status as an arts organization for the Center for Art Law website, which I will reprint below.

Background

New non-profit organizations often find that the world is not a hospitable place. While innovation, entrepreneurship, and risk-taking by new for-profit companies are lauded, fledgling non-profits typically struggle to gain the acceptance and support of private foundations, donors and others in the non-profit community. There is, after all, only a limited supply of grants and donations to fund charitable, artistic, and educational endeavors. Furthermore, the administrative burden of forming and administering a non-profit can be staggering. New non-profits are therefore often advised to pair up with an existing organization, use a for-profit structure, or explore other alternatives before forming a new entity and applying to qualify under section 501(c)(3) of the Internal Revenue Code (the “Code”).

Despite these challenges, arts organizations share certain traits that can help them thrive as non-profit 501(c)(3) organizations, with fewer of the hurdles faced by other kinds of non-profits. First, while many organizations rely largely on foundation grants and private donations, arts organizations can raise funds from ticket sales to performances, exhibits, and other events. For many kinds of organizations, these “fee-for-service” revenue sources can trigger “unrelated business income tax” or endanger 501(c)(3) status under the “commerciality doctrine” applied by the Internal Revenue Service (“IRS”) and the courts. However, these revenue sources are generally consistent with the tax-exempt status of arts organizations. Additionally, these types of revenue sources can more easily satisfy the “public support” tests that enable an organization to qualify as a public charity, and thereby avoid classification as a private foundation and the stringent oversight to which private foundations are subjected.

The Benefits and Burdens of 501(c)(3) Status

501(c)(3) is a special tax status under federal law, generally available to organizations formed and operated for a charitable, educational, scientific or religious purpose, and promotion of the arts is recognized as a valid educational purpose. Treas. Reg. § 1.501(c)(3)-1(d)(3)(ii), Example 4 (Educational organizations include “[m]useums, zoos, planetariums, symphony orchestras, and other similar organizations,” provided that the organizations otherwise satisfy the requirements of section 501(c)(3) of the Code). However, before embarking on the 501(c)(3) qualification process, it is important to carefully consider whether the benefits of 501(c)(3) status are worth the burdens.

There are three legal benefits to having 501(c)(3) status: (1) the organization’s net revenue (after expenses) is generally not subject to tax; (2) contributions to the organization are eligible for the charitable deduction; and (3) the organization is eligible for grants from private foundations.

These benefits are not quite as advantageous as they may appear. Most non-profits (including arts organizations) do not have large amounts of excess revenue – most struggle to earn enough revenue to pay their expenses. Therefore, the tax exemption on net revenue may not be crucial. Second, while the charitable deduction is a powerful incentive for individuals inclined to give money to non-profit organizations, it is still a difficult task to convince people to give. The charitable deduction tends to be important only when an organization’s Board of Directors has a strong and committed network of high-wealth individuals. Lastly, it can be difficult to get grants from private foundations. Finding grant opportunities takes significant research, and the grant writing process requires preparation, perseverance, and commitment.

Maintaining 501(c)(3) status can also be quite burdensome. A 501(c)(3) organization must be run by a Board of Directors (generally 3 or more people) in accordance with Articles of Incorporation, Bylaws, and various corporate policies that comply with requirements set forth under federal tax law and state non-profit corporation law. In addition, any compensation to Directors or Officers must be closely scrutinized to ensure that such payments are reasonable. And complex tax filings called the Form 990 (or Form 990-EZ) are generally required for organizations with gross revenue exceeding $50,000 per year, and are open to public inspection. (Organizations whose annual gross receipts are normally $50,000 or less, file a much simpler electronic form called the Form 990-N). These and other administrative difficulties are not typically worth the trouble unless 501(c)(3) status would significantly enhance an organization’s fundraising capabilities, or at least its image in the arts community.

Designing a Program of Activities to Qualify under 501(c)(3)

An arts organization that has thoroughly considered the benefits and burdens of 501(c)(3) status and wishes to move forward with the qualification process will need to design a program of activities consistent with 501(c)(3) status. It is important to be aware of which types of activities are acceptable and which activities raise suspicions at the IRS, and be able to show the IRS several bona fide activities that fit squarely within the traditional notions of a 501(c)(3) arts organization.

The exemption under section 501(c)(3) for arts organizations is based on the statutory exemption for “educational” organizations, so educational activities carry significant weight in the approval of 501(c)(3) status. Examples of educational arts organizations include:

An organization formed to promote the advancement of young musical artists by conducting weekly workshops, and sponsoring public concerts by the artists. Rev. Rul. 67-392, 1967-2 C.B. 191.

An organization formed to promote public appreciation of group harmony singing by holding frequent meetings of members where they receive training and instruction in vocal harmony and opportunities to practice under trained supervision. Rev. Rul. 66-46, 1966-1 C.B. 133.

A dance school with a regular faculty, daily comprehensive curriculum, and a regularly enrolled body of students. Rev. Rul. 65-270, 1965-2 C.B. 160.

Educational activities can also include individual instruction, or the dissemination of instructional materials for free or for a nominal charge. See Rev. Rul. 68-71, 1968-1 C.B. 249 (approving the 501(c)(3) status of an organization that provided career education by distributing educational publications at a nominal charge and providing free vocational counseling services).

Public exhibits or performances are also typically valid 501(c)(3) activities, provided that steps are taken to ensure that the selection of artists is disinterested (i.e. the organization is not merely a vehicle for showing the work of founders, directors or other insiders of the organization), and provided that the artists or works are chosen for their artistic merit rather than their ability to appeal to a mass audience. See Plumstead Theatre Soc’y, Inc. v. Comm’r, 74 T.C. 1324, 1332-1333 (1980), aff’d 675 F.2d 244 (9th Cir. 1982) (contrasting commercial theaters, which “choose plays having the greatest mass audience appeal … run the plays so long as they can attract a crowd …[and] … set ticket prices to pay the total costs of production and to return a profit,” with 501(c)(3) theaters, which “fulfill their artistic and community obligations by focusing on the highest possible standards of performance; by serving the community broadly; by developing new and original works; and by providing educational programs and opportunities for new talent.”). It helps if at least some of these exhibits or performances are open to the public for free.

For example, the IRS has approved the 501(c)(3) status of the following organizations:

An organization whose sole activity was sponsoring an annual art exhibit of artists selected by a panel of qualified art experts. Rev. Rul. 66-178, 1966-1 C.B. 138.

A filmmaking organization that organized annual festivals to provide unknown independent filmmakers with opportunities to display their films. Rev. Rul. 75-471, 1975-2 C.B. 207.

An organization that presented public jazz concerts featuring aspiring jazz composers and high school students performing alongside established jazz musicians. Rev. Rul. 65-271, 1965-2 C.B. 161.

A touring repertory theatre company that focused on works that were part of college curricula. Rev. Rul. 64-175, 1964-1 C.B. 185.

Note that the IRS views the exhibition of art much differently than the sale of art, especially with respect to the visual arts. The IRS typically denies 501(c)(3) status to art galleries that engage in the sale of art for a commission. See Rev. Rul. 76-152, 1976-1 CB 151 (rejecting the 501(c)(3) status of a gallery formed to promote modern art trends by exhibiting works of modern artists and selling the works on consignment basis with the artist setting the selling price and the organization keeping a 10% commission, even though this commission was lower than that charged by commercial entities and the gallery planned to supplement its revenue through donations); Rev. Rul. 71-395, 1971-2 CB 228 (rejecting the 501(c)(3) status of a gallery formed and operated by approximately 50 artists for the purpose of exhibiting and selling the work of the founders).

Gallery sales activities are permitted only under very limited circumstances when sales activities are sufficiently minor in comparison to educational and other valid 501(c)(3) activities. Goldsboro Art League, Inc. v. Comm’r, 75 T.C. 337 (1980) (approving the 501(c)(3) status of a gallery that engaged in some sales for commissions in addition to educational activities, based on the following factors: (1) there were no other museums or galleries in the area, thus, the exhibition of art works showed a purpose primarily to educate rather than to sell and the selling activity served merely as an incentive to attract artists to exhibit their work; (2) works were selected by an independent jury for their representation of modern trends rather than salability; (3) the organization demonstrated that educational activities were its priority; (4) the art sales were not conducted at a profit; and (5) of more than 100 works of arts exhibited in the organization’s galleries, only 2 members of the organization had their art exhibited).

Most 501(c)(3) arts organizations focus predominantly on education and/or public exhibits or performances, but other types of activities can be acceptable as well. For example, the awarding of grants to aspiring artists and students is a permissible 501(c)(3) activity, provided that procedures ensuring disinterested selection of winners are developed and scrupulously followed. See Rev. Rul. 66-103, 1966-1 C.B. 134 (approving the 501(c)(3) status of organization formed for the purpose of making grants available to writers, composers, painters, sculptors, and scholars for projects in their respective fields which they would not otherwise be able to undertake or finish due to the lack of funds. In awarding grants, preference was given to persons showing distinction or promise in their respective fields, and the recipients promised to make their work available for the benefit of the public in ways customary and appropriate to the particular work. The organization received no financial benefit from these grants).

The IRS has also approved of activities promoting the appreciation of art by less traditional means, such as the recording and sale of obscure classical music pieces to educational institutions, Rev. Rul. 79-369, 1979-2 C.B. 226, and a museum’s sale of greeting cards displaying printed reproductions of selected works from the museum’s collection and from other art collections. Rev. Rul. 73-104, 1973-1 C.B. 263. However, these types of non-traditional promotional activities should be approached with caution, as they implicate difficult issues that can lead to unpredictable results from the IRS. See e.g. Rev. Rul. 76-206, 1976-1 C.B. 154 (rejecting the 501(c)(3) status of an organization formed to generate community interest in classical music by urging the public to support the classical music program of a for-profit radio station).

In summary, when applying for 501(c)(3) status, an arts organization should be prepared to describe several activities similar to those approved by the IRS. There should be at least some educational component, whether through workshops, classes, online publications or tutorials, or other means. It is helpful to show engagement with the public or local community through free exhibits or performances, and to focus on art that lacks mainstream commercial viability. Lastly, an organization founded or run by artists should make sure to focus on a wide variety of artists rather than just its founders or members.

Posted in 501(c)(3), Arts Organizations, Form 1023, Form 1023-EZ | Tagged , , , , , | Comments Off on Qualifying for 501(c)(3) Status as an Arts Organization

Who Should (and Should Not) File the Form 1023-EZ?

Posted on by bentakis

On July 1, 2014, amidst much criticism, the IRS radically changed the nonprofit world by launching the Form 1023-EZ, a new streamlined method of applying for 501(c)(3) status. The Form 1023-EZ is now live on www.pay.gov, along with final instructions, and the accompanying Revenue Procedure 2014-40.

The Form 1023-EZ essentially makes it possible for certain new organizations to self-certify their own 501(c)(3) status. While other types of tax-exempt organizations, such as those exempt under Code sections 501(c)(4), 501(c)(5) or 501(c)(6), have long been allowed to “self-declare” their tax-exempt status without filing for IRS approval, 501(c)(3) organizations historically have been required to endure a rigorous application process comprising a detailed 26-page Form 1023, a written narrative, financial data, and specific governing documents such as the Articles of Incorporation, Bylaws, Conflict of Interest Policy, and copies of contracts with officers, directors, and service providers. In contrast, the Form 1023-EZ is only 2 and a half pages long, requires no documents, and basically requires only that the applicant check various boxes attesting that they will comply with the rules governing 501(c)(3) status.

There are other incentives to use the Form 1023-EZ besides its simplicity. Most applicants will pay a reduced filing fee for the Form 1023-EZ, which only costs $400, compared to the $850 for most applicants filing the standard Form 1023. And applicants filing the Form 1023-EZ will surely have their applications processed much faster (the turnaround on Form 1023-EZ applications is expected to be only a month or two, rather than the 1-2 year waiting periods many Form 1023 filers are experiencing).

The Form 1023-EZ has been very controversial. There are obvious concerns about fraud and abuse, since there will be so little oversight of the applications. While the IRS has promised to shift its attention to enforcement on the “back end,” through more audits once organizations are operational, most practitioners are skeptical that the IRS will be able to follow through on this promise, especially given the large increase in applications the Form 1023-EZ is likely to cause. More fundamentally, critics worry that the Form 1023-EZ abandons that the crucial educational role that the application process has traditionally served. The standard Form 1023 requires new organizations to give serious thought to difficult concepts like the exempt purpose test, the commerciality doctrine, and the private benefit and inurement rules. In the absence of this forced training period, many organizations will be tempted to commence operations without knowledge of the rules.

Nonetheless, the Form 1023-EZ is here to stay for the foreseeable future. The immediate question for new organizations and practitioners is: Who should file the Form 1023-EZ and who should stick with the standard Form 1023? A few considerations are relevant to this question.

First, there are the qualification requirements. The instructions spell out with precision the types of organizations that are ineligible to use the Form 1023-EZ, and applicants must attest that they have completed an eligibility worksheet provided in the instructions (though the worksheet itself need not be submitted, and there is little safeguard against applicants dishonestly attesting that they qualify). The following types of organizations may not use the Form 1023-EZ and must use the standard Form 1023 instead:

(1) Organizations with projected annual gross receipts of more than $50,000 in either the current taxable year or the next 2 years.
(2) Organizations with annual gross receipts that have exceeded $50,000 in any of the past 3 years.
(3) Organizations with total assets the fair market value of which is in excess of $250,000. For purposes of this eligibility requirement, a good faith estimate of the fair market value of the organization’s assets is sufficient.
(4) Organizations formed under the laws of a foreign country.
(5) Organizations that do not have a mailing address in the United States.
(6) Organizations that are successors to, or controlled by, an entity suspended under Code section 501(p) (suspension of tax-exempt status of terrorist organizations).
(7) Organizations that are not corporations, unincorporated associations, or trusts.
(8) Organizations that are successors to a for-profit entity.
(9) Organizations that were previously revoked or that are successors to a previously revoked organization (other than an organization the tax-exempt status of which was automatically revoked for failure to file a Form 990 series return or notice for three consecutive years).
(10) Churches or conventions or associations of churches.
(11) Schools, colleges, or universities.
(12) Hospitals or medical research organizations.
(13) Cooperative hospital service organizations described in Code section 501(e).
(14) Cooperative service organizations of operating educational organizations described in Code section 501(f).
(15) Qualified charitable risk pools described in Code section 501(n).
(16) Supporting organizations described in Code section 509(a)(3).
(17) Organizations that have as a substantial purpose providing assistance to individuals through credit counseling activities such as budgeting, personal finance, financial literacy, mortgage foreclosure assistance, or other consumer credit areas.
(18) Organizations that invest, or intend to invest, 5 percent or more of their total assets in securities or funds that are not publicly traded.
(19) Organizations that participate, or intend to participate, in partnerships (including entities or arrangements treated as partnerships for Federal tax purposes) in which they share profits and losses with partners other than 501(c)(3) organizations.
(20) Organizations that sell, or intend to sell, carbon credits or carbon offsets.
(21) Health Maintenance Organizations (HMOs).
(22) Accountable Care Organizations (ACOs), or organizations that engage in, or intend to engage in, ACO activities
(23) Organizations that maintain, or intend to maintain, one or more donor advised funds.
(24) Organizations that are organized and operated exclusively for testing for public safety and that are requesting a foundation classification under Code section 509(a)(4).
(25) Private operating foundations.
(26) Organizations that are applying for retroactive reinstatement of exemption under sections 5 or 6 of Revenue Procedure 2014-11, after being automatically revoked for failure to file Form 990, 990-EZ, or 990-N for three consecutive years (in other words, organizations applying for reinstatement within 15 months of the revocation notification date that did not qualify to submit the Form 990-EZ or 990-N for each of the three years, or organizations applying for reinstatement more than 15 months after the revocation notification date).

Despite the incentives to use the Form 1023-EZ, there a few reasons organizations qualifying to file the Form 1023-EZ might consider opting for the standard Form 1023.

First, an organization projecting less than $50,000 of revenue for its first few years may end up receiving a larger grant than expected. While it does not appear that there is any penalty for underestimating revenue if the projections were reasonable at the time and made in good faith, it is possible that an organization that receives more than $50,000 per year could be flagged for audit by the IRS. Some organizations may prefer to file the Form 1023 rather than live with the possibility of an audit a few years later.

Second, the Form 1023-EZ provides no opportunity for clarification or explanation, which may work to the disadvantage of certain organizations. For instance, the Form 1023-EZ includes the following “yes or no” questions:

Do you or will you attempt to influence legislation? Do you or will you pay compensation to any of your officers, directors, or trustees? Do you or will you donate funds to or pay expenses for individual(s)? Do you or will you conduct activities or provide grants or other assistance to individual(s) or organization(s) outside the United States? Do you or will you engage in financial transactions (for example, loans, payments, rents, etc.) with any of your officers, directors, or trustees, or any entities they own or control?

These activities trigger IRS concerns, and an applicant has a strong incentive to click “no,” but all of these activities are allowed for 501(c)(3) organizations if conducted properly and in accordance with applicable rules and limits. Organizations answering “yes” to any of these questions may prefer to have the chance to offer more explanation under the standard Form 1023.

Lastly, there is the risk that private foundations, governments, and other donors will be hesitant to fund organizations that got their 501(c)(3) status by filing the Form 1023-EZ. The Form 1023-EZ is likely to unleash large numbers of ill-prepared and poorly conceived nonprofits that never would have followed through with the filing of the standard Form 1023. In the ultra-competitive world of grants and donations, it is possible that grantmakers and donors may screen out Form 1023-EZ filers to ensure that only the most serious and most prepared organizations receive funding.

Additionally, questions have been raised about the extent to which private foundations and other donors are legally entitled to rely on the 501(c)(3) status of an organization that applied using the Form 1023-EZ, particularly where the donor has knowledge of facts that cast doubt on the organization’s eligibility to use the Form 1023-EZ or qualify for 501(c)(3) status. Until these questions are fully resolved, private foundations and other donors may prefer to fund organizations that have filed the standard Form 1023.

Posted in 501(c)(3), Automatic Revocations, Form 1023, Form 1023-EZ | Comments Off on Who Should (and Should Not) File the Form 1023-EZ?

Upcoming Course on Common Legal Pitfalls for Nonprofits

Posted on by bentakis

To provide some background on my upcoming course at the Center for Nonprofit Advancement on June 17, 2014, I have written this guest blog entry, which I will reprint below:

If you ask a few attorneys specializing in nonprofit organizations what legal mistakes they see most often, you will likely see a lot of the same answers. For example, since 2010, over 541,000 organizations have had their tax-exempt status revoked for failure to file the Form 990 (or 990-EZ, or 990-n, where appropriate) for 3 consecutive years. Similarly, many organizations are subjected to heavy fines for failure to report unrelated business income tax, or for misclassifying employees as independent contractors.

However, these disaster scenarios are usually the symptom of the problem, not the cause. Most legal problems start with a failure to keep good records and take simple precautionary measures.

For example, does your Board get timely and accurate financial reports? Does your Board know how to take proper meeting minutes? Does your organization adequately budget for assistance with administrative matters such as legal issues, accounting, insurance and payroll? For nonprofits that end up in serious legal trouble, the answer to these questions is almost always “no.”

On the other hand, organizations that build good habits early rarely suffer legal setbacks that cannot be corrected with minimal time and cost.

At The Top 10 Legal Pitfalls for Nonprofits course on June 17, we will discuss how to lay the groundwork to avoid the most common legal mistakes, and examine the specific issues that tend to get nonprofits into trouble.

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The IRS issues a draft “Form 1023-EZ”

Posted on by bentakis

A couple of weeks ago, the news surfaced on the ABA listserv for tax-exempt organizations that the IRS has been quietly working on a significantly shortened “Form 1023-EZ,” which would drastically cut down on the scrutiny applied to small organizations applying for 501(c)(3) status (and thereby dramatically shorten the long waiting period most organizations are experiencing to receive certification of 501(c)(3) status). You can take a look at the draft form here and the draft instructions here.

Some initial thoughts of mine were quoted in a Tax Analysts publication, which you can read here. I am currently working on an in-depth analysis of this new development for Thomson-Reuters, and will have more thoughts shortly. Suffice it to say that this would revolutionize the non-profit field — and not necessarily for the better, since many organizations will be tempted to abuse the lack of oversight to gain the benefits of 501(c)(3) status without complying with the rules. Nonetheless, if you are starting a new organization and project less than $200,000 per year in annual revenue, it’s probably best to hold off on applying for 501(c)(3) status until we see what happens with the Form 1023-EZ. We should know much more by this summer.

Posted in 501(c)(3), Form 1023 | Comments Off on The IRS issues a draft “Form 1023-EZ”

Part 2: The Tax Consequences of Fee-for-Service

Posted on by bentakis

Part 2 of my new article on the Tax Consequences of Fee-for-Service is now available on the Greater Washington Society of CPAs’s Nonprofit Accounting Basics website here. Part 1 examined the exempt purpose test and commerciality doctrine as applied to 501(c)(3) organizations that rely heavily on fee-for-service income rather than traditional grant and donation fundraising. Part 2 focuses on the basics of the unrelated business income tax. For more information, be sure to attend my free workshop on the topic on May 6, presented by the GWSCPA as part of their 2014 Financial Management Series for Small Nonprofits.

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New Article: The Tax Consequences of Fee-for-Service

Posted on by bentakis

A new article of mine is now available on the Greater Washington Society of CPAs’s Nonprofit Accounting Basics website. This article, the first in a two-part series on the tax consequences of fee-for-service, examines the exempt purpose test and commerciality doctrine as applied to 501(c)(3) organizations that rely heavily on fee-for-service income rather than traditional grant and donation fundraising. Part two will be published later, and will examine the “unrelated business income tax” rules. Check it out, and stay tuned for many more workshops in the DC area addressing this and other topics of interest to nonprofits.

Posted in 501(c)(3), Commerciality Doctrine, Fee-for-Service, Unrelated Business Income Tax | Comments Off on New Article: The Tax Consequences of Fee-for-Service

IRS Rev. Proc. 2014-11 Offers Relief for Automatically Revoked Organizations

Posted on by bentakis

The IRS recently issued Revenue Procedure 2014-11 providing guidance on the process of reinstatement of tax-exempt status for organizations whose tax-exempt status was revoked for failure to file Forms 990 for three consecutive years. Revenue Procedure 2014-11 is the first IRS guidance on this topic since Notice 2011-44 was issued in 2011, and offers a significantly more streamlined process for revoked organizations. This is not surprising, as the IRS has reportedly been overwhelmed with reinstatement applications since the automatic revocations of many smaller organizations (many of which were not required to file an annual tax form prior to a change in the law in 2006) took effect. The Revenue Procedure offers the possibility of retroactive reinstatement of tax-exempt status (back to the date of revocation) and waiver of late filing penalties upon criteria that are easier to satisfy than under Notice 2011-44.

Revenue Procedure 2014-11 sets forth procedures for three categories of revoked organizations: (1) small organizations, i.e. those required to file Form 990-EZ or 990-N rather than the full Form 990, that apply for reinstatement within 15 months after the later of the date of the IRS revocation letter or the date the organization’s name was posted on the IRS revocation list (the “Revocation Notice Date”; (2) other organizations that apply for reinstatement within 15 months of the Revocation Notice Date: and (3) organizations that apply for reinstatement more than 15 months after the Revocation Notice Date.

The new procedures are most favorable for the first category of organizations. An organization qualifies as eligible to file Form 990-N if it normally has annual gross receipts of $50,000 or less, while an organization may file Form 990-EZ if it has gross receipts of less than $200,000 at the end of the taxable year, and total assets of less than $500,000 at the end of the taxable year. Revoked organizations that were required to file Form 990-N or 990-EZ for the years at issue, and that apply for reinstatement within 15 months of the Revocation Notice Date, will generally have their tax-exempt status automatically reinstated retroactive to the date of revocation, and late-filing penalties will be waived. However, note that filing fees for the new Form 1023 or 1024 to reinstate tax-exempt status still apply.

Other organizations filing for reinstatement within 15 months of the Revocation Notice Date will generally have their tax-exempt status reinstated retroactive to the date of revocation, with waiver of late-filing penalties, if they establish “reasonable cause” for the failure to file Form 990 for at least 1 of the 3 years at issue. To establish “reasonable cause” the organization must generally show that it exercised ordinary business care and prudence in attempting to comply with its reporting requirements, and describe the steps the organization has taken to avoid reporting failures in the future.

Organizations filing for reinstatement more than 15 months after the Revocation Notice Date will generally have their tax-exempt status reinstated retroactive to the date of revocation, with waiver of late-filing penalties, if they establish “reasonable cause” for the failure to file Form 990 for all 3 of the years at issue. This is a significant change from Notice 2011-44, which did not allow for retroactive reinstatement at all for organizations missing the 15-month deadline.

Organizations not qualifying for above relief may only have their tax-exempt status reinstated effective on the post-mark date of their application for reinstatement. This means that such organizations will generally be treated as taxable for-profit corporations (required to file Form 1120 and pay taxes on net earnings) for some periods.

Of course, there are nuances and special requirements for taking advantage of this guidance, so if your organization has had its tax-exempt status revoked, it is important to consult a professional as soon as possible.

Posted in Automatic Revocations, Form 1023, Form 1024, Form 990 | Comments Off on IRS Rev. Proc. 2014-11 Offers Relief for Automatically Revoked Organizations

Upcoming Workshops for Nonprofits in DC

Posted on by bentakis

I have a number of workshops for nonprofits coming up in the next couple of months.

This morning October 30, I will be at the Foundation Center leading a free workshop on starting a new nonprofit.

Next Tuesday November 5, I will be at the Hamiltonian Gallery leading a free workshop on starting and running a nonprofit arts organization.

Next Friday November 8, I will be at the Center for Nonprofit Advancement leading a workshop with Karen Hsu Ford on how to find the right service provider for your nonprofit.

On December 17, I will be speaking at the Greater Washington Society of CPA‘s annual Nonprofit Symposium on the topic of fee-for-service revenue.

And lastly, on December 18 I will be back at the Center for Nonprofit Advancement leading a workshop on the top 10 legal mistakes commonly made by nonprofits.

Hope to see you there!

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New IRS Ruling a Victory for Employee Benefit Plans and Same-Sex Couples

Posted on by bentakis

This past June, Supreme Court issued a landmark decision in United States v. Windsor invalidating Section 3 of the Defense of Marriage Act under the fifth amendment of the Constitution, thereby ensuring that same-sex marriages recognized under applicable state law will be respected for purposes of federal law. The decision makes same-sex spouses eligible for wide range of tax benefits, employment-related protections and other federal rights and entitlements that had previously only applied to opposite-sex spouses. For example, same-sex spouses may now file joint federal tax returns; be covered under employer-provided health care plans without triggering tax on the value of such coverage; qualify for surviving spouse rights under pension and 401(k) plans; and more.

However, Windsor did not address how to determine whether a same-sex couple was lawfully married under state law. There are generally two different ways to approach the issue. First, a same-sex couple could be considered lawfully married for purposes of federal law only of they reside in a jurisdiction that recognizes same-sex marriage (a “State of Residence” rule). Alternatively, a same-sex couple could be considered lawfully married if they got married in a jurisdiction that recognizes same-sex marriage, regardless of where the couple resides (a “State of Celebration” rule). A State of Residence rule would have disadvantaged same-sex couples, and imposed significant administrative burdens on employers and employee benefit plans, which would have had to keep track of rapidly evolving state laws, and alter plan administration as participants and spouses covered under the plan move from state to state.

Fortunately, the IRS issued Revenue Ruling 2013-17 last week adopting a State of Celebration rule for all federal tax and employee benefits purposes. Under this historic ruling, “individuals of the same sex will be considered to be lawfully married under the [tax code] as long as they were married in a state whose laws authorize the marriage of two individuals of the same sex, even if they are domiciled in a state that does not recognize the validity of same-sex marriages.” The ruling is great news for employee benefit plans, which need only verify that same-sex couples have a valid marriage certificate. And the ruling is a victory for same-sex couples, who need not fear that their marriages won’t be recognized for tax purposes just because they move to another state.

The ruling also makes clear that same-sex couples can amend prior federal returns or claim refunds for prior tax years based on the new federal definition of “marriage” for all years not barred by the statute of limitations (which generally expires 3 years from the time the taxpayer’s return was filed or 2 years from the time the tax was paid, whichever is later).

However, note that a State of Celebration rule may not apply for all federal law purposes. The Department of Labor has issued guidance instructing its agents to apply a State of Residence rule for purposes of the Family and Medical Leave Act. And the Social Security Administration has also issued guidance following this approach.

I am writing a more in-depth piece examining the employee benefits implications of Windsor and Revenue Ruling 2013-17 that BNA will soon be publishing, so stay tuned for more!

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IRS Offers New Expedited Option for Backlogged 501(c)(4) Applications

Posted on by bentakis

Among the more interesting developments amidst the chaos that ensued following Lois Lerner’s infamous comments at this year’s ABA meeting is the new expedited treatment for certain backlogged applications for 501(c)(4) status, which was announced as part of IRS Acting Commissioner Danny Werfel’s report on ways to address recent IRS wrongdoings.

The portion of the report regarding the expedited treatment is not easily findable on the IRS website, but you can download a copy here, and see the IRS press release here. The expedited option will be offered to certain 501(c)(4) applicants whose applications have been pending for more than 120 days and which indicate that the organizations will engage in lobbying or political activity. 501(c)(4) organizations are permitted to engage in unlimited amounts of “lobbying” activity (which typically includes issue advocacy communications), and may engage in political activity supporting or opposing candidates for public office, so long as such activity is not the primary purpose of the organization. The controversy regarding these groups in recent years involves allegations that many 501(c)(4) organizations are being formed and operated with the primary purpose of engaging in political activity, despite representations to the contrary in their Form 1024 applications. 501(c)(4) organizations are an attractive vehicle for political activity because the donors do not need to be disclosed, unlike other types of entities subject to Federal Election Commission rules.

The expedited treatment offers certified tax-exempt status in a mere 2 weeks if the organization signs a statement (subject to penalty of perjury) that it has and will continue to: (1) expend 60% or more of its time and expenditures on permissible social welfare activities; and (2) expend less than 40% or less of its time and expenditures on political campaign activities, according to standards set forth in the letter.

The catch is that the letter slightly narrows the field of acceptable political activity that otherwise would be permissible for a 501(c)(4) organization. The most significant changes are as follows: (1) in the absence of the letter, 501(c)(4) organizations are allowed to engage in some unquantifiable measure of political activity based on time, expenditures, or other factors, so long as political activities was not the organization’s primary purpose (so, 49% was perhaps a number that would have been acceptable) — the 40% safe harbor is probably a bit less than a 501(c)(4) organization could otherwise get away with; and more importantly (2) the letter creates a new rule that any “public communication” within 60 days of a general election or 30 days of a primary election that identifies a candidate in the election will be deemed political activity — the standard that applies in the absence of the letter is much more fuzzy.

Despite these more narrow restrictions, the certainty offered by the letter is likely to be attractive to many prospective 501(c)(4) organizations. And it would not be surprising if these rules later evolve to apply to all 501(c)(4) organizations, rather than just those that voluntarily opt in. Nonetheless, the laws governing 501(c)(4) organizations are political contentious and may change dramatically in the years ahead, so it is important for organizations to be careful not to commit to any metrics that cannot be adjusted later for future compliance.

Posted in 501(c)(4), Form 1024, Lobbying and Political Activity | Comments Off on IRS Offers New Expedited Option for Backlogged 501(c)(4) Applications ← Older posts Newer posts →