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Housekeeping Items

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February 11, 2016

Legal Lunch Series A Conversation with Legal Affairs

Super Bowl Tailgate (OT)

Welcome

Agenda

• Introductions
• Housekeeping Items
• Form 990 Red Flags & Pitfalls
• Board Governance Hot Topics
• Donor Advised Funds
• Private Foundation Relationships with Businesses &

Family Offices

Fearless Legal Pilgrims

Suzanne Friday

• Sr. Counsel & VP of Legal Affairs

#7 QB University of Texas at Austin

Bryan Del Rosario

Staff Counsel #89 WR Gonzaga University

IRS Form 990

Red Flags & Common Pitfalls

Form 990

• Not only public face of individual charity, but also most readily available data source for

potential donors, state regulators, the media, and researchers, as well as charity’s board, staff and volunteers

• Beginning with 2008 tax year, IRS issued new version of Form 990 (most significant

revisions since 1979)

• Dramatically altered reporting requirements for tax-exempt organizations
• One of boldest area of change: New governance section asking 20 questions in regard to

governance practices of nonprofit organization – 3 areas: 1. Governance composition and management, 2. Organizational policies, and 3. Disclosure practices A charity’s governing board is responsible for “establishing appropriate procedures for internal controls, including financial controls, legal compliance, and information flow to the board – American Law Institute

Form 990 (cont.)

• Limiting the risk of revoked exemption status should always be a charity’s
• priority. The four pillar tests for maintaining tax-exempt status require the
• rganization to:
• 1. Be organized exclusively for charitable purposes
• 2. Be operated primarily for charitable purposes
• 3. Not allow private inurement
• 4. Abide by certain limitations on lobbying and political activities
• Each question on the governance section is designed in some way to probe

whether a tax-exempt organization is meeting the first three tests—particularly the operational and private inurement tests.

• Twin Goals: Ensure organization is meeting requirements of tax exemption and

reduce risk of IRS audit as much as possible

Form 990 (cont.)

Governance Issues & Section VI

• Governing Body and Management
• Internal Policies
• Disclosure Practices

Form 990 (cont.)

Governing Body and Management

– Number of board members – Number of independent board members – Reporting fraud – Contemporaneous notes

Form 990 (cont.)

Internal Policies

– Form 990 review process – Conflict of Interest policies – Whistleblower policies – Document retention policies – Compensation determination process

Form 990 (cont.)

Disclosure Practices

– IRC § 6104(d)

• IRS Exemption Application Form
• Annual reporting form

– Availability of “other documents”

Board Governance

Hot Topics

Self Dealing (Private Foundations)

• IRC Section 4941
• Prohibits certain financial transactions

directly with “disqualified persons”

• Prohibits certain financial transactions

with 3rd parties that provide more than an incidental benefit to “disqualified persons”

• Penalty tax will be imposed for violations

What is Self Dealing?

• Sale, exchange or leasing of property between

foundation and disqualified person

• Lending money to a disqualified person
• Furnishing goods or services to a disqualified

person

• Fulfilling financial obligations of a disqualified

person

• Advertising for a disqualified person
• Providing preferential recruitment or business
• pportunities for a disqualified person

Who are Disqualified Persons? – Foundation managers - officers, directors, trustees, and employees with authority to act

• n behalf of the Foundation

– Substantial contributors to the Foundation (including parent company) – Family members of the above – Certain government officials – Business entities with at least 35% ownership by disqualified persons

What is Not Self Dealing?

• Paying compensation for personal services

that are reasonable and necessary to carry

• ut the exempt purpose of the Foundation if

the compensation is not excessive

• Incidental and tenuous benefits

– Public recognition for the Company – Consumer goodwill for the Company – Increased morale of Company employees

• Providing goods and services to the Company

and Company employees on the same terms as the general public

Investment Oversight

• Legal and fiduciary responsibility of

managing foundation investment assets lies with the board of directors – cannot fully delegate

• Uniform Prudent Management of

Institutional Funds Act (UPMIFA) provides guidance related to the governance of investment assets (endowments)

Investment/Finance Committee

Responsible for initiating an investment policy statement that:

• clearly outlines the investment objective
• roles and responsibilities
• performance expectations
• spending needs
• any prohibitions on investments

Investment/Finance Committee cont.

Often responsible for hiring or recommending investment managers:

• RFP or proposal process
• Written engagement letter or agreement
• Ability to terminate relationship
• Performance measurements
• Appropriate fees

Mission Measurement

• Hot topic today – funders want to know

exactly how their money is being used

• Growing pool of consultants available to

assist

• Provides valuable data to work smarter

and spend less Ask: Who or what purpose does your

• rganization serve and what change do you

seek to create, when?

Donor Advised Funds

A donor advised fund is administered by a public charity and solicits advice and recommendations from the donor or others specified by the donor Has significantly lower financial costs and all compliance burdens are on the public charity The donor has no legal authority over the fund Not the right choice if donor desires significant long-term control

Who calls the play?

DAFs

Private Foundation Relationships

Business & Family Offices

Private Foundations

Private foundations often:

• Pass philanthropy as a family value from

generation to generation

• Help a family business sustain corporate

citizenship and community good will

Private Foundations

• Often controlled by family members or

business executives

• High wealth families often have a “family
• ffice” that manages or supports family

foundation

– Family offices typically handle the investments and other business needs

Private Foundations

But that darn Self-Dealing…

• Prohibits transactions between a PF and a

DQ’d person

• Can be direct or indirect, and includes:

– Sale, exchange or lease of property – Lending of money or extension of credit – Furnishing of goods, services or facilities – Payment of compensation – Transfer to, or use of, income or assets of foundation

Private Foundations

Self-Dealing (cont.)

• Disqualified persons include:

– Substantial contributors – Foundation managers – 20% Owners of substantial contributors – Certain family members* – Business entities of which the foregoing own more than a 35% combined interest

* SEE Treas. Reg. § 53.4958-3(b)(1)

Private Foundations

Self-Dealing (cont.)

• Key exceptions

– Reasonable compensation for reasonable and necessary personal services – Freebies (goods and services provided at no cost to the foundation) – Interest-free loans to the foundation – Certain corporate recognitions

Private Foundations

Common Issues w/Family Offices & Businesses

• Paying for the services of family
• ffice/business
• Sharing space and resources with family

business or family office

• Grantmaking

– Return benefits – Charities that employ family members

• Co-investing
• Compensating & reimbursing

directors/officers

Private Foundations

Paying for Services

• A private foundation cannot pay a family
• ffice or family business for services provided

unless services are personal services that are necessary and reasonable

• If services are not “personal services,” private

foundation must contract w/independent third party or receive services for free

• If services are “personal services,”

compensation must be reasonable

Private Foundations

What are Personal Services?

• Narrowly defined in regulations as legal,

investment management, banking, brokerage and accounting (“professional & managerial”), but rulings give context

– Board & staff functions, Rev. Rul. 74-591 – Administration & grantmaking, e.g., PLR 9433027 – Commercial property management, e.g., PLR 9226067

Private Foundations

Personal Services

• Not personal services (Think Blue Collar jobs)

– Maintenance, janitorial and security, Madden, Jr.

• v. Comm’r, T.C. Memo. 1997-395; PLR

200315031 – Secretarial services, PLR 200217056 – Real estate services: compare PLR 9325061 & 200326039

Private Foundations

Sharing Space & Resources

• Similarly, it is an act of self-dealing for a

private foundation to:

– Lease space from – Purchase supplies, materials or services from – Reimburse the expenses of the family office or family business Corollary Relationships

Private Foundations

Compensation and Reimbursement

• Compensation for reasonable and necessary

personal services must be reasonable

• IRS has not provided private foundations a

procedure to establish a rebuttable presumption of reasonableness, but best practice is to follow public charity procedures under § 4958

• Should consider a third party compensation

study or opinion, especially where there is no independence

Private Foundations

Compensation and Reimbursement (cont.)

• Special issues for reimbursement or

payment of expenses:

– What is reasonable and necessary?

• First class vs. Coach; extra night of hotel

– Payment for other family members/spouses

• Could be treated as compensation rather than a

reimbursement or expense

– Should be considered in package for reasonableness; reported in 1099 or W-2

Thank You for Joining Us for

Legal Lunch Series Super Bowl Tailgate (OT)

Legal Lunch Series #2

TBD

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