Serving Public Charities Registration and Compliance 1 Public - - PowerPoint PPT Presentation

1

Serving Public Charities Registration and Compliance

Public Charities – IRS Compliance Issues

Presented by

Lisa Schaures Schwabe, Williams & Wyatt

2

Classification

• State
• Federal

– I.R.C. § 501(c)(3) – I.R.C. § 509(a)(1)-(4)

Nonprofit Law Institute, October 28, 2016 3

Section 501(c)(3)

• I.R.C. § 501(c)(3)

– Organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals.

Nonprofit Law Institute, October 28, 2016 4

Overarching Rules

• Private Inurement Prohibition: No part of the net

earnings of which inures to the benefit of any private shareholder or individual.

• Lobbying Restrictions: No substantial part of the

activities of which is carrying on propaganda, or

• therwise attempting, to influence legislation (except

as otherwise provided in 501(h)).

• Political Activity Prohibition: Does not participate in,
• r intervene in (including the publishing or distributing
• f statements), any political campaign on behalf of (or

in opposition to) any candidate for public office.

Nonprofit Law Institute, October 28, 2016 5

Public Charities; Where Do You Fit?

• I.R.C. § 509(a)(1), (2), (3), and (4)
• Organizations by Nature of Activities:

– Churches – Educational organizations – Hospitals and medical research organizations – Supporting organizations of public colleges and universities – Governmental units

Nonprofit Law Institute, October 28, 2016 6

Public Charities

• Publicly Supported Organizations:

– Fundraising and Publicly Supported: Normally receives a substantial part of its financial support (not including income received in the exercise of its exempt function) from publicly supported organizations, from a governmental unit, or from direct or indirect contributions from the general public. – Income in Furtherance of Exempt Purpose: Public support normally received (public support includes gross receipts from the performance of exempt activities) is more than 1/3 of its total financial support and normally receives not more than 1/3 of its financial support from gross investment income.

Nonprofit Law Institute, October 28, 2016 7

Public Charities

• Supporting Organization:

– Supports or benefits other public charities in prior categories

• Relationship with other public charities:

– Operated, supervised, or controlled – Supervised or controlled in connection with – Operated in connection with

Nonprofit Law Institute, October 28, 2016 8

• Testing for Public Safety:

– Organized and operated exclusively for testing for public safety

Unrelated Business Income

• I.R.C. § § 511-514
• Unrelated business income tax (“UBIT”) at

regular corporate rates

Nonprofit Law Institute, October 28, 2016 9

What Causes UBIT?

• Net income from:

– Trade or business, – Regularly carried on, and – Not substantially related to organization’s exempt purpose.

Nonprofit Law Institute, October 28, 2016 10

Examples of Exceptions to UBIT

• Activities conducted entirely

by volunteers

• Sale of donated

merchandize

• Certain bingo games
• Corporate sponsorships

Nonprofit Law Institute, October 28, 2016 11

• Interest income, dividends, and annuities
• Royalties
• Rent
• Sale of capital assets
• Activities conducted for convenience of

members, students, patients, or employees

Common UBIT Compliance Issues

• Determining classification as substantially related to exempt

activities.

• Criteria for a corporate sponsorship.
• Advertising.

Nonprofit Law Institute, October 28, 2016 12

• Rent exceptions.
• Activities of subsidiaries.
• Alternative investments, joint

ventures, and partnerships.

• Special events.

Nonprofit Law Institute, October 28, 2016 13

Common UBIT Compliance Issues

Excess Benefit Transactions

• I.R.C. § 4958

– Transaction in which the economic benefit provided by the public charity to a disqualified person exceeds the value of the consideration received for providing such benefit.

Nonprofit Law Institute, October 28, 2016 14

Intermediate Sanctions and Other Penalties

• Personal and Charity liability of 5% - 200%
• Revocation of exempt status
• Back payment of taxes owed

Nonprofit Law Institute, October 28, 2016 15

Procedures to Protect Against Excess Benefit Transactions

• Annual training for board members and officers
• Conflict of interest policy and other governance

policies

• Due diligence
• Documentation
• Director and Officer Insurance

Nonprofit Law Institute, October 28, 2016 16

Executive Compensation

• Serving the public interest means not

providing more than an incidental private benefit.

• Prohibition against net earnings inuring

to the benefit of an “insider.”

Nonprofit Law Institute, October 28, 2016 17

Reasonable Compensation

• Reasonable compensation (clearly intended as

such) is not an excess benefit.

• Steps to confirm that compensation is

reasonable and clearly intended to be reasonable compensation.

Nonprofit Law Institute, October 28, 2016 18

Lobbying, Political Activity, and Issue Advocacy

• Lobbying:

–No substantial part test –Section 501(h) election and test –Penalties and jeopardy to tax exempt status –Common Issues

Nonprofit Law Institute, October 28, 2016 19

Lobbying, Political Activity, and Issue Advocacy

• Political Activity:

–Prohibition on political campaign participation or intervention on behalf of (or in opposition to) any candidate for public office –No de minimis –Penalties and jeopardy to tax exempt status

Nonprofit Law Institute, October 28, 2016 20

Political Activity, Lobbying, and Issue Advocacy

• Issue Advocacy:

–Positions on issues that are related to the

• rganization’s exempt purposes

–Educating or attempting to influence the public on policy –Implicitly favoring or opposing a candidate –Factors to consider

Nonprofit Law Institute, October 28, 2016 21

Lisa E. Schaure

Shareholder 206-407-1566 lschaures@schwabe.com

Lisa Schaures guides businesses, social ventures and nonprofits in the Pacific Northwest through everyday general counsel matters, quandaries and major life cycle events. In more than 10 years of practice, she has helped clients through starting up, governance structuring, purchases, mergers, conversions, conflicts of interests, acquiring tax exempt status, complex tax concerns, deferred compensation strategies, contract negotiations and expansion growing pains.

Schwabe, Williamson & Wyatt US Bank Centre 1420 Fifth Ave Suite 3400 Seattle, WA 98101 schwabe.com

Nonprofit Law Institute, October 28, 2016 22

23

Registration Requirements with the Office of the Secretary of State

Presented by

Tsering Cornell WA Office of the Secretary of State

Agenda

• Registration Requirements

– Business Entities and Filings – Charities Program

• Public Records
• New Registration Systems

24

Business Registration Requirements

• Types of Business Entities
• Types of Required Business Filings
• Consequences for Failure to Maintain

“Active Registration”

25

Types of Business Entities

• Profit Corporations: RCW 23B
• Non Profit Corporations: RCW 24.03
• Limited Liability Companies: RCW 25.15
• Limited Partnerships (LP): RCW 25.10
• Limited Liability Partnerships: RCW 25.05
• Limited Liability LP: RCW 25.10

26

Types of Business Filings

• Name Reservations and Registrations
• Formation documents – Articles of Inc.,

Certificates of Formation

• Foreign Registration
• Amendments
• Mergers and Conversions
• Annual Reports
• Statements of Change

27

More on Business Filings

• Name: must be distinguishable on the

records (RCW 23.95.300)

– Domestic: Name Reservation (180 days) – Foreign: Name Registration (through calendar year)

• Annual Reports: must be filed each year

by end of month formed

• Registered Agent: must have a registered

agent with a street address in WA State

28

Administrative Dissolution: Grounds

(1)The entity does not pay any fee, interest, or penalty required to be paid to the secretary of state when due; (2)The entity does not deliver an annual report to the secretary of state not later than 120 days after due; (3)The entity does not have a registered agent in this state for 30 consecutive days; or (4)The entity's period of duration expired.

29

Administrative Dissolution: Impact

Inactive Status:

– Name no longer protected – Late fees – May not carry on activities except to wind up – Note: Does not terminate the authority/responsiblity of registered agent

30

Reinstatement

• 5 years
• Confirm name available, if not supply

alternative names

• All back fees due

**Note: Voluntary Dissolution of a nonprofit corporation is different; under current RCW 24.03, no method to withdraw (new draft Nonprofit Act remedies this)

31

Charities Program

• Types of Charities Registrants
• Types of Charities Filings
• Consequences of Failure to File and

Renew

32

Types of Charities Registrants

• Charitable Organization - an individual or
• rganization that asks for public donations to

support a charitable cause

• Commercial Fundraiser - an individual or
• rganization compensated to ask for public

donations on behalf of a charity

• Charitable Trust – trustee that is holding

assets in trust for a charitable purpose(s) in value exceeding $250,000

33

Charitable Organizations

• Registration/renewal

– Must register prior to conducting any solicitation – Solicitation Report included in registration/renewal form – Tiered Financial Reporting

• Orgs exempt from registration:

– Political organizations – Entities raising less than $50,000 a year and all activities are conducted entirely by volunteers – Churches and their integrated auxiliaries – Appeals on behalf of a specific, named individual or family unit if all proceeds are given to said individual or family unit

34

Tiered Financial Reporting

All must file solicitation report with registration/renewal

• Tier 1: $1M or less
• Tier 2: more than $1M and up to $3M

– Must also make IRS Form 990 or audited financial statement available to public upon request or accessible online

• Tier 3: more than $3M

– Must obtain an audited financial statement prepared by independent third-party CPA and make available to public upon request or accessible online – Waiver if:

• 3-year average was $500,000 or less in cash
• Unusual or nonrecurring revenue in a single year
• If waiver granted, defaults to Tier 2 requirements

35

Commercial Fundraisers

• Commercial Fundraiser Form (used for

initial registration and renewal)

• Must submit a copy of contract(s) between

the Commercial Fundraiser and the Charity (charity to submit)

• Must register and submit proof of a surety

bond of $25,000

36

Charitable Trusts

• Initial Registration

– Copy of Trust Instrument and any amendments – Inventory of Assets – Registration Form – Due within 4 months of receiving possession or control of trust

• Periodic Reporting

– Annual Renewal Form and 990 – Due last business day of the 11th month after end

• f accounting year

37

Consequences for Failure to Register

• Late fees
• Lapse of Registration (no fundraising

activities should be conducted)

• Referral to Attorney General:

– Legal action, legal fees and/or civil penalty – Any public legal action taken by AG may be posted to Charities Program website

38

Public Records

• Nearly all records filed with the Office of the

Secretary of State are public records

• A narrow exception exists under RCW

11.110.040 for any trust instrument if the content of that trust instrument is not exclusively for charitable purposes.

39

New Registration System

• New filing system in development

– Many more online filings – Ability to search and download public filings

• Go-live date in 2017 is TBD as we work

through testing

40

Questions?

Tsering Cornell Director, Corporations & Charities Division tsering.cornell@sos.wa.gov 360-725-0310

41

42

ENFORCEMENT BY THE ATTORNEY GENERAL

Presented by

Leilani Fisher, Attorney General’s Office

43

Mission of the Attorney General’s Office

Office of the Attorney General will provide excellent, independent, and ethical legal services to the State of Washington and protect the rights of its people.

Mission of the Consumer Protection Division

To secure, for the people of Washington State, a marketplace free from deceit and unfairness through strong enforcement, effective education, and creative problem solving.

About the Attorney General’s Office

44

To identify: I. Enforcement objectives (why AG gets involved) II. Enforcement mechanisms (how AG gets involved) III. Enforcement examples (what AG gets involved in)

Presentation Goals

• “A charitable trust is of public concern and the attorney general is the protector of the

interests of the public[.]”Samuel & Jessie Kenney Presbyterian Home v. State, 174 Wash. 19, 40, (1933).

• Advocate for public charitable beneficiaries who lack standing
• “The duties of the trustees of charitable trusts are ordinarily not owed to or enforceable

by individual beneficiaries, but are enforced at the suit of the Attorney General.” State v. Taylor, 362 P.2s 248 (1961).

45

• I. Enforcement Objectives
• Protect charitable assets from misuse
• Ensure that donor intent is honored
• The CTA, TEDRA, and UPMIFA expressly authorize the

attorney general to intervene in trust matters to ensure that a trustor’s intent is honored.

• Promote registration compliance

“A charitable trust is of public concern and the attorney general is the protector of the interests of the public”

Sources of authority

• Charitable Trust Act (RCW 11.110, “CTA”)
• Trust and Estates Dispute Resolution Act (RCW 11.96A, “TEDRA”)
• Prudent Management of Institutional Funds Act (RCW 24.55, “UPMIFA”)
• Nonprofit Corporations Act (RCW 24.03, “NCA”)
• Charitable Solicitations Act (RCW 19.09, “CSA”)
• Common law

46

• II. Enforcement Mechanisms

*The CTA defines a charitable "Trustee" to include corporations “holding assets subject to limitations permitting their use only for charitable, religious, eleemosynary, benevolent, educational, or similar purposes.”

• “Investigations by attorney general authorized—Appearance and production of books,

papers, documents, etc., may be required…[The attorney general] may require any

• fficer, agent, trustee, fiduciary, beneficiary, or other person, to appear, at a time and

place designated by the attorney general in the county where the person resides or is found, to give information under oath and to produce books, memoranda, papers, documents of title, and evidence of assets, liabilities, receipts, or disbursements…” RCW

• 11. 110.100.

47

• II. Enforcement Mechanisms
• Investigate
• “When the attorney general requires the attendance of

any person… Such order shall have the same force and effect as a subpoena, and, upon application of the attorney general, obedience to the order may be enforced by any superior court judge in the county where the person receiving it resides or is found, in the same manner as though the notice were a subpoena.” RCW 11.110.110.

• “The attorney general may institute appropriate proceedings to secure compliance

with this chapter and to secure the proper administration of any trust or other relationship to which this chapter applies.” RCW 11.110.120.

• “A civil action for a violation of this chapter may be prosecuted by the attorney general”

RCW 11.110.130

48

• II. Enforcement Mechanisms
• File civil actions on behalf of the State
• “[The attorney general] is the proper person to institute

proceedings for the enforcement of a public trust or charity[.]”Samuel & Jessie Kenney Presbyterian Home v. State, 174 Wash. 19, 40, (1933).

• The attorney general is a “party” and “person interested in the estate or trust” under

TEDRA when a charitable trust has public beneficiaries. See RCW 11.96A.030.

• The attorney general may represent public beneficiaries.
• The attorney general may also “virtually represent and bind a charitable organization”

under certain circumstances. RCW 11.96A.120

• “[The attorney general] shall be notified of all judicial proceedings involving or affecting

the charitable trust or its administration in which, at common law, he or she is a necessary or proper party as representative of the public beneficiaries.” RCW 11.110.120.

49

• II. Enforcement Mechanisms
• Appear in proceedings involving charitable assets
• “[T]he attorney general must be given an
• pportunity to be heard” when a charity seeks a

court order modifying a restriction contained in a gift instrument. RCW 24.55.045.

• The attorney general may, in some circumstances, file an action in superior court to

dissolve a nonprofit. See RCW 24.03.250, 266.

• The attorney general is statutorily entitled to notice of proposed distribution plans

that include charitable assets, and the AG may object to distribution plans. RCW 24.03.230.

50

• II. Enforcement Mechanisms
• Seek judicial dissolution of nonprofits; object to distribution plans

• If an entity that solicits donations violates registration requirements, the AG may ask the

entity to enter an Assurance of Discontinuance (in lieu of a lawsuit) pursuant to 19.86.100.

51

• II. Enforcement Mechanisms
• Enter Assurances of Discontinuance

• Trustor’s sole intent was to provide for indigent persons
• Trustees paid themselves more than 3X the ave. market cost to administer similar trusts
• Trustees used tens of thousands of trust fund dollars for personal internet and cell

phone bills and vacations

52

• III. Enforcement Examples
• Trustees treating trust assets like personal accounts

• Trustor’s sole intent was to provide college scholarships to women
• Trustee appoint brother as co-trustee
• Trustees issued themselves credit cards linked to the trust’s checking account
• Trust assets spent on expensive dinners with their families, tuxedo rentals, personal

rent, galas, golf tournaments, and auctions for their friends and family

• Trustees accepted gifts in exchange for contributions from the trust

53

• III. Enforcement Examples
• Trustees treating trust assets like personal accounts
• Trustees paid themselves substantial salaries but didn’t

track time worked

• Trustees hired their children for odd jobs “related to trust

administration,” but they were grossly underqualified & paid well above the median wage for comparable job; the jobs were not advertised to anyone else

54

• III. Enforcement Examples

55

• III. Enforcement Examples

56

• III. Enforcement Examples

57

• III. Enforcement Examples

58

Sponsored by