Non Profit Report - Fall 2007
Updates from the IRS and Capitol Hill
By: Eileen Morgan Johnson, Esq.
The IRS and Congress did not take a break this summer from their efforts to provide stronger oversight of tax exempt organizations.
This past summer, Steven T. Miller, commissioner, Tax Exempt and Government Entities Division of the IRS, presented testimony before the Oversight Subcommittee of the House Ways and Means Committee on the oversight of tax-exempt organizations. Miller had some good news for exempt organizations - the IRS has reduced much of the backlog of requests for determinations and rulings and improved the timeliness of its response to such requests.
In his testimony, Miller focused on compliance problems within the charitable sector. Specifically, he listed five areas of concern for the IRS:
- charitable contribution overvaluation;
- charities established to benefit the donor, namely abusive donor-advised fund arrangements and Section 509(a)(3) supporting organizations established to provide benefits to donors;
- a blurring of the line between tax-exempt and commercial sectors (focusing on credit counseling and down payment assistance organizations and continued problems with collection of the unrelated business income tax);
- executive compensation and inurement; and
- regulation and reporting of political activities.
These compliance challenges have been on the IRS's priority list in recent years and will continue to be at the forefront of the Service's enforcement efforts concerning taxexempt organizations.
Draft Redesigned Form 990
As part of its continued efforts to increase transparency, the IRS released its draft redesigned Form 990 for a period of public comment from June 14, 2007 to September 27, 2007. The redesign is the first overhaul of the Form 990 since 1979. The IRS is now reviewing the comments it received and identifying any changes that may be needed to the form. Based on the initial strong negative reaction, IRS has already announced changes it will make to the first page of the form which is intended to be a "snap shot" of the organization. The IRS will eliminate from the first page questions on compensation percentages, fundraising percentages, and comparisons of an organization's net assets to total expenses. It will also move questions on the organization's activities and accomplishments from the back of the form to the front. The IRS hopes to be able to use the new form for the 2009 filing season.
Small organizations, defined as those with annual gross receipts under $25,000, have a new filing requirement thanks to the Pension Protection Act of 2006. The IRS has designed an "E-postcard" (Form 990-N) that organizations can use to electronically file minimal information with the IRS each year beginning in 2008. The IRS began mailing educational letters about the new E-postcard to the targeted exempt organizations in July.
Public Inspection of Form 990-T
A 990-T is filed when a tax-exempt organization has unrelated business taxable income in excess of $1,000. A new disclosure requirement added by the Pension Protection Act of 2006 made the Form 990-T subject to public disclosure for the first time. This requirement applies to all organizations that file a 990-T, including churches and state colleges and universities. Charities that filed Form 990-T solely to request a refund of the telephone excise tax do not have to make that return public. Charities that make their 990-T widely available (such as on their website) do not need to comply with any individual requests for public inspection.
As the 2008 presidential campaigns get under way, the IRS is closely watching for signs of political activities by charities. The IRS has already begun monitoring contributions made to political action committees and candidates by Section 501(c)(3) organizations. Noncompliance with the prohibition on political activity is a continuing problem. One IRS spokesperson cited charities buying tickets to campaign fundraising events as a particular problem at the state and local level.
Using the theory that an informed organization makes informed choices, the IRS has created four new "life cycles" for tax-exempt organizations. These web-based information tools are designed to help guide tax-exempt organizations through the federal tax rules and requirements that pertain to them. The new life cycles join those for public charities and private foundations under Section 501(c)(3). The new tools provide guidance for:
- Social welfare organizations under Section 501(c)(4);
- Labor organizations under Section 501(c)(5);
- Agricultural and horticultural organizations under Section 501(c)(5); and
- Trade associations and other business leagues under Section 501(c)(6).
The life cycles cover the formation of the organization through challenges it may face as it matures such as disclosure requirements, political campaign involvement, and avoiding the loss of its tax-exempt status.
The IRS has issued warnings that, for the foreseeable future, all of its compliance projects will include some element of compensation as they continue to search for excess compensation in the nonprofit sector. This is in response to criticism from Capitol Hill that charities are being too "creative" in designing compensation packages for their senior employees.
IRS and the Red Cross
Following the recent overhaul of the governance structure of the American Red Cross, two senior IRS officials have been recruited to continue the management restructuring and improve oversight. Mark Everson, former IRS commissioner, left the IRS in May to assume the position of president of the Red Cross. Kevin M. Brown, acting commissioner since May, also left the IRS to become the chief operating officer of the Red Cross.
Q: Is the IRS concerned about whether charitable organizations that use tax-exempt bond financing are complying with record keeping requirements?
A: The IRS recently announced that its tax-exempt bond unit will send surveys this year to up to 500 charities that use tax-exempt bond financing to help gauge compliance with record retention (i.e., maintenance of books, records, and other documents supporting continued compliance with federal tax requirements for tax-exempt bonds) and other requirements. The IRS conducted a smaller scale project last year to determine whether organizations were using their facilities financed with tax-exempt bonds for the purposes for which bond financing was obtained. Information gathered during that project indicated other basic compliance problems - such as failing to comply with requirements for record retention. It is expected that hospitals and educational institutions likely will be the focus of this compliance initiative because those types of organizations are frequent users of tax-exempt bond financing.
Q: Can the board exclude the organization's members from its meetings by going into executive session?
A: A board of directors goes into executive session when it is discussing something that is so confidential that it can only be shared with the members of the board. Examples are: discussing the executive director's performance, meeting with the organization's auditors or attorney, or discussing confidential business planning such as a pending real estate transaction, a possible reduction in force, or a merger with another organization. Members of the organization are not entitled to participate in these executive sessions. Only the members of the board have the right to participate in board meetings in executive session although the board may invite others to participate in all or part of the session. No minutes are kept of the executive session itself but any action taken by the board in executive session should be documented in the minutes.
10 Lobbying Do's for Nonprofit Organizations and Staff
President Bush recently signed the Honest Leadership and Open Government Act of 2007 (HLOGA) into law. In addition to amending the Lobbying Disclosure Act of 1995, the law changes a multitude of ethics laws and rules. Violations can result in severe civil or criminal penalties.
- Do train your staff and board members, and create compliance programs. The new law sets in place a variety of restrictions from gift giving to trip financing from anyone within an organization (or an organization's lobbyist) to congressional members and their staff.
- Do be sure that you, your employees and/or consultants understand the boundaries. Even if they use personal funds, the actions of your employees or lobbyist may come under scrutiny.
- Do a media test. To avoid situations that present the appearance of impropriety, ask yourself, "If my actions were reported by a local reporter, would my organization suffer as a result?" Even speculation about inappropriate actions can result in a public opinion and donor relations nightmare.
- Do understand the seriousness of your reporting activities. Under HLOGA, the proposed changes to the Form 990, and the Federal Election Commission, your organization is now responsible for submitting three separate lobbying reporting and political activities documents.
- Do file your LD-2 form quarterly rather than biannually, and file your LD-3 (a new form) biannually.
- Do know the actions of your staff and your consultant(s). If you sign the LDA report for your organization, you must certify that there has been no violation of the rules by your lobbyists or your organization staff.
- Do understand your amount restrictions. Under the new law, the threshold for lobbying expenses for an association has changed to $12,250 per quarter and $3,000 for a lobbying firm per quarter.
- Do register as a lobbyist no later than 45 days after your first lobbying contact.
- Do report if you or a member of your staff were a member of the government "in the 20 years before the date on which the employee first acted as a lobbyist."
- Do know the exceptions. HLOGA includes a variety of exceptions that may provide some leeway for your organization, particularly with regards to charitable fundraising.
Understanding HLOGA's implications is critically important to organization leaders and their staff. While HLOGA may not be the last word on lobbying practices and congressional disclosure, it is surely a sign that closer scrutiny will be paid to ensure governmental compliance. We recommend that all err on the side of caution.
IRA Charitable Giving Conundrum
While nonprofit organizations rejoiced when President Bush signed the IRA (Individual Retirement Account) Rollover provision (as part of the Pension Reform Act) into law in August 2006, many are now concerned as the provision is set to expire at the end of this year.
The provision allows for direct gifts of cash up to $100,000 from IRAs by individuals 70 and 1/2 years of age or older without tax implications. In a survey by the National Committee on Planned Giving, 4,467 individuals took advantage of the provision by making $80+ million in IRA donations (ranging from $25 to $100,000) from August 2006 to July 18, 2007.
On March 8, 2007, elected officials in both the U.S. House of Representatives and the Senate introduced the Public Good IRA Rollover Act of 2007 to amend the Internal Revenue Code of 1986 to expand tax-free distributions from individual retirement accounts for charitable purposes. Within the House, HR 1419 was referred to the Committee on Ways and Means, and SB 819 was read twice in the Senate and referred to the Committee on Finance.
The proposed Act expands "the IRA charitable rollover to include gifts made to donor-advised funds, supporting organizations, and private foundations; gifts over $100,000; and planned gifts that donors may make starting at age 59," according to the Council on Foundations.
The legislation itself states that "no amount shall be includible in gross income by reason of a qualified charitable donation" and defines qualified charitable donations to include any distribution from an IRA made by the trustee to "an organization described in section 170(c)" or a "splitinterest entity," such as charitable remainder trusts, pooled income funds, and charitable gift annuities.
Although the legislation appeared to gain favor within both the House and Senate,Congress recessed for the summer on August 4, 2007 without further comment on the Act.
Eileen Morgan Johnson Named to ASAE Council
We are pleased to announce that Eileen Morgan Johnson, Esq. has been named to the Legal Section Council of the American Society of Association Executives (ASAE) & The Center of Association Leadership, effective July 1,2007. Eileen is an attorney within the firm’s Nonprofit Organizations Group.
Eileen will serve a one-year appointment on the 22-person council with the possibility of serving up to three consecutive terms. The Legal Section is dedicated to disseminating
knowledge and connecting professionals concerned with association legal issues. Founded in 1920, the ASAE has more than 22,000 association CEOs, staff professionals, industry partners, and consultant members.
As former in-house counsel at the National Wildlife Federation for almost twenty years (the last eight of which were as general counsel and corporate secretary), Eileen offers her clients a first-hand understanding of matters particular to organizations. A prolific author and frequent presenter, she has addressed the national Association of Corporate Counsel numerous times on issues related to both nonprofits and the general counsel function within an organization, and has published articles in Corporate Counsel News and the Legal Times. Eileen was a presenter at ASAE’s recent Association Law Symposium and will be speaking at other upcoming ASAE programs.
Attorney Spotlight: Kevin Kernan
As a member of the firm’s Nonprofit Organizations practice, Kevin A. Kernan counsels nonprofit and for-profit organizations on entity formation, corporate governance, employment relations, general operational compliance, and contract agreements. Located in the firm’s District of Columbia office, Kevin serves as general counsel for several nonprofit and tax-exempt organizations in the Washington, D.C. area.
Kevin is a successful litigator and has appeared before federal and state courts and the Equal Employment Opportunity Commission. Whether he is litigating employment discrimination matters or general breach of contract actions, Kevin works to protect the best interests of his clients.
Kevin is a member of the District of Columbia and Alexandria Bar Associations as well as the Alexandria Chamber of Commerce Government Relations Board. Additionally, Kevin serves on the firm’s Paralegal and Summer Associates committees. He graduated with his J.D. from Widener University in 1995 and earned his B.S. in Criminal Justice from S.U.N.Y. at Albany in 1989.
Outside the firm, Kevin enjoys running, basketball, and spending time with his wife and three children [Morrisey age 6, Jak (John Aloysius) age 3, and Katherine age 1]. When the Kernan family is not escaping to the St. Lawrence River, they enjoy taking in all that DC has to offer.