Non Profit Report - Spring 2006

Date: March 15, 2006

Charitable Organization Reform Initiatives
By: Eric A. Vendt, Esq.

As Congress meets in conference to work on reconciling differences between the Senate and House tax bills (H.R. 4297), the outcome of which may bring a number of legislative reforms to the tax-exempt world, the IRS has set forth its 2006 plan for addressing reforms in the tax-exempt and charitable entities area. Generally speaking, the IRS will be continuing its scrutiny of executive compensation, political intervention and certain transactions identified as abusive.

In the area of executive compensation, the IRS believes that tax-exempt organizations have permitted key executives to have too great an influence in determining their own compensation and have not otherwise exercised full due diligence in setting compensation levels. Closely related to this initiative, the IRS will be auditing and applying more scrutiny to tax-exempt organizations that make loans to organization insiders.

The IRS began this inquiry in 2005 by sending letters to tax-exempt organizations requesting additional information
concerning their compensation practices.

This initiative will also examine hospitals and the compensation that they are paying to their executives. The analysis for hospitals will focus on how non-profit hospitals differ from for profit hospitals in the community benefits that the non-profit hospitals provide.

Political Intervention
Another area of focus for the IRS is political intervention. This initiative began in 2005 but the IRS will be finishing up initiatives with 130 different organizations suspected of prohibited political intervention in the 2004 election campaign. It has reported that over half of these organizations are churches. While it seems that most of the problems were one-time events, the IRS is likely to have recurrent questions regarding its policies of enforcement and examination of religious organizations.

Abusive Transactions
One set of abusive transactions the IRS will examine this year will be excessive deductions for donations of patents and conservation easements. Especially in light of recent hearings in Congress concerning these matters, the IRS Tax-Exempt group will work closely with the Small Business Division to audit these transactions.

Another initiative will address Native American tribal governments. Specifically, the IRS will focus on a large number of "small garden variety peddling schemes" and fraudulent devices such as fraudulent tribal membership cards. Again, the IRS will pursue this examination through letter audits directed to tribal governments, requesting additional information from such tribes before full-blown audits are begun. Many of these issues have been accentuated due to the trial of lobbyist Jack Abramoff, who pleaded guilty to corruption, fraud and tax evasion involving tribal governments and political officials.

Tax-Exempt Bonds
Finally, the IRS will begin new exams in the tax-exempt financing area. Previously, exams have occurred at the inception of a financing transaction, focusing on whether the bonds are being used for the intended purposes, whether money from such financing is going where it is supposed to, how much money is being siphoned off for fees and whether too much interest is escaping taxation. The new exams will focus on whether the requirements have been met five years down the road.

While Congress contemplates the legislative reforms directed at charitable organizations contained in H.R. 4297, the IRS is poised to continue the initiatives it began in 2005, including focusing in several different problem areas and increasing enforcement activities. A report on charitable reforms enacted under H.R. 4297 will be provided in the next edition of "The Nonprofit Report."

Hotel Contracts What to Watch for When Planning a Conference
By: Kevin A. Kernan, Esq.

Planning on holding an annual conference or exposition at a hotel in the near future? An important consideration in planning any event is the contract that your organization enters into with the hotel. How the hotel treats the organization and its guests can play a key role in the success of the event; and how a hotel treats your organization may, in large part, depend upon the contract that is negotiated between the organization and the hotel.

While negotiation of a hotel contract may not be easy and the hotel usually has more leverage in negotiating the contract, it's important that you attempt to negotiate certain provisions that will benefit your organization and guests, while at the same time limiting your organization's liability in the event something unexpected happens. Keep in mind when negotiating a hotel contract that, if you don't ask for certain provisions, you will not receive them. Besides, the worst thing that could happen during the negotiation is that the hotel could refuse to negotiate.

One of the most important provisions in the hotel contract is the cancellation clause. It's important to your organization that you have the right to cancel the hotel contract, without penalty, within a certain amount of time before the scheduled event. The standard length of time for cancellation is between 12 and 18 months. To cover additional unexpected contingencies, your organization should attempt to include in the hotel contract provisions that allow for cancellation, without penalty and with full refund for any deposits, for the following reasons:

  • Construction and Remodeling of Hotel: If the hotel plans any construction, repair, decorating or maintenance work that may interfere with access to the hotel during your organization's function, or interfere with the safety, comfort or convenience of the event or your guests, you should be able to cancel without liability.
  • Force Majeure (French for "a superior force"): This provision is commonly found in all hotel contracts and protects either party from liability if unanticipated acts of nature or people prevent an event
    from being held. However, it's important to include language that provides benchmarks for either party to exercise its right to cancel the contract (e.g. weather-related events that suspend air or ground transportation services for a large percentage of attendees, curtailment of transportation facilities that
    make it impossible or illegal for attendees to travel, or if holding the event, in the organization's reasonable judgment, will place the attendees in possible danger).
  • Adequacy and Acceptability of Facilities: Regardless of any unforeseen weather or terrorism, you should attempt to include a provision that allows for cancellation without penalty if, in your organization's reasonable judgment, the hotel is inadequate to accommodate your conference or is in an unacceptable condition.
  • Hotel May Not Cancel to Accommodate Others: A provision should be negotiated that prevents the hotel from canceling your event or reservations for the sole purpose of accommodating another group or function.

Room Block and Attrition Clauses
The central provisions in any hotel contract are the room block and the attrition clause. The room block provision delineates the number of sleeping rooms that the hotel will set aside, or "block," for use by guests of your organization. An attrition clause allows the hotel to charge the organization an attrition penalty for all the sleeping rooms that it held on the organization's behalf but that were not utilized.

Although all organizations are optimistic that their event will be well attended and will utilize the entire room block, it's important to negotiate a room block provision in the hotel contract that allows your organization the flexibility to reduce the room block, without penalty, as your event draws closer and as you can better estimate the number of expected attendees. At the very least, you should have the ability to adjust the room block numbers in certain monthly intervals as the event date approaches (for example: 120, 90 and 60 days out).

The room block provision will determine how much attrition penalty your organization may be forced to pay the hotel. Although the penalty amount may be calculated using a simple formula (such as number of unused rooms multiplied by the room rate), there is language that you may include that may make it more difficult for the hotel to enforce the attrition clause and penalty.

  • Mitigation of Damages: This provision will place the burden on the hotel to use all reasonable efforts to resell any unused rooms. The provision should also provide that, in order for the hotel to collect any attrition penalties, it must 1) provide written proof of its efforts to mitigate the damages, and 2) provide
    proof that the hotel did not meet its average occupancy levels for the particular time of the year because of the unused rooms reserved for your organization.
  • No Double Collection of Attrition Penalties: It's important that the hotel agree not to double-collect any attrition fees. This situation can arise when the hotel has booked two (or more) meetings simultaneously and multiple meetings are cancelled. In this case, the hotel should charge each
    organization a pro rata share.
  • Waiver of Attrition: Even if your hotel contract results in an attrition penalty to your organization, it's not unusual for a hotel to waive the attrition penalty if your organization agrees to hold another conference or event at the hotel in the near future.

Overbooking or "Walk" Provision
Similar to the airline industry, the hotel industry has a practice of overbooking its rooms on the assumption that a certain percentage of the confirmed reservations will be noshows. If the hotel guesses wrong, the hotel will have to relocate (or "walk") to another hotel some of those who had reservations. In order to protect your guests against being relocated to another location during your event, it's important to have the hotel agree to:

  • relocate transient guests prior to relocating your guests.
  • not to relocate a certain list of guests, (eg. VIPs) that you provide to the hotel.
  • provide alternate accommodation at a property of comparable quality and pay for all necessary expenses for alternate accommodations.
  • provide a letter of apology to the guest, either upon his return or in his room at the alternate accommodations.

A typical hotel contract contains an "indemnification" provision that attempts to have the organization indemnify the hotel for any damages or claims that may arise as a result of any negligent acts of the organization or its breach of the hotel contract. While the exclusion of such a provision is usually non-negotiable, it is important for you to even the playing field by making the indemnification clause mutual. In other words, it should be fair to require the hotel to indemnify your organization for any claims for injury or loss that occur as a result of the hotel's or one of its employee's conduct, or its breach of the contract, statute or ordinance.

Insurance Coverage
In order to confirm that the hotel maintains adequate insurance coverage for any accidents or injuries that may result during your organization's event, the hotel contract should require the hotel to maintain insurance coverage for the following contingencies:

  • Comprehensive general liability insurance, including contractual liability and liability for personal injury, bodily injury, and property damage.
  • Automobile liability insurance for all owned, non-owned and hired vehicles used during the organization's event.
  • Liquor liability insurance.

Each coverage should have a limit of liability of not less than $1,000,000 for each occurrence.

Each hotel contract is different, just as each hotel's approach to negotiating its contract is different. But you may be surprised to learn that most hotels are willing to include language that provides protection for your organization; you just have to remember to ask.