Monday, June 4, 2012

Two Recent Tax Court Rulings on Charitable Contribution Deductions That Charities Should Be Aware Of

Two recent Tax Court cases were decided last month in which the court upheld the IRS's denial of significant charitable contribution deductions. In both of these cases, there was no dispute that the taxpayers made the contributions, or that they were made to qualified 501(c)(3) organizations, or even that the value of the contributions was at least as much as the taxpayers had reported. In both cases, however, the taxpayers failed to comply in some way with substantiation requirements of the Tax Code and Regulations, and so their contribution deductions were denied.

The first case, Durden v. Commissioner, T.C. Memo. 2012-140 (May 17, 2012), involved a Texas couple who claimed a deduction of $25,171 for cash contributions to their church. The church sent a letter of acknowledgement in January of 2008, but that receipt lacked a statement of whether any goods or services were provided to the Durdens in exchange for their contributions. Obviously trying to make up for the error, the church provided a second acknowledgement in June of 2009, which did include the proper statements. Nevertheless, the IRS denied the deduction because the Durdens failed to get a proper receipt from their church. In the IRS's view, the first acknowledgement was lacking a statement of whether goods or services were provided by the church, and the the second acknowledgement was not a "contemporaneous" receipt, because it was not received by the Durdens by the due date for filing their original return for the year. Because the Durdens did not have proper receipts, the judge agreed with the IRS that the Durdens failed to comply with the substantiation requirements of IRC 170(f)(8).

The second case is Mohamed v. Commissioner, T.C. Memo 2012-152 (May 29,2012). In this case, a California couple made gifts of "extremely valuable" real property (>$18.5 million total) to their charitable trust in 2003 and 2004. The IRS denied the deduction for these contributions because the Mohameds did not have the property independently appraised, as required by Treasury regulations for noncash property contributions of more than $5000. The taxpayer in this case prepared and filed his own tax return, including the required Form 8283 for noncash charitable contributions. The taxpayer admitted that he did not read the Form 8283 instructions (!), although the form itself appeared simple enough, and perhaps was even a little misleading. (The IRS has since revised Form 8283.) The tax court agreed with the IRS that the Mohameds had failed to satisfy the appraisal requirements of the Section 170 regulations, and therefore, their charitable deductions were completely denied. The court agreed that this was a harsh result, but found that "the problems of misvalued property are so great that Congress was quite specific about what the charitably inclined have to do to defend their deductions, and we cannot in a single sympathetic case undermine those rules."

From the perspective of charitable organizations, these cases present reminders that charities need to supply donors with proper receipts. These cases make it clear that, ultimately, it is the taxpayer's responsibility to comply with the requirements for disclosure and substantiation in order to take charitable contribution deductions for gifts they have made. And charities should not be giving their donors legal or tax advice, including putting valuation on property received.  That being said, charitable organizations should be familiar with the reporting and substantiation requirements so that they can help their donors comply. At a minimum, charities should be giving donors proper receipts for contributions.

Helpful resources from the IRS include:  Publication 1771 Charitable Contributions-Substantiation and Disclosure Requirements, and Publication 526 Charitable ContributionsPublication 561 Determining the Value of Donated Property, and the IRS's Stay Exempt website program, Can I Deduct My Charitable Contributions?

Friday, May 18, 2012

Reminder: Small Organization Transitional Relief - Only Until December 31, 2012

The number of tax-exempt organizations that have had their exempt status automatically revoked by the IRS since May 15, 2010 because they failed to file required annual information returns (Form 990, 990-EZ, or 990-N) is now approaching nearly 440,000(!).  While many (most?) of these organizations have been dead for a long time, there are many organizations that are not dead yet, and who will want to have their exempt status reinstated. The burden is now on those organizations either to show that the revocation was a mistake, or to file an application for reinstatement.

As noted previously on the Exempt Organizations Blog, the IRS has put in place certain procedures whereby tax-exempt organizations that have had their exempt status can apply for reinstatement of tax-exempt status and request retroactive reinstatement. For small organizations, in particular, Notice 2011-43 and Rev. Proc. 2011-36 provide "transitional relief" in the form of a reduced filing fee of $100 and a lesser burden for showing reasonable cause for filing failure, thereby allowing reinstatement back to the date of revocation. In order to qualify for small organization transitional relief under Notice 2011-43/Rev. Proc. 2011-36, an organization must:
  • Not have been required to file Form 990 or 990-EZ for tax years beginning before 2007
  • Been eligible to file Form 990-N for 2007, 2008, and 2009
  • Submit its application for reinstatement for exempt status by December 31, 2012.
Although December is months away yet, the time required to prepare and submit a Form 1023 or 1024 application is fairly substantial. There is no "short" Form 1023/1024 and the amount of financial and other information required to complete these applications is significant. Now is the time for small organizations to submit applications under the transitional relief provisions. As Benjamin Franklin said, "You may delay, but time will not." And neither will the IRS.

Friday, October 14, 2011

Round Up of 2011 California Nonprofit Legislation

Round'em up!
Governor Jerry Brown signed into law hundreds of pieces of legislation these past few weeks. Most of these laws will go into effect January 1, 2011. The following laws, in particular, impact nonprofit and tax-exempt organizations in some manner:
  • AB 289, Cedillo - Extends the sales and use tax exemption for retail items sold by thrift stores operated by nonprofit organizations to assist individuals with HIV and AIDS.
  • AB 657, Gordon - Allows businesses (including nonprofit corporations) to elect to receive email notices from the Secretary of State, in lieu of hard copy mailings. The bill also standardizes the filing requirements for different types of business entities and makes other technical changes to improve the Secretary of State's ability to administer the law.
  • AB 703, Gordon - Extends the property tax exemption t 2022 for certain lands acquired by nonprofit organizations for natural resource preservation and open-space purposes
  • AB 997, Wagner - Exempts certain qualified nonprofit corporations and charitable trusts from the requirements of the Professional Fiduciaries Act.
  • AB 1163, Brownly - Expands the law to allow the California Educational Facilities Authority to act as a conduit issuer of tax exempt bonds for private religious colleges.
  • AB 1211, Silva - As previously discussed here, makes various changes to the Corporations Code to make the law more clear with regard to the obligations and requirements for nonprofit corporations and unincorporated associations.
  • SB 436, Kehoe - Authorizes state or local agencies to allow qualified and approved nonprofits or special districts to hold property and long-term stewardship funds to mitigate adverse impacts caused by development projects
  • SB 668, Evans - Allows cities and counties to accept contributions from nonprofit or public agencies for specific land that is under a Williamson Act contract to supplement forgone property tax revenues.
In addition to the above bills, two separate bills were passed enacting new corporate forms that blend business (for-profit) corporations with nonprofit purposes:
  •  AB 361, Huffman - Authorizes the creation of a new corporate form called a "benefit corporation" and provides the rules that must be followed by these types of entities. See the press release here from B Lab, a primary proponent of the bill.
  • SB 201, DeSaulnier - Authorizes the creation of a new corporate form called a "flexible purpose corporation" and provides for the rules that must be followed by these types of entities. For a thorough discussion of the flexible purpose corporation, see the FAQs from the California Working Group for New Corporate Forms, who drafted the legislation, available at the Business for Good Blog of R.Todd Johnson, one of the working group members. (h/t Gene Takagi)
For the complete text and current status information for these or any other bills in the California legislature, go to the Bill Information page of the Official California Legislative Information website, www.leginfo.ca.gov.



Monday, October 3, 2011

Governor Brown Signs AB 1211 - Changes to California Nonprofit Corporation Law

Governor Brown signed AB 1211 today, and this bill will become effective January 1, 2012.  AB 1211 was proposed and sponsored by the Nonprofit Organizations Committee of the Business Law Section of the State Bar of California and authored by Assembly Member Jim Silva.  Much like AB 1233 , the NPO Committee sponsored bill from the prior 2009-2010 legislative session,  AB 1211 makes primarily technical, clarifying and non-controversial changes to the California Nonprofit Corporation law.  Among the specific changes enacted by this bill:

1. AB 1211 will make it clearer as to when the vote of an interested director is not required for a unanimous written consent. This is important because "interested directors" of public benefit corporations who vote on a transaction in which they are interested face certain liabilities, and the transaction itself may be void or voidable. The amendments in AB1211 clarify the law so that nonprofit corporations know who is an "interested director" and whether their vote is required for the corporation to act by written consent.

2. AB 1211 will exempt ballot measure committees formed as public benefit corporations from the Attorney General's supervision upon dissolution. The current Corporations Code requires all public benefit corporations to obtain a waiver from the Attorney General's office in order to file dissolution documents with the Secretary of State. Ballot measure corporations are not currently exempted from this requirement, despite the fact that the primary oversight of them is by the California Fair Political Practices Commission. The result has been that public benefit ballot measure corporations have to submit substantial documentation to the Attorney General's office in order to obtain the waiver letter, essentially a formality. This has needlessly involved the waste of time, resources, attention, and money by the Attorney General's office and the dissolving public benefit ballot measure corporation.

3. Finally, AB 1211 would provide cross-references to various other California Code sections that apply to nonprofit corporations and unincorporated associations. In particular, the bill adds references to the provisions of Government Code Section 12586. These provisions affecting the organization, governance and reporting obligations of nonprofit organizations are within the subject matter scope of existing sections of the Corporations Code, but were codified in the Government Code in the 2004 California Nonprofit Integrity Act. These cross-references in the Corporations Code will help make nonprofit organizations and practitioners aware of these significant obligations.

Wednesday, September 28, 2011

Hot Off the Press: Nonprofit Governance and Management, 3rd ed.




Nonprofit Government and Management, 3rd Ed.


The American Bar Association and the Society of Corporate Secretaries & Governance Professionals have just published the third edition of Nonprofit Governance and Management.  As members of the Nonprofit Organizations Committee of the Business Law Section of the ABA, we are proud to have participated in this project by advising on and editing the text. 

The book is divided into three broad chapters: "Governance Basics," discussing the principals and practices of nonprofit governance; "Dealing with Substantive Issues," covering the practical management of the organization; and "Governing Documents, Board Structure, and Operations," providing guidance on the internal workings and functioning of the board. In addition to the discussions of issues in the chapters, there are 27 Appendices "Sample Forms and Guidelines," which are also included on CD-ROM, making this book a very useful resource.

As described in the forward, "This book provides an overview of governance basics and board structure and operations, as well as specific guidance on such key substantive issues as strategic planning, financial management, fund-raising, oversight of the executive officer, human resources management, risk management, and handling of crises." Altogether, this is a highly useful book for nonprofit board members, executive directors, as well as the attorneys who advise them.



Monday, September 12, 2011

ABA CLE Presentation: The Accidental Nonprofit Lawyer

On Tuesday, September 27, 2011, (1:00PM ET/10:00AM PT) Michael Malumut, Amy Lin Myerson, and our own Lisa Runquist will present, The Accidental Nonprofit Lawyer, an online webinar/teleconference sponsored by the ABA General Practice, Solo and Small Firm Division, the ABA Business Law Section, and the ABA Center for Continuing Legal Education. The program is intended to educate those lawyers who find themselves acting as legal counsel to nonprofit organizations with which they are affiliated (as volunteers, officers, or board members) on the relevant nonprofit law and lawyering skills required in this situation.
This program is geared towards the lawyer without significant nonprofit governance or nonprofit law experience who is asked to represent a nonprofit.  The program will also benefit lawyers serving on nonprofit boards who are asked for legal advice as part of their board service.
This program is open to the general public, but lawyers who are members of the ABA are eligible for a discounted rate. The recorded program will also be available in CD-ROM format after the live presentation.   

Wednesday, June 8, 2011

IRS Publishes List of Automatic Revocations for Failure to File Form 990

The IRS announced today that it has published the list of organizations whose exemptions have been automatically revoked due to failure to file Form 990, 990-EZ or 990-N for three consecutive years. (See our previous discussions here, herehere and here.) The names of  the approximately 275,000 organizations are available on the IRS website, Automatic Revocation of Exemption List, with separate spreadsheet lists available by state. [UPDATE - As Sandy Deja notes in the comments, the number of total organizations on the revocations list is now upwards of 330,000.]

The Service has also published several notices and procedures today along with the announcement of the revocations list in order to provide some guidance and relief to those organizations that have had their exempt status revoked. Below are summaries (and certainly not exhaustive) of the main points in each document.

Revenue Procedure 2011-33 (pdf)- This Rev. Proc. provides that donors to organizations listed in Publication 78 or the Business Master File may rely on that listing to support a charitable contribution deduction for a donation made on or before the date of a public announcement that the organization has ceased to qualify as an organization to which deductible contributions can be made under IRC section 170.  As applied to those organizations whose exemption is being revoked for failure to file a Form 990, 990-EZ, or 990-N  pursuant to IRC section 6033(j), deductions will be allowed for contributions made on or before the date of publication of the revocation list.  However, the Rev. Proc. also notes that the IRS may disallow a deduction where the donor 1) had knowledge of the revocation prior to publication, 2) was aware that the revocation was immanent, or 3) was partly responsible for or aware of the organization's activities and deficiencies that gave rise to the loss of qualification.

Revenue Procedure 2011-36 (pdf) - This Rev. Proc. provides a reduced filing fee of $100 for certain small organizations that have had their exempt status revoked under section 6033(j) and are re-applying for exemption. These organizations must normally have annual gross receipts of $50,000 or less and otherwise qualified  for transitional relief under Notice 2011-43. The organization's application (Form 1023 or Form 1024) must be postmarked by December 31, 2012.


Notice 2011-43 (pdf) - This Notice provides "transitional relief" for small organizations that failed to file the Form 990-N (e-Postcard) for the three consecutive years 2007, 2008, and 2009. In addition to the reduced filing fee noted in Rev. Proc. 2011-36, this notice provides that these small organizations will be treated as having established reasonable cause for failing to file and their exempt status will be reinstated retroactive to the date of automatic revocation. In order to qualify, the organization must:

  • Not have been required to file Form 990 or 990-EZ for tax years beginning before 2007
  • Been eligible to file Form 990-N for 2007, 2008, and 2009
  • Submit its application for reinstatement for exempt status by December 31, 2012.
Notice 2011-44 (pdf) - This Notice gives the process and procedures for organizations other than those small organizations to which Notice 2011-43 and Rev. Proc. 2011-36 apply. Generally, these organizations must apply for reinstatement of exemption by submitting a Form 1023 or Form 1024 with the full user fee. They should write "automatically revoked" at the top of the application and on the envelope. If the organization is seeking to have its exempt status reinstated to the date of revocation, it must request reinstatement by including:
  • A statement statement supporting the claim of reasonable cause for fialure to file and the steps taken to avoid or mitigate such failures
  • A statement describinig safeguards the organization has put in place to ensure that the organization will not fail to file returns in the future.
  • Any evidence to substantate the above statements
  • Properly completed and executed information returns for those years that the organization failed to file. 
  • Properly completed and executed Form 990-EZ returns for those years the organization was eligible to file Form 990-N and failed to file.
  • A declaration signed under penalty of perjury by an officer, director, trustee or other official.
The Notice goes on to explain what the "reasonable cause" standard of care is for failure to file returns, noting that:
[A]n organization requesting retroactive reinstatement must provide evidence that it exercised ordinary business care and prudence in determining and attempting to comply with its reporting requirement under section 6033 for each of the three years and over the entire three-year period, but was nevertheless unable to file the required returns or notices for three consecutive years.
Needless to say, that's a pretty high standard. It should also be noted that, in order to have the exemption reinstated back to the date of automatic revocation, the Form 1023 or Form 1024 must be filed within 15 months of the IRS's revocation letter or the posting of the organization's name on the revocation list on the IRS website.

Monday, January 17, 2011

Upcoming: 3 ABA Webinars on Nonprofit Legal Issues

The ABA Business Law Section's Committee on Nonprofit Organizations, in conjunction with the Section of Taxation's Exempt Organizations Committee, is sponsoring a three part webinar series on nonprofit legal issues. This series is intended for lawyers whose practice does not focus on nonprofits but who either represent public charitable nonprofits or sit on nonprofit boards. It also is a great refresher for lawyers who regularly work in the nonprofit area. Each program will provide practical advice for addressing important nonprofit legal issues.

The topics are as follows: Nonprofit Formation Issues (January 19), Tax Issues for Nonprofits (January 26) and Nonprofit Governance Issues (February 2).


Lisa Runquist will speak on the Nonprofit Formation program on January 19 and  on the Nonprofit Governance program on February 2.

IRS Increases Form 990 Filing Threshold; California, Not Yet...

Some exempt organizations that previously were required to file Form 990/990-EZ may now file the short "e-postcard" Form 990-N. The IRS announced last week that, pursuant to Revenue Procedure 2011-15 (pdf), small exempt organizations whose gross receipts are not normally more than $50,000 are relieved from the requirement for filing Form 990 (which includes the Form 990-EZ). The previous filing threshold had been $25,000. Regardless of their gross receipts, all supporting organizations must file Form 990 (or 990-EZ), all private foundations must file a Form 990-PF, and churches and their related entities are not required to file informational returns.

While this is a welcome change, insofar as it reduces the filing burden for many organizations, it may create some confusion for California exempt organizations, since the filing threshold for the Form FTB199 is still set by law at $25,000.  It should also be noted that, effective for tax years beginning on or after January 1, 2010, small tax-exempt organizations in California with gross receipts normally equal to or less than $25,000 must file FTB 199N, the California e-Postcard similar to Form 990-N.

Thus, if an organization normally has gross receipts less than $25, 000, it will be able to file both Form 990-N and Form 199N. However, if it has gross receipts less than $50,000 and more than $25,000, it may file Form 990-N, however it will still be required to file the full Form 199.  Since any organization may file a complete Form 990, organizations in this situation may decide to file both Form 990 (or Form 990-EZ) and Form 199.

Sunday, January 9, 2011

Grassley Staff Reports of Media-Based Ministries

On January 6, 2011, the staff of Senator Chuck Grassley issued several reports regarding six "media-based ministries", including those run by Joyce Meyer, Benny Hinn, Creflo Dollar,  Eddie Long, Paula White, and Kenneth Copeland.  These reports are the result of an investigation of these churches begun in November 2007, when Senator Chuck Grassley issued letters of inquiry to them in response to reports he had received that the leaders of these organizations had been engaging in some extravagant spending, such as buying a private jet, driving a Rolls Royce or Bentley, or installing a $23,000 commode. Senator Grassley expressed concern that perhaps the tax-deductible contributions to these organizations were being misused to support luxury lifestyles. The senator requested information from these organizations regarding the compensation of pastors and other individuals associated with these churches.  Two of the organizations, Joyce Meyer and Pastor Hinn, complied fully with Senator Grassley's request. The remaining four either did not respond, or provided incomplete responses. The staff summary memo, together with reports on each of the individual ministries and correspondence between Senator Grassley and the Evangelical Council for Financial Accountability (ECFA) are available on the Senate Finance Committee website.

These reports are likely to initiate further inquiry and could lead to new legislation with regard to the federal oversight of not just of religious and church entities, but of all 501(c)(3) tax-exempt organization.  The staff summary memo raises several issues in regard to reporting and accountability of churches, as well as the standards applicable to all charitable organizations. 

In particular, Appendix C of the staff summary memorandum (pdf)  raises the following issues:
  • Whether there should be a federal advisory committee for churches and religious organizations.
  • Whether the parsonage allowance under IRC 107 should be limited to a single residence or a specific dollar amount, or whether it should be limited to a more select group of individuals.
  • Whether churches should be required to make some kind of informational return filing requirement. 
  • And whether the "church tax inquiry" protections of IRC 7611 should be removed in regard to excess benefit transactions.
Appendix D raises several issues which impact all 501(c)(3) organizations, including:
  • Whether all 501(c)(3) organizations must include specific language in their organizational documents prohibiting engaging in acts of self-dealing (currently only private foundations are required to do so)
  • Whether a penalty tax should be imposed on charitable entities where there has been an excess benefit transaction. 
  • Whether the rebuttable presumption of reasonableness for transactions should be replaced with minimum standards of due diligence. 
  • Whether guidelines should be developed for compensation studies used to set reasonable compensation under the rebuttable presumption standards. 
  • And whether the practices of "love offerings"should be excluded from gross income of a recipient when a charitable organization has facilitated the offering. (A practice mainly seen in religious organizations)
Finally, Appendix E of the report addresses whether the electioneering prohibition should be eliminated or circumscribed.  It is worth noting that political activity was not a significant issue raised in regard to the 6 media-based ministries. Nevertheless, the staff proposes either replacing the prohibition with a limitation similar to the lobbying restrictions on 501(c)(3) organizations, or retaining the prohibition, but defining "participate in" and "intervene in" a political campaign in terms of federal election law.

The individual reports of the 6 media-based ministries suggest that at least some are taking advantage of their religious and a tax-exempt status in order to provide personal benefits to the individuals who are running them.  As part of the process and in order to initiate further action, Senator Grassley has formally asked the ECFA to consider the issues raised by his staff and spearhead a discussion about how to address those issues.  ECFA has begun to establish an independent commission to review and provide input on major accountability and policy issues affecting church and religious organizations.