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Charities and Life Insurance – A Growing Trend?

Life insurance has always been an important part of charitable giving.  Although there are legitimate uses, over the years the IRS has identified certain abuses regarding the use of life insurance in charitable planning.  In our practice, we have seen a recent surge in charitable planning techniques involving life insurance.  Before your charity accepts a gift of life insurance, you should consider several issues, including the following:  (1) the application of Section 170(f)(10), the so-called “charitable split-dollar rules” (which, if applicable, impose an excise tax on the charity equal to 100% of the premium payments), (2) applicable state insurable interest laws, (3) private inurement, private benefit, and excess benefit rules, (4) unrelated business income rules (and debt-financed income rules, to the extent the life insurance was acquired with borrowed funds), (5) the partial interest rules (impacting both the income and gift tax deduction of the donor), (6) I.R.C. § 4944, the jeopardizing investment rules, and I.R.C. §

Don’t Forget to Maintain Donation Records

September 2, 2010


In order to be entitled to a charitable deduction for cash donations, a donor must maintain records providing evidence of the donation.  For example, for tax years after August 17, 2006, a donor must maintain a bank record or a written receipt from the donee showing the name of the donee organization, the date of the contribution, and the amount of the contribution in order to deduct any contribution of cash, check, or other monetary gift (additional rules apply for donations of $250 or more).

The Tax Court re-emphasized the strictness of this requirement in a recent case.  In Fessey v. Comm., T.C. Memo. 2010-191 (Aug. 30, 2010), the taxpayer alleged that he donated $920 in cash in 2004 to a church by way of $20 weekly cash donations made to the church’s offering plate.  The taxpayer provided the Court with a computer printout listing the date, amount, and recipient of his donations.  However, the taxpayer did not produce a receipt or any form

FAQs for Delinquent Form 990 Filers

August 30, 2010


FAQs for Delinquent Form 990 Filers

August 30, 2010

Authored by: Keith Kehrer

The IRS just released “Frequently Asked Questions” regarding its one-time relief for charities that face automatic revocation of tax-exempt status for failure to file Form 990, Form 990-EZ, or Form 990-N. As we discussed in our July 26 post, the IRS is providing limited relief to small charities that failed to file Form 990-EZ or Form 990-N for the past three years. The IRS estimates more than 300,000 charities may lose their tax-exempt status but is giving charities until October 15, 2010 to file the delinquent Form 990-EZ or Form 990-N and maintain tax-exempt status. The IRS released the Frequently Asked Questions, which may be accessed by clicking here, to provide additional information regarding this one time relief.

Change Your Activities? Don’t Forget to Tell the IRS

August 27, 2010


When a charity significantly expands or changes its activities, it must inform the IRS by disclosing the activities on its next filed Form 990.  The Form 990 includes questions regarding whether the filing charity has undertaken any significant activities not listed on a prior Form 990, whether the charity ceased conducting, or made significant changes in how it conducts any activities, and requires the charity to describe the changes in an attached schedule. The Form 990 also asks whether the charity made any significant changes to its articles or bylaws, and requires such documents be included with the Form 990.  Although disclosing the changes on the next Form 990 satisfies a charity’s obligation to update the IRS, it does not provide any comfort that the new activities do not jeopardize the charity’s exempt status because there is no guaranty any IRS agent will review (or approve) such changes.  

In addition to Form

Facing Late Filing Penalties – Don’t Despair (At Least Not Right Away)

August 22, 2010


Many small and medium sized charities are run almost entirely by volunteers and have little or no paid staff. It is not unusual for such charities to inadvertently fail to timely file Form 990 or Form 990-EZ. The IRS imposes a penalty of $20 a day for failure to timely file Form 990 or Form 990-EZ. The IRS will send a penalty letter to late-filing charities imposing the penalty with interest. Where the charity can show reasonable cause, however, we have had success convincing the IRS to abate and refund the late-filing penalty. For example, if the charity has a history of compliance, is run by volunteers (or has little or no paid staff), and puts procedures in place to ensure future compliance, the IRS has been willing to abate and refund the penalty. Although there can be no guaranty, if your charity is faced with a late filing penalty, contact your

Board Duties Part III – Duty of Obedience

August 12, 2010


The first and second installments of this series briefly discussed the duty of care and the duty of loyalty.  A third duty fiduciary duty imposed on charity board members is the duty of obedience (although some characterize the duty of obedience as a sub-set of the first two duties).  To satisfy the duty of obedience, a board member must act with fidelity, within the bounds of the law, to the charity’s mission as expressed in its Articles and Bylaws.  Therefore, it is important for every board member to carefully review the Articles and Bylaws, understand the charity’s mission, and consider this mission when making board decisions.

Board Duties Part II – The Duty of Loyalty

August 10, 2010


In the first installment of this series on board duties, we briefly discussed the fiduciary duty of care.  This second installment briefly discusses the fiduciary duty of loyalty.  To satisfy the duty of loyalty, a board member must act in the interest of the charity, and not act in their own interest or that of another person or entity.

The duty of loyalty primarily relates to conflicts of interest, corporate opportunity, and confidentiality. A conflict of interest is present whenever a director has a personal interest, whether direct or indirect, in connection with any proposed contract, arrangement or transaction. The mere presence of a conflict of interest, however, does not necessarily render a transaction void or voidable, or expose a director to liability.  When faced with a potential conflict of interest transaction, the board should consult the Internal Revenue Code (IRC Section 4941 or IRC Section 4958) and applicable state

Board Duties Part I – The Duty of Care

The board of directors of most charities are made up of good-hearted volunteers who are passionate about the charity’s exempt mission and eager to donate their time and experience.  Before agreeing to serve, however, a potential board member must understand the fiduciary duties that they will owe to the charity as a member of the board, including the duty of care, duty of loyalty, and duty of obedience.   The following is a brief overview of the duty of care.  A brief discussion of the duty of loyalty and duty of obedience will follow in subsequent blog entries.   

To satisfy the duty of care, a board member must discharge his or her duties as a director in good faith, with the care of an ordinarily prudent person and in a manner the director reasonably believes to be in the best interests of the charity.  This means, among other things, the director should

Charitable Gaming Overview

Charitable Gaming Overview

August 2, 2010

Authored by: Keith Kehrer

As contributions and grants have decreased, many organizations must get creative to raise the necessary funds to further their exempt purposes.  One common method of raising additional funds includes gaming activities, such as raffles, sweepstakes, contests, and 50-50 drawings.  Before engaging in any gaming activities, however, it is critical for your organization to analyze applicable state and federal law.   For example, certain gaming activities are strictly prohibited under state law (e.g., such activities may constitute an illegal lottery).  Certain gaming activities may be permitted but are often limited to specific organizations, such as Section 501(c)(3) organizations.  In addition, most states impose registration, licensing, and reporting obligations before an organization may conduct gaming activities.  It is important to consult with a professional familiar with each applicable state’s laws before conducting gaming activities. 

With respect to federal tax law, the IRS warns that “[a]ll exempt organizations conducting or sponsoring gaming activities, whether for one night of the year or throughout the year … must

Should your nonprofit organization obtain D&O Insurance?

July 28, 2010


We frequently get asked by new and existing nonprofit organizations about directors and officers liability insurance (“D&O Insurance”). Should you obtain coverage? Is it worth the cost?

Yes, you should explore obtaining D&O Insurance. If you want to recruit high-quality directors, you may find that they will not serve on your board without seeing a copy of your policy. They want to know that they will be protected. In addition, their employers may not allow them to serve on your board unless you have D&O Insurance.

On a related note, you might also want to review your organizational documents for provisions that indemnify your directors and officers against certain acts. The same potential directors who want to see a copy of your D&O Insurance policy may also want to see your indemnification provisions.

There are a number of organizations, some of them nonprofit themselves, that provide affordable D&O Insurance to