BCLP Charity Law

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Artists Seeking Grants – The Laws That Govern Givers

As government funding of private arts and education shrinks, grants from private foundations become more competitive.  There are many legal factors that affect foundations’ decisions to give away money. The laws can be very complex, but the following primer can help artists direct their energies when choosing foundations and crafting their applications:  Team Publication (Artists Seeking Grants – The Laws that Govern the Givers of the Grant).

Credit Card Rebates (aka Points) Eligible for Charitable Deduction

July 13, 2010

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The IRS recently decided, in PLR 201027015, that a taxpayer who directs her credit card “rebates” to a charitable organization is not required to include the amount in gross income and is entitled to a charitable deduction.

The facts are simple: taxpayers make purchases using their credit cards and as a result of the purchases, they earn “rebates.”  These rebates equal 1% of the taxpayer’s purchases, and the taxpayer can either receive cash back or direct the cash to a charitable organization.  The IRS holds that these rebates are not includable in the taxpayer’s gross income becase these “rebates” are adjustments to the purchase price paid for the item.  The problem is: what item??  Presumably the taxpayer purchased several items from several different retailers.  These facts are clearly different from the cell phone company who charges “$50” for my phone by making me pay $200 up front and requiring me to

Overview of Form 990 Governance Policies

The Form 990 includes numerous governance and management questions.   A brief summary of the more significant governance and management questions are provided below. The IRS has indicated that, although a negative response to a question on the Form 990 will not necessarily result in an audit, the IRS will use such negative responses in conjunction with other information on the Form 990 to determine whether further inquiry is necessary.  It is important for the leadership of public charities to become familiar with these provisions and should analyze each of the following:

  • Records Management Program – Form 990 asks whether the organization has a written document retention and destruction policy. Nonprofit corporations should adopt a document retention and destruction policy, along with a records retention schedule, utilizing the standards under Sarbanes-Oxley, 18 U.S.C. 1512(c), and the new Federal Rules of Civil Procedure regarding e-Discovery, Fed. R.

Here’s the Cheese, but Forget the Wine

July 11, 2010

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The IRS, in PLR 201025078, denied exemption under section 501(c)(7) to a winemaking club.   The club was formed for the specific purpose “to encourage the appreciation of winemaking, promote the responsible use of wine, educate wine tasters and home wine makers, and to promote and support the healthful creation of wine made without sulfites.”  Although the club, had it been properly managed, could have qualified under section 501(c)(3) as an educational organization, the club failed to qualify as exempt under any section due to its commercial nature.  Specifically, the club allowed anyone to become a “member” for a fee, didn’t allow its “members” any actual rights, and didn’t allow its “members” enough socializing amongst each other.  Perhaps if the wine club had been more exclusive in its membership and hosted more parties among its members, the IRS would have granted exemption.  Of course, the club should have also considered adding a few more disinterested board members and

Fertility Clinic not so Fertile (or Exempt)

July 10, 2010

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In Free Fertility Foundation v. Commissioner, the Tax Court affirmed the IRS’ denial of 501(c)(3) status to The Free Fertility Foundation—an organization that provides its founder’s sperm “free of charge to women seeking to become pregnant through artificial insemination or in vitro fertilization.” Interestingly, the court stated the “free provision of sperm may, under appropriate circumstances, be a charitable activity.” But The Free Fertility Foundation did not qualify because the class of potential beneficiaries is “not sufficiently large to benefit the community as a whole.” After all, the class of potential beneficiaries is limited to those that want the founder to be the biological father of their children. Further, the founder and his father choose recipients from applicants based on a “very subjective, and possibly arbitrary” process that includes a questionnaire on topics such as an applicant’s education, ethnicity, geographic location, fertility history and contribution

IRS Issues Final Regulations on Prohibited Tax Shelter Transactions

July 9, 2010

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The IRS has issued final Regulations under Section 4965 on excise taxes for prohibited tax shelter transactions involving tax-exempt entities and on related disclosure obligations and filing requirements.  The final Regulations may be view using the following link:  http://www.irs.gov/pub/irs-tege/4965fregs.pdf

Form 1023 – To File (Now) Or Not To File (Wait), That Is The Question

The date when an organization files its IRS Form 1023 application for federal tax-exempt status has an effect on the date the organization will be considered tax-exempt under Section 501(c)(3). If an organization files Form 1023 within 27 months after the end of the month in which it was legally formed, and the IRS approves the application, the effective date of Section 501(c)(3) status will be retroactive to the date of formation. If an organization does not file within 27 months of formation, Section 501(c)(3) status is generally effective as of the date it files the Form 1023 application (the postmark date).

For organizations with gross receipts exceed more than $10,000 annually, the U.S. Department of Treasury generally requires a fee of $850 to process a Form 1023 application (for organizations with gross receipts do not exceed $10,000 annually, the fee is $400). However, the IRS has been developing an

Rare IRS Guidance Regarding Single-Member LLCs

The IRS recently released an Information Letter (2010-0052) regarding the tax treatment of a single-member limited liability company (SMLLC) the sole member of which is a public charity.  The IRS confirmed the well-accepted position that a SMLLC is a “compontent part” of the exempt member which must treat the operations of the SMLLC as a branch or division.  The IRS went on to confirm that the SMLLC “receives the benefit of its owner’s tax-exempt status, including exemption from federal income tax, federal unemployment tax, and other federal taxes where applicable” but noted that a SMLLC is subject to certain federal excise taxes and employment taxes. 

The IRS also confirmed that a grant from a private foundation to a SMLLC the sole member of which is a public charity would be treated as a qualifying distirbution  and not a taxable expenditure, and expenditure responsibility generally will not have to be exercised by the private foundation.  The

Conduit Foundation Status – A Missed Opportunity for Private Foundations

Corporate and family sponsored charitable organizations typically qualify as private foundations because most of their support is provided by the sponsoring corporation or family. Under these circumstances, sponsoring corporations and individuals often limit their donations to cash contributions since the deduction for contributions of appreciated property to a private foundation is generally limited to the cost basis in the property. If the private foundation can qualify as a “conduit” foundation in the year of contribution, however, the amount of the charitable deduction with respect to a donation of appreciated property may equal the fair market value of such property, assuming there is no depreciation recapture with respect to the property.

A private foundation can qualify as a conduit foundation if it (a) satisfies the minimum distribution requirements for the current and all prior years and (b) makes additional distributions in an amount equal to

Medium-Sized Charities – It Is Time To Prepare For The New Form 990 Now

July 5, 2010

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The Form 990 was substantially revised in 2008.  To allow charities time to prepare, only charities with gross receipts ≥ $1 million, or total assets ≥ $2.5 million, were required to file the new Form 990 in 2008 (small and medium sized charities were required to file Form 990-N and Form 990-EZ, respectively).  The filing thresholds were reduced for 2009, and for the 2010 tax year and beyond, were further reduced and are established as follows:

  • Form 990 – Gross receipts ≥ $200,000, or total assets ≥ $500,000
  • Form 990-EZ – Gross receipts < $200,000, and total assets < $500,000
  • Form 990-N – Gross receipts normally ≤$50,000

As a result of these filing thresholds, many medium-sized charities must now prepare to file the new Form 990 in 2010.  The new Form 990 will require such charities to gather and disclose substantially greater information than before.  We strongly recommend that medium-sized charities become familiar with the new Form 990 now

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