Get Ready for Machine-Readable Form 990s

There is a significant technological advance coming down the pike in connection with the IRS Form 990, the  all-important information return required for many tax-exempt organizations. Machine-readable Form 990’s (Modernized E-file, “MeF”) will reportedly be launched in the next month or so. The significance of this innovation is that this method makes it possible to electronically search for data, making it much “easier to study and review the” information contained in” these returns.

Court Case Ruling

As with most new advancements related to the IRS, this development did not come about without an outside push. Early last year, a government transparency advocacy organization,, made a Freedom of Information Act (FOIA) request for nine Forms 990 in the MeF format, “which is readable by computers and which the IRS uses to process the forms.”
Since Forms 990 are considered public record, they are subject to FOIA requests.  “The IRS currently handles FOIA requests by converting paper forms of the Form 990 into an image file format, a file type that makes it difficult for users to search specific fields online. Electronically filed Form 990s are converted into images as well because the IRS has to remove personally identifiable information from all Forms 990 before it distributes them.” Some nonprofits are required to file electronic returns, but many others have the option of filing either electronically or by paper documents. argued that ordering the IRS to use an MeF file “would enhance the public’s ability to review and study the data contained” in the requested Forms 990.” When  the IRS did not comply. filed suit in federal court in California, alleging that the tax agency’s refusal to release the requested 990s in MeF format violated the requirements of the Freedom of Information Act.”  
Federal judge William H. Orrick considered but rejected the IRS’ argument that its “policy of producing Forms 990 … in an image-only format complies with the FOIA.” The agency argued that it was cost-prohibitive to convert the filed 990s to the machine-readable format. Judge Orrick ruled that the IRS “must hand over electronic documents in a machine-readable format, because the “alleged burden of the cost of training staff, developing new protocols and redacting the Forms 990, which the IRS receives and stores in MeF format, was not a compelling argument.”  
The Internal Revenue Service implemented its current method of redacting data from Forms 990 back in 1998, years before the introduction of electronic filing. The tax agency receives almost 800,000 information returns each year from exempt organizations. It spends $1.3 million processing them for disclosure in PDF format. had argued in its moving papers that “releasing the tax-exempt returns in MeF format would actually  increase the IRS’ ability to redact confidential information.”
The attorneys representing hailed the decision, noting that “[t]is ruling will go a long way to change the practices at the IRS and encourage all federal agencies to make their records available in useful electronic formats,” and that “doing so will reap benefits for everyone.”  
And it’s “not just the courts that are asking the IRS to become more open to digital use of the Form 990. The IRS Advisory Committee on Tax-Exempt Organizations and Government Entities (ACT) recently recommended the IRS make filing Form 990s electronically mandatory for all not-for-profit organizations.”

Implications for Exempt Organizations

This is a wake-up call for any organization that takes the Form 990 for granted or believes that the information return can be slapped together without serious preparation. Since much of the information on Form 990 is a matter of public record,  it’s always been important to accurately and carefully complete this document.
With the advent of this machine-readable format, far more information will be available – much more easily – to “enterprising reporters, watchdog groups, and many others [who] will be able to use the new format to more easily aggregate data about the sector – and potentially expose bad actors/behavior.” It will be easier to compare nonprofits, too.
Nonprofit advisors and experts have long advised exempt organizations to treat the 990 “as a public relations document.” The information contained in the 990 can be a valuable way to attract donors, grants, and supporters, and to show these third parties that the Organization “can effectively manage its financial resources.”


“Not-for-profits should prepare now for more scrutiny on their returns. Verify that the information you include about your organization accurately displays the mission and scope of your organization to the public and to other not-for-profits.”

Lessons in Charity Governance, Courtesy of Sweet Briar and San Diego Opera

In the spring of 2015, we followed with keen interest two developing stories about major community institutions that were suddenly threatened with immediate closure: Virginia’s Sweet Briar College and the San Diego Opera.  We watched as these institutions’ supporters rallied to oust the leadership that had proposed these unexpected and undesirable courses of action, and and how those dissenters saved the day(s).
There are certain interesting parallels in the two cases as well as some clear distinctions, but observers in the philanthropy community agree that these were fascinating case studies with important lessons for charities and their boards.

New Leaders Share Thoughts

Some six months after these situations were resolved – and catastrophe averted – Nonprofit Quarterly’s editor Ruth McCambridge sat down with the two key women who played a role in saving these venerable community institutions and are now leading them into the future. The webinar featuring Sweet Briar College’s Teresa Tomlinson and San Diego Opera’s Carol Lazier was lively and full of important insights for charity boards of directors, large and small. Vernetta Walker, Vice President of Programs and Chief Governance Officer for BoardSource was also a panelist. Here, we’re highlighting a few of the key themes raised by both organization leaders.
For background, take a look at “Sweet Briar College: Saved – At Least For Now,” and “Drama at the San Diego Opera: A Dynamic Different Than Sweet Briar.” In each instance, a strong executive bolstered by an insular executive committee, decided that the financial viability of the organization was in such severe jeopardy that the only option was to shutter the operations within several months.  
There had been some advance planning by these insiders, although they told no one outside the inner circle. Both in Sweet Briar and San Diego, an emergency special meeting of the board of directors and called, and with no advance information, the directors were told that the institutions must be closed.
Both boards felt blindsided, but voted to approve the action.
In the Sweet Briar situation, it was the students, faculty, staff, and alumnae who rallied to fight, and save the College. Leadership held firm, and fought the dissenters in court. This high-profile community battle was settled in mediation within about 3 months, but not before the Virginia governor, attorney general, and Supreme Court got involved. Teresa Tomlinson, who was a key figure in leading the opposition, emerged as the new Board Chair.
In the San Diego case, a substantial number of the board members had immediate buyers’ remorse, changed their votes, and – along with strong community support – ousted the entrenched leadership. Carol Lazier was a board member who led the dissenters-turned-new board majority, and is now the President. 
Both organizations are open for business.

Issues Raised by Panelists

  • Be Wary of Vanity Board and Top-Down Management by Insiders

Both panelists were quick to point out that their impressive-on-paper boards were actually “vanity boards” (also sometimes called “potted plant” boards or “bobble-head” boards). Directors were passive and/or did not understand their fiduciary responsibilities to ask questions and demand information – especially concerning finances which was the purported reason why the insiders insisted there was no choice but to close down operations.
Moreover, insiders (the CEO, board chair, and executive committee) apparently wanted it that way. The insiders’ management style was top-down, secretive, and uncommunicative. This was especially true at the San Diego Opera, where the brilliant and charismatic Ian Campbell directed both the artistic and the organizational aspects of the group. Because of his vision and expertise, board members (and staff) felt that he likely knew best, and were they hesitant to question his decisions, including his “my way or the highway” attitude.
In addition, the organization was structured to perpetuate this closed management group. There was too much formal power vested in the key insiders, supported by management/executive committees with too much authority and discretion.

  • Reform Governance Documents and Policies

Once the old leadership was ousted at Sweet Briar and at the San Diego Opera, the new board (comprising opponents of the “we have to close down immediately” insider faction) set out to formalize the change from an insider-controlled, top-down management structure to a more open and balanced governance structure. They are rewriting bylaws and policy documents, divesting executive committees of too much concentrated power, and formalizing a plan of more meetings and a better, regular flow of information.  They are reformulating mission statements, holding “listening tours” and avoiding a “we know best” management culture.
These new structures include staff and stakeholder input and participation.

  • Recognize the Value of Stakeholders and Networks

For both Sweet Briar College and the San Diego Opera there were important, natural networks of interesting parties and supporters who were ignored by former management. Even if the financial problems were – indeed – dire, there was little or no outreach to these groups for help.  The attitude towards these built-in networks was they are “too much time and trouble.”
But when the dissidents took over the reins of power, in each case they used these networks immediately and effective. For Sweet Briar, there were devoted students, staff, alumni, and members of the local community who spearheaded the drive to “Save Sweet Briar,” and came through with financial and other support. The local and Virginia press at first took the side of the insider group, but were persuaded by these stakeholders to come over to their side. The “Save Sweet Briar” group effectively harnessed the power of social media and energized powerful stakeholders like successful alumnae who were able to come through with needed money.
In San Diego, the allies were the community at large, the press, and the employees and artists who were surprised and outraged at the decision to close down the Opera after fifty years. Social media worked here, as well; a crowdfunding campaign took off quickly and exceeded the original goal.


The panelists agreed that the actions of the new leadership not only changed the outdated, rigid, and ineffective governance structures of these organizations, but also brought these groups in line with 21st century expectations of how operations like these should run. In particular, the various stakeholders are now used to a more open, egalitarian style of operation – and they expect to have input and recognition.

Private Museums Targeted by Senate Finance Committee

The tax-exempt status of certain high-profile private museums have become the target of an inquiry by the Senate Finance Committee. The issue is whether they are providing enough public benefit to justify the benefits of exemption under Section 501(c)(3) of the Internal Revenue Code and the related charitable deductions.
In November 2015, Finance Committee Chairman Senator Orrin G. Hatch (R-UT) sent letters to a number of “small galleries” around the nation. The information sought includes items like identification of directors, donations, collection valuations, loans of artwork, and visiting hours that the premises are open to the general public.
GOP staffers on the Finance Committee indicated that the questions are part of a larger effort by Senator Hatch to reevaluate several categories of institutions that have long enjoyed the substantial tax benefits of Section 501(c)(3) status. The list includes private universities and organizations that call themselves museums.
According to Senator Hatch, “[t]ax-exempt museums should focus on providing a public good and not the art of skirting around the tax code.” He added: “While more information is needed to ensure compliance with the tax code, one thing is clear: Under the law, these organizations have a duty to promote the public interest, not those of well-off benefactors, plain and simple.” Acknowledging that “charitable organizations have an important role in promoting good in our society,” he nevertheless wonders whether “some private foundations are operating museums that offer minimal benefit to the public while enabling donors to reap substantial tax advantages.”

What Prompted the Concern?

In a lengthy, detailed feature article earlier in 2015 in the New York Times, questions were raised about so-called private museums “created by wealthy art collectors, sometimes in their own backyards.”  They apply for and receive 501(c)(3) tax exemptions, but then operate in a manner more like a personal gallery – having only limited public access, closing for months at a time, and avoiding signs and publicity.
One such institution was featured in that earlier article:

The Brant Foundation Art Study Center — a picturesque gallery space inside a converted 1902 stone barn — is just down the road from the Greenwich, Conn., estate of its creator, Peter M. Brant, the newsprint magnate and avid art collector. There are no identifying signs for the center, whether at the turnoff on North Street, at the security gate or on the building itself, though the location is known to the art-world cognoscenti and celebrities who attend the twice-a-year gala openings, held at the private polo club next door that Mr. Brant also founded. Visits to the center itself are by appointment only.

The art market is very hot, and many high-net-worth people see that transferring their personal art collections to private foundations or “museums” that they create could be a way to try to reduce their tax liability.

Targets of Finance Committee Letters

Among the recipients of the Finance Committee’s inquiry letters in November was the Brant Foundation Art Study Center featured in the New York Times feature piece. Another target is the Glenstone Museum in Potomac, Maryland, featured as well in that New York Times article in January 2015. Like the Brandt museum, the Glenstone has limited public access by appointment only and is located adjacent to the wealthy art collectors’ home. A letter was sent as well to Eli and Edythe Broad’s new $140 million art museum in downtown Los Angeles, which doesn’t fit into this same category of small, out-of-the-way private museums.


In every presidential election year, there is some lip-service given to tax policy reevaluation. Whether this is part of that cyclical lip-service to revamping the tax code remains to be seen.
Although the IRS considers this a valid issue – that is, a question of meeting the organization and operational test of section 501(c)(3) and not violating the Private Benefit Rule – the rules are somewhat vague and imprecise. Nevertheless, the explosion of these “private museums” in the last several years may spur action by the Internal Revenue Service or by Congress.

Alzheimer's Association Tries to Consolidate, But Splits Apart

Recently, the Chicago-based Alzheimer’s Association embarked on a strategic change of course to fully integrate its independent chapters nationwide into a single charitable organization. There were some unexpected consequences, though, that may have lessons for other affiliated groups. Instead of uniting – as the national board planned – chapters are starting to peel off and go it alone.

Merger Plan Proposed

Nationwide, many charitable organizations are structured with affiliates or chapters in various forms of confederation. It’s not a one-size-fits-all plan.
Some charities choose to be strongly tied together; the national organization files for a group tax exemption, and the chapters operate under the umbrella of that group ruling. Others are more or less loosely affiliated; chapters may be “independent.”
The Alzheimer’s Association has the latter structure. At the time of its recently announced merger plan, called “Mission Forward,” it  had already merged 27 formerly independent chapters into the national association. With the proposed new merger agreement, the national board hoped to bring the more than 50 remaining independent chapters into one single charity. The board touted the merger “as a way to sharpen its attack on a fast-growing disease that affects more than 5-million Americans.”
Early on, there was a lack of unanimity about this proposal. “Only half of the then 54 independent chapters voted in favor of the consolidation in early fall, shortly before the national board voted unanimously to move ahead with the plan.” In particular, the local groups have been worried they will “ lose control over their local assets and programs.”

Chapters Drop Out of Merger Plan

First, in early December, the New York chapter decided to leave. A few days later, two more – Orange County and San Diego/Imperial County – decided to bolt. These Southern California affiliates feared that “the consolidation plan would jeopardize the local services they provide to Alzheimer’s patients and their caregivers.”Also, on December 18, 2015, the Greater New Jersey affiliate voted to separate. Each of these four affiliates had voted against the Mission Forward plan earlier in the fall.
“Simply hearing ‘We don’t plan on major changes’ isn’t great when you’re handing them the keys to the store,” said Jim McAleer, president of the former Orange County chapter, now called Alzheimer’s Orange County.
Mary Ball, head of the San Diego/Imperial County affiliate, commented :”When you look at the merger agreement, it’s fairly clear that the national association in Chicago will have all the control.” Under the restructuring, 100 percent of donations would go to the national organization, and chapters would be required to dissolve their independent boards.  “Chapters did not have a meaningful say in the decision,” according to a statement released by the San Diego area group.
Three of these organizations already have new names and websites: Alzheimer’s Orange County, Alzheimer’s San Diego, and Alzheimer’s Greater New Jersey.  The New York City chapter is expected decide on a new name this month.
These four chapters accounted for almost $18 million in total revenue in the most recent fiscal year (2014): New York City, $7 million; Orange County, $4.5 million, Greater New Jersey, $3.3 million, and San Diego, $3.1 million. The organization’s total reported revenue for 2014 was approximately $273.
Stewart Putnam, the chairman of the board of the national association, said that “he’s heard from about a half-dozen affiliates that committed to continuing with the organization,” but “he still expects the “vast majority” of the independent chapters to join the unified organization.
However, more affiliates are expected to split off from the national organization in the coming weeks.


The Orange County group indicated in a letter to the national organization that it “had a great relationship with the national organization”and “[t]here was nothing derogatory in any way in our decision” to disaffiliate.
“Hopefully, like any divorce, it’s one that can be done as smoothly as possible,” said Mike Lancaster, Orange County’s board chair. “We know the accounting aspects that need to be flushed out, know the particulars of what we need to do. Those are being done, hopefully done in very open and good fashion, and not any animosity.”
But the national’s Stewart Putnam, indicated that he is “committed to introducing [the national organization’s] services in areas where chapters disaffiliate.”  
In split-ups like this, there are going to be questions about money, property, and – of course – who will get custody of the kids. The new local groups may or may not be able to bring along with them all of the patient-beneficiaries, caregivers and families, and other supporters. Time will tell.

Charitable Gifts in Perpetuity: Not a Great Idea

Two news stories from 2015 highlight the problem of the “dead hand” reaching out from eternal slumber, squeezing the life out of needed flexibility for a charitable institution established long ago by a bequest.
“The Law” disfavors anything in perpetuity; hence, the dreaded Rule Against Perpetuities that is the bane of the existence of every first-year law student:

The common rule against perpetuities forbids some future interests (traditionally contingent remainders and executory interests) that may not vest within the time permitted; the rule “limits the ability of a decedent to exercise dead hand control over property, which the state wishes to be alienable. In essence, the rule prevents a person from putting qualifications and criteria in his/her will that will continue to control or affect the distribution of assets long after he or she has died, a concept often referred to as control by the “dead hand” or “mortmain“.

Now – technically – the Rule Against Perpetuities applies only in cases of said contingent remainders and executory interests, and doesn’t prohibit a generous soul from establishing a charitable testamentary trust with all sorts of qualifications and conditions. But the general idea holds: Perpetuity is a very, very long time indeed.
It’s usually not a great idea to include lots of restrictions that could get in the way of progress one hundred years later, even to the point of leaving the charitable institution with no choice but to shut its doors.

Charitable Trust No. 1: Sweet Briar College

Last  year, we discussed the case of Virginia’s Sweet Briar College – a small, women-only, liberal-arts college in the beautiful foothills of the Blue Ridge Mountains.
Over 100 years ago, its founder created a testamentary trust to establish the college on the grounds of her family’s (former) plantation as a memorial for her deceased daughter. At that time, promoting women’s higher education was a progressive concept, and establishing a single-gender college was a logical decision. Not only was the land tied up by this bequest, but there were restrictions on use of the endowment as well.
In March 2015, the board of directors was summoned to a special meeting, at which the interim president announced that he and the executive committee had determined that the school was facing “insurmountable financial difficulties” and would need to close at the end of the semester.
A firestorm of opposition erupted, and within a few months, the leadership had been ousted and a committed group of supporters had rallied enough support and financial resources to keep the college open for the 2015-2016 academic year.
But it was a mess. The local county attorney intervened in order to protect the charitable trust and assets; she argued that the proposed closing of the college would violate the terms of the will. The matter went up to the Virginia Supreme Court on an expedited basis before a mediated settlement had saved the institution.  
In addition to the issues raised by the county attorney, another matter was whether the terms of the endowment could be altered to free up needed cash. The settlement made that point moot.
Another issue that did not arise, but was at least discussed, was the possibility of attracting more students by making the college co-ed. Of course, the terms of the founder’s trust specified that it would be a women-only educational institution. It’s unclear whether a court would have ordered that testamentary condition to be ignored. (The matter has come up, in cases of other financially struggling, women-only institutions; having to go to court to seek a judicial order revising a testamentary trust is no easy – or sure – road.)

Charitable Trust 2: Paul Smith’s College

Another higher education case was decided by the terms of a testamentary trust created long ago. It, too, involved a struggling institution – this time in rural, northern New York State.
Paul Smith’s College is “the only four-year college in the six-million-acre Adirondack Park.” Its “students are mostly from rural communities, and nearly all receive financial aid.” It is “known for its hospitality and forestry programs.”
As a rural school without wealthy alumni, it was encountering tough financial woes that were serious enough to possibly force the college’s closure.
In the past, Paul Smith’s College had benefited from the generosity of Sanford I. Weill, billionaire financier, and his wife, Nancy. “The Weills own a home near the college, and Mrs. Weill has said she was impressed by Paul Smith’s.”  
“Mrs. Weill has been actively involved with the college’s development for more than two decades and served on the board of trustees.” The couple had donated many millions of dollars themselves, and garnered donations from others. The campus library and student center are named in her honor.
But, in 2015, when the school was in more serious financial straits, the Weills offered a $20-million gift, but it was “on the condition that Paul Smith’s College change its name to Joan Weill-Paul Smith’s College.”  
But there was a hitch – in addition to the fact that the Paul Smith students, staff, and alumni were not crazy about the cumbersome proposed name.
Paul Smith’s College had been created by testamentary trust and a condition of that bequest is that the college be named after Paul Smith “in perpetuity.” Of course, because of this restriction, it would take a court order to proceed.
The court was not impressed, and denied permission to break the iron-clad condition of the charitable trust.  
Previously, in “Naming Rights: It’s a Philanthropic Jungle Out There,” we had discussed the complexities of so-called “renaming gifts.”  But when the name is tied up in knots in a charitable trust, the complications multiply – and may be insurmountable.


At the time that a charitable trust is created or, indeed, when any sizeable donation is made, the restrictions on the use of the funds may seem prudent and logical. But times change, and needs change, and flexibility should be an important consideration. Anything “in perpetuity” is probably not a great idea.

New Laws, New Rules in 2016 for California Nonprofits

On New Year’s Eve, there are champagne toasts and doomed-to-failure resolutions to lose weight. At the stroke of midnight, there are also new laws on the books that affect California nonprofits
Some of them apply only to nonprofits; others, for instance, cover all employers in the state, including nonprofits.

New Laws and Rules Just for Nonprofits

Attorney General Regulations

After a lengthy period of review and controversy, the California Attorney General went ahead and adopted stringent new amendments to the regulations under the California Supervision of Trustees and Fundraisers for Charity Purposes Act.
The full text of the new regulations is here.
Members of the philanthropy community have identified “several provisions that are particularly troubling.
Specifically –

Section 999.9.3 of the regulations provides that, if an entity that is required to register with the California Attorney General’s Registry of Charitable Trusts has had its registration suspended or revoked, “[m]embers of the board of directors or any person directly involved in distributing or expending charitable assets [while the organization is suspended or revoked without the written approval of the Attorney General] may be held personally liable” for the amounts of such expenditures. The same Section goes on to provide that “[t]he Attorney General may direct a registrant whose registration has been suspended or revoked to distribute some or all of its charitable assets…to another charitable organization or into a blocked bank account.

The Attorney General’s Office sees these revised regulations as procedural changes only. Critics, however see them as substantive policy modifications, and are “…concerned with the question of whether these regulations represent the beginning of a general trend in the regulation of the nonprofit sector” that includes “excessive discretionary enforcement authority or that fail to differentiate between the failure to file a required registration form and a true abuse of charitable assets.”

Dissolution Rules

When a California Nonprofit Corporation decides to close operations, there is a set procedure for winding down operations, dissolving the entity, and distributing any remaining assets. The ordinary procedure involves several procedural steps with multiple California agencies: the Attorney General, the Secretary of State, and the Franchise Tax Board. The rules are explained on the California Attorney General’s website, here.
There is a new, alternative procedure, effective January 1, 2016, that applies to inactive nonprofit corporations which are eligible for administrative dissolution under a recent statute, AB 557. They can be automatically or voluntarily dissolved.
There are now 3 ways a nonprofit corporation can be dissolved:

  • Automatic Dissolution: The Franchise Tax Board can automatically dissolve a corporation that is suspended or forfeited for at least 48 months and no longer operates. (There may be a backlog and some delay, though, because of the anticipated volume.)
  • Short Form Dissolution: The Secretary of State will allow a short form dissolution for eligible corporations that act within 24 months of filing the articles of incorporation.
  • Voluntary Dissolution: The Franchise Tax Board will develop a form (in 2016) for a corporation to request administrative dissolution.  

There will be additional information and guidance as new procedures are developed.

Additions to Charitable Solicitations Rules

Under existing law, the Supervision of Trustees and Fundraisers for Charitable Purposes Act, “generally regulates charitable corporations, trustees, and other legal entities holding property for charitable purposes, commercial fundraisers for charitable purposes, and fundraising counsel for charitable purposes, among others, over which the state or the Attorney General has enforcement or supervisory powers.”
Assembly Bill 556 was signed into law on September 21, 2015, effective January 1, 2016. There are changes, by way of amendments to, the charitable solicitation rules in sections 12596, 12599, and 12599.1 of that Act:

  • Commercial fundraiser for charitable purposes”: Definition expanded to include “any individual, corporation, unincorporated association, or other legal entity that plans, manages, advises, counsels, consults, or prepares material for, or with respect to, the solicitation in this state of funds, assets, or property for charitable purposes, as specified”; it also excludes from that definition “a trustee, a charitable corporation, specified financial institutions, or an escrow agent or caging company, as defined, that receives or controls funds as a result of a solicitation for charitable purposes.
  • Fundraising counsel for charitable purposes”: Lists conditions “under which a fundraising counsel for charitable purposes is deemed to receive or control funds, assets, or property. The bill would require an individual, corporation, unincorporated association, or other legal entity that does not meet the qualifications of fundraising counsel for charitable purposes to be deemed a commercial fundraiser for charitable purposes.”

Existing law requires an individual or entity who for compensation solicits funds or property for charitable purposes to disclose that the solicitation is being conducted by a commercial fundraiser for a charitable purpose and the registered name of the commercial fundraiser.” Under new law, “the disclosures, if printed or if presented electronically” must be in “at least 12-point type, and be clear and conspicuous.”
Assembly Bill 556 also authorizes the AG “to bring an action for a violation of these provisions at any time within 10 years after the cause of action accrued. The bill would also authorize the Attorney General to bring an action for civil liability against a person who aids or abets a violation of these provisions at any time within 10 years after the cause of action accrued.

Enforcement of Charitable Trust

The California Attorney General has jurisdiction over charities and property held in charitable trust in this state. “Existing law requires the Attorney General to establish and maintain a register of charitable corporations, unincorporated associations, and trustees subject to these provisions and of the particular trust or other relationship under which they hold property for charitable purposes.”
In addition, “[e]xisting law provides that one who wrongfully detains a thing is an involuntary trustee thereof for the benefit of the owner, and that one who gains a thing by fraud, or other wrongful act is an involuntary trustee of the thing gained for the benefit of the owner.”
“This bill would authorize the Attorney General to bring an action for a violation of these provisions at any time within 10 years after the cause of action accrued.”  It would also authorize the AG to “bring an action for civil liability against a person who aids or abets a violation of these provisions at any time within 10 years after the cause of action accrued.”
There is an analogous provision specifically directed at directors and officers of nonprofit public benefit corporations; the assets of these corporations are held in charitable trust for the general public.
Under existing law, “the Nonprofit Corporation Law, sets forth standards of conduct for directors and officers of nonprofit public benefit corporations and provides that it is a crime for any director or officer of any corporation among other things, to knowingly engage in specified acts relating to fraud, to make materially false reports, to receive or acquire possession of the property of the corporation, or to falsify the books or accounts of the corporation.”  The AG is, under this bill, authorized “to bring an action for a violation of these provisions at any time within 10 years after the cause of action accrued” and “to bring an action for civil liability against a person who aids or abets a violation of the standards of conduct for directors and officers of nonprofit public benefit corporations at any time within 10 years after the cause of action accrued.”

Limited Expansion of Raffle Rules

In California, raffles are permitted as charitable fundraisers – but only subject to strict rules. A key restriction is that at least 90% of the proceeds must go to the charitable cause. We explained in “It’s Just a Raffle: What’s the Big Deal?” that the winner is limited to no more than 10% of the money raised.
In other states, there’s a popular raffle activity – the 50/50 raffle – that is conducted by major league sports team to benefit several community organizations. Proponents of this type of raffle finally won over legislators (and Governor Brown, apparently) to allow this type of 50/50 raffle in California under the same conditions; that is, sports league fundraisers for the community. We reported this development in  “Surprise Change to Charity Raffle Rules in California

New Laws For All Employers

We’ve made a point in several earlier posts – like here and here – of emphasizing that nonprofits that have employees are subject to almost all of the laws that every employer in California must follow.
In “Gender Equality (and Nonprofits): California’s Bold New Law,” we reported on a piece of legislation passed by the California legislature among the avalanche of legislative measures in September 2015. Beginning January 1, 2015, the Golden State now has a mandate of “equal pay.”

The Fair Pay Act is a landmark piece of legislation in the ongoing struggle for fair and equal pay for women. Its goal is to eliminate the well-documented 26 percent pay disparity that exists across the economy between men and women doing the same job. The new law requires equal pay, regardless of gender, for “substantially similar work” and prohibits retaliation against employees who invoke the law and/or discuss wages with their coworkers. See Lab C §1197.5, as amended by Stats. 2015, ch 546, SB 358 (effective January 1, 2016).


Here’s wishing you a prosperous and meaningful New Year – totally in compliance with all applicable rules and regulations!

2015 Year-End Congressional Measures Affecting Nonprofits in 2016

In a perfect world, federal tax policy would be comprehensively analyzed, thoughtfully debated, and then enacted without partisan rancor or dispute.
We don’t live in that perfect world. For several years, budgets and tax proposals have been held hostage to entirely unrelated political disputes. The result is that even when there are temporary extensions for relatively uncontroversial tax laws, sometimes these extensions expire before another piecemeal, eleventh-hour emergency patch can be cobbled together.
There was some, small good news in Congress’ most recent end-of-year marathon to avoid a shutdown and pass some legislation. But there were also omissions, as well as a partisan gag on a matter in the headlines and generating continued controversy.

Three Charitable Giving Incentives Made Permanent

There are three popular charitable-giving incentives that have been caught up in recent years in this budget turmoil.  They have been re-authorized for a year at a time, in a way that leaves organizations and taxpayers in a bind. These three provisions actually expired at the end of 2014, with no intermediate legislation remedying the problem.
The good news is that – this time – Congress not only reinstated these incentives (with retroactive application back to January 1, 2015) but the legislators managed to enact a permanent extension of these tax provisions.  They are:

  • The IRA Charitable Rollover

This provision permits individuals who are 70-½ and older to donate up to $100,000 from the Individual Retirement Accounts (IRA) directly to charities.

  • Food Donation Tax Deduction

This worthwhile and much-needed incentive authorizes small businesses that donate surplus food to take the same enhanced tax deductions available to regular C corporations.  

  • Conservation Easement Deduction

This tax break allows an enhanced tax deduction for donation of conservation easements.
These charity related deductions were part of a package of dozens of tax extenders made permanent under the Protecting Americans from Tax Hikes (PATH) Act of 2015. Just in time for the Representatives and Senators to flee Washington, D.C. for their Christmas holidays destinations, the measure passed in the House by a vote of 318-109 and in the Senate by a vote of 65-33.
“The charitable sector worked closely with Congress,” according to the Council on Foundations, “to educate members and their staff about the difference these incentives make….Passage of the PATH Act is the culmination of a nearly 10-year-long effort to have charitable tax incentives permanently enacted and, in the case of the food donation tax deduction, expanded. After years of renewal and expiration, … these charitable giving incentives are now permanent law.”
The Council on Foundations noted, also, that –

during the first two years the IRA charitable rollover was available, it prompted more than $140 million in gifts, assisting social service providers, religious organizations, cultural institutions and schools, and numerous other nonprofit organizations. Similarly, according to Feeding America, this legislation would significantly increase food bank access to the 70 billion pounds of nutritious food wasted each year, particularly the 6 billion pounds of produce that does not make it to market. Finally, a survey by Land Trust Alliance showed that the land conservation incentive helped 1,700 land trusts increase the pace of conservation by a third – to over a million acres a year.

   Less Favorable Results

There was a setback in the complicated negotiations surrounding the omnibus spending bill (that eventually passed and will keep the government open until next September).
For two years, since the blow-up over the IRS Exempt Organization Division’s purported targeting of certain section 501(c)(4) social welfare organization, the IRS has been working with the Treasury Department to update and improve the rules that govern permissible political activities of 501(c)(4) groups. Needed revisions to the regulations have been repeatedly promised but delayed.
In the omnibus spending bill there is now a provision that prohibits the Internal Revenue Service from clarifying the rules at all.  There is disappointment by many observers over this partisan halt to what is needed clarification of confusing and divisive rules.
Another proposal that was left out of the final budget package was one aimed at simplifying the private foundation excise tax to a flat 1 percent.

The "Trade or Business" Test: Does It Quack Like a Duck?

The hallmark of a 501(c)(3) public charity is that it receives enough support from donations or grants to make it accountable to the public good. But many 501(c)(3)s also generate income from business-type activities – like selling products or services.
Generally, this is fine –  and won’t jeopardize the tax exemption. But if the scope of the business-type activities is too big compared with the nonprofit’s exempt, charitable activities and purposes, that can spell trouble.
What kind of trouble? An excise tax; that is, the unrelated business income tax, commonly referred to as “UBIT.”

Unrelated Business Income Tax

In “The Fourth Way to Sink Your Tax Exemption: Too Much Unrelated Business Income,” we first dipped our toes into the UBIT waters.
This special excise tax on unrelated business income may apply if an activity meets all three of these factors:

  • (1) it constitutes a “trade or business”,
  • (2) it is “regularly carried on,” and
  • (3) it is not “substantially related” to the charity’s exempt purposes.

The Internal Revenue Service publishes a helpful guide to UBIT:  Publication 578.  In the Introduction to Pub 578, these three factors are explained both backward and forward:

(Backward:) An exempt organization is not taxed on its income from an activity substantially related to the charitable, educational, or other purpose that is the basis for the organization’s exemption. Such income is exempt even if the activity is a trade or business.

(Forward:) However, if an exempt organization regularly carries on a trade or business not substantially related to its exempt purpose, except that it provides funds to carry out that purpose, the organization is subject to tax on its income from that unrelated trade or business.

What is a “Trade or Business” Under the UBIT Statute?

The least complicated prong of this 3-part test is themeaning of a “trade or business.” It’s fairly easy because the approach of the IRS is along the lines of: “If it looks like a duck, and quacks like a duck, then ….” The term ‘trade or business’ generally includes any activity conducted for the production of income from selling goods or performing services….An activity must be conducted with intent to profit to constitute a trade or business.”
So far, so good. The term “trade or business” here is roughly the same as that term is used in the income tax rules to determine deductibility of business expenses.   Quack, quack. And even if the “trade or business” doesn’t actually generate a profit in a particular year, it can still be a “trade or business” for purposes of this test.

One Special Situation

A common scenario – a variation –  is worth mentioning here:

An activity does not lose its identity as a trade or business merely because it is conducted within a larger group of similar activities that may or may not be related to the exempt purposes of the organization.

Pub 578 gives an example (from the federal tax regulations) that’s fairly straightforward: a hospital pharmacy open to the general public:

The regular sale of pharmaceutical supplies to the general public by a hospital pharmacy does not lose its identity as a trade or business, even though the pharmacy also furnishes supplies to the hospital and patients of the hospital in accordance with its exempt purpose.

The quacking sounds are heard only in the pharmacy; that is, the “trade or business.” No ducks are spotted wandering around the hospital operating rooms or the maternity ward.


There are exceptions, of course – as well as exceptions to the exceptions. This is a complicated statute.

2016 Priorities for Exempt Organizations Division

It’s no secret that it’s been a tough year for the Tax-Exempt and Government Entities Division of the IRS.
Actually, it’s been a difficult few years for these embattled federal regulators and the philanthropy community they serve.
There was the huge brouhaha surrounding former Division Chief Lois Lerner and allegations of political favoritism in Section 501(c)(4) approvals or denials.
There has been the years-long, enormous backlog of pending 501(c)(3) exemption applications that led officials to introduce the controversial Form 1023-EZ application form. Critics have warned that the 3-page 1023-EZ application is little more than a front-end, rubber-stamp of representations and promises by applicants.
While processing times have significantly improved, the overall success or failure of this program may not be fully known for a while.
And the primary cause of this long waiting time is that the tax agency’s budget has been severely slashed over and over.

Challenges to Planning Priorities

All of these factors are hurdles and challenges for the EO Divisions’ strategic planners when they meet each year to determine priorities and allocation of (scarce) resources for the following fiscal year.
In its recent “TE/GE Priorities for FY 2016,” the Division has stressed that “EO’s overarching compliance strategy is to ensure organizations enjoying tax-exempt status comply with the requirements for exemption and adhere to all applicable federal tax laws.”  The goal is “…identifying and addressing existing and emerging high-risk areas of non-compliance” with the best use of its smaller-than-needed budget and workforce.  

Examinations Focus

A key part of the Exempt Organization’s function is to selectively examine organizations that already have been granted recognition of tax exemption.

The focus will be on significant compliance issues, not on the number of cases closed, and some issues may require a multi-year approach. EO will use the most appropriate, cost-effective and least intrusive compliance treatment. This will include educational efforts, compliance reviews, compliance checks, and correspondence and field examinations.

The agency identifies “areas of high non-compliance risk through stakeholder input, reliable outside data, and public information.”  The focus will be on five key “issue areas”:

  • Exemption: Agents and examiners will look for “non-exempt purpose activity and private inurement.” These are problems that rank high year after year. Notably, this is the only one of the listed categories that the agency indicates will be “enforced primarily through field examination.”
  • Protection of Assets: This category focuses on issues of “self-dealing excess benefit transactions, and loans to disqualified persons.” There’s, of course, some overlap with the “Exemption” category; the goal is to ensure that charitable funds are used for exempt purposes and not for the personal enrichment of insiders. Enforcement will be “primarily through correspondence and field examination.”
  • Tax Gap: These high-risk areas include “employment tax and Unrelated Business Income Tax liability.” Nonprofit employers often overlook their responsibilities for general tax responsibilities that apply to all organizations with workers, both for-profit and nonprofit. The UBIT issue is tricky and complex, leading many organizations astray – even inadvertently. These examinations will be “enforced through compliance checks, correspondence audits, and field examination.”
  • International: The IRS is concerned not only about how U.S. exempt organizations spend their money and conduct activities domestically but also about their foreign operations and expenditures. The targeted examination issues in this category include “oversight on funds spent outside the U.S., including funds spent on potential terrorist activities, exempt organizations operating as foreign conduits, and Report of Foreign Bank and Financial Accounts (FBAR) requirements, enforced through compliance reviews, compliance checks, correspondence audits, and field examination.” This comprehensive approach reflects the (sometimes substantiated) suspicions that foreign charities are fronts or facilitators of terrorism.
  • Emerging Issues: These areas of risk “include non-exempt charitable trusts and IRC 501(r) organizations.” The new 501(r) classification was added to the Internal Revenue Code as a result of passage of the Affordability Care Act, and applies to 501(c)(3)s that run one or more hospital facilities. These audits will focus on “compliance reviews, correspondence audits, and field examination.”  

Determinations Focus

While the Examinations Section of this IRS Division is geared towards compliance reviews of existing 501(c)(3) organizations, the Determinations Section has the important responsibility of reviewing and approving (or denying) applicants’ requests for tax exemption.
Before the introduction in July 2014 of the short-form 1023-EZ, applicants were required to complete a 26-page behemoth and submit considerable documentation about their organization structure and operational plans.
For many smaller applicants, this procedure has been streamlined into what some critics have characterized as “easier” to obtain than “a library card.” For the most part, the up-front review will be minimal. In certain selected sample cases, there will be a more in-depth “predetermination review.” The agency will also “… continue to review organizations that were granted tax-exempt status through the streamlined determination process and … will begin post-determination compliance enforcement” on organizations that applied through the Form 1023-EZ process.”


Against the background of a limited budget, fewer employees, and ongoing scrutiny and controversy, the Tax Exempt and Government Entities (TE/GE) Division is moving forward in FY 2016 to do its best to oversee the administration of the federal tax exemption laws.

The Better Choice?: A Foundation or a Donor-Advised Fund

Although the donor-advised fund (DAF) has been around for many decades, this charitable-giving format has  surged in popularity in recent years.

Our recent post, “Donor-Advised Funds: An Alternative for High-Net-Worth Philanthropists,” provides an introduction to this timely topic.

The DAF is a choice midway between an outright donation to an independent 501(c)(3) organization and establishing a private foundation. “In this model, the philanthropist makes a charitable contribution, relinquishes legal control over the contributed money or assets to an independent public charity, the ‘supporting organization,’ and receives an immediate tax deduction. But the benefactor is permitted from time to time to recommend specific grants from the fund.

An easy way to think about a donor-advised fund is like a charitable savings account: a donor contributes to the fund as frequently as they like and then recommends grants …  when they are ready.’

For some time, observers have noted a shift away from family foundations to donor-advised funds.  “Frustrated by the upkeep, philanthropists are increasingly unwinding their private foundations into donor-advised funds,…”  

There are pros and cons to each format, but the key distinctions relevant to well-to-do individuals and families making this choice are: time and cost; control and prestige; and financial benefit, including level of deductibility of contributions.

Pros and Cons: DAFs and Foundations

Time and Cost

Perhaps the key reason why well-to-do taxpayers are switching from family foundations to donor-advised funds is that the latter are (1) cheaper and (2) easier.

Creating and maintaining a private foundation involve considerable commitments of time and money. “[T]he factor that drives most people to close a foundation is the heavy time commitment.”

The private foundation is a distinct legal entity that must be organized under state law and recognized as tax-exempt by the Internal Revenue Service. Organizational costs and professional fees can cost several thousand dollars; ongoing management expenses and fees for legal and accounting advice and assistance add to the total financial burden. Overseeing the initial phase and well as conducting the day-to-day activities (including grant-making) requires substantial direct participation. There are also tax forms and filings. While some of it can be done by paid staff or consultants, that expenditure will add to the total costs. “Donor-advised funds can cost thousands of dollars less to maintain than foundations — a factor that has taken on increased significance as many foundations’ assets have plunged.”

There is also a timing factor: while a donor-advised fund can be set up relatively quickly, there will be at least some delay for the foundation vehicle because of the need to create the separate legal entity and get government exemption approvals.  

Control and Prestige

Under the private foundation format, the person or family setting up the entity enjoys the benefit of complete and exclusive control and decision-making authority for large and small matters. This element is particularly appealing when the taxpayer(s) have a strong vision for their charitable footprint, or see a philanthropic need that is currently being unmet entirely or adequately. “A foundation can make more sense if the donor prefers paying personal staff to study making grants for a specific goal, like research on a particular disease.”
By contrast, when the donor-advised vehicle is used, the donors have advisory authority – but not legally binding control over the charitable contributions. The supporting organization that receives and manages the DAF contributions has the “…final say on where [the] money is donated, and can require minimum contributions to open accounts.”

With the foundation choice, the donors are able to make a mark currently as well as into future generations; the family name is, and can continue to be, associated with generosity and worthwhile causes and activities. While there are ways for contributions made via the DAF vehicle to be publicly connected with a particular family, the connection is not as strong or continuously visible to the community.

Financial Benefit

The deductibility of contributions is a big incentive for charitable giving. The donor-advised fund provides larger and more immediate financial benefit.

Under the DAF format, a charitable donation is available immediately – even if some of the distribution of the money to grantees, projects, or activities is delayed until later years. (Under recent rules changes, this delay can’t be for more than 5 years.) The deductibility rate is higher, also. Donors can deduct half their adjusted gross income for an annual cash contribution, and 30% for appreciated securities. Donors to foundations can deduct only of 30% for cash gifts and 20% for appreciated securities.”

“Donor-advised funds have another advantage: They don’t impose annual distribution requirements. Foundations, by contrast, are required to make annual distributions of at least 5% of their assets, even when markets are plunging.”

By choosing the DAF format, donors “can also give many types of assets — including cash, securities and even art — depending on the fund’s specific rules.”


The final decision is a matter of becoming familiar with the rules and regulations relating to foundations and to donor-advised funds, and then weighing and balancing the many pros and cons.

Choosing a DAF allows the well-to-do ”to park … money in a variety of diversified investments, take an immediate tax deduction and recommend where grants should go later.” It’s especially useful if the desired contribution level is on the (relatively) lower side; a “practical minimum size” for a DAF, depending on the charity’s policy, can be in the range of $10,000 to $25,000. The recommended minimum amount of assets required to establish a private foundation is at least $1.0 million and up.

Privacy is another potential benefit. Foundation tax forms, which contain details on grants and other revealing information about a donor, are easy to find on the Web. The public forms filed by donor-advised funds don’t list individual accounts.

Then there is the factor of “liability and risk.” The foundation rules are complex; an inattentive or incompetent board of directors can make mistakes that will result in hefty hassles and sanctions.