Louis E. Michelson, A Professional Corporation

Providing Legal and Tax Advisory Services to Nonprofit Organizations

Automatic Revocation of Exemption List

March 16th, 2013 · Loss of Tax-Exempt Staus

Most tax-exempt organizations are required to file an annual return or notice with the Internal Revenue Service.  Section 6033(j) of the Internal Revenue Code automatically revokes the exemption of any organization that fails to satisfy its filing requirement for three consecutive years. The automatic revocation of exemption is effective as of the due date of the third required annual filing or notice.

Organizations on the Automatic Revocation of Exemption List (Auto-Revocation List) previously recognized as exempt under section 501(c)(3) of the Internal Revenue Code are no longer eligible to receive tax-deductible contributions under Code section 170.

Publication of an organization’s name on the Auto-Revocation List serves as notice to donors and others that the organization is no longer eligible to receive tax-deductible contributions under section 170 and that donors and others may not rely on an IRS determination letter dated before the effective date of revocation or on a prior listing in either Exempt Organizations Select Check (Pub. 78 data) or the IRS Business Master File extract for purposes of claiming tax-deductible contributions.

See the following link on the IRS website for Tax Exempt Organizations Search Bulk Data Downloads to access the Automatic Revocation of Exemption List.

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Charitable Contribution Alert: Dot Your “i”s and Cross Your “t”s

March 16th, 2013 · Charitable deduction

Assume that you are an upstanding citizen and contribute generously, over $25,000, to your church in 2012. Assume further that your church, which is recognized as a 501(c)(3) organization, gives you a receipt that acknowledges and thanks you for your contribution. One detail: the receipt does not have a statement whether any goods or services were provided in consideration for the contributions; but you did not notice this omission. You receive the receipt in January, 2013 and you file the receipt and do not give it a second thought until you file your return. Assume further that you gave the receipt to your tax preparer and your taxes are filed timely, claiming the charitable deduction. You are good right?

Not so fast says Tax Court.   There is a substantiation requirement for certain charitable contributions.  Specifically, Internal Revnue Code Section 170(f)(8)(A) provides: “No deduction shall be allowed under subsection (a) for any contribution of $250 or more unless the taxpayer substantiates the contribution by a contemporaneous written acknowledgment of the contribution by the donee organization that meets the requirements of subparagraph (B).”

For donations of money, the donee’s written acknowledgment must state the amount contributed, indicate whether the donee organization provided any goods or services in consideration for the contribution, and provide a description and good faith estimate of the value of any goods or services provided by the done organization.   Also, the written acknowledgment is contemporaneous if it is obtained by the taxpayer on or before the earlier of: (1) the date the taxpayer files the original return for the taxable year of the contribution or (2) the due date (including extensions) for filing the original return for the year.

If the acknowledgment does not contain the required statement regarding whether goods or services were provided, the Tax Court holds you are not entitled to a charitable deduction.   The Tax Court was not sympathetic to the “substantial compliance” argument:  “but we have substantially complied with the statute and are entitled to the deduction.”

The take away:  be sure to dot your “i”s and cross your “t”s and make sure your charities are doing their job when they acknowledge your contributions.   Look closely at the acknowledgements you receive from the charities.   For more information see Durden v Commissioner. TCMemo 201-140

 

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Congressional Hearing on Itemized Deduction for Charitable Contributions

February 6th, 2013 · Charitable deduction

Congressman Dave Camp (R-MI), Chairman of the Committee on Ways and Means, today announced that the Committee will hold a hearing to examine the itemized deduction for charitable contributions as part of the Committee’s work on comprehensive tax reform.  The hearing will take place on Thursday, February 14, 2013, in Room 1100 of the Longworth House Office Building, beginning at 9:30 A.M.

In announcing this hearing, Chairman Camp said, “Public charities and private foundations perform invaluable services for our society, especially during this time of economic slowdown and high unemployment.  These organizations depend upon the goodwill of the American people – the most giving and charitable people in the world.  Because of the critical role that charities play, the Committee must hear directly from the charitable community before considering any proposals as part of comprehensive tax reform that might impact their ability to obtain the resources they need to fulfill their missions.”

For more information see the following link.

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Relief for California Charities: A Carrot and Stick Approach of SB 1341

October 2nd, 2012 · California Exempt Status, Loss of Tax-Exempt Staus

California has given charities a new carrot and a stick to encourage compliance with filing requirements with the California Attorney General.  SB 1341 is effective January 1, 2013.

Existing Law.  If a charity failed to file the registration statement or the periodic report, under existing law what used to happen would be the Attorney General would notify the Franchise Tax Board of the delinquency.  The charity would have its tax exempt status “suspended” and would owe the minimum franchise tax when this suspension was effective.  Even after fixing the noncompliance, there was no statutory requirement to get the AG to inform the FTB of the new compliant status and to re-instate the tax-exempt status and therefore to be required to pay the minimum tax.

New Law.  Under the new law, the FTB will now use a new carrot and stick.  The stick is that the FTB will send a notice to the charity indicating that FTB will revoke the exemption unless the delinquent filings are made within 120 days of the notice.  If the charity acts promptly and rectifies the delinquent filings, the AG is then required to provide “prompt notification” that the charity has filed the required documents.  If the FTB does not receive the notice from the AG, the stick is revocation of exemption.   This is a heavy stick for delinquent filings with the AG.  It is not nice to fool with Mother Nature (in this case the Attorney General).

Under the new law, the carrot is that the charity will not be required to pay the minimum franchise tax for the year or years when its exemption was disallowed.  The California Legislature declared that the abatement of the minimum franchise tax serves a public purpose of encouraging charities to come into compliance with their filing requirements so that Californians can continue to support and donate to much needed nonprofit organizations.

For a copy of the bill see the following link.

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Automatic Revocation of Exemption: In Error?

July 29th, 2012 · Federal Income Taxes, Loss of Tax-Exempt Staus

Background: The Pension Protection Act of 2006 made two important changes affecting tax-exempt organizations, effective the beginning of 2007.  First, it requires all tax-exempt organizations, other than churches and church-related organizations, must file an annual return with the IRS. That includes small tax exempt organizations with gross receipts of $25,000 or less and had not previously had a filing requirement (the threshold is currently $50,000 or less). They now are required to submit a Form 990-N, also known as an e-Postcard. Second, it mandates that any tax-exempt organization that fails to file for three consecutive years automatically loses it federal tax-exempt status.

Organizations on the Auto-Revocation List.  The automatic revocation of exemption is effective as of the due date of the third required annual filing or notice.   The IRS publishes a list of organizations that were previously recognized as exempt which are no longer eligible exempt.  This list serves notice to donors and others that the organization is no longer eligible to receive tax-deductible contributions under Internal Revenue Code Section 170.  See the following link to access this list.

Was Exemption Erroneously Revoked?  The IRS published Frequently Asked Questions if you believe your organization was erroneously listed as revoked.  These questions address whether the IRS can “undo” the automatic revocation, whether there is an appeal of the automatic revocation, what can be done if the organization has documentation that it has met the filing requirement and how to reinstate exemption.  These questions include:

  1. Can the IRS “undo” my organization’s automatic revocation?
  2. May my organization appeal its automatic revocation?
  3. If an organization on the Auto-Revocation List has documentation that it met its filing requirement for one or more years during the three year period, what should it do?
  4. If an organization on the Auto-Revocation List has a letter from the IRS stating that it does not have an annual filing requirement, what should it do?
  5. Why does a federal credit union appear on the Auto-Revocation List, even though it is not required to file an annual return?
  6. If an organization on the Auto-Revocation List has been legally formed for less than three years, what should it do?

See the following link for the FAQs.

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Governance 101: Providing Form 990 to Board Members

July 12th, 2012 · Form 990, Governance

Pop quiz on governance for nonprofits:

Question 1.  Are each of your Board members provided with a copy of the final Form 990 before that form is filed with the IRS?

Question 2.  What if the nonprofit notifies each of the Board members that the Form 990 is available on request.  Does this procedure accomplish the same result as the procedure in Question 1?

Question 3.  Does it matter which procedure is followed when one is completing the governance question on Part VI, line 11 of Form 990?

Answers:

Answer to Question 1:  The 2011 Instructions to Form 990 clarified that in order to answer yes the governance question on Part VI, line 11 of Form 990 they need to acutally provide a copy of Form 990 to all of the governing board members or e-mail a link to the Form 990.

Answer to Question 2.  No.  If the organization only notifies the Board members that the form is available, the instructions for 2011 clarified that the organization should answer no.  A different result than the procedure in Question 1.

Answer to Question 3.  Yes it matters.  See IRS Instructions for Form 990 at the following link.

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When Providing Consulting Services Ruins 501(c)(3) Exemption

July 6th, 2012 · Consulting services, Denial of Exemption, private inuremenet

It is common for a new nonprofit to draw on the experience of its founders.  Is there any reason that a nonprofit can not provide consulting services?  If the new nonprofit seeks to obtain tax-exempt status under 501(c)(3) there are a number of pot-holes to avoid, based on a recent ruling by the Sixth Circuit in Asmark Institute, Inc.

● The fact that the new nonprofit is a successor to a for-profit “weighs heavily against exemption”

● The sale of services, including consulting services, is commonly considered to be a non-exempt, commercial purpose. B.S.W. Group, Inc., 70 T.C. at 358

● Listing anticipated income solely from fee-based operations and no revenue from grants, donations and fundraising operations indicates an expectation that commercial profits will be the main source of income sustaining the ongoing operations

● Performance based compensation allowing officers’ salaries to increase as the nonprofit’s activities increase

● Improvements to real estate that are not owned by the non-profit but which instead ultimately benefit a for-profit entity can count as private inurement. See Tex. Trade Schl. v. Comm’r, 30 T.C. 642, 646-47 (1958)

● Revenue sharing arrangements with other nonprofit organizations and for-profit organizations may trigger private inurement questions

The United States Court of Appeal for the Sixth Circuit upheld the denial of federal income tax exemption for an organization that described its purpose as a resource center for compliance materials for the agribusiness industry.  See the following link for the decision.

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Non-Profit Resources

June 29th, 2012 · California Exempt Status, Charity, Governance

Where do you look to find answers if you have questions related to forming and operating a nonprofit organization? Where can you learn about various types of fundraising sources that should be considered? What are the legal and ethical responsibilities of a board member?

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Three resources that are a good starting point include:

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Public Counsel Law Center: for a collection of resources to assist nonprofit organizations that have chosen to incorporate in California and the pro bono attorneys who represent them. This resource includes information on forming a nonprofit as well as information, forms, and policies that are useful to existing nonprofits. See the following link.

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Nonprofit Answer Guide: a project of Center for Nonprofit Management & Cause Communications. 2-Minute Answers for Busy Nonprofit. See the following link.
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Attorney General’s Guide For Charities. Published by the California Attorney General’s Office. See the following link.

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Congressional Committee Hearing on Tax-Exempt Organizations

May 11th, 2012 · Charity, Federal Income Taxes, Governance

Congressman Charles W. Boustany Jr., MD (R-LA), Chairman of the Subcommittee on Oversight of the Committee on Ways and Means, announced on Wednesday, May 16th that the Subcommittee will hold a hearing examining operations and oversight of tax-exempt organizations. This will be the first in a series of hearings by the Subcommittee on the tax-exempt sector and IRS oversight of tax-exempt activities

On October 6, 2011, Chairman Boustany sent a letter to the Internal Revenue Service seeking information related to the agency’s administration and oversight of tax-exempt organizations (including charitable organizations).  The letter sought information on a variety of topics to help the Committee understand the current state of relations between the IRS and tax-exempt entities, and provide a foundation for further engagement in overseeing this important sector of the U.S. economy.  The letter focused on a number of issues related to corporate governance and compliance, requested information related to new reporting requirements for tax-exempt hospitals, and asked for an update on the ongoing Colleges and University Compliance Project that was launched in 2008.

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In announcing this hearing, Chairman Boustany said, “Oversight of the tax-exempt sector is an important priority for the Subcommittee, and it has been an area that both Republicans and Democrats agree needs greater attention.  In my letter to the IRS last October, I asked the IRS about recent efforts to address certain concerns that have been raised regarding the operation of tax-exempt organizations, including corporate governance issues and mishandling of funds by officers.  It is now time for the Subcommittee to hear from members of the tax-exempt community for a more complete picture of the current state of affairs.  This review allows us to examine the state of the tax-exempt sector, as it currently exists today and consider this information as we continue the Committee’s efforts toward comprehensive tax reform.  In both cases the goal is the same – to ensure that the tax-exempt sector is operating in an efficient manner and that the laws governing tax-exempt organizations are being applied fairly and evenly.”

The hearing will focus on certain current issues related to tax-exempt organizations, including the current IRS compliance initiative related to Universities, recently enacted reporting requirements for tax-exempt hospitals, recent efforts by tax-exempt organizations to design and implement good governance standards, and taxpayer involvement in redesigning the Form 990.  In addition, the hearing will discuss the history of recent legislative changes to the tax code dealing with tax-exempt organizations and what prompted those changes.

See the Hearing Advisory of Committee on Ways and Means Chairman Dave Camp at the following link.

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Reporting Changes to the IRS

April 21st, 2012 · Federal Income Taxes, Form 990

When must a tax-exempt organization report changes to the IRS.  The events that trigger a reporting requirement to the IRS are changes in an organization’s name or address and structural and operational changes.
If an organization files an annual return, it must report the changes on its return. If it is not required to file annually, it reports the changes to the EO Determinations Office. The EO Determinations Office can issue an updated determination letter showing an organization’s new name and address and affirming that it is still exempt.
An organization may request a determination letter regarding the effect of certain changes on its tax exempt status or public charity status.  For example, a determination letter will be issued to classify or reclassify an organization as a public charity or a private foundation.  An organization may also request a determination letter to determine whether an organization is exempt from filing annual information returns in certain situations.
If an organization is unsure about whether a proposed change in its purposes or activities is consistent with its status as an exempt organization or as a public charity, it may want to request a private letter ruling .  The IRS will issue a private letter or the organization on the tax consequence of proposed changes to an organization’s purposes or activities.  It is a good idea to think though pros and cons of requesting a private letter ruling.
When must a tax-exempt organization report changes to the IRS?  The events that trigger a reporting requirement to the IRS are changes in an organization’s name or address and structural and operational changes.
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If an organization files an annual return, it must report the changes on its return. If it is not required to file annually, it reports the changes to the EO Determinations Office. The EO Determinations Office can issue an updated determination letter showing an organization’s new name and address and affirming that it is still exempt.
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An organization may request a determination letter regarding the effect of certain changes on its tax exempt status or public charity status.  For example, a determination letter will be issued to classify or reclassify an organization as a public charity or a private foundation.  An organization may also request a determination letter to determine whether an organization is exempt from filing annual information returns in certain situations.
If an organization is unsure about whether a proposed change in its purposes or activities is consistent with its status as an exempt organization or as a public charity, it may want to request a private letter ruling .  The IRS will issue a private letter or the organization on the tax consequence of proposed changes to an organization’s purposes or activities.  It is a good idea to think though pros and cons of requesting a private letter ruling.

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