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Legal Lunch Series A Conversation with Legal Affairs Super Bowl Tailgate (OT) February 11, 2016
Welcome Agenda • Introductions • Housekeeping Items • Form 990 Red Flags & Pitfalls • Board Governance Hot Topics • Donor Advised Funds • Private Foundation Relationships with Businesses & Family Offices
Fearless Legal Pilgrims Suzanne Friday Bryan Del Rosario Sr. Counsel & VP of Legal Affairs Staff Counsel #7 QB #89 WR University of Texas at Austin Gonzaga University
IRS Form 990 Red Flags & Common Pitfalls
Form 990 • Not only public face of individual charity, but also most readily available data source for potential donors, state regulators, the media, and researchers, as well as charity’s board, staff and volunteers • Beginning with 2008 tax year, IRS issued new version of Form 990 (most significant revisions since 1979) • Dramatically altered reporting requirements for tax-exempt organizations • One of boldest area of change: New governance section asking 20 questions in regard to governance practices of nonprofit organization – 3 areas: 1. Governance composition and management, 2. Organizational policies, and 3. Disclosure practices A charity’s governing board is responsible for “establishing appropriate procedures for internal controls, including financial controls, legal compliance, and information flow to the board – American Law Institute
Form 990 (cont.) Limiting the risk of revoked exemption status should always be a charity’s • priority. The four pillar tests for maintaining tax-exempt status require the organization to: 1. Be organized exclusively for charitable purposes 2. Be operated primarily for charitable purposes 3. Not allow private inurement 4. Abide by certain limitations on lobbying and political activities • Each question on the governance section is designed in some way to probe whether a tax-exempt organization is meeting the first three tests — particularly the operational and private inurement tests. Twin Goals: Ensure organization is meeting requirements of tax exemption and • reduce risk of IRS audit as much as possible
Form 990 (cont.) Governance Issues & Section VI • Governing Body and Management • Internal Policies • Disclosure Practices
Form 990 (cont.) Governing Body and Management – Number of board members – Number of independent board members – Reporting fraud – Contemporaneous notes
Form 990 (cont.) Internal Policies – Form 990 review process – Conflict of Interest policies – Whistleblower policies – Document retention policies – Compensation determination process
Form 990 (cont.) Disclosure Practices – IRC § 6104(d) • IRS Exemption Application Form • Annual reporting form – Availability of “other documents”
Board Governance Hot Topics
Self Dealing (Private Foundations) • IRC Section 4941 • Prohibits certain financial transactions directly with “disqualified persons” • Prohibits certain financial transactions with 3 rd parties that provide more than an incidental benefit to “disqualified persons” • Penalty tax will be imposed for violations
What is Self Dealing? • Sale, exchange or leasing of property between foundation and disqualified person • Lending money to a disqualified person • Furnishing goods or services to a disqualified person • Fulfilling financial obligations of a disqualified person • Advertising for a disqualified person • Providing preferential recruitment or business opportunities for a disqualified person
Who are Disqualified Persons? – Foundation managers - officers, directors, trustees, and employees with authority to act on behalf of the Foundation – Substantial contributors to the Foundation (including parent company) – Family members of the above – Certain government officials – Business entities with at least 35% ownership by disqualified persons
What is Not Self Dealing? • Paying compensation for personal services that are reasonable and necessary to carry out the exempt purpose of the Foundation if the compensation is not excessive • Incidental and tenuous benefits – Public recognition for the Company – Consumer goodwill for the Company – Increased morale of Company employees • Providing goods and services to the Company and Company employees on the same terms as the general public
Investment Oversight • Legal and fiduciary responsibility of managing foundation investment assets lies with the board of directors – cannot fully delegate • Uniform Prudent Management of Institutional Funds Act (UPMIFA) provides guidance related to the governance of investment assets (endowments)
Investment/Finance Committee Responsible for initiating an investment policy statement that: • clearly outlines the investment objective • roles and responsibilities • performance expectations • spending needs • any prohibitions on investments
Investment/Finance Committee cont. Often responsible for hiring or recommending investment managers: • RFP or proposal process • Written engagement letter or agreement • Ability to terminate relationship • Performance measurements • Appropriate fees
Mission Measurement • Hot topic today – funders want to know exactly how their money is being used • Growing pool of consultants available to assist • Provides valuable data to work smarter and spend less Ask: Who or what purpose does your organization serve and what change do you seek to create, when?
Donor Advised Funds
DAFs Who calls the play? A donor advised fund is administered by a public charity and solicits advice and recommendations from the donor or others specified by the donor Has significantly lower financial costs and all compliance burdens are on the public charity The donor has no legal authority over the fund Not the right choice if donor desires significant long-term control
Private Foundation Relationships Business & Family Offices
Private Foundations Private foundations often: • Pass philanthropy as a family value from generation to generation • Help a family business sustain corporate citizenship and community good will
Private Foundations • Often controlled by family members or business executives • High wealth families often have a “family office” that manages or supports family foundation – Family offices typically handle the investments and other business needs
Private Foundations But that darn Self- Dealing… • Prohibits transactions between a PF and a DQ’d person • Can be direct or indirect, and includes: – Sale, exchange or lease of property – Lending of money or extension of credit – Furnishing of goods, services or facilities – Payment of compensation – Transfer to, or use of, income or assets of foundation
Private Foundations Self-Dealing (cont.) • Disqualified persons include: – Substantial contributors – Foundation managers – 20% Owners of substantial contributors – Certain family members* – Business entities of which the foregoing own more than a 35% combined interest * SEE Treas. Reg. § 53.4958-3(b)(1)
Private Foundations Self-Dealing (cont.) • Key exceptions – Reasonable compensation for reasonable and necessary personal services – Freebies (goods and services provided at no cost to the foundation) – Interest-free loans to the foundation – Certain corporate recognitions
Private Foundations Common Issues w/Family Offices & Businesses • Paying for the services of family office/business • Sharing space and resources with family business or family office • Grantmaking – Return benefits – Charities that employ family members • Co-investing • Compensating & reimbursing directors/officers
Private Foundations Paying for Services • A private foundation cannot pay a family office or family business for services provided unless services are personal services that are necessary and reasonable • If services are not “personal services,” private foundation must contract w/independent third party or receive services for free • If services are “personal services,” compensation must be reasonable
Private Foundations What are Personal Services? • Narrowly defined in regulations as legal, investment management, banking, brokerage and accounting (“professional & managerial”), but rulings give context – Board & staff functions, Rev. Rul. 74-591 – Administration & grantmaking, e.g., PLR 9433027 – Commercial property management, e.g., PLR 9226067
Private Foundations Personal Services • Not personal services (Think Blue Collar jobs) – Maintenance, janitorial and security, Madden, Jr. v. Comm’r , T.C. Memo. 1997-395; PLR 200315031 – Secretarial services, PLR 200217056 – Real estate services: compare PLR 9325061 & 200326039
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