Serving Public Charities Registration and Compliance 1
Public Charities – IRS Compliance Issues Presented by Lisa Schaures Schwabe, Williams & Wyatt 2
Classification • State • Federal – I.R.C. § 501(c)(3) – I.R.C. § 509(a)(1)-(4) Nonprofit Law Institute, October 28, 2016 3
Section 501(c)(3) • I.R.C. § 501(c)(3) – Organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals. Nonprofit Law Institute, October 28, 2016 4
Overarching Rules • Private Inurement Prohibition: No part of the net earnings of which inures to the benefit of any private shareholder or individual. • Lobbying Restrictions: No substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in 501(h)). • Political Activity Prohibition: Does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office. Nonprofit Law Institute, October 28, 2016 5
Public Charities; Where Do You Fit? • I.R.C. § 509(a)(1), (2), (3), and (4) • Organizations by Nature of Activities: – Churches – Educational organizations – Hospitals and medical research organizations – Supporting organizations of public colleges and universities – Governmental units Nonprofit Law Institute, October 28, 2016 6
Public Charities • Publicly Supported Organizations: – Fundraising and Publicly Supported: Normally receives a substantial part of its financial support (not including income received in the exercise of its exempt function) from publicly supported organizations, from a governmental unit, or from direct or indirect contributions from the general public. – Income in Furtherance of Exempt Purpose: Public support normally received (public support includes gross receipts from the performance of exempt activities) is more than 1/3 of its total financial support and normally receives not more than 1/3 of its financial support from gross investment income. Nonprofit Law Institute, October 28, 2016 7
Public Charities • Supporting Organization: – Supports or benefits other public charities in prior categories • Relationship with other public charities: – Operated, supervised, or controlled – Supervised or controlled in connection with – Operated in connection with • Testing for Public Safety: – Organized and operated exclusively for testing for public safety Nonprofit Law Institute, October 28, 2016 8
Unrelated Business Income • I.R.C. § § 511-514 • Unrelated business income tax (“UBIT”) at regular corporate rates Nonprofit Law Institute, October 28, 2016 9
What Causes UBIT? • Net income from: – Trade or business, – Regularly carried on, and – Not substantially related to organization’s exempt purpose. Nonprofit Law Institute, October 28, 2016 10
Examples of Exceptions to UBIT • Interest income, dividends, and annuities • Royalties • Rent • Sale of capital assets • Activities conducted for convenience of members, students, patients, or employees • Activities conducted entirely by volunteers • Sale of donated merchandize • Certain bingo games • Corporate sponsorships Nonprofit Law Institute, October 28, 2016 11
Common UBIT Compliance Issues • Determining classification as substantially related to exempt activities. • Criteria for a corporate sponsorship. • Advertising. Nonprofit Law Institute, October 28, 2016 12
Common UBIT Compliance Issues • Rent exceptions. • Activities of subsidiaries. • Alternative investments, joint ventures, and partnerships. • Special events. Nonprofit Law Institute, October 28, 2016 13
Excess Benefit Transactions • I.R.C. § 4958 – Transaction in which the economic benefit provided by the public charity to a disqualified person exceeds the value of the consideration received for providing such benefit. Nonprofit Law Institute, October 28, 2016 14
Intermediate Sanctions and Other Penalties • Personal and Charity liability of 5% - 200% • Revocation of exempt status • Back payment of taxes owed Nonprofit Law Institute, October 28, 2016 15
Procedures to Protect Against Excess Benefit Transactions • Annual training for board members and officers • Conflict of interest policy and other governance policies • Due diligence • Documentation • Director and Officer Insurance Nonprofit Law Institute, October 28, 2016 16
Executive Compensation • Serving the public interest means not providing more than an incidental private benefit. • Prohibition against net earnings inuring to the benefit of an “insider.” Nonprofit Law Institute, October 28, 2016 17
Reasonable Compensation • Reasonable compensation (clearly intended as such) is not an excess benefit. • Steps to confirm that compensation is reasonable and clearly intended to be reasonable compensation. Nonprofit Law Institute, October 28, 2016 18
Lobbying, Political Activity, and Issue Advocacy • Lobbying: – No substantial part test – Section 501(h) election and test – Penalties and jeopardy to tax exempt status – Common Issues Nonprofit Law Institute, October 28, 2016 19
Lobbying, Political Activity, and Issue Advocacy • Political Activity: – Prohibition on political campaign participation or intervention on behalf of (or in opposition to) any candidate for public office – No de minimis – Penalties and jeopardy to tax exempt status Nonprofit Law Institute, October 28, 2016 20
Political Activity, Lobbying, and Issue Advocacy • Issue Advocacy: – Positions on issues that are related to the organization’s exempt purposes – Educating or attempting to influence the public on policy – Implicitly favoring or opposing a candidate – Factors to consider Nonprofit Law Institute, October 28, 2016 21
Lisa E. Schaure Shareholder 206-407-1566 lschaures@schwabe.com Lisa Schaures guides businesses, social ventures Schwabe, Williamson & Wyatt and nonprofits in the Pacific Northwest through US Bank Centre everyday general counsel matters, quandaries and 1420 Fifth Ave major life cycle events. In more than 10 years of Suite 3400 practice, she has helped clients through starting up, governance structuring, purchases, mergers, Seattle, WA 98101 conversions, conflicts of interests, acquiring tax exempt status, complex tax concerns, deferred compensation strategies, contract negotiations and expansion growing pains. schwabe.com Nonprofit Law Institute, October 28, 2016 22
Registration Requirements with the Office of the Secretary of State Presented by Tsering Cornell WA Office of the Secretary of State 23
Agenda • Registration Requirements – Business Entities and Filings – Charities Program • Public Records • New Registration Systems 24
Business Registration Requirements • Types of Business Entities • Types of Required Business Filings • Consequences for Failure to Maintain “Active Registration” 25
Types of Business Entities • Profit Corporations: RCW 23B • Non Profit Corporations: RCW 24.03 • Limited Liability Companies: RCW 25.15 • Limited Partnerships (LP): RCW 25.10 • Limited Liability Partnerships: RCW 25.05 • Limited Liability LP: RCW 25.10 26
Types of Business Filings • Name Reservations and Registrations • Formation documents – Articles of Inc., Certificates of Formation • Foreign Registration • Amendments • Mergers and Conversions • Annual Reports • Statements of Change 27
More on Business Filings • Name: must be distinguishable on the records (RCW 23.95.300) – Domestic: Name Reservation (180 days) – Foreign: Name Registration (through calendar year) • Annual Reports: must be filed each year by end of month formed • Registered Agent: must have a registered agent with a street address in WA State 28
Administrative Dissolution: Grounds (1)The entity does not pay any fee, interest, or penalty required to be paid to the secretary of state when due; (2)The entity does not deliver an annual report to the secretary of state not later than 120 days after due; (3)The entity does not have a registered agent in this state for 30 consecutive days; or (4)The entity's period of duration expired. 29
Administrative Dissolution: Impact Inactive Status: – Name no longer protected – Late fees – May not carry on activities except to wind up – Note: Does not terminate the authority/responsiblity of registered agent 30
Reinstatement • 5 years • Confirm name available, if not supply alternative names • All back fees due **Note: Voluntary Dissolution of a nonprofit corporation is different; under current RCW 24.03, no method to withdraw (new draft Nonprofit Act remedies this) 31
Charities Program • Types of Charities Registrants • Types of Charities Filings • Consequences of Failure to File and Renew 32
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