2012 Western Conference on Tax-Exempt Organizations


Los Angeles

I'll be attending the 2012 Western Conference on Tax Exempt Organizations (WCTEO) co-sponsored by Loyola Law School and the IRS on November 29 and 30. This is the must-attend conference on the West Coast for attorneys and accountants who serve the nonprofit sector. And it's always nice to have the opportunity to meet and reconnect with colleagues (and play beach volleyball in Santa Monica after the conference ends). Among the presentations I'm looking most forward to: Operational Issues in Joint Ventures, Update on Executive Compensation, Current Charitable Solicitation Issues (paid solicitors, coventurers; multi-state events; use of social media), For-profit Subs and Other Complicated Structures, and Program Related Investments and other Mission Related Investments. 

I'll be live tweeting the Conference (#WCTEO) and providing some highlights below:

 Day One:

  • Treasury Priority Guidance 2012-13 – see IRS site
  • IRS Update: Foreign grantmaking – see proposed reg 134974-12, which can be currently relied upon.
  • If IRS responds to exemption application with questions indicating the app wasn't carefully read, ask for manager. Holly Paz, IRS
  • Joint venture policies are critically important to create understanding for for-profit partner's professionals.
  • IRS will be suspicious of any nonprofit joint venture; must evidence furthering charitable purpose & no impermissible private benefit.
  • Licensing of intangibles (eg nonprofit's logo) should be factored in nonprofit's capital contribution to joint venture.
  • Shared employee costs – be careful of valuation for arm's length transaction – consider total comp + assoc HR support, insurance, etc.
  • In a joint venture with a for-profit, the nonprofit partner must have at least 50% governance control, not nec 50% ownership.
  • Fast track settlement with IRS – a valuable little-used mediation option http://www.irs.gov/irb/2012-36_IRB/ar08.html
  • Peter Drucker Institute – Award for Nonprofit Innovation 
  • For-profit that represents to the public that a purchase will benefit a charity is probably a commercial coventurer – know the rules.
  • For-profit compensated by anyone (incl "tips" from donors) for including donate button on website – may be a commercial fundraiser.
  • Alternative investments – nonprofits, if you don't know what you're doing, don't include it in your portfolio.
  • Be careful of passive investment income that may be subject to UBIT if org borrows to fund operations; see ABA comments to IRC 514.
  • Executive compensation – for comparables, consider budget, scope, complexity, geography, unique talents/backgrounds.
  • Executive compensation – difficult to use 990 data to compare total comp (including perks/benefits that may be hard to value).
  • Board compensation – seeing more (big) exempt organizations considering this; but generally avoid paying per meeting fees.
  • Nonprofit executive compensation – rebuttable presumption important but not foolproof – IRS can assert inurement/private benefit.
  • 2012 DC case re denial of exemption – commerciality, inurement – http://plannedgifts.ucsc.edu/?pageID=134&docID=526
  • Corporate Philanthropy http://www.stblaw.com/content/publications/pub595.pdf (download)
  • Charity event tickets paid for by company foundation that benefit company's employees = self-dealing.

Day Two:

  • Many IRS PLR (private letter rulings) denying 501(c)(3) because of operating in commercial manner, failure to operate primarily for exempt purpose.
  • 501(c)(6) members must have voice in operations & org must have meaningful extent of membership support. IRS PLR 201242010.
  • Selection of consultant without bidding process held to be form of prohibited private benefit.  PLR 2101234029. Hopkins says wrong.
  • Lifetime board positions unlawful in most states & IRS says ineligible for exemption in PLR 201233017.
  • Be careful! Charitable deductions are being denied for legitimate gifts to charities because of lack of proper substantiation.
  • Think about timing of creating for-profit subsidiary – may not want to wait if know will soon add joint venture partners.
  • Single member disregarded LLC with 501(c)(3) member that is not title holding company still subject to CA gross receipts tax.
  • If benefit corporations or flex purpose corps raise funds in a charity-like manner, CA Attorney General may exercise charitable trust jurisdiction [Ed. via Arthur Rieman, citing Belinda Johns who heads the charitable trust section for the AG].
  • Nonprofit may form nonprofit subsidiary to compartmentalize liabilities but must understand oper concerns & evidencing separateness.
  • Nonprofit using SMLLC sub for liability protection – need to make sure parent practically observes separation, adequately capitalizes.
  • IRS Notice 2012-52: Charitable Contributions to Domestic Disregarded Entities 
  • IRS Notice 2012-69: special relief to encourage employee leave-donation programs for Hurricane Sandy victims
  • Tax Extenders – see Independent Sector site (charitable rollover IRA and others) and s-corp contribution basis adjustment
  • Back-loaded charitable lead trusts (CLATs) – see Innovative CLAT Structures: Providing Economic Efficiencies to a Wealth Transfer Workhorse
  • White House Office of Social Innovation very interested in program-related investments http://www.whitehouse.gov/blog/2012/05/04/opening-door-program-related-investments
  • Ruth Madrigal, IRS: Not all good purposes are charitable (job creation in and of itself is not charitable) https://nonprofitlawblog.com/home/2012/10/starting-a-nonprofit-what-is-charitable-under-501c3.html
  • Gates Foundation PRI example: sales volume guaranties (polio vaccines) http://www.rhsupplies.org/fileadmin/user_upload/Final_Report_-_June_2008.pdf UNICEF
  • Public charities and DAFs may be smart to use PRI rules (even if they are not required to) – Victoria Bjorklund
  • Nonprofit with taxable sub may put new taxable sub with losses under the first sub (even if would qualify as exempt) to offset income
  • Can outside counsel be a disqualified person? Possibly. How about in-house counsel? Depends. Use rebuttable promotion procedures.
  • 501(c)(3) public charity startup – individual person sole member setup may result in IRS not providing exemption even if wrong
  • Insiders = 5 year look back for public charities excess benefit txs (eg, director 4 years ago = DQP), not defined for priv fdns 
  • If PF making grant to startup PC before IRS recognition of 501(c)(3), consider conditional ER grant (no ER if IRS recognizes PC)

You can find my post on last year's WCTEO here