2015 Western Conference on Tax-Exempt Organizations (WCTEO)

Pershing Square in Los Angeles, USA

Loyola Law School is holding its 19th-Annual Western Conference on Tax Exempt Organizations (WCTEO) in Los Angeles on November 19 and 20. This is one of the country’s premier conferences on tax-exempt organizations and one of my must-attend events as an attorney for nonprofits. I had the honor of speaking at the WCTEO a couple of years ago and have another opportunity this Friday.

The following is a running list of highlights from the WCTEO (check back!):


Washington Update

IRS Exempt Organizations division will focus resources on five strategic issue areas:

  1. Exemption: Issues include non-exempt purpose activity and private inurement, enforced primarily through field examination;
  2. Protection of Assets: Issues include self-dealing, excess benefit transactions, and loans to disqualified persons, enforced primarily through correspondence audits and field examination;
  3. Tax Gap: Issues include employment tax and Unrelated Business Income Tax liability, enforced through compliance checks, correspondence audits, and field examination;
  4. International: Issues 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; and
  5. Emerging issues: Issues include non-exempt charitable trusts and IRC 501(r), enforced through compliance reviews, correspondence audits, and field examination.

Consequences of State of Incorporation

  • In choosing a state, consider: (1) state of founder/incorporator; (2) state of domicile; (3) states where activity will be conducted; and (4) state’s charity regulation regime (but note that a strict regime may be a good thing for protecting charitable assets)
  • California may not be the appropriate choice if a majority of the contemplated directors will be ‘interested persons’ (compensated or related to someone compensated)
  • California charity enforcement: AG focuses on fraud, mismanagement, and diversion of charitable assets
  • Internal affairs doctrine: Generally, state of incorporation controls internal affairs (structure and internal administration)
  • AG holds that part of the California Nonprofit Public Benefit Corporation Law will apply to foreign nonprofit corporations with activities in California citing Cal. Corp. Code Sec. 6910 and precedential cases including American Center for Education v. Cavnar
  • Courts are less apt to apply the internal affairs doctrine when vital statewide interests are at stake, such as protecting its citizens from harmful conduct
  • The Delaware General Corporation Law (DGCL) is a flexible enabling statute, allowing nonstock corporations and their members to craft specific internal governance regimes, but the DGCL does require nonstock corporations to have members
  • DGCL was amended in 2010 to provide more guidance regarding nonstick corporations (see New Day for Nonstock Corporations: The 2010 Amendments to Delaware’s General Corporation Law)
  • Delaware – board committees can be granted broad powers (but may be problematic if persons who are not board members are on the committee)
  • Delaware courts will tend to be protective of internal affairs doctrine for internal disputes (and statutes allow for Delaware laws to apply exclusively in such matters) but this would not apply if a foreign state charity official sues the nonstock corporation or its board members

Form 990 Issues

  • Description of mission on page 2 must be board-approved or ratified.
  • Make sure the IRS has an accurate picture of the organization – see page 2: Did the organization undertake any significant program services during the year which were not listed on the prior Form 990 or 990-EZ? Did the organization cease conducting, or make significant changes in how it conducts, any program?
  • Only answer “yes” to the following question if the board receives a complete, unrelated Form 990 (including Schedule B): Has the organization provided a complete copy of this Form 990 to all members of its governing body before filing the form?
  • Use Schedule O to include an explanation of whether new earned revenues is not unrelated business income, if that is the organization’s position
  • Schedule L definition of “interested person” now includes creators/founders and substantial contributors (and family members and related entities) in disclosures regarding loans and business transactions – need to exercise reasonable efforts to get this information (consider using negative confirmation letter) – consider whether to identify substantial contributors by name here (instead of simply by the term “substantial contributor”) because this Schedule is not designed to be redacted
  • Schedule A requires greater disclosures from supporting organizations (new Part IV)
  • Pubic disclosure issues – moves towards greater public access – e-filed 990s will be made available by the IRS in machine-readable format (MeF) – will result in great new applications (thanks to Carl Malamud and Public.Resource.org for litigating this
  • Public disclosure issues – attempts towards lower access by state regulators – but unredacted Schedule B (donor disclosure) to Form 990 must be submitted to state’s Attorney General (Center for Competitive Politics vs. Harris)

Hot Issues in Nonprofit Compensation

  • Executive compensation is a top subject of interest for government oversight
  • Bonuses – make them discretionary (reasonable and tied to affordability), performance-based, focused on retention
  • Severance pay – intended to help with attraction and retention concerns; payable if terminated without cause (possibly in part for release of cognizable claims)
  • Fringe benefits – need to have and enforce policies and know the specific rules involved – e.g., working condition fringe benefits and accountable plans not subject to excess benefit transactions, but only with full compliance
  • Incentive compensation design – be careful of private inurement concerns, different rules for fixed vs. non-fixed payments, ceiling or cap, tying to objective measure of performance, no joint venture, no incentive to reduce charitable services – process matters (approval by independent governing body, comparability data, articulation of clear relationship between incentive and accomplishment of charitable purposes)
  • Never raise compensation just before retirement if it looks like the raise was effected simply to raise the retirement benefit
  • Comparability data: might use for-profit examples but must be justified on facts and circumstances and documented contemporaneously
  • Help Hospitalized Veterans case – see Calif. AG Kamala Harris Comes Down on Questionable Veterans Charity – Nonprofit Quarterly
  • See Executive Compensation Webinar (2010) – Martin Katz, Frederic W. Cook & Co.

Pete Manzo, United Ways of California

  • Don’t discount United Way as a simply old-school model of operating a nonprofit – look what they’re doing now with 2.6 million volunteers and 9.6 million donors and a focus on education, income and health—the building blocks for a good quality of life and a strong community (see, for example, United Way’s work on the earned income tax credit and the 2-1-1 referral program).
  • United Way remains the largest privately-funded nonprofit in the world with an active public policy agenda, providing a platform for people to take meaningful action that makes a difference
  • We live in very different times – see, for example, America’s Top Companies: 1964 vs. 2011 (“In 1964, AT&T topped the list with $254 billion in market capital, and 758,611 employees. Today, Exxon Mobil is in first place—with $412 billion in market capital, and 83,600 employees.”)

Technology and the Nonprofit Organization

Professional Opinions and Exempt Organizations

  • Different types and reasons for opinions: comfort (e.g., exempt from UBIT), contractual condition (e.g., required for closing), escape hatch (e.g., right to terminate joint venture if counsel opines exempt status is at risk), penalty protection (e.g., reliance on a reasoned written legal opinion of counsel – IRC 4941, 4944, 4945, 4958), ASC 740 (FIN 48), proper tax reporting (e.g., 990)
  • Loren E Parks and Parks Foundation vs Commissioner 11/17/15 – shocking conclusion by court that petitioner (taxpayer) relied on “reasoned written legal opinion”
  • Reasoned written legal opinion – an opinion will be considered “reasoned” even if it reaches a conclusion which is subsequently determined to be incorrect so long as such opinion addresses itself to the facts and applicable law.
  • A foundation cannot rely on an opinion from foreign counsel to make a good faith determination of equivalency – see International Grantmaking: Equivalency Determination
  • IRC Section 6694 contains penalties for tax return preparers who are found responsible for a taxpayer’s understatement of tax liability based on taking an “unreasonable position.” This section creates a three-tier classification of support for positions – “substantial authority,” “reasonable basis,” and “more likely than not.”
  • Circular 230 – competence and reasonableness are keys
  • Form 1023-EZ: “will” level opinions – tax return preparers should be very careful about making such opinions if signing the exemption application or advising a client to sign


Current Developments

Charitable Giving

  • CA: prudent investor standard in Nonprofit Corporation Law harmonized with investor standard in UPMIFA (see Good News on the Investment Front!! California Passes AB 792, Harmonizing Investment Standards for Nonprofits in California – Nonprofit Law Matters)
  • CA: conformity on CRTs and unrelated business income – California (Finally) Conforms to Federal Treatment of UBTI in Charitable Remainder Trusts – PGDC
  • Using LLCs to facilitate gifts to private foundations PLR 201407021 – Distribution to Foundation Won’t Result in Self-Dealing or Excess Business Holdings
  • IRS Issues Final Regs on Sale of CRT Interests – Trusts & Estates
  • Enforcing pledges – see When Donors Back Out: Are Charitable Pledges Legally Enforceable – Inside Philanthropy
  • Enforcing donor intent – see How Donor Intent and External Influences Can Impact Your Nonprofit Organization (Garth Brooks case) – Nonprofit Talent

Hot Topics in State and Local Taxation

  • Private person challenging organization’s status as a property tax-exempt organization – see Princeton Loses Appeal in Bid to Dismiss Tax-Exemption Suit (discussing Fields v. Trustees of Princeton University) – Bloomberg Business; Tax Court Decision Could Impact NJ Hospitals – The Nonprofit Times
  • Unlike the church exemption, the welfare exemption requires the church to provide certain information including financial information to the BOE (such as its financial statements and information on anyone who is paid more than $78,000 annually in compensation).
  • Challenge: lack of uniformity in application of transfer tax for change in ownership of property due to a change in the composition of a nonprofit’s board of directors or a merger between two nonprofit corporations