FINANCIAL MANAGEMENT

FASB Updates Not-for-Profit Accounting Standards

Piggy bank with glasses and calculator on a black background

 

The Financial Accounting Standards Board (FASB) released its Accounting Standards Update (ASU) 2016-14, Presentation of Financial Statements of Not-for-Profit Entities, on August 18, 2016. The Update modifies previous accounting standards and Generally Accepted Accounting Principles (GAAP) that have been in place for more than 20 years. According to the American Institute of CPAs (AICPA), it “will change the way all not-for-profits (NFPs) classify net assets and prepare financial statements.” The Update’s new standards are effective for annual financial statements issued for fiscal years beginning after December 15, 2017.

Why the Change?

The ASU represents the first of two phases of FASB’s project to improve the current net asset classification requirements and the information presented in financial statements and notes about a not-for-profit entity’s (NFP’s) liquidity, financial performance, and cash flows. According to FASB Chair Russell G. Golden:

While the current not-for-profit financial reporting model held up well for more than 20 years, stakeholders expressed concerns about the complexity, insufficient transparency, and limited usefulness of certain aspects of the model.

Some Major Changes

There will only be two classes of net assets:

  1. Net assets with donor restrictions. The part of net assets of a not-for-profit entity that is subject to donor-imposed restrictions (donors include other types of contributors, including makers of certain grants).
  2. Net assets without donor restrictions. The part of net assets of a not-for-profit entity that is not subject to donor-imposed restrictions (donors include other types of contributors, including makers of certain grants).

These two classes will replace the three existing classes of net assets many of us are familiar with (and confused about): unrestricted, temporarily restricted, and permanently restricted. This will change the way the statement of financial position (balance sheet) and the statement of activities (income statement) will be presented.

In addition, the ASU will require the enhanced disclosures about:

  • Amounts and purposes of governing board designations, appropriations, and similar actions that result in self-imposed limits on the use of resources without donor-imposed restrictions as of the end of the period.
  • Composition of net assets with donor restrictions at the end of the period and how the restrictions affect the use of resources.
  • Qualitative information that communicates how an NFP manages its liquid resources available to meet cash needs for general expenditures within one year of the balance sheet date.
  • Quantitative information, either on the face of the balance sheet or in the notes, and additional qualitative information in the notes as necessary, that communicates the availability of an NFP’s financial assets at the balance sheet date to meet cash needs for general expenditures within one year of the balance sheet date. Availability of a financial asset may be affected by (1) its nature, (2) external limits imposed by donors, grantors, laws, and contracts with others, and (3) internal limits imposed by governing board decisions.
  • Amounts of expenses by both their natural classification and their functional classification [e.g., program service, general and administrative, or fundraising]. That analysis of expenses is to be provided in one location, which could be on the face of the statement of activities, as a separate statement, or in notes to financial statements.
  • Method(s) used to allocate costs among program and support functions.
  • Underwater endowment funds [i.e., endowments that have a current fair value that is less than the original gift amount (or amount required to be retained by donor or by law)], which include required disclosures of (1) an NFP’s policy, and any actions taken during the period, concerning appropriation from underwater endowment funds, (2) the aggregate fair value of such funds, (3) the aggregate of the original gift amounts (or level required by donor or law) to be maintained, and (4) the aggregate amount by which funds are underwater (deficiencies), which are to be classified as part of net assets with donor restrictions.

Nonprofits that elect to use the direct method of reporting on their statements of cash flow will no longer be required to present or disclose the indirect method (reconciliation)

Investment returns must be reported net of external and direct internal investment expenses and no longer will require disclosure of those netted expenses.

Additional Resources

IN FOCUS: FASB Accounting Standards Update on Not-for-Profit Financial Statements (live webcast, Tuesday, September 13, 2016, 10:00–11:15 a.m. PDT)

TWEETS OF THE WEEK

Nonprofit Tweets of the Week – 8/19/16

Media

The Summer Olympics continues to occupy much of the media’s attention though there continues to be important developments with respect to the U.S. Presidential election, police-citizen relations, Syria, and the Louisiana flooding. Have a listen to Aaron Neville‘s version of Louisiana 1927 while perusing our curated nonprofit tweets of the week:

  • Gene: IRS Priority Guidance Plan (update released yesterday) – #nonprofit exempt orgs pages 11-12
  • Tony Martignetti: IRS to Update Rules for Exempt Organizations Moving to Different States » @IndSector http://ow.ly/G82K303keg6
  • Foundation Center-SF: Form 1023 & 1023-EZ are different. So what’s the big deal? via @GuideStarUSA http://ow.ly/FQIl303gel1
  • Nonprofit VOTE: Get the facts re nonpartisan voter engagement for 501(c)(3)s w our new guide http://bit.ly/501c3guide #election2016
  • Tides: A Both/And Approach to Civic Participation Funding http://j.mp/2aQTgnA
  • Council of Nonprofits: We just answered this Q “Is there any basic info re: copyright for nonprofits?” Yes! http://buff.ly/2beDGzc HT @PublicCounsel
  • La Piana Consulting: Building a better board is about investing in relationship http://ow.ly/pxyB303ipEC
  • Ellis Carter: Cause Related Marketing and Commercial Co-Venture Best Practices: http://bit.ly/2br6S7u
  • Neva Gupta: #Socent leaders should take time to read these 11 articles by their peers in #philanthropy http://ow.ly/Aj4t303koE8
  • CompassPoint: 8 Tips to Help You Hold Space for Others: http://goo.gl/MZvN2R
  • Fortune: How Fortune’s ‘Change the World’ companies profit from doing good http://for.tn/2byuoNw  #ChangeTheWorld
DONOR-ADVISED FUNDS   IRS & FEDERAL TAX ISSUES

Donor-Advised Funds: What You Should Know

woman listening to gossip

Introduction

A donor-advised fund (“DAF”) is a charitable vehicle housed within a 501(c)(3) public charity that allows a donor to make a gift, take an immediate charitable deduction, and recommend, typically with strong persuasive authority, future grants made from funds in the DAF. Unlike private foundations that require a minimum annual distribution, a DAF has no distribution requirements and can allow investment funds within the account to build up for years or even decades. This is one reason why DAFs have come under fire by philanthropists and academics like Lewis B. Cullman and Ray Madoff, who together wrote The Undermining of American Charity published by The New York Review of Books (“Donor-advised funds (or DAFs) give donors all of the tax benefits of charitable giving while imposing no obligation that the money be put to active charitable use.”).

Growth

DAFs are growing ever faster, according to The Nonprofit Quarterly. The 2015 Donor-Advised Fund Report released by the National Philanthropic Trust in November 2015 and cited by The Nonprofit Quarterly provides:

Grants from donor-advised fund accounts to charitable organizations reached a new high at $12.49 billon …. This is a 27.0 percent growth rate compared to a revised total for 2013 grants of $9.83 billion.

 

Contributions to donor-advised fund accounts in 2014 totaled $19.66 billion, also an all-time high. This number surpasses the revised 2013 value of $17.23 billion by $2.4 billion …, an increase of 14.1 percent.

 

Charitable assets under management in all donor-advised fund accounts totaled $70.70 billion in 2014, an all-time high …. The increase in total charitable assets can logically be attributed to the growth in the number of funds (an 8.8 percent increase) and contributions (a 14.1 percent increase).

 

The number of donor-advised fund accounts increased by 8.8 percent in 2014, to 238,293 ….

 

Grant payout rates from donor-advised fund accounts annually exceeded 20 percent for the eighth consecutive year.

 

The 2014 average donor-advised fund account size reached $296,701, which is also an all-time high ….

Definition

A donor-advised fund is defined in the Internal Revenue Code as a fund or account:

  1. which is separately identified by reference to contributions of a donor or donors,
  2. which is owned and controlled by a sponsoring organization, and
  3. with respect to which a donor (or any person appointed or designated by such donor) has, or reasonably expects to have, advisory privileges with respect to the distribution or investment of amounts held in such fund or account by reason of the donor’s status as a donor.

– IRC Sec. 4966(d)(2)(A)

The first prong of this definition may be met by (1) naming the fund after a donor, or (2) treating a fund on the books of the sponsoring organization as attributable to funds contributed by a specific donor or donors. Contrary to popular myth, giving a fund a generic name (e.g., “The Human Fund” (Seinfeld alert)) doesn’t result in a fund falling out of the DAF definition. The second prong requires ownership and control by a sponsoring organization, which generally includes most domestic public charities. The third prong may be met even if a donor doesn’t have advisory privileges codified in a written agreement so long as the donor has reasonable reason to expect to have advisory privileges with respect to distribution or investment of amounts held in the fund. For more information, see our earlier post What is a Donor Advised Fund?

Exceptions: Even if a fund meets three prongs required of a DAF, it may still be excepted from the definition if:

  1. it make distributions only to a single identified organization or government entity; or
  2. the donor or donor advisor provides advice regarding grants to individuals for travel, study, or other similar purposes, provided that:
    1. the donor’s, or the donor advisor’s, advisory privileges are performed in his capacity as a member of a committee, all the members of which are appointed by the sponsoring organization;
    2. no combination of donors or donor advisors (or related persons) directly or indirectly control the committee; and
    3. all grants are awarded on an objective and nondiscriminatory basis pursuant to a procedure approved in advance by the board of directors of the sponsoring organization that meets the requirements of IRC 4945(g)(1), (2), or (3) (scholarship or fellowship grant to be used for study at a qualifying educational organization; prize or award to recipient selected from the general public; or grant with a purpose to achieve a specific objective, produce a report or other similar product, or improve or enhance a literary, artistic, musical, scientific, teaching, or other similar capacity, skill, or talent of the grantee; respectively).

Restrictions

No Distributions to Natural Persons

A sponsoring organization and its fund managers (including directors, officers, trustees, and employees having authority or responsibility related to any act or failure to act resulting in the prohibited distribution) may be subject to excise taxes if they engage in “taxable distributions” with respect to the DAF’s grants. A taxable distribution includes any distribution from a DAF to any natural person.

A taxable distribution imposes an excise tax of 20% on the sponsoring organization and 5% (with a $10,000 cap) on any fund manager who knowingly agrees to the distribution.

Unfortunately, the meaning of a “distribution” within the context of this rule has not been clarified by the IRS. A conservative view would suggest that payments to any individuals, even if goods or services of equal value were provided in return, are prohibited as a form of distribution. Under this interpretation, DAFs could only make payments to business entities for goods or services and not to any individuals or sole proprietorships.

Conditional Distributions to Organizations

A taxable distribution also includes any distribution from a DAF to any entity if:

  • the distribution is not for a religious, charitable, scientific, 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 purpose; or
  • the sponsoring organization does not exercise expenditure responsibility with respect to such distribution.

However, excepted from the definition of a taxable distribution are distributions from a DAF to:

  • any organization described in section 170(b)(1)(A) (which includes most public charities and private operating foundations) other than a disqualified supporting organization (e.g., non-functionally integrated Type III supporting organizations, other supporting organizations controlled directly or indirectly by the donor or any donor advisor),
  • the sponsoring organization of such DAF;
  • any other DAF.

Accordingly, distributions from a DAF to most public charities (other than disqualified supporting organizations and public safety organizations) and private operating foundations will not be taxable distributions.

As noted above, a taxable distribution imposes an excise tax of 20% on the sponsoring organization and 5% (with a $10,000 cap) on any fund manager who knowingly agrees to the distribution.

No Prohibited Benefits to Donors, Donor Advisor, or Related Persons

A donor, donor advisor, or related person* may be subject to a tax penalty if they advise a distribution, or receive, directly or indirectly, more than an “incidental benefit” resulting from a distribution. The penalty tax is 125% of the prohibited benefit, and any prohibited benefit must be returned to the DAF. As an example, a distribution from a DAF to a college for payment of a donor’s child tuition would be a prohibited benefit warranting a penalty tax.

* A related person includes a member of the donor or donor advisor’s family (spouse, ancestors, children, grandchildren, great grandchildren, and the spouses of children, grandchildren, and great grandchildren) and any 35-percent controlled entity (i.e., entity in which the donor and donor advisors own more than 35% of the total combined voting power of a corporation, the profits interest of a partnership, or the beneficial interest of a trust or estate).

Furthermore, any fund manager (e.g., director, officer, or employee having authority or responsibility with respect to the act in question) who knowingly agrees to make a distribution that confers a prohibited benefit faces a 10% tax amount of the benefit amount, not to exceed $10,000 per transaction. Note, though, that taxes for a prohibited benefit will not be imposed if the taxes for an excess benefit transaction are imposed instead on the same transaction.

No Excess Business Holdings

Generally, a DAF and its disqualified persons together may own no more than 20% of the voting stock, profits interest, capital interest, or beneficial interest in a business enterprise. For these purposes, a disqualified person includes the donor, donor advisor, and related persons. The penalty for a violation of the excess business holdings rule is a first-tier tax of 10% of the value of such excess business holdings and a second-tier tax of 200% if the foundation still has excess business holdings at the end of the taxable period. The amount of excess holdings is determined as of the day during the tax year when the foundation’s excess holdings were the greatest.

There are a few exceptions to this general rule, including:

  • Where the DAF (together with certain related DAFs) owns less than 2% of the voting stock and 2% of the value of all outstanding shares of all classes of stock.
  • Where the DAF and disqualified persons with respect to the DAF own up to 35% of the business enterprise but one or more persons who are not disqualified persons have effective control of the business enterprise.

No Excess Benefit Transactions

An excess benefit transaction is defined as any transaction in which an economic benefit is provided by the organization directly or indirectly to or for the use of any disqualified person, and the value of the economic benefit provided exceeds the value of consideration (including the performance of services) received for providing the benefit. For these purposes, a disqualified person is a person in a position to exercise substantial influence over the affairs of the organization at any time during the five-year look back period from the date of the excess benefit transaction, and, with respect to a DAF, includes the donor, donor advisor, and related persons (which also includes for these purposes, the donor’s and donor advisor’s brothers and sisters (whether by the whole or half blood) and their spouses).

If an excess benefit transaction has occurred, the IRS can levy taxes, commonly referred to as intermediate sanctions, on both the disqualified person who received the excess benefit and the organizational manager(s) who knowingly approved the excess benefit transaction:

  • 25% excise tax of the excess benefit on the disqualified person who received the excess benefit; and an additional 200% excise tax of the excess benefit if the violation is not corrected within the taxable period.
  • 10% excise tax of the excess benefit on the organizational manager who knowingly participated in the transaction (maximum of up to $10,000).

Resources

Donor-Advised Fund Guide Sheet Explanation (IRS)

Donor-Advised Funds (Council on Foundations)

Is the Fund a Donor-Advised Fund? (Council on Foundations)

What are the issues with donor-advised funds? (Urban Institute)

Discerning the True Policy Debate over Donor-Advised Funds (Urban Institute)

An Analysis of Charitable Giving and Donor Advised Funds (Congressional Research Service, 2012)

Regulations

Well, we’ve been waiting for regulations on DAFs for almost a decade since a DAF was first defined in the Pension Protection Act of 2006. DAF guidance has been on the IRS priority guidance list for years. The Treasury Department completed and released a study on DAFs in 2011, though it was criticized as “disappointing and non responsive” by Senator Chuck Grassley, Senate Finance chairman at the time of the 2006 legislation, and I can no longer access the report from the link on the IRS site.

You can read comments about prospective regulations from the American Bar Association’s Charitable Planning and Organizations Group of the Section of Real Property, Trust and Estate Law here. My personal view is not to expect proposed regulations before the Presidential election because of the growing controversy with DAFs, whether they should be treated more like private foundations with minimum annual distribution requirements, and how this all fits in with broader tax policies.

Benefits to Donors

  • An immediate income tax deduction
  • Avoidance of capital gains taxes if the gift is appreciated property
  • Reduction of the gross estate by the amount of the excluded asset

Advantages Over Setting Up a Private Foundation:

  • Donations to a donor-advised fund qualify for the more favorable charitable deduction treatment of a gift to a public charity than donations to a private foundation
  • Donor-advised funds are not subject to the self-dealing and payout rules applicable to private foundations
  • Sponsoring organization generally takes care of all the administrative work
  • Typically, low contribution minimums
  • Ease and relative low-cost in establishment
  • Privacy, if donor desires
  • Ability to receive donations from private foundations, charitable remainder trusts, charitable lead trusts

Disadvantages Over Setting Up a Private Foundation:

  • Lack of control over distributions (grant-making)
  • Lack of control over investments
  • Less visibility and prestige than family-named private foundation
  • Lack of flexibility (e.g., grant-making areas)
  • No ability to hire staff (such as the donor and his or her family members)
  • No distributions to individuals
TWEETS OF THE WEEK

Nonprofit Tweets of the Week – 8/12/16

Think Tank

The New York Times published a few illuminating and important articles on think tanks and corporate influence this week (including mine). Have a listen to Radiohead’s Kid A while perusing our curated nonprofit tweets of the week:

FUNDRAISING & CHARITABLE GIVING   IRS & FEDERAL TAX ISSUES   PRIVATE FOUNDATIONS / PHILANTHROPY

Program-Related Investments

Goodness

Program-related investments (PRIs) are investments (different from strictly donative grants) made by private foundations in which:

  1. The primary purpose is to accomplish one or more of the foundation’s 501(c)(3) exempt purposes (other than testing for public safety),
  2. Production of income or appreciation of property is not a significant purpose, and
  3. Influencing legislation or engaging in political campaign intervention is not a purpose.

While PRIs are not used widely by the vast majority of private foundations, PRIs can be an effective alternative strategy to grantmaking in advancing the foundation’s charitable purpose and meeting its minimum distribution requirements. One reason why PRIs are not used more broadly is the difficulty in interpreting whether a particular investment would qualify as a PRI and not subject a foundation to penalties for making a jeopardizing investment or failing to meet its distribution requirements (if it relied on the investment being part of its qualifying distributions). Some foundation rely on legal opinions to mitigate such risks, but this may not always be cost-effective, particularly for smaller investments. But legal opinions are not always necessary provided that the the foundation has a sufficient understanding of the PRI rules and how they are applied and is comfortable accepting and managing a modest amount of risk. The trade-off can be key in allowing a private foundation to use PRIs to “get more bang out of their buck.”

The following examples and principles are listed on the IRS webpage on program-related investments:

5 Examples of PRIs

  1. Low-interest or interest-free loans to needy students,
  2. High-risk investments in nonprofit low-income housing projects,
  3. Low-interest loans to small businesses owned by members of economically disadvantaged groups, where commercial funds at reasonable interest rates are not readily available,
  4. Investments in businesses in low-income areas (both domestic and foreign) under a plan to improve the economy of the area by providing employment or training for unemployed residents, and
  5. Investments in nonprofit organizations combating community deterioration.

7 PRI Principles

  1. An activity conducted in a foreign country furthers an exempt purpose if the same activity would further an exempt purpose if conducted in the United States,
  2. The exempt purposes served by a PRI may include any of the purposes described in section 170(c)(2)(B) are not limited to situations involving economically disadvantaged individuals and deteriorated urban areas,
  3. The recipients of PRIs need not be within a charitable class if they are the instruments for furthering an exempt purpose,
  4. A potentially high rate of return does not automatically prevent an investment from qualifying as program-related,
  5. PRIs can be achieved through a variety of investments, including loans to individuals, tax-exempt organizations and for-profit organizations, and equity investments in for-profit organizations,
  6. A credit enhancement arrangement may qualify as a PRI, and
  7. A private foundation’s acceptance of an equity position in conjunction with making a loan does not necessarily prevent the investment from qualifying as a PRI.

Two Sticky Issues

  1. When a private foundation makes a particular investment, like a loan to a for-profit, can the foundation reasonably justify that such investment was made primarily to advance the foundation’s specific exempt purpose? According to the regulations: “An investment shall be considered as made primarily to accomplish one or more of the purposes described in section 170(c)(2)(B) if it significantly furthers the accomplishment of the private foundation’s exempt activities and if the investment would not have been made but for such relationship between the investment and the accomplishment of the foundation’s exempt activities.”Beyond the PRI rules, can the foundation also show that any private benefit it provides to the for-profit is incidental, quantitatively and qualitatively, to furthering its exempt purpose? An interesting example of an investment target would be a local for-profit newspaper. If the private foundation makes a high risk $1 million loan to the newspaper company at below market interest, is that consistent with the foundation’s educational goals? Is the newspaper company only incidentally benefited by the loan primarily extended to help assure the local public remain informed of important issues?
  2. If the production of income or appreciation of property is a secondary purpose for making the loan (the primary purpose being to advance the foundation’s exempt purpose), how can the foundation tell if such secondary purpose is significant? According to the regulations: “In determining whether a significant purpose of an investment is the production of income or the appreciation of property, it shall be relevant whether investors solely engaged in the investment for profit would be likely to make the investment on the same terms as the private foundation.”Using the newspaper example above, what if, in lieu of a loan, the foundation purchased a $1 million equity stake in the newspaper company? Such purchase may be at below the stock’s market value (particularly if the foundation accepted non-preferred stock), but it could help leverage additional equity investments from other investors seeking more preferential terms, which could ultimately result in a high return for all shareholders. While a high rate of return in and of itself does not signal that the foundation had a significant profit motive at the time it made the investment, how can one tell?

Resources

Program-Related Investments: Will New Regulations Result in Greater and Better Use? Nonprofit Quarterly

Strategies to Maximize Your Philanthropic Capital: A Guide to Program Related Investments TrustLaw, Thompson Reuters Foundation for Mission Investors Exchange

Examples of Program-Related Investments – Final Regulations  Federal Register

 

TWEETS OF THE WEEK

Nonprofit Tweets of the Week – 8/5/16

Rio

The 2016 Summer Olympics starts today with the opening ceremony! Have a listen to the 2016 Summer Olympics Official Anthem Song while perusing our curated nonprofit tweets of the week:

IRS & FEDERAL TAX ISSUES   SOCIAL ENTERPRISE

Economic Development as a 501(c)(3) Activity

Economic prosperity financial concept as a group of green trees shaped as growing finance pie chart as a metaphor for gradual gains in company stock or competitive wealth success.

 

Economic development may not immediately come to mind as an activity that furthers a charitable purpose, but it doesn’t take long to think of circumstances where helping a depressed community in its economic development can help in the relief of poverty and distress, and in the combat of community deterioration, all of which are regarded as charitable purposes. Accordingly, it is possible for a 501(c)(3) organization to provide funds and other resources to for-profit businesses to advance the purposes of economic development consistent with its charitable purpose. However, such support is limited by the 501(c)(3) restrictions against private inurement, prohibited private benefit, substantial lobbying, and political campaign intervention. For private foundations, additional rules and restrictions apply with respect to self-dealing, excess business holdings, jeopardizing investments, and taxable expenditures.

Economic Development Corporations and Incubators

Public charities that focus on charitable economic development are sometimes referred to as economic development organizations or incubators. According to a 1990 EO CPE Text (Economic Development Corporations: Charity Through the Back Door) published by the IRS:

Economic development corporations generally are established to assist existing and new businesses located in a particular geographic area through a variety of activities including grants, loans, provision of information and expertise, or creation of industrial parks. Incubators are a type of economic development corporation generally formed to provide assistance to induce new businesses to locate in communities whose economies are depressed or deteriorating, or to provide assistance to existing, emerging businesses so that they may remain in such communities. Incubators provide low-interest loans, facilities and equipment to new and emerging businesses as well as clerical and technical services in an effort to encourage such businesses to locate in the depressed areas. The services provided to the new businesses are offered by the incubator at reduced rates or even free of charge. Incubators may be set-up and/or sponsored by local and state governments, they may be affiliated with universities, or they may be an offshoot of an existing tax-exempt organization. In many cases, incubator organizations operate a “technology center” where businesses can be assisted (nurtured) through provision of business expertise, lower rental rates or pooled or shared services.

Serving a Public Interest

In addition to having a stated charitable purpose and consistent activities, a 501(c)(3) economic development organization or incubator must serve a public rather than an private interest. Any private benefit conferred upon an individual or for-profit business that is more than incidental, quantitatively and qualitatively, to the furthering of its exempt purposes is prohibited. Grants of funds or other resources to for-profit businesses must be justified as incidental to advancing the 501(c)(3) organization’s charitable purposes, which may include relief of the poor and distressed and combat of community deterioration.

The 1990 EO CPE Text stated that the following factors “are necessary” for an agent to conclude that an economic development corporation is primarily accomplishing charitable purposes despite the element of private benefit present.

Assistance is targeted (1) to aid an economically depressed or blighted area; (2) to benefit a disadvantaged group, such as minorities, the unemployed or underemployed; and (3) to aid businesses that have actually experienced difficulty in obtaining conventional financing (a) because of the deteriorated nature of the area in which they were or would be located or (b) because of their minority composition, or to aid businesses that would locate or remain in the economically depressed or blighted area and provide jobs and training to the unemployed or underemployed from such area only if the economic development corporation’s assistance was available.

It’s been more than 25 years since the above guidance was released, and additional guidance, including a more definitive test and/or examples of acceptable charitable activities that reflect the current needs and economic climate in many communities, has recently been requested by the Council of Michigan Foundations (CMF):

CMF urges Treasury to consider updating previous guidance regarding economic development as a charitable activity by providing a more definitive test and/or examples of acceptable charitable activities that reflect the current needs and economic climate in many communities. Here are two examples encountered by CMF foundation members that illustrate the requests for foundation support.

 

• The Chamber of Commerce is sponsoring an initiative to encourage small businesses to locate in a deteriorating section of downtown and ask the local community foundation about collecting charitable contributions from individuals and businesses. The community foundation will then make grants to assist individuals with expenses associated with establishing new small businesses provided they agree to locate in this particular area.

 

• A rural municipality in the Upper Peninsula desires to expand internet services to its citizens and wants to collect charitable donations to build infrastructure through a fund at the local community foundation.

Lessening the Burdens of Government

It’s possible for an economic development organization to be exempt under 501(c)(3) based on the charitable purpose of lessening the burdens of government. This involves a two part test:

  1. There is an objective manifestation by a governmental unit that it considers the activities of the organization to be its burden; and
  2. The organization’s activities actually lessen such burden of the government.

The 1990 EO CPE Text lists 7 factors that favor a lessening of governmental burdens rationale for an economic development corporation (but also states that extreme caution should be exercised before employing a lessening the burdens rationale ):

(1) There is a state statute specifically authorizing government funding of an economic development corporation to operate by assisting fledgling businesses within the state as a means to help alleviate severe unemployment.

(2) The economic development corporation was established to specifically qualify under the statute and was funded under the statute.

(3) The state statute provides that the funding is more than a mere grant but provides the state with approval authority over projects to be financed by the corporation and approval must be obtained from the state on an ongoing basis.
(4) As part of its assistance, the economic development corporation operates in conjunction with a state university. (5) The specific cities which will be the corporation’s primary beneficiaries provide officials who sit on the corporation’s board of directors in their official capacity.

(6) The commissioner of the state’s Department of Economic Development utilizes the corporation as an extension to carry out services formally conducted by the Department. The Department was unable to continue such services because of budgetary constraints and is not otherwise prohibited from providing such services.

(7) The corporation is required to provide annual reports of its activities and finances to the state government.

Resources

Obtaining 501(c)(3) Status for Economic Development Organizations (Community Economic Development Law Project)

Economic Development Organizations, Trickle Down Charity and the Private Benefit Doctrine (American Bar Association)

TWEETS OF THE WEEK

Nonprofit Tweets of the Week – 7/29/16

Silhouette of a superheroine on clouds

The past week was marked by the Democratic National Convention and Comic-Con! Have a listen to Alicia KeysSuperwoman while perusing our curated nonprofit tweets of the week:

  • Nonprofit Quarterly: Examining important trends under way in the regulation of nonprofits and philanthropy: NPQ
  • Bridgespan Group: Free tools for building a #nonprofit board: http://bspan.org/29RFhgG  make it work from the ground up
  • BoardSource: Address the Need for Nonprofit Succession Planning http://hubs.ly/H03PfHK0
  • Ford Foundation: We must question how #philanthropy and our economic system intertwine. – @darrenwalker Medium
  • Commonfund: Responsible Investing Study of Foundations Released by @COF_ and Commonfund Institute http://hubs.ly/H03Gkbq0
  • For Purpose Law: No one wants to donate to pay for overhead, so we need to call it something sexier: FastCoExist by @bpaynter
  • Gene: Nonprofits’ tax penalties for political spending down sharply, says IRS Ind Sector $14,607 (2015); $643,776 (2014)
  • Stacy Palmer: NYT oped: How the Rich Are Hurting the Museums They Fund
  • Sandra Feinsmith: IRS Gives Opposite Rulings to Convention Committees BNA via @bloombergbna
  • Harvard Biz Review: Why you should involve a legal representative in new business initiatives from the beginning – Why Your Innovation Team Needs a Lawyer
  • Fast Co. Exist: A breakdown of all the business models in the sharing economy, from for-profit to co-op http://buff.ly/2aeCQC6
CURRENT AFFAIRS & OPINION   IRS & FEDERAL TAX ISSUES

Johnson Amendment: 501(c)(3) Prohibition on Political Campaign Intervention

Church

The Johnson Amendment refers to the law codified in Section 501(c)(3) of the Internal Revenue Code prohibiting organizations exempt from taxes under 501(c)(3) from participating in any political campaign on behalf of (or in opposition to) any candidate for elective public office. Churches & Political Activity: The Call to Repeal the Johnson Amendment, an article written by our senior counsel Erin Bradrick, was published by The Nonprofit Quarterly yesterday.

The most significant call for repealing the Johnson Amendment is from the Republican Party in its official 2016 Platform:

We value the right of America’s churches, pastors, and religious leaders to preach and speak freely according to their faith. Republicans believe the federal government, specifically the IRS, is constitutionally prohibited from policing or censoring the speech of America’s churches, pastors, and religious leaders. We support repeal of the Johnson Amendment, which restricted First Amendment freedoms of all nonprofit organizations by prohibiting political speech.

Additional Resources:

Know the law: Avoid political campaign intervention (IRS)

The Rules of The Game: A Guide to Election-Related Activities for 501(c)(3) Organizations (Alliance for Justice)

Republican Platform Calls for Repeal of Ban on Political Organizing by Churches (TIME)

TWEETS OF THE WEEK

Nonprofit Tweets of the Week – 7/22/16

Create

The past week was marked by the Republican National Convention and Melania Trump’s alleged plagiarism of a Michelle Obama speech from 2008. Have a listen to Robin Thicke’s (and Marvin Gaye’s) Blurred Lines while perusing our curated nonprofit tweets of the week:

  • Nonprofit Quarterly: In this new regulatory environment, can #nonprofits find a balance? NPQ
  • For Purpose Law: When the Revenue Agent Comes Calling: Organizational Control
  • Gene: The Future of #Philanthropy: Is a new gospel of giving on the rise? Eight philanthropic thinkers weigh in. The Nation
  • Bridgespan Group: 5 ways being flexible helps makes your #philanthropy more impactful: http://bspan.org/29liJ6b
  • Gene: 7 Steps #Philanthropy Can Take to Bring the #SDGs Home to America – @nataliejoross @cof
  • Stacy Palmer: Icebucket challenge lowered average age of donors to ALS charity from 50 to 35 & still prompting 25% rise in gifts The New Yorker
  • Gene: The Next Stage of Social Entrepreneurship: Benefit Corporations & the Companies Using This Innovative Corporate Form ABA
  • Jake Hayman: Is social investment a threat to #charity values? Forbes #socent #socinv #socialinvesting #philanthropy #Fundraising #CSR
  • Drew Lindsay: #BlackLivesMatter activism + #philanthropy? Foundations try to sort out their role. https://shar.es/1lPd7u @Philanthropy [Ed. Behind Chronicle of Philanthropy paywall.]
  • Nonprofit VOTE: BREAKING: @google to offer state-specific voter reg. guide ahead of 2016 Elections! http://ow.ly/g40k302myQ7  YASS!