TWEETS OF THE WEEK

Nonprofit Tweets of the Week – November 27, 2014

Thanksgiving in the palm of your hand
The truest indication of gratitude is to return what you are grateful for. -Richard Paul Evans

We have so much to be thankful for. But Thanksgiving also reminds us of the courageous efforts of those who worked and fought to give us so many of those things for which we are grateful and often take for granted. Let’s honor and build on their work today and everyday.

Have a listen to Meghan Trainor perform New Thanksgiving Classic Songs while perusing our curated nonprofit tweets of the week:

  • ColorOfChange: A reminder from @ColorOfChange that #MikeBrown and all #BlackYouthMatter.
  • John Lewis: I know this hard. I know this is difficult. Do not succumb to the temptations of violence. There is a more powerful way. #FergusonDecision
  • TIME: “Why Ferguson should matter to Asian-Americans” http://ti.me/1ppPjqh
  • Gene: Dep’t of Justice: 182,000 charities in CA operating without proper registration – what happens if they’re shut down? JD Supra [Ed. See our post on the proposed regs that may signal the AG’s initiative to do this and hold board members personally liable if those charities continue operating.]
  • Gene: Preventing and Investigating Fraud, Embezzlement, and Charitable Asset Diversion: What’s A Nonprofit Board To Do? Public Counsel
  • CEP: Seven Trends in Philanthropy to Be Thankful For http://ow.ly/EP3eE via @InsidePhilanthr
  • Alliance Magazine: Be Afraid: The Five Scariest Trends in Philanthropy @InsidePhilanthr http://ow.ly/EFF9p
  • Independent Sector: Great editorial by IS board member Sonya Campion in @seattletimes. Echoing sentiments from @Diaviv speech at #ISConf http://ow.ly/ENx4h
  • AFJ Bolder Advocacy: 5 lessons for #nonprofit orgs from the 2014 election http://bit.ly/1ybJMnK
  • BDO Nonprofit: Don’t miss these 10 nonprofit employment mistakes from @NonProfitTImes http://bit.ly/1tVgODA
  • Gene: The commandments of Economics vs the commandments of the Earth | Nonprofit Quarterly – http://bit.ly/158Ux0J #socent

 

EVENTS

AAPI Capacity Building and Grant Seeking Event

White House Initiative on AAPI

Last week, I had the privilege of attending an event hosted by the White House Initiative on Asian Americans and Pacific Islanders, Region 9 Interagency Working Group. The central purpose of the Initiative is to increase AAPI community access to federal resources. This event focused on best practices and strategies for finding and applying for grants. Here are some highlights:

  • Leafa Taumoepeau, from Taulama for Tongans, stressed the importance of bridging the gap in understanding between a funding source and the target community. Without cultural appreciation and acknowledgement of how a community may be best served, there is a greater risk that money may be spent on activities that miss the mark.
  • Chic Dabby, from the Asian Pacific Institute on Gender-Based Violence, noted the unfortunate emphasis on what we don’t want in our communities, versus what we do. As an example, she suggested we transform the dialogue from “ridding our communities of violence against women,” and instead, discuss how we may implement a gender democracy.
  • The panelists offered a number of helpful approaches to applying for various funding opportunities.  When writing a grant proposal, starting with a budget, as opposed to brainstorming potential activities, is key. Creating a budget as an initial step helps to demonstrate your actual capacity, inform program planning, and eliminate over-promising.
  • Whether a grant proposal is accepted or rejected, organizations should request comments from the grant reviewer who worked with their application. The most informative tool in applying for grants is determining which aspects of an organization’s application were effective, and which may be improved upon.

While applying for and securing funding is imperative for many charitable organizations, remaining anchored to the organization’s mission and vision is equally important. Organizations should apply for grants that are consistent with their exempt purposes and core values and be careful not to chase funds by ​straying from ​such purposes and values simply to appease grant makers. Lastly, founders of a new charitable project thinking of forming a nonprofit should carefully assess their funding strategy prior to formation. Funding is almost never a guarantee, and founders should take reasonable steps to assure that charitable funds do not go to waste for a lack of planning.

EVENTS

2014 Western Conference on Tax-Exempt Organizations

université de UCLA, university of california los angeles

Erin and I attended the 18th Annual Western Conference on Tax-Exempt Organizations (WCTEO) co-sponsored by Loyola Law School and the UCLA School of Law, Lowell Milken Institute for Business Law and Policy on November 20 and 21. Here are highlights of some of the great sessions:

Washington Update. Ruth Madrigal, U.S. Treasury, walked us through the past year’a accomplishments and the current year’s priority guidance plan, which was updated earlier this month. Regarding the current year’s plan, of particular note: proposed regulations under §501(c) relating to political campaign intervention, additional guidance on §509(a)(3) supporting organizations, final regulations under §§4942 and 4945 on reliance standards for making good faith determinations (see proposed regs), and final regulations under §4944 on program-related investments and other related guidance (see proposed regs). Tammy Ripperda, Internal Revenue Services – Exempt Organizations, emphasized what she said were excellent improvements in internal processes and customer service since May 2013 controversy. She noted in particular the new Form 1023-EZ, which has an estimated 90 days response time (and anecdotally, we are hearing has closer to a 2-3 week response time to date). While noting some controversy about the Form 1023-EZ, she defended its development and use, stating that, statistically, small nonprofits are historically compliant. She also mentioned that a sample of 1023-EZ applications would be subject to additional questions in a pre-determination process. And there would also be a post-determination process checking up on some of the 1023-EZ applicants). Finally, Ripperda identified the 5 key focus areas of the Exempt Organizations Unit regarding compliance: (1) exemption issues; (2) protection of assets (including diversions); (3). tax (UBIT and employment); (4) international activities (terrorist, FBAR filings); and (5) emerging issues.

Mergers, Acquisitions, Dissolution and Alliances of Exempt Organizations. Attorneys Arthur Rieman and Lisa A. Runquist walked us through a hypothetical involving a nonprofit considering various options for its future:

  • Creating a new revenue-generating program will first require that the board make sure that the program is consistent with its exempt purposes. While it may be possible to expand the organization’s exempt purposes by amending the articles of incorporation, the organization must make sure that the “investment” of charitable assets to build the program doesn’t violate charitable trust principles (i.e., you can’t use funds raised in support of the old mission to pursue an unrelated new part of the mission).
  • Creating a nonprofit joint venture with a for-profit requires analysis of whether the joint venture is furthering the exempt purposes of the nonprofit, whether the joint venture is going to be a nonprofit or for-profit, and what type of control mechanism is required to protect the nonprofit’s interest. If the nonprofit joint venture is unrelated to the nonprofit’s exempt purpose, the nonprofit must also consider whether its investment in the joint venture is consistent with prudent investment requirements. Additionally, the nonprofit must consider any disqualified person and interested person conflict of interest, self-dealing, and excess benefit transaction issues and how to manage them in compliance with applicable laws.
  • Converting a nonprofit to a for-profit where board members of the nonprofit are going to become the owners of the for-profit will require care to ensure that self-dealing, excess benefit transaction, and private inurement rules are not violated. Fair market value must be paid by the owners (get an independent appraisal) and such monies should be distributed to another nonprofit with a consistent exempt purpose.
  • Selling the assets to the nonprofit’s chair of the board may be a possibility if done correctly (including getting approval of the majority of the board without counting the vote of any interested directors) and ensuring fair market value is paid to the nonprofit. Valuations are tricky and the nonprofit will want to make sure they are truly independent and that the valuation reflects the actual transaction. If, for example, post-valuation, the buyer states they are unwilling to take on any of the liabilities that were included in the valuation, the nonprofit may need a new valuation.
  • Dissolving the nonprofit will require certain steps be taken, including obtaining a dissolution waiver of objections from the Attorney General. See General Guide for Dissolving A California Nonprofit Corporation. The nonprofit will need to determine what other nonprofit would be a desirable and acceptable recipient of its remaining assets among many other things.
  • Merging the nonprofit will require certain steps to be taken, and there may be additional steps necessary where the nonprofit is merging with a nonprofit in another state or the nonprofit is merging into a for-profit.

Advising Versus Earmarking. Attorneys Jennifer L. Franklin and Ingrid Mittermaier discussed the differences between “advising” and “earmarking” in various tax law contexts, including donor-advised funds (DAFs), fiscal sponsorships (Model C or pre-approved grant relationship), and “friends of” organizations affiliated with foreign charities. The emphasis was on the sponsoring organization, fiscal sponsor, and friends of organization maintaining discretion and control of any charitable contributions including the legal authority to grant such contributions to a grantee other than the one identified as the contemplated ultimate charitable recipient. Jennifer and Ingrid also discussed the issues related to common board members when differentiating between advising and earmarking and the issues related to a ultimate grantee that was not a U.S. public charity.

Hosted Lunch. Former Chief of Staff of the Joint Committee on Taxation, George K. Yin, provided a scathing criticism of the Form 1023-EZ, calling it essentially a self-certifying method of getting 501(c)(3) status.

Charitable Diversions (and Not the Good Kind): Dealing with Embezzlement. Attorneys Ofer Lion and Suzanne Ross McDowell discussed the too-common problem of charitable diversions (embezzlement) and introduced a 12-step response framework: internal nondisclosure agreements for board members, internal investigations (with thoughtful determination of who conducts the investigation), public relations plans, insurance, indemnification requirements, board liability issues, employee release / settlement agreements, governmental notice requirements (local, AG, IRS), tax-exempt status issues, succession plans.

Current Developments. Attorney Bruce Hopkins walked us through his comprehensive list of annual developments in laws affecting nonprofits. Among the trends and rulings Hopkins noted: (1) an exempt activity focused on “consulting” is very likely to raise commerciality concerns; (2) an organization was denied tax exemption as public charity because a substantial portion of its activities, in pursuit of social justice, could only be accomplished by legislative action (PLR 201408030); (3) an organization was denied exemption in part because its activities were unduly integrated with its affiliated social welfare organization (PLR 201408030); and (4) the IRS, in course of processing an exemption application, took into consideration remarks made by the applicant’s founder in social media, resulting in denial of the application (PLR 201417017).

Attorney General Update. Sonja Berndt, California Deputy Attorney General, provided a very helpful update of the AG’s regulation of charities. See an older version of the slide deck here. Charities operating in California should be very familiar with the AG’s regulations as there are transactions that may require giving notice to the AG or obtaining the AG’s approval and the AG is the state enforcement agency to ensure charities and their leaders are operating and taking actions appropriately. Berndt emphasized (1) the dangers of false reporting, which can result in individual liability for breach of fiduciary duty, aiding and abetting a fiduciary’s breach of fiduciary duty, and unfair business practice; and (2) common problems with executive compensation. She also listed the top 9 Ways to Get Investigated (which we’ll cover in a separate blog post). Sean Delany of the Lawyers Alliance for New York led us through the Nonprofit Revitalization Act and comparisons between New York and California laws in several key areas.

Social Enterprise Entities. Attorney David A. Levitt discussed the “hybrid” entities, including the benefit corporation, the flexible/social purpose corporation, the Delaware public benefit corporation, and the low-profit limited liability company. What the hybrid entities have in common: (1) they blend business purpose with social or charitable purpose; (2) their directors can and/or must take non-economic issues into considerations when making business decisions; and (3) they are taxed like other for-profit entities. He also cited part of the opinion in EBay vs. Newmark that served as in impetus for the hybrid social enterprise movement: “Having chosen a for-profit corporate form, the craigslist directors are bound by the fiduciary duties and standards that accompany that form. Those standards include acting to promote the value of the corporation for the benefit of its stockholders.” See Using New Hybrid Legal Forms.

Uncategorized

Nonprofit Tweets of the Week – November 21, 2014

IS 2014The highlight of my past week was speaking at and attending the Independent Sector Annual Conference. Have a listen to Miri Ben-Ari‘s Symphony of Brotherhood while perusing our curated nonprofit tweets of the week (Independent Sector edition):

  • Independent Sector: Keep the #ISConf tweets coming! We’ve got lots to share frm our amazing experience in Seattle, starting w/ this video http://vimeo.com/112225962
  • Independent Sector: Watch @Diaviv’s speech “We Have a Dream” from #ISConf 2014, which challenges our sector to change the way we work. https://vimeo.com/112141925 [Ed. Among Diana’s remarks: “We can’t embrace the status quo if we hope to solve the daunting problems threatening our future.” “We can’t move forward by specializing even further or by clinging to the past.” “Reflecting on what we are willing to do in the months and years ahead will move us all closer to our collective dream and will enable us to pivot, as we must, to respond to the new world with agility, confidence, and respect.”]
  • Nonprofit Times: @diaviv: Sector Could Be “Part Of The Problem” http://bit.ly/1uA476s #nonprofit
  • Bright Lines Project: “If you’re not participating fully in the democratic process, you’re leaving leverage on the table.” @ljaguzny
  • Gene: Nonprofits: (1) visit your policymakers; (2) inform them of your value and of the sector’s economic impact; (3) stay in touch. [Ed. Read more from the Independent Sector Public Policy Action Institute pre-conference here.]
  • Greg Colvin: On Sat @IndSector #ISPPAI conf in Seattle, we hit Send to submit draft @brightlinesproject political regs to IRS, spontaneous applause. [Ed. The proposed regs are available at Citizen.org.]
  • Sarah Perz: Lisa Danielson says rule in advocacy is: “if you want me to listen to you, talk about ME, not about you.”
  • Allison McAffree: Lisa Danielson: No good advocacy plan survives the first battle. You must accommodate the inevitable change. @WaNonprofits
  • Gene: Self-reported nonprofit merger success rate is 80% vs 35% for for-profits. – BridgespanGroup
  • Independent Sector: Here’s a quote frm @p2173 “We can no longer assume we can ride along the same digital infrastructure we have used in the past”
  • Independent Sector: “In the Internet world, if you deny me equal Internet access, you make me a second-class citizen.” —@ibarguen [Alberto Ibargüen, recipient of the John W. Gardner Leadership Award] #ISConf #NetNeutrality
  • Gene: “Vision without execution is hallucination.” W Isaacson

 

And from the fantastic diversity program led by Phyllis Braxton and Beth Zemsky:

  • Diversity is where we count the people. Inclusion is where the people count.
  • The goal of doing diversity work is not comfort. It’s spreading the discomfort around.
  • “Do unto others as you would have them do unto you.” Not the Golden Rule. #diversity #culturematters

 

UBIT / UNRELATED BUSINESS

UBIT – Issues for Shared Spaces

content

 

I will be speaking this week for The Nonprofit Centers Network on unrelated business income tax (“UBIT”) related issues faced by nonprofits providing shared space with other individuals or entities (you can register for the webinar here).  As we’ve discussed in previous posts on UBIT, generally, net income from unrelated business activities will be subject to UBIT if the activity constitutes (1) a trade or business, (2) that is regularly carried on, and (3) is not substantially related to the furtherance of the organization’s exempt purpose.

Most nonprofits that share space with other entities presumably rent that space out for a return payment.  Because renting space for a prolonged period would be considered a trade or business and is likely regularly carried on, whether the income from such rentals constitutes unrelated business income potentially subject to UBIT will turn on whether providing the rentals is substantially related to furthering the organization’s exempt purpose.  If a nonprofit is formed with the purpose of strengthening the nonprofit sector by fostering collaboration, inspiring and nurturing nonprofits, reducing duplication, and increasing nonprofit efficiency, and rents space solely to other nonprofits exempt under Section 501(c)(3) of the Internal Revenue Code, then such rentals are likely to be considered substantially related.  However, this remains somewhat of an unsettled area and whether the activities are substantially related may turn on how commercial in nature they are.  If the same nonprofit were to begin renting some of its space to for-profits, the income from such rentals would likely be subject to UBIT and may even cause the organization’s activities to be viewed as too commercial in nature to qualify as exempt.  Similarly, if an exempt organization with a completely unrelated purpose had extra space in its building and decided to rent it to other nonprofits or to for-profits, those rentals would unlikely be considered substantially related and the rental income may be subject to UBIT.

As we’ve previously discussed on this blog, though, there are exceptions, exclusions, and modifications that apply to the UBIT rules.  One such exclusion is that income that is earned passively, including from some rentals of real property or personal property rented with real property, is not subject to UBIT.  However, the rents exclusion does not apply (and thus the rental income may be subject to UBIT) if any of the following is true:

  1. The nonprofit renting the property out also provides services not typically provided with such a rental as part of the rental (e.g., administrative or technology support services);
  2. The value of the personal property rented out with the real property equals more than 50% of the total rent amount; or
  3. The amount of rent is determined based on the income or profits derived by the renter from the leased property, other than an amount based on a fixed percentage of receipts or sales.

Also, if property is acquired by a nonprofit as an investment to produce income and the nonprofit has debt on the property, then only a portion (based on the debt/basis percentage) of the rental income may be excluded from UBIT.

A nonprofit that shares space may potentially have multiple lines of unrelated business activities (such as if it runs a coffee cart or café for the benefit of its tenants or provides administrative support services for a separate fee) and each line of business will need to be analyzed separately for potential UBIT. There may also be other exclusions (such as if substantially all of the work related to the unrelated business is carried on by uncompensated volunteers or is for the convenience of the nonprofit’s members) or modifications (such as the reasonable allocation of expenses attributable to both related business activities and unrelated business activities) that may also impact the amount of UBIT that a nonprofit owes on any unrelated business income.

Any nonprofit that receives income from sharing space with other individuals or entities and is not absolutely certain that such rentals are substantially related to furthering its exempt purpose, or that engages in any other unrelated business activities, would be well-advised to consult with a nonprofit attorney or accountant to determine whether it has any income subject to UBIT.

ADVOCACY & LOBBYING   EVENTS

Independent Sector National Conference 2014: Imagine – Public Policy Action Institute

testa coloriImagine. That’s the theme of the 2014 Independent Sector National Conference currently being held in Seattle. And it’s a reminder for nonprofit board members and managers of the importance of thinking beyond our very important day-to-day matters and mere compliance. One of the Conference’s two important pre-conferences was the Public Policy Action Institute (PPAI): 

The Institute is an exciting day-and-a-half event that brings together a diverse group of nonprofit leaders, policy advocates, and communications professionals to discuss policy issues vital to advancing the work of the nonprofit sector and meeting the needs of our communities. It truly is our premiere policy gathering of the year. The Institute features timely expert presentations on the key issues facing the nonprofit and philanthropic sector; effective strategies for conveying our messages to policymakers; networking opportunities with other policy leaders; and practical, hands-on learning through small group breakout sessions.

At the PPAI, I had the pleasure of participating on a panel moderated by Jane Searing discussing how social enterprise policy and trends affect nonprofits. Some takeaways from that session: (1) newer alternative business forms like the benefit corporation, social purpose corporation, and L3C (so-called “hybrids”) may signal more trustworthy for-profit collaborators; (2) hybrids may be used by nonprofits creating subsidiaries to house earned income ventures (particularly if they include substantial unrelated business activities); (3) hybrids are legal forms (except for Certified B Corps, which represents an independent certification of meeting certain social good standards) and will not in and of themselves make a business venture work; (4) donors, businesses and some funders are increasingly becoming sector agnostic in supporting organizations that do social good (nonprofits should recognize this competition for resources, dollars, and talent); (5) hybrids may be the shiny, new toy of the moment, but nonprofits will continue to lead the work on addressing many of the most difficult social issues that market forces alone cannot and will not correct.

Other highlights from the PPAI:

  • A panel moderated by Laverne Woods discussed the power of having a 501(c)(4) organization affiliated with a 501(c)(3) organization. The 501(c)(3) can raise charitable contributions and engage in educational activities, including advocacy. The 501(c)(4) can lobby and support candidates for public office who would best further the affiliated group’s social goals. During the session, Greg Colvin and the Bright Lines Project sent proposed regulations to Treasury to define political intervention for 501(c)(4) social welfare groups. Incredible work.
  • A panel moderated by Allison McCaffree discussed emerging state and local policy trends (including property taxes, minimum wage) and how important it is to advocate on state level issues because they spark action at the federal level. On the importance of coalition-building, we were reminded by Michael Rafferty, Director of Detroit Metro Partnership: “If you’re not at the table you’re on the menu.”
  • Independent Sector CEO Diana Aviv talked with Mike Harcourt, former premier of British Columbia, about his involvement with nonprofit advocacy as a citizen, a government leader, and now as lead faculty of the local United Way Public Policy Institute. I had the great pleasure of speaking briefly with Mr. Harcourt and his colleague at the Public Policy Institute Yves Trudel about growing up in Vancouver while Mr. Harcourt was mayor and hockey in the 70’s and 80’s. So cool.
  • A panel moderated by Sandra Vargas discussed federal policy affecting the sector on a wide variety of issues but particularly regarding proposed tax reform. We were told to be proactive, engage policymakers (look for the best partners), meet in-person, don’t just send policy geeks, and don’t disregard working with candidate who lost but still hold great influence.
  • A panel moderated by Andy Solomon discussed communications that not only move people to action, but inspire policymakers and other key stakeholders to advocate on behalf of the people served by our organizations. We were told to tell stories to support the data and to bring along beneficiaries of our organizations to tell their stories of how they are impacted. Great tips: (1) If you want me to listen to you, talk about ME, not about you; (2) No good advocacy plan survives the first battle. You must accommodate the inevitable change.
  • A panel led by Jason Sabo discussed navigating legislative roadblocks and started off with the powerful message: “Anyone can win anywhere.” In order to move policy, you need to focus, build credibility, recruit believable messengers, be pragmatic, and partner w/ government. And you need to know how to speak and frame issues in the language of the other side. Adaptability, timeliness, and utilizing all political levers (administrative, legislative, judicial, corporate) are critical.

If you have the opportunity to attend the Independent Sector National Conference next year, I recommend that you include the Public Policy Action Institute in your plans. Advocacy is one of the most powerful, underutilized tools in the nonprofit tool kit.

TWEETS OF THE WEEK

Nonprofit Tweets of the Week – November 14, 2014

Robot con chiave inglese
Fix the regs!

This week was marked by our advocacy efforts against certain proposed regulations that will adversely impact California nonprofits if passed. Have a listen to Styx’s Mr. Roboto while perusing our curated nonprofit tweets of the week:

  • Nonprofit Quarterly: FREE NPQ webinar on one of the most effective and best used tools for #nonprofit #sustainability planning http://hubs.ly/y0hw590 [Ed. Guests are Jeanne Bell and Steve Zimmerman, authors of The Sustainability Mindset: Using the Matrix Map to Make Strategic Decisions – Nov 21 at 12 pm ET]
  • Nell Edgington: How do we move beyond nonprofit starvation mode? Ann Goggins Gregory discusses in this interview: http://ow.ly/E5c0b
  • Rob Reich: Dark Money and the U.S. Senate, the ritual abuse of social welfare organizations. NY Times
  • Rebecca Hamburg Cappy: Fascinating infographic from @cpppatusc about #foundations in #California
  • Council of Nonprofits: “What if funders asked what type of capacity is needed 2 deliver on this grant? vs. What is the overhead…?” http://buff.ly/1uZimCQ
  • For Purpose Law: The Deep End of the Charity Board Conference Table
  • Trustee Magazine: From @lucymarcus on strategic planning: One of the board’s most important duties is “stargazing.” http://ow.ly/EaHQO
  • Perlman & Perlman: IRS tax exemption granted, but where’s the determination letter?  @abromberger
  • Emily Chan: Date of Gift Rules for Charitable Contributions – common scenarios discussed via Nonprofit Law Matters Blog http://bit.ly/1xCwyRU
  • Harvard Business: HBS pioneered the concept of “social enterprise.” Now @HBSSEI is celebrating 20 years! #SEI20 http://hbs.me/1xm3WuS
DONOR-ADVISED FUNDS   FISCAL SPONSORSHIP   STARTING A NONPROFIT

NEO Law Group’s Video on Tips for Starting a Nonprofit – Alternatives to Forming a Nonprofit

 

Today, NEO Law Group released a new 3 minute video in its series of videos on tips for nonprofits, available on YouTube.  While incorporating a nonprofit and applying for tax exemption may be the right choice in some instances,  there may often be a better way to achieve your charitable goals.  This video focuses on some possible alternatives to formation, including partnering with an existing nonprofit, fiscal sponsorship, and donor-advised funds.  We hope that you enjoy it and please stay tuned for additional videos from NEO Law Group on tips related to nonprofits.

STARTING A NONPROFIT

Arts Projects: Charitable or Not?

Art palette

An organization devoted to the promotion of art may qualify for tax exemption under Section 501(c)(3) of the Internal Revenue Code (the “Code”) by emphasizing its educational exempt purpose and goal of educating the public about the arts. The difficult part of determining whether the organization would be exempt under 501(c)(3) is deciphering whether it serves primarily charitable and/or educational purposes, or whether it serves impermissible private or commercial interests.

Educational Purpose

Educational, within the meaning of 501(c)(3), relates to:

  • The instruction or training of the individual for the purpose of improving or developing his capabilities; or
  • The instruction of the public on subjects useful to the individual and beneficial to the community.

In the context of an arts organization, an educational purpose may be advanced by, among other things, instructing students to develop their capabilities as artists (e.g., art school) or by instructing the general public on a particular form of art (e.g., symphony).

Examples

The following are examples of art projects that serve an exempt purpose:

  • Producing annual festivals to provide unknown filmmakers with opportunities to display their films;
  • Making grants to needy artists in order to encourage creative arts and scholarship;
  • Sponsoring performances for a community that might not otherwise be exposed to such works; and
  • Providing workshops, sponsoring public concerts, and securing paid engagements for young musicians and singers to improve their professional standing.

Conversely, the following activities would likely not be exempt:

  • Selling works of art and distributing the proceeds to the individual artists (provided that such artists are not part of a charitable class of disadvantaged beneficiaries, whether physically, economically, or otherwise); and
  • Sponsoring, advertising, marketing, and selling films of up-and-coming or unknown writers, directors, and actors.

Private Benefit

A 501(c)(3) organization may not confer any benefit, monetary or otherwise, on any individual or entity that is not incidental, quantitatively and qualitatively, to furthering the organization’s exempt purposes. In the qualitative sense, to be incidental, the private benefit must be necessarily related to the activity that benefits the public at large. In simpler terms, one might consider whether the public benefit can be achieved to a similar degree without benefiting the private interest. If the answer is yes, then it is not incidental. Additionally, in order to be quantitatively incidental, the private benefit must be insubstantial in the context of, and balanced against, the overall public benefit. (See Private Benefit Rules).

Arts organizations should be watchful of potential private benefit issues and particularly avoid preferential treatment of directors, officers, or substantial donors (or to any of their relatives, related companies, friends, or business associates). They should also note that organizational activities resulting in payments given to individual artists, including where the organization is marketing and selling artists’ works for commission, may result in what the IRS considers prohibited private benefits.

One important factor in determining whether the interest being served is public or private is the extent and nature of the organization’s commercial activity. Although no specific amount of commercial activity is dispositive, generally the IRS will look at all of the facts and circumstances to see if the commercial nature of the activity is incidental, or substantial enough to outweigh the charitable or educational value and fail the operational test.

Commerciality

The Commerciality Doctrine, a product of the courts, looks at whether a nonprofit organization is operating in a manner that is too commercial for purposes of determining whether the organization is operating primarily in furtherance of an exempt purpose. Generally, in applying the Commerciality Doctrine, the IRS or courts will look to whether a nonprofit is engaging in activities that are in direct competition with for-profits entities. They will consider factors such as pricing, marketing methods, source of revenues, staffing, and use of surpluses to determine whether the activities are excessively commercial. Nonprofit arts organizations should keep these principles in mind when conducting activities, so as to not jeopardize their exempt status. (See Unrelated Business Income and the Commerciality Doctrine).

The IRS has issued a number of rulings relating to art projects that suggest, in the name of education, arts organizations can operate commercially in order to sell art or art-related items, so long as no actual artists are directly benefitted. (However, see Rev. Rule 79-369—an organization formed to create, develop, and promote an appreciation of contemporary symphony music was granted exemption even though its primary activity was to record and sell, mostly to educational institutions, relatively unknown works not produced by commercial music publishing and recording industries).

Other revenue rulings suggest that an arts organization may achieve an educational purpose so long as the programs are presented in a noncommercial manner. In a Non Docketed Service Advice Review, the IRS denied exemption to an organization that provided assistance to up and coming directors, writers, actors in producing low-budget films. Even though the organization planned to sponsor films irrespective of their commercial appeal, they also planned to solicit films through distributors, and advertise, market, and potentially sell those films later. The IRS said this failed the operational test due to “determinable commercial overtones.”

Arts organizations should be watchful of potential commerciality issues and consider, among other things, whether they are doing the following to best further their 501(c)(3) mission and not to make the most profit:

  • Selecting artists (mission-related merit-based criteria > commercial appeal);
  • Selecting artistic works (mission-related merit-based criteria > commercial appeal);
  • Selecting display and/or performance venues (maximizing public accessibility);
  • Setting the price for experiencing the artistic works (e.g., admission fee, ticket price);
  • Marketing the experiencing and/or sale of the artistic works;
  • Selecting distributors;
  • Selling the artistic works;
  • Providing supplemental educational materials in connection with the activities; and
  • Funding the activities (donative support is evidence of charitable activities).

Other Resources

Qualifying for 501(c)(3) Status as an Arts Organization (Tax-Exempt Solutions PLLC)

Co-authored with Gene Takagi.

CALIFORNIA LAW   CURRENT AFFAIRS & OPINION

Proposed Rules Affecting California Charities – Comment Period Ends Today!

Your Comment Counts Suggestion Feedback Opinion BoxUnless the Department of Justice receives persuasive feedback today by 5 p.m., California charities that are required to register with the Attorney General’s Registry of Charitable Trusts (most charities except religious organizations, hospitals, and schools) may be subject to the following regulations and penalties:

  • $100 penalty per day per violation of certain California nonprofit laws, including those regarding timely filings of annual registrations (capped at $1,000 per violation). – This is generally authorized by Gov. Code Sec. 12591.1(c) but may signal a change in policy to enforce such penalties.
  • Automatic suspension of registration for failing to pay penalties when due. – This is generally authorized by Gov. Code Sec. 12591.1(d) but may signal a change in policy to enforce such sanction.
  • Automatic suspension of registration for failing to file complete registration renewals (Forms RRF-1, attachments, and fees) for three consecutive years.
  • Automatic revocation of registration if suspended for one year.
  • Possible refusal by the Registry of Charitable Trusts to renew the registration of a charity that has failed to pay fees or file complete registration renewals for three consecutive years.
  • Need to file an accounting of all charitable assets within 30 days of any revocation of registration.
  • Prohibition applicable to all suspended or revoked charities against distributing or expending any charitable assets without the written approval of the Attorney General.
  • Board members or any person directly involved in distributing or expending charitable assets while a charity is suspended or revoked may be held personally liable.
  • The Attorney General may direct a charity whose registration has been suspended or revoked to distribute some or all of its charitable assets to another charity or into a blocked bank account.
  • Prohibition applicable to any charity whose registration is delinquent, suspended or revoked against fundraising and engaging in other charitable activities in California.

Note that it is very common for charities to be delinquent on their registration renewals, particularly for smaller charities that are volunteer-run whose address on record may be tied to a volunteer leader’s address and not a facility occupied by the charity.

The proposed regulations, if adopted, will mean such charities will need to suspend activities and fundraising if they are delinquent in their registration, and if suspended or revoked, their board members will be subject to personal liability and their assets subject to forced divestiture.

Send your comments to:

Scott Chan, Deputy Attorney General

California Department of Justice Charitable Trusts Section

455 Golden Gate Avenue, Suite 11000

San Francisco, CA 94102

Fax: (415) 703-5480

Email: scott.chan@doj.ca.gov

Notice of Proposed Rulemaking Action (September 26, 2014)

Proposed Text of Regulations

Read our Comments to Proposed Regulations 111014 submitted together with Barbara Rosen (Evans & Rosen LLP) and endorsed by Pete Manzo (President/CEO of United Ways of California).
Please consider joining our efforts with your endorsement. Just leave your name and organizational affiliation in the comments or email me at gene @ neolawgroup.com.
Additional endorsements:*

 

* Parties endorsing our Comments include individuals and organizations that do not provide legal counsel but otherwise serve the nonprofit sector.