Last Thursday and Friday, I attended one of my favorite annual events, the Western Conference on Tax Exempt Organizations (WCTEO), co-sponsored by Loyola Law School and the Internal Revenue Service. As always, the event was attended by many prominent attorneys, accountants, and executives who practice in the nonprofit and tax-exempt organizations area.
After brief introductions, the program began with speakers from the IRS and Treasury Department. Among the items they discussed:
- Patient Protection and Affordable Care Act signed by President Obama in March 2010 enacts new Section 501(r) of the Internal Revenue Code, which impacts tax-exempt hospitals. See Notice 2010-39.
- The IRS 2011 Priority Guidance Plan (to be published soon) will include additional regulations for supporting organizations, proposed regulations for donor advised funds, and guidance on IRC Section 501(r), changes to Form 990, and international activities. The donor advised fund report due in 2007 under the Pension Protection Act has yet to be completed in part because a "donor advised fund" was statutorily defined only in 2006.
- CyberAssistant for preparing and filing Form 1023 (exemption application) will not be released soon due to technical and other issues. Don't hold your breath on this for 2011.
- The agency-wide study on employment tax issues will continue (nonprofits need to make sure they are in compliance).
William Choi, Ruth Madrigal, and LaVerne Woods discussed supporting organizations and donor advised funds (DAFs). It was very helpful for more experienced practitioners because the presenters focused on practical issues involving these vehicles and not on the basics. Woods discussed the Polm Family Foundation case in which an applicant sought recognition as a Type II supporting organization but was determined to be a private foundation. Choi discussed two cases (Styles v. Friends of Fiji and In re: National Heritage Foundation, Inc. that illustrate how important it is for donors to carefully choose sponsoring organizations of donor advised funds because of the lack of remedies if such sponsoring organizations use the funds without regard to the donor's advice (including in bankruptcy). Choi also discussed a number of issues left open with DAFs, including:
- How many unrelated donors do you need to qualify as a "multiple" donor fund (not a DAF)?
- Does the prohibition on distributions to individuals apply to individual vendors or contractors who provide goods or services in connection with the DAF?
- If a donor advises a distribution of $1,000 to a charity (the amount of the charity event ticket) and attends the charity event without paying the $200 non-deductible portion, is the amount of the prohibited benefit subject to tax just the non-deductible portion ($200) or the entire distribution ($1,000)?
- If instead the donor advises a distribution of $800 and pays the remaining $200 out-of-pocket, is there a prohibited benefit received by the donor? In the private foundation context, this strategy would not avoid self-dealing. PLR 9021066
- How do you distinguish between prohibited benefits (IRC 4967) and excess benefits (IRC 4958)?
We received two presentations on Form 990 – one from the IRS's Stephen Clarke (government perspective) and the other (on Friday) from Jody Blazek (practitioner's perspective). Clarke focused on changes on the 2010 Form. Blazek covered a number of ongoing issues for practitioners and offered some helpful tips:
- Prepare Schedule R first (if it applies) because it will drive other parts of Form 990.
- It is vital that organizations with modest public support ratios monitor them before year's end to try to avoid the unexpected circumstance of tipping into private foundation status (see Schedule A).
- Adopt an annual combined relationship-conflict of interest disclosure form, including questions about family and business relationships among officers, directors, trustees, and key employees (and not just with the organization).
I particularly enjoyed the Governance Update provided by Michael Peregrine and James Schwartz. Peregrine, who has an excellent PowerPoint on nonprofit corporate law trends and developments available here, started the presentation by predicting the downfall of one or two big time executives this year because of expense account issues. Here are some of the trends identified by the presenters:
- The sustained focus on corporate governance from the IRS demands serious attention of boards and executive leadership.
- The business judgment rule may not protect directors who consciously disregard compliance and liability issues.
- "Best practices" for nonprofit organization governance continue to emerge with unavoidable force and considerable detail. Will best practices be treated as industry standards, resulting in greater exposure to directors who do not observe best practices?
- There will be no respite from close regulatory attention to executive compensation matters.
- Boards will increasingly be expected to become more involved in confirming the effectiveness of the organization's system of legal controls, including but not limited to corporate compliance.
- Boards will be under increased pressure to address and resolve issues related to director independence and conflicts of interest management. It may be prudent to go beyond minimum requirements.
- Increasingly, we are seeing a "where was the Board?" mentality – at least from the media.
Michael Sanders and Margaret Anadu discussed the New Markets Tax Credit (NMTC). Fascinating but complex. There is a brief overview of the NMTC on the Treasury's Community Development Financial Institutions Fund webpage here. And you can learn more from Sanders' article on How Nonprofit Organizations Can Use the New Markets Tax Credits.
Bruce Hopkins started Friday's presentation with his always entertaining and informative recap of the past year. Here are just a few of the many interesting private letter rulings, technical advice memoranda, and other tidbits identified by Hopkins:
- Denial of exemption because of applicant's provision of ambulances and wheelchair vans to health care organizations that provide transportation services to elderly and handicapped, principally because it charges fees. PLR 201041045
- Denial of exemption because applicant's principal purpose in conducting workshops was to attract business for the benefit of its founders. PLR 201039046
- Public charity intervened in political campaigns when it absorbed the website pages of its controlled social welfare organization (which included candidate questionnaires and endorsements). TAM 200908050
- Sen. Baucus's letter to IRS Commissioner Shulman dated September 28, 2010 asking for an investigation of tax-exempt organizations engaged in politics.
- IRS website to enable public comment on government tax forms, starting with Form 1023, which the IRS says is "extremely burdensome and difficult,'' and requires 96 hours to prepare.
- Distribution by private foundation to disregarded LLC to accomplish charitable purposes, where sole member of LLC is public charity that is not controlled by foundation is qualifying distribution. INFO 2010-0052 (but left answered is the question of whether a charitable contribution to the LLC would be deductible)
- One-time sale of intellectual property rights to interactive website software ruled to be activity not regularly carried on, so sales proceeds not unrelated business taxable income. PLR 201024069
- Joint Committee on Taxation, on January 11, 2010, issued estimates of tax expenditures for fiscal years 2009-2013 (JCS-1-10); charitable contribution deduction is seventh largest tax expenditure ($237.6 billion).
There were three breakout sessions covering private foundations, intermediate sanctions, and charitable giving. I attended the private foundation session presented by Michael Berry and Jeffrey Haskell. There was brief discussion of the so-called hybrid organizations (L3Cs and benefit corporations) and the ABA Tax Section's comments on additional examples of program-related investments, which updated the Section's 2002 comments with 17 proposed examples of PRIs.
The conference ended with a 90-minute Q&A session with a knowledgeable panel of experts: Blazek, Hopkins, Douglas Mancino, and Woods.
On a personal note, I really appreciate the efforts of my San Francisco colleagues Cherie Evans and Barbara Rosen (Evans & Rosen LLP), who lead the State Bar's Nonprofit & Unincorporated Organizations and Tax-Exempt Organizations Committees, respectively; Loyola's Ellen Aprill and the other WCTEO program committee members; and Bill Choi (Rodriguez, Horii, Choi & Cafferata LLP), a highly respected and experienced exempt organizations attorney and speaker who was kind enough to introduce himself to me. And outside of the conference, it was great to catch up with my childhood best friend and well-known L.A. entertainment attorney Larry Zerner and several of my volleyball-playing friends. I'll be back next year!