Best of the Nonprofit Law Blog 2014

Best of 2014 - The year in reviewHere are some selected highlights from NEO Law Group over the past year that we hope you’ll find helpful. 2014 was also highlighted by an addition to Erin’s family and Michele’s graduation and passage of the bar exam! Amazing year for all of us.

Blog Posts


What Issues Should a Nonprofit Board Consider Annually?

Executive Succession: 10 Tips for Boards

Executive Committees: Why You Should Limit Their Authority


Nonprofit Advocacy is More Than Lobbying

Charities and Issue Advocacy: Doing it Right – Part One

5 Things Nonprofits Should Know About Ballot Measure Advocacy in California

Fiscal Sponsorship

Fiscal Sponsor Due Diligence

Fiscal Sponsorship: A Valuable Option for Grantmakers and Grantees

Arts Projects: Charitable or Not?

Proposed Laws

12 Things Nonprofits Should Know About Proposed Tax Reform

California Bill to Strengthen Enforcement of Charity Registration and Reporting

Proposed Rules Affecting California Charities – Comment Period Ends Today!

UBIT / Social Enterprises

UBIT: Advertisements vs. Qualified Sponsorship Payments

Nonprofit Limited Liability Company

Nonprofit Crowdfunding Risks


Nonprofit Laws for Human Resources Managers to Be Aware Of

Retroactive Reinstatement Procedures: Simplified

Dissolution and Transfer of Remaining Assets: An Alternative to Merger


Fair or Foul: A Review of Federal Tax Laws Governing Unfair Competition, The Nonprofit Quarterly (2014)

12 Reasons Why You Should Gracefully Resign from a Nonprofit Board, The Nonprofit Quarterly (2014)

10 Issues To Address In Your Nonprofit’s Social Media Policy, The Nonprofit Times (2014)


Tips on Starting a Nonprofit: Initial Board of Directors

Tips on Starting a Nonprofit: Fundraising Before Exemption

Tips on Starting a Nonprofit: Initial Bylaws

Nonprofit Radio

Advocacy, Net Neutrality, & The Bright Lines Project

Your Board’s Role in Executive Hiring


Speaking Engagements


Profit for Good: How Social Enterprise Policy Affects You, Independent Sector Public Policy Action Institute

Hot Topics in Nonprofit Law, CalNonprofits Policy Convention

Small Charities – Problems and Solutions, American Bar Association, Tax Section Mid-Year Meeting


Earned Income 101 for Nonprofits, Lawline

Understanding UBIT: What Does It Mean for Your Shared Space? Nonprofit Centers Network

Navigating Legal and Ethical Issues, New Grantmakers Institute, Northern California Grantmakers


Pearson Charitable Foundation to Dissolve

group of school kids writing test in classroom

A few weeks ago, the Board of Directors of Pearson Charitable Foundation, the Section 501(c)(3) organization affiliated with the educational publishing company Pearson PLC, announced that it will be closing the Foundation at the end of the year after a decade of operations.  According to the Foundation’s website, the decision to close the Foundation comes after a decision by Pearson PLC to “integrate all of its corporate responsibility activities and functions into its business as a way to maximi[z]e social impact and to no longer fund the Foundation as the primary vehicle for its philanthropic and community activities.”

The announcement comes after several years of controversy surrounding the Foundation, including an investigation by the New York Attorney General.  According the Attorney General, the Foundation was being operated in a manner that was for the benefit of Pearson PLC.  Specifically, the Attorney General found that the Foundation had engaged in activities relating to the development of educational products, including course materials, related to the Common Core State Standards (a set of academic standards that has been adopted by most states) to be sold by Pearson PLC.  The Attorney General also found that the Foundation had helped to attract clients to Pearson PLC by paying for them to attend education conferences sponsored by the Foundation and at which Pearson PLC executives were present.  Both the Foundation and Pearson PLC have denied any wrongdoing, but the Foundation agreed to pay $7.7 million to settle the Attorney General’s investigation.  $7.5 million of the settlement amount was to be paid into a fund to support the work of 100Kin10, a network of organizations focused on placing science and math teachers in U.S. schools.

The investigation, and resulting dissolution, of the Foundation serve as an important reminder of the requirement that Section 501(c)(3) exempt organizations operate to serve a public, rather than a private, interest.  This remains true even when an exempt organization is affiliated with a for-profit entity.  Such affiliated nonprofits (and all nonprofits generally) hold their assets in charitable trust for use in furtherance of their exempt purposes and are prohibited from using such assets to benefit their for-profit affiliates.

501(c)(3) exempt organizations are also prohibited from providing prohibited private benefits, permitting private inurement, or entering into excess benefit transactions.  Private foundations are also subject to strict self-dealing rules under Internal Revenue Code Section 4941 which generally prohibit foundations from engaging in transactions with certain defined disqualified persons.  See our prior posts on these topics for more information.


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


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 @
Additional endorsements:*


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


12 Things Nonprofits Should Know About Proposed Tax Reform

change ahead

On February 26, 2014, Rep. Dave Camp (R-MI), the Chairman of the Ways and Means Committee, released a draft proposal for comprehensive tax reform. The almost 1,000 page document contains significant changes that will affect individuals, for-profit corporations, and tax-exempt entities.  Camp’s proposals will likely be debated throughout the year, but it is imperative that nonprofits stay alert to the possible ramifications of the bill’s lengthy provisions regarding charitable giving, tax exemption, and tax obligations. The discussion draft imposes the following changes:

  1. AGI Percentage Limitations  Adjusted gross income (AGI) limits on charitable giving will be altered to 40% for contributions to public charities and 25% to private foundations. This lowers the percentage limit for cash contributions, but simplifies the rules by no longer making the distinction of whether the contribution is cash or capital gain property.
  2. Two-percent Floor for Charitable Giving – A two-percent floor will be imposed for charitable donations to qualify for a deduction. This means that taxpayers may only deduct the amount of their charitable giving that exceeds two percent of their AGI.  A 2011 study by the Congressional Budget Office determined that this type of two-percent floor would likely cut charitable giving by approximately $3 billion.
  3. Excise Tax on Excessive Executive Compensation – Any compensation in excess of $1 million paid to any of the five highest compensated employees of any tax-exempt organization will incur a 25% excise tax. The compensation cap includes both salary and benefits. The rationale behind this provision is to ensure resource accountability of an organization receiving tax exemption by the Federal government.
  4. Unrelated Business Income Tax – Currently under the law, tax-exempt organizations may calculate unrelated business income tax (UBIT) based on the gross income of all business activities, minus the deductions connected with carrying on those activities. Losses generated by one activity can be used to offset the gains from another. However, under the Camp legislation, organizations will have to calculate UBIT separately for each business activity. This means that the loss from one unrelated business activity will no longer be used to offset the income from another unrelated trade or business activity. Furthermore, any sale or licensing by a tax-exempt organization of its name or logo (including any related trademark or copyright) will be treated as an unrelated trade or business.
  5. Expansion of Excess Benefit Transaction Rules – Excess benefit transaction rules will be expanded to apply to both 501(c)(5) and (c)(6) organizations (e.g., unions and trade/professional associations, respectively), and a 10% tax will be imposed on an organization whenever the excess-benefit excise tax is imposed on a disqualified person of that organization. Furthermore, the safe-harbor rebuttable presumption of reasonableness will be eliminated.
  6. Expansion of Self-dealing and Simplification of Private Foundation Excise Tax  The draft legislation imposes a new excise tax of 2.5% on private foundations for each act of self-dealing discovered within the organization and eliminates the professional advice safe harbor for foundation managers.  Additionally, excises taxes on private foundation investment income will be changed to a flat 1%.
  7. Payout Requirement for Donor Advised Funds – Donor advised funds will be required to distribute all contributions within 5 years of receipt or otherwise face a 20% excise tax on the amount not distributed.
  8. Private Operating Foundations Subject to Distribution Requirements – Private operating foundations will face the same minimum distribution rules currently imposed on private non-operating foundations.
  9. Type II and Type III Supporting Organizations – Type II and III supporting organizations will be eliminated. Thus, any current Type II or III supporting organization will have to qualify as a Type I supporting organization, another classification of public charity, or a private foundation by 2016.
  10. Social Welfare Organization Changes – Section 501(c)(4) organizations will need to notify the IRS within 60 days of formation and may seek declaratory judgments in the same manner as 501(c)(3) organizations. Furthermore, social welfare organizations will be required to list on Schedule B of Form 900 each donor contributing $5,000 or more, who is either an officer, director, or one of the organization’s five highest compensated employees.
  11. Repeal of Tax-Exempt Status for Professional Sports Leagues – While amateur sports leagues may still become tax-exempt under 501(c)(6), professional sports leagues will no longer be permitted to seek exemption.
  12. Electronic Filing of Form 990-series – Most nonprofit organizations will have to file their IRS Form 990 information returns electronically.

Although it is unclear which, if any, of these provisions will be adopted into law, nonprofit organizations should continue to monitor the debate and contemplate how these proposed changes could affect them.

For additional information:

Committee on Ways and Means

–        Comprehensive Tax Reform Site

–        Discussion Draft [Full]

–        Section-by-Section Summary

Independent Sector: Tax Reform

Nonprofit Quarterly: Draft Tax Reform Act of 2014 Proposes Profound Impact on Tax-Exempt Organizations


IRS Deadline: March 1, 2014 – Who is Your Responsible Party?



Do you know who your organization has reported to the IRS as its responsible party? Your organization should make sure the IRS has the current information by the February 28, 2014 deadline.

According to the Instructions to IRS Form 8822-B:

Beginning January 1, 2014, any entity with an EIN [Employer Identification Number] must file Form 8822-B to report the latest change to its responsible party. Form 8822-B must be filed within 60 days of the change. If the change in the identity of your responsible party occurred before 2014, and you have not previously notified the IRS of the change, file Form 8822-B before March 1, 2014, reporting only the most recent change.

For a nonprofit organization, "the “responsible party” is the person who has a level of control over … the funds or assets in the entity that, as a practical matter, enables the individual, directly or indirectly, to control, manage, or direct the entity and the disposition of its funds and assets." Typically, this will be the organization's executive or president.

The person who has accepted the role of being the responsible party may have greater responsibility and therefore greater exposure to personal liability for failure to pay withholding (payroll) taxes. Internal Revenue Code Section 6672(a) provides in pertinent part:

Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.

While there is no direct reference to "responsible party" in Section 6672, it might be difficult for a person identifying herself or himself as the responsible party to claim she or he was not the party responsible for collecting, accounting for, and paying over withholding taxes. The term "person" in Section 6672 explicitly includes officers and employees, and Section 6672 does not from penalties volunteer board members unless they solely serve in an honorary capacity, do no participate in day-to-day or financial operations of the organization, and do not have actual knowledge of the failure to collect, truthfully account for, and/or pay withholding taxes, and so long as someone else can be held liable for the penalty.

It's important to note that nonprofit organizations may have identified a responsible party when it first applied for an EIN (see the organization's Form SS-4 or online filing records). If the individual listed as the responsible party has since changed, a nonprofit organization must file Form 8822-B by no later than February 28, 2014 to report such change.

Here are additional resources on withholding taxes and possible personal liability:

Not Paying Your Taxes? Your Board Could Be Personally Liable (Nonprofit Quarterly)

Yes Virginia, Nonprofit Directors Really Can be Held Liable for An Insolvent Nonprofit’s Debts (Charity Lawyer Blog)



Top 10 Events in 2013


  Top 10

Here is a list of our top 10 events of 2013 affecting the American nonprofit sector:

  1. IRS Exempt Organizations Division controversy
    IRS Issues Initial Report And Action Plan Following Tax Exempt Organization Scandal, Forbes;
    IRS Controversy: scrutiny of tax exempt applications, Independent Sector.
  2. Federal government shutdown
    Government Shutdown Hurting Nonprofits, GuideStar Blog;
    Federal Government Shutdown and Effects on Nonprofits, National Council of Nonprofits.
  3. Affordable Care Act rollout
    Obamacare Rollout, Huffington Post;
    The Affordable Care Act and Charitable Nonprofits – FAQs, National Council of Nonprofits.
  4. Supreme Court decisions paving way for gay marriage
    Court Overturns DOMA, Sidesteps Broad Gay Marriage Ruling, NPR;
    IRS Ruling on Same-Sex Marriage Has Implications for Nonprofits, Leaffer Law.
  5. Snowden/NSA leaks
    10 most shocking NSA revelations of 2013, CNN Money;
    Edward Snowden, after months of NSA revelations, says his mission’s accomplished, Washington Post.
  6. Pope Francis actions signaling a change in the Catholic Church
    Person of the Year, Time;
    Is Pope Francis Bullish on Poverty Eradication and against Capitalism? Nonprofit Quarterly
  7. Death of Nelson Mandela
    The Nonprofit Sector Remembers Nelson Mandela, The Nonprofit Times;
    On Nelson Mandela's Passing, Nonprofit Quarterly.
  8. Malala's advocacy for education and women's rights
    Malala's year: Shot for defying Taliban, now considered for Nobel, L.A. Times;
    Extended Interview: Malala Yousafzai, The Daily Show.
  9. Civil war escalation in Syria
    Crisis in Syria, New York Times;
    The Nonprofit Stake in the Possible U.S. Military Action against Syria, Nonprofit Quarterly.
  10. Federal Food Stamp Program Cut
    Food stamps will get cut by $5 billion this week — and more cuts could follow, Washington Post WonkBlog;
    SNAP (Food Stamps): Facts, Myths and Realities, Feeding America.

Holiday Thanks!


Christmas Tree

Thank you to all our readers. We wish you a very happy holiday season!

Here are just a few tips on giving thanks:

  1. Make sure your “thank you” receipts to donors are in the form they need to take a deduction.
  2. If you make commitments when giving thanks, make sure you honor them.
  3. If you give substantial gifts when giving thanks, understand whether you’ll reduce the amount of a donor’s charitable contribution deduction or cause a recipient to recognize taxable income.
  4. If you give holiday bonuses to executives, consider whether the board should approve the total compensation, including the bonus, pursuant to the rebuttable presumption of reasonableness procedures.
  5. Thank your donors, volunteers, employees, suppliers, and supporters throughout the year.

Proposed Guidance for 501(c)(4) Social Welfare Organizations



On November 29, 2013, a Notice of Proposed Rulemaking by the Internal Revenue Service was published in the Federal Register containing proposed regulations that provide guidance to tax-exempt social welfare organizations on political activities related to candidates that will not be considered to promote social welfare.

A 501(c)(4) social welfare organization must be operated exclusively for the promotion of social welfare. Under the current regulations, it meets this standard if it is “primarily engaged in promoting in some way the common good and general welfare of the people of the community." The Treasury Department and the IRS are considering, and seeking public comment on, whether the current section 501(c)(4) regulations should be modified to provide more precision with respect to the meaning of the term "primarily engaged" if the “primarily” standard is retained. 

The current regulations also provide that "[t]he promotion of social welfare does not include direct or indirect participation or intervention in political campaigns on behalf of or in opposition to any candidate for public office." The proposed regulations would replace the term “participation or intervention in political campaigns on behalf of or in opposition to any candidate for public office” with a new term—“candidate-related political activity”—to differentiate the proposed Section 501(c)(4) rule from the standard employed under Section 501(c)(3).

Under the proposed guidelines, candidate-related political activity includes:

1. Communications:

  • Communications that expressly advocate for a clearly identified political candidate or candidates of a political party.
  • Communications that are made within 60 days of a general election (or within 30 days of a primary election) and clearly identify a candidate or political party.
  • Communications expenditures that must be reported to the Federal Election Commission.

2. Grants and Contributions:

  • Any contribution that is recognized under campaign finance law as a reportable contribution.
  • Grants to section 527 political organizations and other tax-exempt organizations that conduct candidate-related political activities (note that a grantor can rely on a written certification from a grantee stating that it does not engage in, and will not use grant funds for, candidate-related political activity).

3.  Activities Closely Related to Elections or Candidates:

  • Voter registration drives and “get-out-the-vote” drives.
  • Distribution of any material prepared by or on behalf of a candidate or by a section 527 political organization.
  • Preparation or distribution of voter guides that refer to candidates (or, in a general election, to political parties).
  • Holding an event within 60 days of a general election (or within 30 days of a primary election) at which a candidate appears as part of the program.

Here are some additional provisions we found interesting:

  • The Treasury Department and the IRS request comments on whether any particular activities conducted by section 501(c)(4) organizations should be excepted from the definition of candidate-related political activity as voter education activity and, if so, a description of how the proposed exception will both ensure that excepted activities are conducted in a non-partisan and unbiased manner and avoid a fact-intensive analysis.
  • The Treasury Department and the IRS request comments on whether, and under what circumstances, material posted by a third party on an interactive part of the organization's Web site should be attributed to the organization for purposes of this rule.

Thumbs Up Down

The proposed guidlines have generated much discussion already. Check out the following:

Alliance for JusticeTreasury, IRS proposal endangers citizen participation in democracy

Adler & Colvin (Nonprofit Law Matters): Just Released Proposed 501(c)(4) Regulations: A Good Start, But Rough …


Hearing on the IRS Exempt Organizations Division Post-TIGTA Audit



The House Ways and Means Oversight Subcommittee held a hearing on September 18 to review the audit of the Internal Revenue Service Exempt Organizations Division and question the acting chief of the IRS Danny Werfel. Here are some links and excerpts of articles covering the hearing:

Rep. (R-LA) Charles Boustany Opening Statement

In May, the Treasury Inspector General for Tax Administration [TIGTA] released an audit exposing the Internal Revenue Service’s practice of targeting applicants for tax-exempt status based on name and policy position. The audit confirmed what many feared – that the IRS was treating applicants differently based on their beliefs by subjecting them to endless delays and intrusive information requests.  Today we want to bring that disinfecting sunshine to the audit branch of the IRS as well.

Highlights from the House Ways & Means Committee IRS Exempt Orgs Hearing (Sustainable Law Group)

A few years ago Lois Lerner told an audience at Duke University that the IRS Exempt Organizations Division can use the tax return examination process to take a closer look at advocacy groups.  As a result, the Subcommittee has expanded its investigation to include whether the IRS improperly targeted conservative advocacy groups for reviews and audits.

Acting IRS Chief Touts Progress in Reforming Exempt Organizations Processes (Government Executive)

Ranking Member Rep. John Lewis, D-Ga., though agreeing that the IRS tax exempt organizations unit needed reforms, said, “Unfortunately, my friends on the other side of the aisle continue to frame this issue as a partisan one — as only affecting conservative groups. Time and time again the facts have shown that both Republican-leaning and Democratic-leaning groups were singled out during the application process. We know why we are here today — for Republicans to distract us from their lack of a positive legislative agenda to improve the economy, create jobs and fund the government.”

News of interest for startup nonprofits:  There is currently a backlog of over 65,000 exemption applications from 501(c)(3) and 501(c)(4) organizations.

Also see this article published in The Nonprofit Quarterly the day before the hearing: Update on IRS Scandal.



Delaware Public Benefit Corporation Signed Into Law


Yesterday, Delaware Governor Jack Markell signed Senate Bill 47, creating a new corporate form called the public benefit corporation. Delaware is the 19th state to enact benefit corporation legislation, which enables business leaders to consider public interest and societal impact in addition to profit when making business decisions. Delaware public benefit corporations must identify one or more specific public benefits in their certificate of incorporation, which include but are not limited to, artistic, charitable, cultural, economic, educational, environmental, literary, medical, religious, scientific and technical.

The founders of B Lab, a nonprofit organization dedicated to using the power of business to solve social and environmental problems, believe this legislation has unparallel implications:

“The benefit corporation legal structure is a new and useful tool for everyone.  For policy makers and the public interest, it combats the plague of short termism.  For business leaders, it helps attract the best talent and turn customers into evangelists.  For customers, it offers greater transparency to protect against pretenders.  For employees, it promises higher quality jobs where they can bring their whole selves to work every day.  And for investors, it mitigates risk, reduces transaction costs, creates additional rights to hold management accountable, and  accelerates the growth of a big market opportunity to meet the needs of people who want to invest to both make money and make a difference.”

Delaware corporations are eligible to form or transform into public benefit corporations beginning August 1, 2013.


Additional Resources: