Nonprofit Law Blog

Group Exemption

IRS Publication 4573 (12-2006) provides guidance on group exemptions.  A group exemption letter may be granted by the IRS in response to an application for group exemption by a central organization on behalf of itself and one or more subordinate organizations (e.g., chapters).  To qualify for a group exemption, the central organization and its subordinates must have a defined relationship where the subordinates are:

• Affiliated with the central organization;
• Subject to the central organization's general supervision or control; and
• Exempt under the same paragraph of IRC Section 501(c), though not necessarily under the same paragraph under which the central organization is exempt.

Evidence of the above requirements will be included with the group exemption application, including:

• A letter containing information verifying the existence of the required relationship;
• A sample copy of a uniform governing instrument adopted by the subordinates;
• An affirmation by a principal officer of the central organization that, to the best of such officer's knowledge, the purposes and activities of the subordinates are set forth and consistent with the uniform governing instrument;
• A statement that each subordinate to be included in the group exemption letter has furnished written authorization to the central organization; and
• If the application for group exemption involves IRC 501(c)(3), an affirmation to the effect that, to the best of the officer's knowledge and belief, no subordinate to be included in the group exemption letter is a private foundation.

Once the group exemption letter is granted, the central organization is responsible for:

1. Ensuring that its current subordinates continue to qualify to be exempt;
2. Verifying that any new subordinates are exempt;
3. Updating the IRS on an annual basis of any changes in purposes, character, or methods of operation of included subordinates; new subordinates; subordinates no longer to be included; and subordinates that have changed their names or addresses.

Click here for Publication 4573.

Click here for Rev. Proc. 80-27 to find more detailed information about obtaining group exemption.

Free Online IRS Training

The IRS is now offering interactive online workshops designed for small- and mid-sized charitable organizations on the following topics:

• Tax-Exempt Status - How can you keep your 501(c)(3) exempt?
• Unrelated Business Income - Does your organization generate taxable income?
• Employment Issues - How should you treat your workers for tax purposes?
• Form 990 - Would you like to file an error-free return?
• Required Disclosures - To whom must you show your records?

Based on my experience participating in the first workshop on Tax-Exempt Status (it was informative and fun!), I give the IRS a big thumbs up for offering this valuable and accessible resource. Click here to go the IRS "Stay Exempt" website.

Review: Preventing Fraud in Nonprofit Organizations

Preventing Fraud in Nonprofit Organizations by Edward J. McMillan, CPA, CAE, is described on the book's back cover as "the proactive manual your organization needs to detect fraud and prevent it from affecting your organization's bottom line and name."  McMillan, an experienced association executive, delivers the goods with dozens of plausible examples of fraud and embezzlement that might affect a nonprofit and a 74-page form for conducting an internal control analysis and documentation.  Wiley, the publisher, has made the form available for download in Word format here.

The book is largely written from the perspective of larger organizations and business leagues, but even smaller charitable nonprofits will benefit by learning how to recognize potential areas of vulnerability and how to minimize such risks.  With increasing media coverage of fraud in the nonprofit sector and heightened government scrutiny, the book addresses an area that requires more coverage.  No longer can nonprofit boards simply deny the possibility of fraud within the organizations under their watch.

Among the examples of fraud and embezzlement offered:

• Diverting checks made out to the organization to a private account using the same acronym (e.g., a check intended for the "American Medical Association" but made out to "AMA" could easily be diverted to an account for the otherwise fictitious "Association for Modern Artists").
• Making payments to "ghost vendors."

Perhaps in recognition that the book's primary audience would likely consist of CPAs, CFOs and financial consultants of larger organizations and business leagues, McMillan proclaims that the following four areas "are of paramount importance when evaluating the risk associated with a typical not-for-profit" -

1. Checks mailed to the organization's offices from members, advertisers, and the like;
2. Printing expenses;
3. Postage expenses; and
4. Personnel-related  expenses including wages, payroll taxes, and employee fringe benefits.

He bases this list on, among other things, the faulty assumption that "[i]n most not-for-profit organizations, the primary product is the printed word (magazines, newsletters, books, brochures, etc.) and printing expense is typically a substantial portion of the overall budget, and in that respect, susceptible to fraud."  Printing and postage may not be areas of great exposure to many smaller charitable nonprofits.  However, the point is made that large line items in the budget may be particularly susceptible to fraud.

Overall, the book provides a good starting point for understanding how fraud and embezzlement may occur in nonprofit organizations, and offers good suggestions and useful forms (but you must be careful about using any of the legal forms without the review of appropriate legal counsel for applicability in your jurisdiction and currency).  McMillan's writing style is accessible to non-financial experts with fiduciary duties, and an evening browsing through the materials could make a big difference to an organization and its leaders.  Well worth the $45.00 cover price.

San Francisco - New Sick Law Goes Into Effect

Effective as of February 5, 2007, all employers (including nonprofits) must provide paid sick leave for staff members working in San Francisco.  Learn more about this groundbreaking, controversial law at the following sites:

Fact Sheet - Paid Sick Leave Ordinance - SF Office of Labor Standards Enforcement

FAQs - SF Office of Labor Standards Enforcement

"Law now entitles all workers in S.F. to paid sick leave" - San Francisco Chronicle

On February 8, 2007, the Rules Committee Board of Supervisors will hold a special hearing on the Proposed Ordinance on Implementation of Paid Sick Leave Ordinance.  Read more here.

Advisory Committee Principles - Principles for Responsible Fundraising Practices

Here are the 7 draft principles falling within the category of "Principles for Responsible Fundraising Practices" developed by the Panel on the Nonprofit Sector's Advisory Committee on Self-Regulation of the Charitable Sector:

1. Solicitation materials and other communications with donors and the public must clearly identify the organization and be accurate and truthful.
2. Contributions must be used for the purposes described in the relevant solicitation materials, in the way specifically requested by the donor, or in a manner that reflects the donor’s intent.
3. Charitable organizations must provide donors with appropriate acknowledgments.
4. Charitable organizations should implement clear policies, based on the organization’s exempt purpose, to determine whether accepting a gift is in the best interests of the organization.
5. A charitable organization should provide appropriate training and supervision of the people soliciting funds on its behalf to ensure that they understand their responsibilities and applicable federal, state and local laws, and that they do not employ techniques that are coercive, intimidating, or intended to harass potential donors.
6. Organizations should not compensate internal or external fundraisers based on a commission or a percentage of the amount raised.
7. A charitable organization must respect the privacy of individual donors and must not sell or otherwise make available the names and contact information of its donors without prior permission, except where disclosure is required by law.

Here are some of my observations:

Advisory Committee Principles - Principles for Strong Financial Oversight

Here are the 5 draft principles falling within the category of "Principles for Strong Financial Oversight" developed by the Panel on the Nonprofit Sector's Advisory Committee on Self-Regulation of the Charitable Sector (note that today is the last day for public comment):

1. The board of a charitable organization must institute policies and procedures to ensure that the organization and, if applicable, its subsidiaries, manages and invests its funds responsibly and prudently. The full board must review and approve the organization’s annual budget and should monitor actual performance against the budget.
2. A charitable organization must keep complete and accurate financial records and should have a qualified, independent financial expert audit or review them annually in a manner appropriate to the organization’s size and scale of operations.
3. A charitable organization must not provide loans (or the equivalent) to directors or trustees.
4. A charitable organization must spend a reasonable percentage of its annual budget on programs in pursuance of its mission. An organization must also provide sufficient resources for effective administration of the organization, and, if the organization solicits contributions, for appropriate fundraising activities.
5. A charitable organization must establish and implement policies that provide clear guidance on its rules for paying or reimbursing expenses incurred when conducting business or traveling on behalf of the organization, including the types of expenses that can be paid for or reimbursed and the documentation required.

Here are some of my observations: