Nonprofit Law Blog

California Form 3500 (2007) and Instructions

California Form 3500 - 2007 Exemption Application available here.

Instructions for Forms 3500 and 3500A available here.

Retailers' Embedded Giving Legislation

On December 19, 2007, Sen. Robert Menendez (D-NJ) introduced legislation to regulate embedded giving, a practice whereby retailers promise to donate a portion of the purchase price to one or more charities.  The problem with embedded giving as highlighted by an article by Stephanie Strom in The New York Times (December 16, 2007):

Some programs fail to disclose what part of a transaction will go to charity, others fail to name the charity that will benefit, and in most cases, consumers have no way of knowing if their money actually went to charity and how much was raised overall.

Sometimes charities do not even know they are supposed to be receiving donations....

Menendez's website states that the Protecting the Spirit of Giving Act would do the following:

• Require retailers to notify a charity if they intend to use the charity’s name or logo to sell or market a product or donate proceeds from a product;
• Ensure that charities consent to their name or logo being used to market a product;

• Provide consumers with additional information about how their money will benefit a designated charity, including the portion of the item’s price that will be passed on to the charity and if there is any maximum amount that a retailer will be providing a charity.

One big issue with the legislation:  it doesn't account for the role of the states in regulating charitable giving.  Should the feds have jurisdiction in this area?  Should the legislation preempt existing state laws?

Read Jack Siegel's critical take on the legislation ("[it] certainly didn't yield a particularly thoughtful or well-crafted bill") at Charity Governance here.

Note also that there are licensing issues where the retailer (the "commercial co-venturer" or CCV) is using the charity's name or logo in any sales promotion.  The Intellectual Property Law Blog (published by alma mater Sheppard, Mullin, Richter & Hampton LLP) describes applicable California commercial co-venture laws as follows:

Sections 17510 through 17510.95 of the California Bus. & Prof. Code requires the CCV to: (i) have a written contract with the charity; (ii) specifically disclose to the public the name and address of the charity and the precise amount that the charity will receive; (iii) pay the charity the amount disclosed on the promotion statement within 90 days after the representations commence and every 90 days thereafter; and (iv) provide an accounting of all such sales with every 90 day payment to the charity. CCVs may also be required to officially register as a CCV with the California Attorney General's Office.

Read the full post, Using Charity Names in Sales Campaigns, here.

Click here for the California Commercial Coventurer Annual Registration Form.

Form CT-1 is Back!

California Form CT-1 has returned after being replaced by an Initial Checklist which followed passage of the Nonprofit Integrity Act of 2004.  If your organization must register with the California Attorney General's Registry of Charitable Trusts, Form CT-1 is the initial registration form.

Click here for Form CT-1.

Here is an excerpt from the California Attorney General's website regarding what types of organizations are subject to the registration requirements:

The Nonprofit Integrity Act of 2004 amended existing law, including the Supervision of Trustees and Fundraisers for Charitable Purposes Act (Government Code sections 12580-12599.7), which requires registration and annual reporting by all charitable corporations, unincorporated associations, trustees, and other legal entities holding property for charitable purposes, commercial fundraisers for charitable purposes, fundraising counsel for charitable purposes, and commercial coventurers, over which the Attorney General has enforcement or supervisory powers. The Nonprofit Integrity Act of 2004 did not alter the range of persons and entities who are subject to the registration and reporting requirements.

The law’s application is not limited to entities that are tax exempt under section 501(c)(3) of the Internal Revenue Code, which pertains to charities. With certain limited exceptions, the law applies to any person holding money or property for charitable purposes. This includes entities that are tax exempt under other subsections of section 501(c), entities that are not tax exempt, and for-profit entities, if, apart from their general purposes, they hold assets for charitable purposes. If, for example, a social club or fraternal organization holds a fundraising event for a charitable purpose, such as creation of a college scholarship fund, the moneys it collects are held as a charitable trust and it is subject to the law.

The law applies to all foreign charitable corporations (corporations formed under the laws of other states) doing business or holding property in California for charitable purposes. Doing business in California includes soliciting donations in California by mail, by advertisements in publications or by any other means from outside of California. Other examples of doing business in California include engaging in any of the following activities in California: holding meetings of the board of directors or corporate members here, maintaining an office here, having officers or employees who perform work here, and/or conducting charitable programs here.

In general, if a foreign charity´s sole contact with California is that it makes grants to persons, programs or charitable organizations located in California, or maintains financial accounts or investments at an office of a financial institution located in California, it is not considered to be doing business in California for purposes of compliance with Government Code section 12580 et seq.

IRA Charitable Rollover

The IRA Charitable Rollover, which provided individuals 70-1/2 years old and older with an annual exclusion of up to $100,000 from their gross income for qualified charitable distributions from IRAs, expired on December 31, 2007.  Despite efforts by some legislators to get either a temporary or permanent extension of the provision passed into law, this has yet to be accomplished.

Independent Sector reports:

Congress is expected to take up legislation in early 2008 to extend expired tax provisions, possibly retroactive to January 1. Independent Sector is working with others in the charitable community to ensure that the IRA rollover is included in that legislation.

At a recent NCPGC program, Janne Gallagher, Vice President and General Counsel of Council on Foundations, stated her optimism of getting an extender for one or two years.  However, she added that legislation on this issue may not be passed until the end of the year, largely because of differing opinions on the need for offsets to replace lost revenues, making tax planning difficult.

Keep track of the status of the IRA Charitable Rollover at Independent Sector's IRA Charitable Rollover Resource Center.

GreatNonprofits (and GiveWell)

GreatNonprofits is a charity and a website (still in beta) that provides "a place to find, review, and talk about great -- and perhaps not yet great -- nonprofits."  The Chronicle of Philanthropy (December 13, 2007) featured GreatNonprofits on its front page and titled its article using founder and CEO Perla Ni's description of the organization as a "Zagat's for Charities" (referring to the popular restaurant guidebook that publishes public opinions and cumulative ratings of various establishments).

First, the disclaimer:  GreatNonprofits is one of my clients.  With that being said, I must add with complete subjectivity, that the concept is brilliant.

Next, the issue for charities and their leaders:  more information about your organization - whether accurate or inaccurate, complete or incomplete, objective or biased, beneficial or detrimental - will be available to the public than ever before.  Such additional information may be self-reported (see posts on the new Form 990), published by the media (which has also increased its scrutiny over nonprofits, particularly where juicy stories lead to front page credits), or the result of insiders and outsiders posting their opinions of charities online through listservs, blogs, wikis, social networking sites, and ratings services (e.g., Charity Navigator, BBB Wise Giving Alliance, American Institute of Philanthropy).  How will charities monitor, manage, and respond to such information?  What is the responsibility of governing boards with respect to all of this?

These questions do not have simple answers, but they need to be asked and discussed at the board level.  Ironically, a nonprofit that assesses the effectiveness of charities, GiveWell, which was co-featured with GreatNonprofits in the same issue of The Chronicle of Philanthropy, ran into a public relations nightmare when it was later exposed that its CEO was posing online as an information-seeking donor to promote GiveWell.  Clearly, not the right way to manage information for an organization aspiring to be the "world's first completely transparent charitable grant maker."

Read more about GreatNonprofits here.

Read The New York Times (January 8, 2008) article about the GiveWell story here. 

Washington Update - NCPGC Program - January 10, 2008

Janne Gallagher, Vice President and General Counsel of Council on Foundations, gave a fascinating presentation on the developments in Washington D.C. over the past year at a luncheon meeting of the Northern California Planned Giving Council on January 10.  Among the topics she discussed:

• IRA Charitable Rollover (no extenders yet)
• Senate Finance Committee Activities (Smithsonian, university endowments, television ministries, hospitals, orphan trusts)
• House Ways and Means Committee (hearings on charities, diversity, hedge fund UBIT issue)
• Treasury Study on Donor Advised Funds and Supporting Organizations (past due but not yet published)
• IRS Guidance on the Pension Protection Act and Tax Shelter Penalties
• Supporting Organizations - Advanced Notice of Proposed Rulemaking - August 2007 (Payout Requirements for Type III SOs that are not Functionally Integrated)
• IRS Compliance Initiatives (political activity, executive compensation)
• Tax-exempt Hospitals (compliance checks)
• New Form 990 (released December 20, 2007; instructions forthcoming)
• Outlook for 2008
  • Legislative:  Extenders (e.g., IRA Charitable Rollover) should pass but otherwise little tax legislation expected in an election year
  • Regulatory:  Community foundations compliance checks; more PPA guidance

Future posts will examine some of these developments in greater detail.

In closing, Janne mentioned that attendees could subscribe to an e-mail update from the Council on Foundations' Legislative Network, a grassroots network of foundation representatives committed to educating government officials about the value of organized philanthropy.

You can learn more about the Northern California Planned Giving Council (NCPGC) here.  I'm a member and can vouch for the quality of the organization's programs and membership.  The NCPGC will be holding its annual conference at The Palace Hotel in San Francisco on May 1.

Schedule F of Redesigned Form 990 - Statement of Activities Outside the U.S.

The Redesigned Form 990, which goes into effect for tax years ending after December 31, 2008, contains a new Schedule F, Statement of Activities Outside the United States.  Schedule F, Part I, General Information on Activities Outside the United States, must be completed by organizations that have had aggregate revenues or expenses of more than $10,000 from grantmaking, fundraising, business, and program service activities outside the United States.  Part II requires a disclosure of grants or other assistance to organizations or entities outside the United States if over $5,000.  Part III requires a disclosure of grants or other assistance to individuals outside the United States if over $5,000.  Part IV requires the organization to describe its procedures for monitoring the use of grant funds outside of the United States.

The requirement of disclosing foreign recipients of grants posed concerns of the safety of recipients involved in furthering a U.S. charity's mission, particularly in areas that are dangerous or hostile to Americans and those who work with American organizations or in furtherance of American interests.  The IRS explained that it cannot redact or withhold from public disclosure such information without legislative authority.  As a concession, in the 2008 Form, the IRS will require reporting on a regional (rather than on a country by country) basis and not require the identification of individual grantee organizations.

Study of Donor Advised Funds and Supporting Organizations

In Notice 2007-21, Treasury and the IRS requested comments on issues relating to the organization and operation of donor advised funds and supporting organizations as part of a study required by the Pension Protection Act. 

The Notice identified the following issues for public comment:

1. Whether charitable contribution deductions are appropriate in light of the use of assets contributed to these organizations
2. Whether donor-advised funds should be required to distribute a specified amount for charitable purposes
3. Whether retaining certain rights with respect to transferred assets (including advisory rights with respect to making grants or investing assets) is consistent with treating the transfers as completed gifts
4. Whether issues identified in paragraphs 1-3 are also issues for other forms of charities or charitable donations.
5. The advantages and disadvantages of these organizations, compared to other charitable giving arrangements
6. How to determine the amount of a charitable contribution deduction for transfers to these organizations if the transferor retains certain rights, receives certain benefits, or the property is not readily convertible to cash
7. The effects of new legislative provisions (including applying excess benefit transaction taxes) on the practices of these organizations and their donors
8. Appropriate payout requirements for these organizations
9. Advantages and disadvantages of perpetual existence for these organizations
10. Whether issues identified in paragraphs 5-9 are also issues for other types of charitable giving arrangements.

View the comments of the Council on Foundations here (April 9, 2007).

View the comments of Independent Sector to the exempt organizations provisions of the Pension Protection Act here (August 8, 2007).

e-Filing Forms 990, 990-EZ, 990-PF, 8868

The IRS on its website notes:

Electronic filing is quick, secure, and more accurate than filing a paper return; and e-filing provides fast acknowledgment that the IRS has received the return.  E-filing reduces normal processing time and makes compliance with reporting and disclosure requirements easier.  Charities and non-profits can file the following forms electronically through an Approved IRS 990-efile Provider.

• Form 990
• Form 990-EZ
• Form 990-PF
• Form 8868 (Application for Extension of Time to File an EO Return)
• Form 1120-POL
• Form 7704 (extension form for the 1120-POL)

One such Approved Provider is The Urban Institute, which offers a a web application called NCCS 990 Online.  The service is FREE for organizations with less than $100,000 in gross receipts.

E-filing of Form 990 and 990-PF is required for certain large tax-exempt organizations.  For tax years ending after December 31, 2006, this requirement applies to exempt organizations with at least $10 million in total assets if the organization files at least 250 returns (including W-2s) in a calendar year.  Private foundations and non-exempt charitable trusts must file Form 990-PF electronically regardless of their asset size if they file at least 250 returns annually.

Read more here.

IRS Exempt Organizations Division 2008 Plans

I.  Enhancing Enforcement of the Tax Law

A.  New Compliance Tools

1. National Research Program
2. EO Research and Compliance Initiative (Colleges and Universities)
3. Voluntary Compliance Program

B.  Donor Control and Non-cash Contributions

1. Section 509(a)(3) Supporting Organizations
2. Charitable Trusts
3. Deconstruction
4. Conservation Easements
5. Successor Member Interests

C.  Form 990 Redesign

D.  Other Compliance Projects

1. Franchises or Business Ventures
2. Small Insurance Companies

E.  Ongoing Compliance Projects

1. Political Activities
2. Executive Compensation
3. Community Foundations
4. Gaming
5. Section 527 Organizations

IV.  Improving Customer Service

A.  TE/GE Determination System (TEDS) - an electronic determinations case processing and tracking system.

B.  Cyber Assistant

C.  Education and Outreach

D.  Formal Guidance

• Proposed or final regulations pertaining to new requirements added by the Pension Protection Act on supporting organizations, new excise taxes on donor-advised funds, and the e-Postcard.
• Regulations to implement the new Form 990.
• Regulations governing qualified tuition programs under section 529.
• Final regulations on excise taxes on prohibited tax shelter transactions and related disclosure requirements.
• Final regulations on sections 501(c)(3) and 4958 on revocation standards for organizations that engage in excess benefit transactions.
• Guidance related to charitable trusts.

You can read more about the Division's plans in the FY 2008 Implementing Guidelines.