the website of Lisa Nachmias Davis Attorney at Law

NEW or Recent Additions or Updates:  *  New checklists of Insurance basics and Employer Basics *  Connecticut Toughens Charitable Solicitation Rules *  Disclosure Requirements for Charities *  Know Your Fractions:  The Public Support Test *  Sure You Really Want to...Start a 501(c)(3)? *  Compliance list for CT 501(c)(3)s CLICK for a full list of nonprofit related Articles

ALERT:  IRS SIMPLIFIES EXEMPTION APPLICATION PROCESS FOR SMALL NONPROFITS!

NONPROFIT ORGANIZATIONS PAGE 
last updated 9/22/18

  The law affecting charitable organizations, in particular, changes as the pendulum of Congressional opinion swings from support for the "thousands points of light" that provide so much support to the American community, to fear that charlatans and opportunists will use our tax-deductible dollars for selfish gain.  In the late 90's, the pendulum has swung first towards increased regulation (money penalties for "excess benefit transactions" between charities and those that control them) to reduced regulation (a softening of the rules interpreting these new statutes).  In 2008, congressional rules  mandating "three strikes"  and you're out (failure to file  Form 990 or comparable document each year for 3 years = loss of exemption); in 2014, a new IRS Form 1023EZ that makes it frighteningly easy to obtain tax-exempt status (which may then be lost just as easily in 3 years)!

Some recent and not-so-recent developments of interest to different types of tax-exempt organizations:

Recent CT law -- organizations that don't file annual reports for 3+ years may get dissolved.  Per Public Act 14-154, if an organization is delinquent in filing, it can be notified that unless the filing is done within 3 months it will be "administratively dissolved."  If that happens, it CEASES TO EXIST -- unless it reinstates and pays a large fee.

New Form 1023 EZ (revised!)  In 2014, the IRS released Form 1023 EZ, an online-only exemption application form available only to an organization that expects to to have less than $50,000 income in each of the next three years (and has not had $50,000/year income in the past 3 yearst), has less than $250,000 of assets, is not a church, school, hospital or certain other specified organizations,  The applicant is required to affirm various requirements of tax-exempt organizations, but need not submit any documents or detailed information. The fee is $400 at pay.gov.  Presto, tax exemption!  The catch: for those organizations that take this easy way in too lightly and fail to appreciate the obligations of a tax-exempt organization (such as annual filings)  loss of tax-exempt status and a much tougher form (1023) for reinstatement.  Try Sandy Deja's website for help; unfortunately I don't do as much of this as I used to.

Don't forget to file -- 3 strikes and you are OUT!  2006 Congressional legislation required the IRS to establish an annual filing requirement for tax-exempt organizations, no matter how tiny. The 990N "e-postcard" (or 990, or 990EZ) must be  filed annually (starting in 2008) by all tax-exempt organizations -- not just charities.  This requirement was part of the Pension Protection Act of 2006.  Failure to file for 3 consecutive years = AUTOMATIC revocation of exemption.  Reinstatement is possible, but difficult/expensive.  Read the IRS page. Thousands have found this out the hard way.  While awaiting reinstatement, don't forget to file, or you will be revoked again!

   Worry Less about "excess benefit" penalties?  In July 2006 a U.S. Court of Appeals reversed the Tax Court's decision in the Caracci (pdf) case that had found $5 million in excess benefits when a nonprofit home health agency sold its assets to a for-profit created by the nonprofit's principals.  The Court lambasted the IRS for numerous factual errors  and for refusing to admit its errors over years of litigation.  The Court was particularly dismissive of the IRS appraiser's methodology and experience, concluding that he had ignored the reality of the organization's financial difficulties and the implication of Medicare reimbursement rules, and had instead created fictional value for "good will."  (It was the lack of payment for the "good will" that had created the alleged excess benefit.)  Instead of $18 million in penalties, the home health agency principals have zero to pay.  Consider, however, the legal fees they may have incurred in defending this suit. 

... But it is still wise to worry about "excess compensation" as an "Excess Benefit.   The 2004 "continuing professional education" manual for IRS field agents discusses "automatic excess benefit transactions."  In effect, when a "disqualified person" receives a benefit, even if the organization intended it as compensation for services, and even if the overall benefit the person receives was reasonable in proportion to the services provided, there may still be an "excess benefit transaction" under the regulations if there was no contemporaneous documentation of the organization's intent.  Documentation might be reporting on a W-2, recipient reporting on Form 1040, reporting as compensation on Form 990, etc.  The manual includes several scary examples about how a relatively innocuous payment could create massive penalties.  You can read the IRS mind online on the website - click for the latest manuals (although they have apparently been discontinued, which is a pity).  This area is not as simple as it seems.  My article on "how to stay out of trouble under the excess benefit rules," published in the October 2002 edition of Connecticut Lawyer  (the magazine of the Connecticut Bar Association), explains the excess benefit rules and provides a checklist for reference.  (The Caracci case, however, which I refer to, has now been overturned, as discussed above.)  Instead of "whenever possible," consider the documentation requirements an "always" when compensation to board members or officers is involved.  I've also created a "user-friendly," non-lawyer version for your convenience.  Because the penalties can be severe -- 25% if the "excess" is returned in time, but up to 200% if not -- charities need to review these regulations carefully.  Strong conflict-of-interest policies will go far to protecting an organization against claims of "excess benefit" transactions. 

Congress TRASHES car donation programs.  2004:  The American Jobs Creation Act, signed into law by President Bush, says that donors of cars may only deduct the actual value the charity got when the car was sold -- effectively eliminating the appeal to donors, who will at least know what they are getting when they trade in the car to the dealer.  This overturns a ruling in November 6, 2002, when the IRS issued official guidance (Revenue Ruling 2002-67) approving car-donation programs operated through private agencies.  Stay tuned as to whether the "C.A.R.E." Act, which would permit tax-free rollovers of IRAs into charitable remainder trusts, will get through as an offset.  

Checklists Available:  As part of my work as a faculty director for the Yale Law School Nonprofit Law Clinic, I  prepared a ten-step guide to forming a nonprofit 501(c)(3) corporation in Connecticut, a guide to compliance obligations for such organizations, and a detailed explanation of disclosure requirements.  However, read with caution:  (1) these do not constitute "legal advice," and (2) many factors relate to how they will apply in your situation.  I also have checklists for organizations to analyze their liability risks and ways to deal with them and another checklist of employer obligations -- but do check with an accountant and good insurance agent, please!

Risky Business:  Trading Securities on Margin is "Unrelated Business Income."   The federal appeals court for the Second Circuit (covering New York, Connecticut, and Vermont) has held that income from securities purchased on margin is income from "debt-financed property" and therefore constitutes unrelated business income.  Bartels Trust for the Benefit of the University of New Haven v. USA (April 11, 2000).  What does this mean?  Additional reporting requirements; income tax on gains under state and federal law; and ultimately, if the amount of such income exceeds required percentages, potential loss of tax exemption.

For information on administering your own charitable remainder trust, information about Connecticut's Charitable Solicitation Act, or information on compliance with the laws governing substantiation and disclosure relating to charitable donations, email me at davis@sharinglaw.net.

Click HERE for a list of sites and resources of interest 

Articles of Interest on this Site:

* ALERT:  Pension Protection Act imposes NEW BURDENS on SMALL NONPROFITS!  (8/2006)
* Connecticut Toughens Charitable Solicitation Rules
* Disclosure Requirements for Charities
* Know Your Fractions:  The Public Support Test
* 10 steps to form a nonprofit 501(c)(3) corporation in CT
* SURE YOU REALLY WANT TO....start a Nonprofit, Tax-exempt Corporation in Connecticut?
* Magic Words Necessary for Your Organization to be Recognized as Tax-Exempt by the IRS
* Compliance list for CT 501(c)(3)s
* Excess Benefit rules, with checklist
* Excess Benefit rules:  user-friendly version, with checklist
* Indemnification Requirements and Liability Risks for a Connecticut Organization Exempt under Section 501(c) of  the Internal Revenue Code
* Employer Basics
* Liability Basics Checklist

DISCLAIMER:
THIS INFORMATION IS NOT PROVIDED AS  LEGAL ADVICE AND CREATES NO ATTORNEY-CLIENT RELATIONSHIP.  NO ENDORSEMENT IS INTENDED BY ANY REFERENCES HEREIN.  PLEASE CONSULT YOUR OWN LEGAL AND FINANCIAL ADVISORS BEFORE TAKING ANY ACTION. 

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Lisa Nachmias Davis
Attorney at Law
59 Elm Street, Suite 540
New Haven, CT 06510
Phone: 203-776-4400
Fax: 203-774-1060
email:  davis@sharinglaw.net