Form 1023 and the Toughest Compliance Challenges

Transcription

1 Form 1023 and the Toughest Compliance Challenges Clearing the Hurdles When 501(c)(3) Organizations Apply for Tax Exempt Status WEDNESDAY, OCTOBER 23, 2013, 1:00-2:50 pm Eastern IMPORTANT INFORMATION This program is approved for 2 CPE credit hours. To earn credit you must: Participate in the program on your own computer connection and phone line (no sharing) if you need to register additional people, please call customer service at x10 (or x10). Strafford accepts American Express, Visa, MasterCard, Discover. Respond to verification codes presented throughout the seminar. If you have not printed out the Official Record of Attendance, please print it now. (see Handouts tab in Conference Materials box on left-hand side of your computer screen). To earn Continuing Education credits, you must write down the verification codes in the corresponding spaces found on the Official Record of Attendance form. Complete and submit the Official Record of Attendance for Continuing Education Credits, which is available on the program page along with the presentation materials. Instructions on how to return it are included on the form. To earn full credit, you must remain on the line for the entire program. WHOM TO CONTACT For Additional Registrations: -Call Strafford Customer Service x10 (or x10) For Assistance During the Program: - On the web, use the chat box at the bottom left of the screen - On the phone, press *0 ( star zero) If you get disconnected during the program, you can simply call or log in using your original instructions and PIN.

2 Tips for Optimal Quality FOR LIVE EVENT ONLY Sound Quality Call in on the telephone by dialing and enter your PIN when prompted, and view the presentation slides online. If you have any difficulties during the call, press *0 for assistance. You may also send us a chat or sound@straffordpub.com so we can address the problem. Viewing Quality To maximize your screen, press the F11 key on your keyboard. To exit full screen, press the F11 key again.

3 Program Materials FOR LIVE EVENT ONLY If you have not printed or downloaded the conference materials for this program, please complete the following steps: Click on the ^ sign next to Conference Materials in the middle of the left-hand column on your screen. Click on the tab labeled Handouts that appears, and there you will see a PDF of the slides and the Official Record of Attendance for today's program. Double-click on the PDF and a separate page will open. Print the slides by clicking on the printer icon.

4 Form 1023 and the Toughest Compliance Challenges Oct. 23, 2013 Rich Ruvelson, Green Hasson Janks Ofer Lion, Hunton & Williams

5 Today s Program Introduction Slide 4 Slide 7 [Rich Ruvelson, Ofer Lion] Due Dates and Required Attachments Slide 8 Slide 10 [Rich Ruvelson] Form 1023: Parts I-XI Slide 11 Slide 25 [Ofer Lion] Form 1023: Schedules A-H Slide 26 Slide 36 [Rich Ruvelson] Expedite Requests Slide 37 Slide 38 [Ofer Lion] Closing Remarks Slide 39 [Rich Ruvelson, Ofer Lion]

6 Notice ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SPEAKERS FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. 6

7 Rich Ruvelson, Green Hasson Janks Ofer Lion, Hunton & Williams INTRODUCTION

8 Exemption Issues 26 USC Section 501-Exemption from tax on corporations, certain trusts, etc. (c) List of exempt organizations..» (3) Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.» (4)» (A) Civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare, or local associations of employees, the membership of which is limited to the employees of a designated person or persons in a particular municipality, and the net earnings of which are devoted exclusively to charitable, educational, or recreational purposes.» (B) Subparagraph (A) shall not apply to an entity unless no part of the net earnings of such entity inures to the benefit of any private shareholder or individual. October 21, Green Hasson & Janks LLP. All Rights Reserved. An Independent Member Firm of HLB International. 8

9 IRS Scrutiny and Scrutiny of IRS 501(c)(4) s: Tea Party exemptions - The Internal Revenue Code isn t always black and white Lois Lerner, Official at Heart of IRS Investigation, Resigns October 21, Green Hasson & Janks LLP. All Rights Reserved. An Independent Member Firm of HLB International. 9

10 Interactive Form 1023 October 21, Green Hasson & Janks LLP. All Rights Reserved. An Independent Member Firm of HLB International. 10

11 Rich Ruvelson, Green Hasson Janks DUE DATES AND REQUIRED ATTACHMENTS

12 Due Dates and Required Attachments October 21, 2013 Charities file Form 1023 within 27 months after the end of the month in which the organization was legally formed - Reasonable cause - File Forms 990, 990-EZ 0r 990-N for tax years ending before approval Churches do not need to file Conformed articles of incorporation, bylaws and/or trust document Other attachments as specified on form User fee Power of Attorney Checklist Conflict of interest policy? Form 1023 and correspondence are open for public inspection Organizations other than charities file Form Green Hasson & Janks LLP. All Rights Reserved. An Independent Member Firm of HLB International. 12

13 Slide Intentionally Left Blank

14 Ofer Lion, Hunton & Williams FORM 1023: PARTS I-XI

15 Form 1023 Seminar Form 1023 Checklist Make sure to include all of the documents listed, and include them in the order requested it s the first test they use to see if you know how to follow directions (this is important to IRS agents). Note the four bullet points under the first check box the last one is key: Financial information should correspond with proposed activities. The first mailing address shown (with the PO Box) has been changed to IRS, PO Box 12192, Covington, KY

16 Form 1023 Seminar Part I Identification of Applicant If you are preparing and submitting the application, you should probably be the primary contact. If the primary contact is an authorized representative (attorney/accountant), be sure to include a power of attorney on the then current version of Form Many organization website addresses are under construction. 16

17 Form 1023 Seminar Part II Organizational Structure Be sure to include a state certified copy of the corporation s articles this is typically my Exhibit A. My usual Exhibit B: The bylaws should include an adoption date typically a certificate of the corporate secretary. 17

18 Form 1023 Seminar Part III Required Provisions in Your Organizing Document A 501(c)(3) must be both organized and operated exclusively for charitable or other exempt purposes, and this is the basic organizational test. A proper purpose clause and dissolution clause are a must, but make sure that they also meet any state property tax exemption or other requirements. 18

19 Form 1023 Seminar Part IV Narrative Description of Your Activities Typically my Exhibit C, the narrative description is the backbone of the entire application. Here, you need to clearly set forth how the organization meets the operational test. What exempt purposes will you further, and how will you do it? (See the Instructions for further queries). I ve drafted one page narratives, and 15+ page narratives decide what s appropriate under the circumstances. 19

20 Form 1023 Seminar Part V Compensation and Other Financial Arrangements With Your Officers, Directors, Trustees, Employees, and Independent Contractors For 3b, don t forget to include short bios for all of the officers, directors, trustees and the highest paid employees and IKs (include service provider entities). Question 4: Do you establish the rebuttable presumption of reasonableness? Questions 7/8/9: Related party transactions look back to question 4 for guidance (establish the presumption). 20

21 Form 1023 Seminar Part VI Your Members and Other Individuals and Organizations That Receive Benefits From You The heading here is somewhat decieving. Presumably, the answer to either 1a or 1b or both is yes. Otherwise, how do you further an exempt purpose? For the narrative response in your exhibit, feel free to cross reference back to the main narrative from Part IV. 21

22 Slide Intentionally Left Blank

23 Form 1023 Seminar Part VII Your History If your organization is a successor under the definition provided in the instructions, complete Schedule G (which can be painful). If your organization is filing 27 or more months after forming, it may face bigger challenges than Schedule E, but start there. 23

24 Form 1023 Seminar Part VIII Your Specific Activities If your answer to question 1 is yes, you can stop here. For question 4 regarding solicitation and fundraising activities, be sure to understand all of the state law implications of your organization s intended activities. In many cases, a 50-state solicitation registration is required (in almost all 50 state). Do not try this at home use a service provider. A good answer to question 5 can be helpful, but a government affiliation is not enough you still need a valid exempt purpose (and lessening the burdens of government is low on the IRS totem pole). Foreign operations? Know the anti-terrorist regulations. 24

25 Form 1023 Seminar Part IX Financial Data Some time ago, a cursory presentation with a handful of obviously made up line items would do the trick. Make sure that the financial projections are complete and line up with the narrative description of your activities, your compensation disclosures, and the years the IRS wants to see (the description at the top is inaccurate). If a line item calls for an itemized list provide one in the exhibits. Line item 22 (professional fees, that s you) doesn t ask for an itemized list, but provide one anyway. They follow up on this one a lot, but legal and accounting fees tends to be an adequate response. 25

26 Form 1023 Seminar Part X Public Charity Status Is the organization a private non-operating foundation, a private operating foundation, or a public charity? If it s not a private foundation, but sure to select the best available category in question 5. Do not complete or sign question 6a it s outdated. Only complete line 6b and line 7 if in the organization has been in existence 5 or more tax years. 26

27 Form 1023 Seminar Part XI User Fee Information The fees shown are incorrect. The applicable fees are $400 or $850. Make sure to have the application signed, and note that a signed original is no longer required (your client can the signature page to you). Form 1023 is executed under penalties of perjury and, if approved, becomes publicly available, so make sure that the client has reviewed, understands and agrees with everything in the application. 27

28 Slide Intentionally Left Blank

29 Rich Ruvelson, Green Hasson Janks FORM 1023: SCHEDULES A-H

30 Schedule A. Churches October 21, 2013 There is a difference between a church, synagogue or mosque and other types of religious organizations. - Churches must meet a number of the following non-exclusive requirements, in addition to other requirements for tax-exemption: Distinct legal existence Recognized creed and form of worship Definite and distinct ecclesiastical government Formal code of doctrine and discipline Distinct religious history Membership not associated with any other church or denomination Ordained ministers who have completed prescribed studies Established places of worship Regular congregations with regular services Religious schools, and Seminary Green Hasson & Janks LLP. All Rights Reserved. An Independent Member Firm of HLB International. 30

31 Schedule B. Schools, Colleges and Universities Not all educational organizations are schools - In addition to meeting all of the other requirements of exemption private schools must: Adopt and maintain a policy of racial nondiscrimination Have a regularly scheduled curriculum» Presentation of formal instruction» Non-educational activities must be incidental Have a regular faculty Have a regularly enrolled student body attending class at a facility where classes are regularly carried on October 21, Green Hasson & Janks LLP. All Rights Reserved. An Independent Member Firm of HLB International. 31

32 Schedule C. Hospitals and Medical Research Organizations Community benefit factors; -Community board -Open medical staff -Emergency room -Non-emergency care -Use of surplus funds -Charity care required -Other Affordable Care Act requirements: -Written financial assistance and emergency care policies -Limit amounts charged for emergency and other medically necessary care -Reasonable efforts to determine whether individual eligible for assistance under hospital policies before collections actions taken -Community health needs assessment and implementation plan performed and adopted once every three years MRO s October 21, Green Hasson & Janks LLP. All Rights Reserved. An Independent Member Firm of HLB International. 32

33 Schedule D. Section 509(a)(3) Supporting Organizations October 21, 2013 Organizational test -A supporting organization must be organized exclusively for the benefit of, to perform the functions of, or to carry out the purposes of one or more specified 509(a)(1) or 509(a)(2) organizations Articles must state name of supported organization Articles must not expressly empower the organization to engage in activities not in furtherance of these purposes or to operate to support or benefit any organization other than its specified supported organization(s) Operational test -Activities must benefit or support the supported organization, including making grants and providing services and facilities Control test Relationship test -Type I -Type II -Type III Green Hasson & Janks LLP. All Rights Reserved. An Independent Member Firm of HLB International. 33

34 Slide Intentionally Left Blank

35 Schedule E. Organizations Not Filing Form 1023 Within 27 months of Formation Reasonable cause -Don t miss 990 filing deadlines October 21, Green Hasson & Janks LLP. All Rights Reserved. An Independent Member Firm of HLB International. 35

36 Schedule F. Homes for the Elderly or Handicapped and Low-Income Housing Homes for the elderly -Residential facilities -Health care -Financial assistance to those unable to pay and care at lowest cost Low-income housing -Income eligibility October 21, Green Hasson & Janks LLP. All Rights Reserved. An Independent Member Firm of HLB International. 36

37 Schedule G. Successors to Other Organizations For obvious reasons the creation of successor organizations is looked at closely -Can have legitimate business reasons such as creation of a new private foundation after a merger, restructuring of a family foundation or restructuring of a multiple entity nonprofit group October 21, Green Hasson & Janks LLP. All Rights Reserved. An Independent Member Firm of HLB International. 37

38 Schedule H. Organizations Providing Scholarships, Fellowships, Educational Loans, or Other Educational Grants to Individuals and Private Foundations Requesting Advance Approval of Individual Grant Procedures How is scholarship, fellowship, educational loan or award program structured? -Concerns over transactions with insiders -This is the easiest way for private foundations to request advance approval Advance approval of award program not required, if award subject to IRC Section 74(b) and award winners selected from the general public October 21, Green Hasson & Janks LLP. All Rights Reserved. An Independent Member Firm of HLB International. 38

39 Publication 557 Tax-Exempt Status for Your Organization October 21, Green Hasson & Janks LLP. All Rights Reserved. An Independent Member Firm of HLB International. 39

40 Ofer Lion, Hunton & Williams EXPEDITE REQUESTS

41 Form 1023 Seminar Expedite Requests There are only a handful of viable rationales for an expedite request, so make sure you have one if you apply. It can be helpful to include documentation to back up your request. Send the request to the right place. You might include a copy of your Form 1023 submission with the expedite request, and a copy of your expedite request with your Form 1023, but these are filed in different places. 41

42 Rich Ruvelson, Green Hasson Janks Ofer Lion, Hunton & Williams CLOSING REMARKS