National Society Daughters of the American Revolution Policy for Maintenance of Group Exemption from Federal Income Tax

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Arron Goodwin
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1 National Society Daughters of the American Revolution Policy for Maintenance of Group Exemption from Federal Income Tax Overview (Updated January 2011) The IRS granted NSDAR a group tax exemption in 1949 that covers NSDAR state organizations and chapters. As a result, states and chapters do not have to apply for exemption from federal income taxes on their own. NSDAR may add new chapters as they are formed. The IRS refers to NSDAR as the parent or central organization, while all others in the group are subordinates. The subordinates must fall under the general supervision and control of the central organization. In order to maintain exempt status under the group umbrella, each member must adhere to annual reporting requirements of the IRS. NSDAR establishes additional policies and procedures to ensure that it has carried out its responsibility for supervision and control of its subordinates. If the group is composed of 501(c)(3) organizations, as in NSDAR s case, no member of the group may be a private foundation. Each member of the group tax exemption must qualify as a public charity. Any chapter that is a private foundation must apply on its own to the IRS for tax exempt status. Annual Federal Filing Requirements Each member of NSDAR s group exemption is responsible for filing its own federal information return, Form 990 with the IRS. There are three versions of Form 990; the form to be filed is determined by the organization s financial activity. As of tax year 2010 (for filing in 2011) the thresholds are as follows: Financial Activity Gross Receipts normally less than or equal to $50,000 Filing Requirement 990-N epostcard Gross Receipts <$200,000 and Total Assets <$500,000 (for 2010 and thereafter) 990-EZ Gross Receipts >$200,000 and Total Assets >$500,000 (for 2010 and thereafter) 990 Beginning in May 2010, any organization that fails to file an information return (990, 990-EZ, or 990-N) for three consecutive years automatically loses its federal tax-exempt 1

2 status. The IRS has no discretion in applying or reversing the automatic revocation. An organization which has had its tax-exempt status revoked must file Form 1120 as a U.S. Corporation or Form 1041 as an Estate/Trust and may need to pay income taxes. In addition, an organization that automatically loses its 501(c)(3) status can no longer receive tax-deductible charitable contributions. Any organization that loses its 501(c)(3) status will have to apply directly with the IRS to attempt to reinstate the status using Form 1023, even if the organization was not originally required to file an application for exemption. The IRS does not have the authority to undo an automatic revocation. A parent or central organization may not add the subordinate back to the group ruling after the subordinate s exempt status has been automatically revoked. Maintaining Public Charity Status To maintain public charity status, an organization must pass a public support test. A public charity must seek a broad base of support from the general public, including contributions, dues, and bequests. An organization verifies public charity status by calculating its public support as a fraction of its total revenue. The resulting percentage must fall within the thresholds established in one of the tests described below. Investment income is excluded from the definition of public support included in the numerator of any of the tests. Therefore, any state or chapter that attempts to operate solely on interest income will fail to satisfy the public support test. In addition, broad support also means that there are limitations on the amount that may be included in the numerator for any donation from an individual person or corporation. There are two types of organizations that may qualify as publicly supported. The first type is a section 509(a)(1) organization. To qualify under this section, the Internal Revenue Code requires that organizations normally (over a four-year period) receive at least one-third of their support from qualifying public and/or governmental sources. To qualify under this section, most DAR chapters would count only chapter dues, contributions, and bequests. Gross receipts from exempt function activities, such as museum entrance fees, are not included in either the numerator or the denominator of the support calculation. If the organization does not meet the one-third test, it may still qualify under section 509(a)(1) if it receives at least 10% public support and meets a facts and circumstances test. Meeting the requirements of the facts and circumstances test would involve the chapter working with its local counsel or accountants to establish and document a detailed description of the particular situation, including the attraction of public support requirement of the test. The second type of publicly supported organization, a section 509(a(2) organization, is a service-providing organization, which earns a good part of its revenue, usually 2

3 through fees. It must pass the one-third and not more than one-third tests. There is no 10% exception for this section. Under this test, an organization must normally receive more than one-third of its support from a combination of gifts, contributions, membership fees, and revenue from the conduct of its exempt functions (e.g., museum entry fees.) At the same time, the organization is prohibited from having more than one-third of its income come from investment income and unrelated business income, such as rent of an apartment in its historic house. Note that while failing the public support test does not automatically result in loss of tax exemption, a non-publicly supported state society or chapter would have to file on its own with the IRS for status as a private foundation. Chapters and state societies should make every effort to maintain their public charity status, since private foundations are subject to a number of onerous operating rules that do not apply to public charities. In addition, donations to private foundations are subject to more stringent charitable contribution deduction limits. If a chapter or state society receives notice from the IRS that it no longer qualifies as a public charity, it should notify NSDAR immediately. NSDAR will be required to remove the chapter/state from its annual group exemption update submitted to the IRS, described below. See pages 6-7 for examples of the public support tests. NSDAR s Annual Reporting Requirement for Group Exemption As the parent organization, NSDAR is required to submit to the IRS an annual update of its group exemption listing. The update is due at least 90 days before the end of NSDAR s fiscal year, or no later than November 29. NSDAR must provide the IRS with information for every subordinate organization in the group, including: A list of chapters or states that have changed their addresses or in care of names during the year Chapters/states that have ceased to exist, withdrawn from, or failed to qualify for the NSDAR group Newly organized chapters in the NSDAR group. To assist NSDAR in meeting its filing deadline with complete and accurate information, each state and chapter organization must notify the Office of the Organizing Secretary General immediately when there are changes to its name, address, officers, or public charity status. Officer changes and address changes may be made through emembership. 3

4 If the updates cannot be made through emembership, the changes may be ed to the Organizing Office at faxed to or sent through US Mail. Annual NSDAR Financial Reporting Requirements NSDAR s group exemption is a valuable privilege that it must protect by exercising a reasonable amount of oversight over the subordinates. For NSDAR to be able to demonstrate that states and chapters are operating financially in accordance with NSDAR and IRS requirements, states and chapters must prepare annual financial statements that list the details of their income, expenses and assets. Note that this is separate and in addition to the requirement to file some form of 990 directly with the IRS. Any state or chapter that has audited financial statements or that files Form 990 or Form 990-EZ may submit a copy of these documents to satisfy NSDAR s annual financial reporting requirement. These options will cover most, if not all, states and the larger chapters. Others may submit an annual financial report that includes annual income and expenses by major category (i.e., Statement of Activities or Statement of Revenues and Expenses), along with a listing of fiscal year-end bank account balances, investments, and other property, if any (i.e., trial balance or Statement of Position). States are required to send their annual financial reports to the NSDAR Treasurer General's Office. Chapters are required to file their annual financial reports with the state treasurer. Chapter financial reports should be held by state organizations for 7 years. NSDAR and the DAR chapters and state organizations are fortunate to have a group tax exemption. By paying attention to the policies prescribed here, including the proper filing of required tax returns, the group will continue to enjoy this privileged status. Questions regarding the information in this document may be addressed to the Office of the Treasurer General. Preventing Loss of Exemption In addition to the financial reporting, to maintain its tax exempt status a public charity must limit its involvement in certain activities and completely refrain from others. Activities that may jeopardize a tax-exempt status: Private Benefit or Inurement more than insubstantial benefit to individuals or organizations is prohibited. The organization must serve a public interest, not a private one. 4

5 Political Campaign Intervention Public charities are absolutely prohibited from participating in either directly or indirectly any political campaign on behalf of or in opposition to any candidate for public office. Legislative Activities (Lobbying) Public charities are prohibited from attempting to influence legislation by contacting, or urging the public or its members to contact, employees or members of a legislative body for purposes of proposing, supporting or opposing legislation Additional Instructions IRS requirements for 501(c)(3) public charities also include the following: Send a timely written acknowledgement (receipt) to any donor who contributes $250 or more. If applicable, include a description of any non-cash contributions or a good faith estimate of any goods or services provided in return for the contribution. Keep thorough Board meeting minutes and maintain accurate books and records. Adopt a Conflict of Interest Policy and maintain a policy of full disclosure regarding Board members potential conflicts of interest. Record all payments to businesses or private persons to reflect fair value for services rendered or goods received. Include with all grant payments correspondence documenting the purpose of the grant and any restrictions on its use. Contact NSDAR or your local tax advisor if you have any questions. For further guidance on compliance with IRS requirements for 501(c)(3) Public Charities, see IRS publication number 4221-PC, Compliance Guide for 501(c)(3) Public Charities at 5

6 Examples - IRS Public Support Tests to Qualify for Charity Status Option 1 1/3 Public Support (section 509 (a)(1)) To pass this test a chapter must be able to show that it normally receives at least one-third of its income from dues, contributions and bequests. The IRS calls this income "qualifying public support." Under this test, the chapter is not allowed to count income from fees. Investment income can be up to two-thirds if dues and contributions are onethird. The test is calculated over a four-year period, which will give a chapter some time to reorganize its finances should it find itself drifting into higher percentages of investment income compared to contributions. Example A chapter with 400 members collects $2,000 in dues. The chapter deposits its membership dues in its local bank account and earns interest income in the amount of $80 during the year. It also receives interest from bonds purchased many years ago and the interest income per year is $3,500. It has no other revenue or investment income. Dues. $2,000 = 36% Interest. $3,580 = 64% Total.$5,580 Based on these facts, this chapter would satisfy the IRS public support test, as it would receive more than one third of its support from membership dues. The balance could be from investment income, as long as the one-third public support test is met. Option 2 10% Public Support, Facts and Circumstances (section 509(a)(1)) If a chapter does not meet the one-third test, but at least 10% of its income is from dues and contributions, it can try to meet the "facts and circumstances" test. A chapter will have to work with its local counsel or accountants to establish and document a detailed understanding of its particular situation to show that it passes the facts and circumstances test. Example A chapter has $1,500 of its income from membership dues and contributions, and $8,500 from investment income for the year. Dues/contributions. $1,500 = 15% Interest $8,500 = 85% Total.. $10,000 Since the chapter is receiving at least 10% of its support from dues and contributions, it will try to show that it meets the 10% "facts and circumstances" test. The chapter has instituted a fundraising program to attract new and additional contributions from 6

7 members and the public. Moreover, the chapter expects that next year, contributions will increase to 30% of its overall support. The chapter has selected a board of directors that is responsive to the local needs of the community and its membership is broadly based. It devotes its efforts and income to many causes that benefit the local community. Based on these facts and circumstances, although the chapter would not meet the onethird test in Option 1, it might be able to satisfy the IRS by demonstrating its good faith efforts to achieve the necessary public support along with the benefits to the community. Option 3-1/3 and Not More than 1/3 (section 509(a)(2)) This test requires a chapter to show that it normally receives more than one-third of its income from gifts, contributions, membership fees, and other types of fee income. Under this test, investment income and unrelated business taxable income can be no more than one-third of the organizations total income. Example A chapter owns an historic home that it has restored. Docents provide tours and the chapter collects admission fees that it uses to maintain the building. The chapter also receives $1,500 from membership dues and contributions, and $3,000 from investment income. Dues $1,500 Admissions $5,500 $7,000 = 70% Interest $3,000 = 30% Total $10,000 The chapter passes the public support test, since contributions and admissions related to its tax exempt purpose are more than one-third of its total income, and investment income is less than one-third of the total income. 7

QUALIFYING FOR PUBLIC CHARITY STATUS: The Section 170(b)(1)(A)(vi) and 509(a)(1) Test and the Section 509(a)(2) Test

QUALIFYING FOR PUBLIC CHARITY STATUS: The Section 170(b)(1)(A)(vi) and 509(a)(1) Test and the Section 509(a)(2) Test Tax-exempt status under Section 501(c)(3) of the Internal Revenue Code permits a charitable