LEGAL AND TAX ASPECTS WORKSHOP Marilyn Jacobs April 27, 2018 This training is provided for educational, compliance and loss-prevention purposes only, and absent the express prior agreement of DWK, does not create or establish an attorney-client relationship. The training is not itself intended to convey or constitute legal advice for particular 1issues or circumstances. Contact a DWK attorney for answers to specific questions. OVERVIEW Fiduciary Duties of the Board Noncommercial Policy Sponsorship verses Advertising Payments Unrelated Business Income Fundraising Activities Alcohol at PTA Events Acknowledgment and Disclosure Requirements 2 FIDUCIARY DUTIES OF THE BOARD Board members must perform their duties in good faith, with ordinary care, and in the best interest of the nonprofit. Good faith is shown by honesty and sincere intention to be faithful to the director s duties and obligations. Ordinary care means exercising the care (good judgment and common sense) that an ordinary, prudent person in a like position would use under similar circumstances. In the best interest of the nonprofit means acting in the best interest of the nonprofit (rather than the director s own interests). 3 1
RESPONSIBILITIES OF BOARD MEMBERS INCLUDE: Being Familiar with Governing Documents Articles of Incorporation Bylaws Policies Attending Board Meetings Prepare for meetings by reviewing materials before taking board action. Ask questions, be informed, participate in discussions. Exercise independent judgment do not just vote with the majority. 4 Overseeing Financial Operations There should be regular board reviews of the nonprofit s financial performance. Is a director reviewing bank statements and reconciling the checks issued and cash expenditures with bank balances? There should be good internal financial controls. Who are the signatories on the bank accounts? Who is responsible for the receipt of cash and checks? Who is responsible for bank deposits? How are expense reimbursements handled? Receipts must be required 5 Being Familiar with Reporting Requirements 501(c)(3) organizations are subject to information reporting requirements. Statement of Information is filed biennially with the Secretary of State IRS Form 990, 990-EZ or 990 e-postcard The type of form that is filed is generally determined by the amount of the nonprofit s gross receipts and the value of its assets. Failure to file for 3 consecutive years will result in the revocation of the nonprofit s tax exempt status. FTB Form 199 or 199N e-postcard AG Form RRF-1 Sales Tax Returns if applicable 6 2
NONCOMMERCIAL POLICY The State PTA is a 501(c)(3) Organization As a 501(c)(3) organization, the State PTA must be organized and operated for exempt purposes. It cannot regularly conduct activities that are commercial in nature. Failure to comply with this requirement can result in the recognition of taxable income and the loss of tax-exempt status. 7 THE STATE PTA S NONCOMMERCIAL POLICY The State PTA Bylaws state that "the organization shall be noncommercial." The State PTA has a non-commercial policy. Some of the prohibitions in that policy include: Not using the name PTA or the names of PTA officers in the commercial activities of other organizations, such as the promotion of their goods and services. Because it can be seen as an endorsement, taking care when: conducting continuing or repeat projects in cooperation with a commercial business, and using the name of PTA along with the name of a business in promotions. 8 Members in their official capacities not endorsing or promoting a commercial business or engaging in activities that do not promote the purposes of the PTA. They should not: Make a qualitative judgment of a sponsor s products or services, such as: Joe s widgets are the best! Include comparative language or language that implies good quality in an acknowledgment, such as Joe s widgets are so much better than Bob s widgets! Permit a sponsor to write the acknowledgment of thanks, such as Thank you, ABC PTA, for endorsing our product! Ask members or the public to buy the products or services of a sponsor, such as Go to Joe s for your widgets! Endorse a product or service, such as Our PTA supports Joe s. 9 3
SPONSORSHIP VERSES ADVERTISING PAYMENTS A 501(c)(3) organization may receive donations from a commercial company. If a donation is in the form of a: sponsorship payment, it is generally tax-exempt advertising payment, it is taxable 10 SPONSORSHIP PAYMENTS A sponsorship payment is generally a tax-exempt donation to the nonprofit. A nonprofit may acknowledge a sponsor s generosity and express its appreciation for the sponsorship payment. The acknowledgement can: be in printed media or on the nonprofit s website; include the sponsor s name, logo, general phone number, location and internet address; be a simple static internet website link that takes the reader to the sponsor s home page; and/or be a value neutral display of the sponsor s products or services, or the distribution of samples of the sponsor s products, at a nonprofit event. 11 EXAMPLE: If Coca Cola wanted to sponsor the State PTA s annual conference and a web page, the following message acknowledging Coca Cola as the sponsor can be placed on the State PTA s website and in the conference program: This conference and website page is sponsored by a generous donation from Coca Cola, 111 N.W. 22 nd Street, Atlanta, Georgia, phone: 800-123-4567. https://www.cocacolacompany.com [The website address can be a hyperlink to Coke s homepage] 12 4
In addition: The Coke logo can be displayed; Coke products can be displayed at the conference; and Free samples of Coke products can be distributed at the conference. It is important to note that the product displays and the website acknowledgment cannot contain any language indicating value, price or quality, or any inducement to purchase Coke products. 13 ADVERTISING PAYMENTS An advertising payment is almost always taxable to a nonprofit as unrelated business income. If the nonprofit s acknowledgement looks too much like an advertisement for the sponsor s goods or services, the IRS will treat the donation as a taxable advertising payment (instead of a tax-exempt sponsorship payment). 14 Examples of acknowledgments deemed to be advertising: Providing prices, qualitative information, or other indications of value or savings. Providing endorsements or inducements to buy/lease the sponsor's products or services. Providing an "active placard" or a "running banner" with the sponsor's name or logo on a nonprofit's website. Providing a website link that takes the user directly to the page of the sponsor's site where products or services can be ordered, or listing the specific phone number for ordering products or services from the sponsor. 15 5
Providing more than token facilities, services or other privileges to the sponsor in return for its sponsorship payment (i.e., complimentary sports or theater tickets, special briefings or reports not available to the public, or lavish receptions). Accepting a sponsorship payment where the amount of the payment is contingent upon the level of attendance at the charity event (i.e., the payment is contingent on the degree of public exposure). Providing the sponsor with advertising or acknowledgments printed in a nonprofit's regularly scheduled and published materials (i.e., a periodical). 16 UNRELATED BUSINESS INCOME A 501(c)(3) organization does not have to pay taxes on income that is related to its tax-exempt purposes. Examples include: Donations Membership dues Interest and dividends from investments Royalties paid for the use of intellectual property (i.e., licensing the use of a nonprofit s name/logo; renting its mailing list) Rental income if the nonprofit is totally passive 17 When a nonprofit earns revenues from a commercial activity (i.e., a trade or business) that is unrelated to its exempt purpose and is a substantial part of the nonprofit s overall activities, those revenues may be taxed as unrelated business income. It does not matter that the revenues will be used for an exempt purpose. The test is whether the activity furthers the exempt purpose, not whether the nonprofit uses the revenues that it raises from the activity for an exempt purpose. Unrelated business income must be reported annually on IRS Form 990-T and FTB Form 109 if more than $1,000, and estimated taxes paid if the amount of tax due is more than $500 per year. 18 6
UNRELATED BUSINESS INCOME DEFINED The income is from a trade or business, such as the sale of goods or services. The trade or business is regularly carried on by the nonprofit. It does not apply if it is an occasional activity. The trade of business is not substantially related to the exempt purpose of the nonprofit. The activity does not further the nonprofit s exempt purposes, other than to raise funds for its operations. The activity is regularly carried on by for profit entities. 19 Examples of unrelated trade or business activities: Advertising. Many nonprofits sell advertising in their publications or other forms of public communication (i.e., selling advertising space in bulletins, magazines and journals, or on the organization s website). Gaming. Most forms of gaming, if regularly carried on, may be considered an unrelated trade or business. Sale of merchandise and publications. The sale of merchandise and publications, as well as the actual publication of materials, is considered an unrelated trade or business if the items involved do not have a substantial relationship to the exempt purposes of the organization. 20 Exceptions from unrelated trade or business activities: Activities conducted substantially by volunteers Activities conducted for the convenience of members, students, patients, officers or employees Sales of donated merchandise (i.e., a thrift store) Convention and trade show activities Sponsorship payments Income from bingo games if: A traditional type of bingo; Legal under state and local law; and Not ordinarily carried out on a commercial basis. 21 7
FUNDRAISING ACTIVITIES Gaming Activities The California Constitution prohibits many forms of gambling. There is an exception for Section 501(c)(3) organizations that meet certain requirements. Because gambling does not further a charitable purpose, it cannot be a substantial part of a nonprofit s activities. Unless an exception applies, unrelated business income tax is paid on gambling receipts. 22 POKER NIGHT A nonprofit that has existed for 3 years may conduct 1 poker night fundraiser per year. The nonprofit must register annually with the AG s Bureau of Gambling Control. Only approved games may be played at the fundraiser. The event cannot be longer than 5 consecutive hours. The prizes must be donated and cash prizes cannot be awarded. No individual prize may have a cash value greater than $500, and the total value of prizes awarded cannot exceed $5,000. Participants must be at least 21 years of age. 23 90% or more of the revenues generated must go directly to the nonprofit, and no more than 10% of gross receipts may be used to pay those conducting the fundraiser (excluding a facility rental fee). Records must be maintained of the gross receipts, costs incurred, recipients of net profits, number of fundraiser participants, and prizes awarded, in the event the Bureau of Gambling Control requests an itemized report. Suppliers of equipment used to play the controlled games must be registered with the Bureau of Gambling Control. [For more information about conducting charity poker night fundraisers, visit the California Attorney General s Bureau of Gambling Control website, http://ag.ca.gov/gambling/charitable.php] 24 8
BINGO Nonprofits may conduct bingo games for fundraising purposes if permitted under a local city or county ordinance. The bingo games must be operated consistent with the ordinance and the Penal Code. The Penal Code contains restrictions such as: The nonprofit must register prior to conducting the bingo games. Bingo players must be physically present at the time and place where the bingo game is being conducted. Bingo games must be open to the public. 25 Must be 18 to operate or play bingo. Bingo games must be operated and staffed by nonprofit members, who cannot be paid from bingo game proceeds. Prizes are limited to $500 per game. Funds from bingo games must be deposited into a special fund or account, and cannot be commingled with other funds. The funds must be used for charitable purposes; however, proceeds may be used for prizes and to pay license fees. The IRS has created a special exemption to the unrelated business income tax rules for proceeds from traditional bingo games. [Check with local city, sheriff or police department for additional information] 26 RAFFLES Nonprofits must be registered in California for 1 year before they can legally conduct raffles. Nonprofits must register with the AG s Registry of Charitable Trusts at least 60 days prior to the scheduled raffle date, and receive confirmation before conducting any raffle activities. A raffle is exempt from registration if: participants do not have to pay for a chance to win, tickets are offered on the same terms as the tickets for which a donation is given, and there is a general and indiscriminate distribution of tickets. Following the raffle, the nonprofit must file a disclosure report on or before October 1. 27 9
Rules for operating a raffle include: Each ticket must be sold with a detachable coupon or stub that is marked with a unique and matching identifier. Winners must be determined by draw, and the raffle must be supervised by a person 18 years or older. 90% of the gross proceeds from raffle ticket sales must be used by the nonprofit to support charitable purposes in California. Raffles cannot be advertised, operated, or conducted over the internet. Nonprofit may place an announcement of a raffle on its website. [For information on raffle restrictions, eligible organizations, and registration requirements, please refer to the California Attorney General s website, http://oag.ca.gov/charities/raffles.] 28 AUCTIONS AND OTHER SALE OF GOODS An auction or silent auction is not a game -- it is a sale of goods. The purchasers of items at a charity auction may claim a charitable contribution deduction for the excess of the purchase price paid for an item over its fair market value. The purchaser must, however, be able to show that he/she knew the value of the item was less than the purchase price. Donors who provide goods for charities to sell may generally take a charitable contribution deduction but the deduction may be limited. A nonprofit may be subject to unrelated business income tax on proceeds from such sales if they are regularly carried on, unless an exception applies (such as selling donated goods or using a volunteer workforce). 29 A nonprofit may also be subject to sales tax for conducting sales of goods, and should review the California State Board of Equalization website, http://www.boe.ca.gov, and BOE Publication 18. 30 10
SELLING SCRIPT Script is similar to a gift certificate. A nonprofit buys scripts from a vendor at a discount and then sells it to donors at full face value. Example: A nonprofit buys $100 scrip cards from a grocery store for $95 apiece, sells them for $100 apiece, and thereby nets $5 from each sale. It is the State PTA's policy to treat the scrip as non-deductible. The policy states that purchasers must be informed that the scrip is not tax deductible. Use a stamp to mark the front of checks received in payment for scrip, Scrip Purchase Not Tax Deductible. Because scrip is redeemable by anyone, it is subject to loss or theft as cash. 31 The Scrip Committee should comply with the following financial procedures: Work directly with the store(s) and purchase the scrip with a PTA check signed by 2 authorized elected officers. Keep an accurate record of scrip inventory and all sales. Provide a written report to the treasurer with deposit receipts attached, to be placed on file for audit. Conduct sales of scrip in a safe, protected location. Provide interested customers with a name and phone number of a person whom they can contact for information. 32 Make arrangements for safekeeping the scrip between sales. Do not keep scrip at a private residence or in a car trunk. Renting a safe deposit box at a bank is recommended for large amounts of scrip. If unsold scrip or money cannot be deposited in the bank immediately, advance arrangements should be made with the principal to use the school safe. It is recommended that the PTA purchase a small safe or lockbox to place inside the school safe. Prior to placing unsold scrip or money in the school safe, 2 PTA members (one of whom must be a financial officer or the chairman) must count it, document the amount, and have the documentation signed by the PTA members. The principal may require that a school representative verify the documentation. Never use children as couriers. Maintain control of the program to ensure that all scrip sales are accurately reported. 33 11
ALCOHOL AT PTA EVENTS California Business and Professions Code, Section 25608 states that every person who possesses, consumes, sells, gives, or delivers to any other person, any alcoholic beverage in or on any public schoolhouse or any of the grounds thereof, is guilty of a misdemeanor. PTAs may not sell alcoholic beverages under any circumstance. PTAs may auction donated alcoholic beverages. Donated bottles and/or cases of wine may be used as auction items provided the contents are not decanted on the school premises. Contact the school district for local policies regarding auctioning of donated alcoholic beverages. 34 The State PTA strongly urges its unit, council, and district PTAs to refrain from serving alcohol at PTA events. If alcohol is served, the alcoholic beverages must be provided and served by a licensed establishment or catering company that has the appropriate permits and insurance. The PTA may not collect for the cost of the alcoholic beverages through ticket sales. This cost must be paid separately to the catering company or the licensed establishment. Under no circumstances may PTA funds be used to purchase alcoholic beverages or bottles of alcohol. [If you have any questions, contact the State PTA s insurance broker or your District PTA] 35 ACKNOWLEDGMENT AND DISCLOSURE REQUIREMENTS The IRS imposes recordkeeping and substantiation rules on donors of charitable contributions, and acknowledgment and disclosure rules on nonprofits that receive certain quid pro quo contributions. [Please refer to IRS Publication 1771] 36 12
THANK YOU! SAN FRANCISCO LONG BEACH SAN DIEGO SAN RAFAEL CHICO SACRAMENTO SAN LUIS OBISPO Marilyn Jacobs Sacramento Office 916/970-2004 mjacobs@dwkesq.com 37 13