Just turn on your TV and you will be reminded by the constant smear campaigns that political campaign season is here once again.  Section 501(c)(3) organizations must be careful and resist the urge to speak their minds.  Section 501(c)(3) organizations (including churches) are strictly prohibited from engaging in political campaign activities, including making statements for or against a candidate for public office.   Unlike legislative lobbying (where a Section 501(c)(3) public charity may engage in insubstantial lobbying), any amount of political campaign activity, including the use of the organization’s assets for campaing activities, may result in loss of tax-exempt status.  Therefore, Section 501(c)(3) organizations must resist the urge to endorse or oppose candidates, or allow their assets to be used for campaign activities, even though the election of a particular candidate may have a dramatic impact on the organization’s agenda.  Watchdog groups and concerned citizens frequently file complaints with the Internal Revenue Service alleging violation of the prohibition on political campaign activities and calling for revocation of exemption.  Therefore, make sure your Section 501(c)(3) organization is aware of this strict prohibition as the campaign season heats up.

On September 22, 2010, the Centers for Medicare and Medicaid Services (“CMS”) issued proposed rules that will dramatically change the enrollment process for Medicare providers and suppliers, including new enrollment following a change of ownership.  The proposed rules are intended to carry out various provisions of the Patient Protection and Affordable Care Act (“PPACA”), particularly section 6401, which requires that HHS develop procedures to screen Medicare providers for risk of fraud and abuse. The rules represent a shift in CMS’ anti-fraud strategy from one that pays first and asks questions later to one designed to prevent fraud before it starts.  These rules will impact many tax-exempt organizations, especially health care organizations.  For more information regarding these proposed rules, please click here.

Recently, the IRS, state Attorney Generals, and charity watchdog groups have raised concerns regarding the payment of excessive compensation to charity executives.  For example, the redesigned Form 990 includes numerous questions regarding compensation and related practices.  The IRS has sent compensation questionnaires to thousands of hospitals and universities.  Recently, Protect the Hershey’s Children sent a letter to the IRS Commissioner, Senate Finance Committee, and Pennsylvania Department of Banking alleging board compensation abuses at the Milton Hershey Trust School and Milton Hershey School. 

I believe it is likely that charities will continue to experience heightened scrutiny of executive compensation from the public, IRS, and Attorney Generals, especially in light of the additional compensation data that is now available on the Form 990.  In addition to negative publicity, payment of excessive executive compensation may result in loss of the charity’s exempt status (private inurement), the imposition of excise taxes on the executive who received and the directors who approved the compensation (excess benefit or self-dealing rules), and other potential penalties imposed by the state Attorney General. 

So what can your charity do to protect itself against scrutiny?  The answer is simple – follow the procedures set forth in the Treasury Regulations!  (more…)

Recently, the Federal Circuit Court of Appeals upheld the revocation of church status for the Foundation for Human Understanding (106 AFTR 2d 2010-5862) because it did not satisfy the so-called associational test.  The associational test is a test used by courts to determine whether an organization constitutes a church for 501(c)(3) purposes and consists of asking whether the organization “includes a body of believers who assemble regularly for communal worship.”  The IRS and the courts generally avoid getting into the substance of the worship services of the various churches–as long as the believers associate with each other (and, in some churches, with venomous snakes).    (more…)

As we discussed in a prior post, a charity must notify the IRS of material changes in activities on its next Form 990.  This process is beneficial to the IRS and the public.  As I also discussed, in addition to the Form 990, a charity may (in its discretion) notify the IRS of material changes in activities through the Correspondence Unit (also referred to as the Adjustments Unit). 

In the past, when it seemed appropriate (e.g., where the activities were in a gray area or the charity was very conservative), we would submit a letter explaining the changes in activities to the Correspondence Unit and request an updated determination letter from the IRS that the charity was still exempt taking into consideration the new activities. On several occasions, the Correspondence Unit issued such an updated determination letter, which was of great benefit to the charity, providing assurance and comfort that the charity’s new activities were exempt. 

Recently, we have made similar filings and requests to the Correspondence Unit, which has declined to issue an updated determination letter – instead, the requesting charity merely received a confirmation letter from the Correspondence Unit acknowledging receipt of the filing and reminding the charity to disclose the changes on its next Form 990.  Obviously, this mere confirmation letter is of significantly less benefit to the charity compared to an updated determination letter, making it difficult to recommend the additional filing with the Correspondence Unit in light of the additional time and legal cost to do so.

We propose that the IRS should introduce a formal process that allows a charity, in its sole discretion, to file a “Notice of Material Changes in Activities” with the Correspondence Unit and request an updated determination letter that such activities do not jeopardize the charity’s exempt status. (more…)

When charitable pledges come do, some donors scramble to find ways to satisfy the pledge without a negative impact to current cash flow.   A donor’s use of a private foundation to satisfy the pledge is often unattractive since such a transfer could result in self-dealing to the extent the donor’s pledge is considered a legally binding obligation under applicable state law.  However, a transfer from the donor’s IRA in satisfaction of the pledge may represent a viable alternative.  In an Information Letter released August 20, 2010, to Harvey Dale (a well-known tax professor), the IRS concluded that a taxpayer who satisfies a pledge by making a qualified charitable distribution from his or her IRA directly to a charitable organization would not include the distribution in gross income (citing Rev. Rul. 55-410, which provides that the satisfaction of a pledge by means of a donation of appreciated or depreciated property does not give rise to a taxable gain or a deductible loss) – and of course, IRAs are not subject to the self-dealing rules imposed on private foundations.  Therefore, the next time you are faced with a pending pledge and cash flow is tight, you may want to explore satisfaction of the pledge using your IRA.

The IRS today released a draft version of the form that tax-exempt organizations will use to calculate the small business health care tax credit when they file income tax returns next year. The IRS also announced how eligible tax-exempt organizations –– which do not generally file income tax returns –– will claim the credit during the 2011 filing season.   Tax-exempt organizations will claim the small business health care tax credit on a revised Form 990-T. The Form 990-T is currently used to report and pay the tax on unrelated business income. Form 990-T will be revised for the 2011 filing season to enable eligible tax-exempt organizations –– even those that owe no tax on unrelated business income –– also to claim the small business health care tax credit.  For more information, please click here.