Useful Past Tips: IRS & Tax: The Taxman Cometh Cause-Related Marketing and the IRS Executive Compensation - The DP defense may not work Intermediate sanctions - know your terms Regulation - How the group exemption works Legal - Charitable disclosure requirements

1.The Taxman Cometh

The nonprofit community enjoys no immunity from penalties assessed by the Internal Revenue Service (IRS) for violations of federal pension rules. Whether designing a new system, re-considering your current pension plan or contemplating outsourcing the work, take the time to properly view your options to avoid these potential retirement plan compliance pitfalls.

Be careful regarding:

• Loans from pension funds to plan beneficiaries. The problem lies in the failure of beneficiaries to repay pension plan loans in a timely manner.
• Failure to comply with federal fund withdrawal notice requirements. The paperwork must be completed when the money is pulled out of a plan.
• Premature distributions to plan beneficiaries who are not yet eligible to receive payments.
• Noncompliance with the three separate, yet interrelated limitations on the amount of contributions to a 403 (b) plan that are excludable from gross income.

2. Cause-Related Marketing and the IRS

The popularity of cause-related marketing may obscure the fact that, like any nonprofit-related activity, it can have unexpected pitfalls. One of those problems is the tax complications that can arise.

Harvey Berger, national director of Not-for-Profit Tax Services at Grant Thornton, LLP, discussed some of the caution areas at a Cause Marketing Forum in New York City.

For one thing, there are contribution issues, including the fact that donors can only deduct direct payments to the organization and most cause marketing payments come from the commercial partner.

Then there is the matter of sponsorships. Payment from business is not unrelated business income tax (UBIT) if it is "qualified sponsorship payment" (QSP). A QSP is treated as a contribution by the receiving charity. Even if it is not a QSP, payment may not be taxable.

A QSP is one in which there is no substantial return benefit to the sponsor. A substantial return benefit (greater than 2 percent of payment) is treated separately and may or may not be taxable.

UBIT is income from an activity not substantially related to exempt purposes and is subject to tax. There are many exceptions, such as dividends, interest and capital gains, real estate rental, donated merchandise and royalties.

For charitable solicitation, charities must register and file annual forms if they solicit funds in most states. In most states, merely having a Web site that allows viewers to contribute does not trigger registration requirements. But, any follow-up with direct mail, telemarketing etc. will require registration.

With this, as with any venture, an organization needs to review its activities carefully.

3. Executive Compensation - The DP defense may not work

As if nonprofits did not have enough to worry about with the IRS, it plans to take a close look at disqualified persons (identified as DP) working for organizations. The focus will be that the compensation of a DP (this also includes fringe benefits) is reasonable and that no one on the board had a conflict in setting the compensation.

A DP is a person who is now or was in the past five years "in a position to exercise substantial influence over the affairs" of a 501(c)(3) or 501(c) (4).

Nonprofits failing to satisfy the rules may face intermediate sanctions, monetary penalties if a DP engages in excess benefit transaction within an organization.

The best defense against intermediate sanctions is a good offense, and that means ensuring protection against intermediate sanctions by taking the following steps:

• Identify and notify any DP in the organization;
• Obtain and use comparable compensation data to discuss the transaction with DPs before approval;
• Document concurrently the organization's reliance on comparable data in the approval process;
• Establish the intent to compensate for services rendered.

It is also good to remember that a DP can be personally liable for excess benefit, as well as a penalty of 200 percent of the excess benefit received.

4. Intermediate sanctions - know your terms

Changes in tax law and increased scrutiny of nonprofits have brought about a host of new terms, regulations and complications.

In his book The Law of Intermediate Sanctions, Bruce R. Hopkins presents a list of new terms, as well as their definitions, that may be of interest to nonprofit managers in the near future.

Intermediate sanctions were established to prevent wrongdoing by persons who have a special relationship with many types of nonprofit, tax-exempt organizations, particularly charitable entities.

• Applicable tax-exempt organization. Public charities and social welfare organizations.
  
  
• Disqualified person. One who has a close relationship with an applicable tax-exempt organization.
  
  
• Excess benefit transaction. An impermissible transaction between an applicable tax-exempt organization and a disqualified person.
  
  
• Excess benefit. The impermissible aspect of a transaction that constitutes an excess benefit transaction. It is the amount used to compute one or more intermediate sanctions taxes.
  
  
• Revenue-sharing transaction. A transaction between an applicable tax-exempt organization and a disqualified person, wherein the benefit flowing to the disqualified person is based on the revenue flow of the exempt organization.
  
  
• Initial contract exception. A broad exception to the concept of the excess benefit transaction, by which the transaction created by the initial relationship between an applicable tax-exempt organization and a disqualified person is exempted from the intermediate sanctions penalties.

5. Regulation - How the group exemption works

Group exemption is a procedure devised by the Internal Revenue Service (IRS) to eliminate the administrative burdens that would be caused by the pursuit of rulings by identical organizations.

In his book 650 Essential Nonprofit Law Questions Answered, Bruce R. Hopkins offers a breakdown on the procedure by which a group exemption is established.

First, the entity intending to be a central organization must obtain recognition from the IRS of its own tax-exempt status. Then the organization applies to the IRS for classification as a central organization.

The central organization must submit the following information on behalf of the subordinate organizations.

• Information verifying the relationships and other requirements.
  
  
• A description of the principal purposes and activities of the subordinates, including financial information.
  
  
• A sample copy of a uniform or representative governing instrument adopted by the subordinates.
  
  
• An affirmation by a principal officer of the central organization that the subordinates are operating in accordance with their stated purposes.
  
  
• A statement that each subordinate has furnished the requisite written authorization.
  
  
• A list of subordinates to which the IRS has issued a determination letter or ruling recognizing exempt status.
  
  
• If relevant, an affirmation that no subordinate organization is a private foundation.
  
  
• A list of the names, addresses and employer identification numbers of the subordinates to be included in the group (or a satisfactory directory of them).

6. Legal - Charitable disclosure requirements

One of the major trends affecting development of the law of tax-exempt organizations is the expansion of disclosure requirements. In his The Law of Tax-Exempt Organizations Planning Guide, Bruce R. Hopkins attributes this expansion to two reasons: abuses that have been reported in the nonprofit world and transparency, the view that intense disclosure of exempt organizations' operations is necessary. The view is especially prevalent in government circles.

The regulations that cover tax-exempt organizations in this country are many and complicated, and they require a great deal of study for anyone intending to file for tax-exempt status as well as for organizations that already have it.

Hopkins offers a quick summary of some of those rules in an attempt to illuminate some of the more pertinent features of the regulations.

Some of the elements of these rules that an organization might be required to consider are:

• Whether the organization has principal, regional or district offices.
  
  
• Whether the organization has copies of its application for recognition of exemption ready to respond to in-person requests to see it.
  
  
• Whether the organization is able (if necessary) to avail itself of the unusual circumstances exception.
  
  
• Whether the organization will charge a fee for providing copies of the document.
  
  
• Whether the organization is able (if necessary) to avail itself of the harassment campaign exception.

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