©2008 rothgerber johnson & lyons llp rothgerber johnson & lyons llp the colorado charitable...
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©2008 Rothgerber Johnson & Lyons LLP
Rothgerber Johnson & Lyons LLP
THE COLORADO CHARITABLE ENTITY:
Where Have We Been?Where Are We Going?
Presenter – James R. Walker, Esq.
Rothgerber Johnson & Lyons LLP1200 Seventeenth Street, Suite 3000Denver, CO 80202303-623-9000
©2008 Rothgerber Johnson & Lyons LLP
TAX-EXEMPT ORGANIZATIONS
Hostile Regulatory Environment
IRS Compliance Checks
MediaAttention
Pension Protection Act
New Form 990
Tax Shelter Regulations
Tax-Exempt Organizations
Congressional Inquiries
Doubling of ExcisePenalty Taxes
Intermediate Sanctions
©2008 Rothgerber Johnson & Lyons LLP
TAX-EXEMPT ORGANIZATIONS
Nonprofit ≠
Tax-Exempt
©2008 Rothgerber Johnson & Lyons LLP
TAX-EXEMPT ORGANIZATIONS
• Function of state law
• No distribution of income
• Not necessarily “tax-exempt”
Nonprofit
©2008 Rothgerber Johnson & Lyons LLP
TAX-EXEMPT ORGANIZATIONS
• Primarily a function of federal tax law
• With few exceptions, must apply to IRS to be “tax-exempt”
Tax-Exempt
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TAX-EXEMPT ORGANIZATIONS
• Nonprofit Corporation
• Charitable Trust
• Unincorporated Association
• Limited Liability Company (“LC3 – Vermont”)
Nonprofit Organizational Forms
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TAX-EXEMPT ORGANIZATIONS
• 501(c)(3) - Religious, educational, charitable, etc.
• 501(c)(4) - Social welfare organizations
• 501(c)(6) - Business leagues
• 501(c)(7) - Social clubs
Code Section 501(c)
©2008 Rothgerber Johnson & Lyons LLP
TAX-EXEMPT ORGANIZATIONS
• Deductible Contributions
• Exempt Income
• Eligible for Grants
• Reduced Postal Rates
• Employment Benefits
Benefits of 501(c)(3) Status
©2008 Rothgerber Johnson & Lyons LLP
TAX-EXEMPT ORGANIZATIONS
Public CharitiesPrivate
Foundations
501(c)(3)
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TAX-EXEMPT ORGANIZATIONS
Publicly Supported Charities
Limited Control
Absolute ControlPrivate Foundation
©2008 Rothgerber Johnson & Lyons LLP
TAX-EXEMPT ORGANIZATIONS
Private Foundations
Traditional
Conduit
Operating
Exempt Operating
©2008 Rothgerber Johnson & Lyons LLP
TAX-EXEMPT ORGANIZATIONS
Primarily engage in passive grant-making
Traditional Private Foundations
©2008 Rothgerber Johnson & Lyons LLP
TAX-EXEMPT ORGANIZATIONS
• Excise Penalty Taxes for:• Self-Dealing• Failure to Distribute 5% of Investment
Assets• Excess Business Holdings• Jeopardizing Investments• Taxable Expenditures
• 1% - 2% Tax on Investment Income• Lower Deductibility Thresholds
Traditional Private Foundations
©2008 Rothgerber Johnson & Lyons LLP
TAX-EXEMPT ORGANIZATIONS
Distributes 100% of the contributions it receives
in a particular year
Conduit Foundations
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TAX-EXEMPT ORGANIZATIONS
Treated like traditional foundations, except
donations may qualify for maximum deduction
Conduit Foundations
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TAX-EXEMPT ORGANIZATIONS
Conduct direct, active charitable activities rather
than simply making grants to other charities
Operating Foundations
©2008 Rothgerber Johnson & Lyons LLP
TAX-EXEMPT ORGANIZATIONS
Treated like traditional foundations, except:• Exempt from the minimum
distribution requirement• Donations qualify for maximum
deduction
Operating Foundations
©2008 Rothgerber Johnson & Lyons LLP
TAX-EXEMPT ORGANIZATIONS
Foundations meeting the public support test for at least 10 years are not subject to the 2% / 1% excise tax on net
investment income
Exempt Operating Foundation
©2008 Rothgerber Johnson & Lyons LLP
TAX-EXEMPT ORGANIZATIONS
Include -
• Educational Institutions
• Hospitals/Healthcare Institutions Operating for “Community Benefit”
• Religious Organizations
Automatic Publicly Supported Charities
©2008 Rothgerber Johnson & Lyons LLP
TAX-EXEMPT ORGANIZATIONS
All others must meet one of two mathematical public support tests
• Donative Test – 509(a)(1)
• Service Provider Test – 509(a)(2)
Public Support Tests
©2008 Rothgerber Johnson & Lyons LLP
TAX-EXEMPT ORGANIZATIONS
One-third of its total income from
• government grants,
• grants from private foundations or other public charities, or
• from members of the public.
Donative Test – 509(a)(1)
©2008 Rothgerber Johnson & Lyons LLP
TAX-EXEMPT ORGANIZATIONS
Donative charities are typically organizations that receive little or no remuneration in
connection with their charitable programs
Donative Test – 509(a)(1)
©2008 Rothgerber Johnson & Lyons LLP
TAX-EXEMPT ORGANIZATIONS
One-third of total income from
• Government grants
• Grants from other public charities
• Members of the public
• Revenues generated by activities within organization’s exempt purpose
Service Provider Test – 509(a)(2)
©2008 Rothgerber Johnson & Lyons LLP
TAX-EXEMPT ORGANIZATIONS
Not more than one-third of total income from
investments
Service Provider Test – 509(a)(2)
©2008 Rothgerber Johnson & Lyons LLP
TAX-EXEMPT ORGANIZATIONS
Service provider charities typically operate primarily
from revenues generated by activities that are related to
their exempt purposes
Service Provider Test – 509(a)(2)
©2008 Rothgerber Johnson & Lyons LLP
TAX-EXEMPT ORGANIZATIONS
Supporting Organizations
Donor Advised Funds
Hybrids
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TAX-EXEMPT ORGANIZATIONS
Enjoys public charity tax status due to its close
affiliation with one or more publicly supported
organizations
Supporting Organization
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TAX-EXEMPT ORGANIZATIONS
• Disqualified Persons Cannot Control
• No Public Support Tests
• Maximum Charitable Deduction
• Can Operate Active Programs and Make Grants
• High IRS Suspicion
Supporting Organizations
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TAX-EXEMPT ORGANIZATIONS
Three Types -
• Type I — “Operated, Supervised, or Controlled By”
• Type II — “Operated, Supervised, or Controlled With”
• Type III —“Operated In Connection With”
Supporting Organizations
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TAX-EXEMPT ORGANIZATIONS
• Low autonomy
• Supported organization appoints a majority of supporting organization’s board
• Publicly supported charity retains legal control
Type I — Supporting Organization“Operated, Supervised, or
Controlled By”
©2008 Rothgerber Johnson & Lyons LLP
TAX-EXEMPT ORGANIZATIONS
• Generally least autonomy
• Publicly supported charity and supporting organization have identical boards
• Greatest operational flexibility
Type II — Supporting Organization“Operated, Supervised, or
Controlled With”
©2008 Rothgerber Johnson & Lyons LLP
TAX-EXEMPT ORGANIZATIONS
• Potentially greatest autonomy
• Must satisfy both the “Responsiveness” test AND the “Integral Part” tests
• Founding family cannot control
• Type III not eligible for foundation grants unless “functionally integrated”
Type III — Supporting Organization“Operated, Supervised, or
Controlled With”
©2008 Rothgerber Johnson & Lyons LLP
TAX-EXEMPT ORGANIZATIONS
• Component fund of public charity
• Donor Retains right to advise
• Charity retains ultimate control
• Subject to excess business holdings, minimum distribution, and excess benefit and special automatic excess benefit rules
Donor Advised Funds
©2008 Rothgerber Johnson & Lyons LLP
TAX-EXEMPT ORGANIZATIONS
• Administering Charity offers expertise and handles compliance
• Simplified creation via Fund Agreement
• Donations treated as gifts to public charity
• Low cost
Donor Advised Funds
©2008 Rothgerber Johnson & Lyons LLP
TAX-EXEMPT ORGANIZATIONS
Donor Advised Fund Within Public
CharitySupporting
Organization of Public Charity
Private Foundation
Least Control
Most Control
Public Charity
©2008 Rothgerber Johnson & Lyons LLP
TAX-EXEMPT ORGANIZATIONS
©2008 Rothgerber Johnson & Lyons LLP
Thank you!
James Walker – [email protected]
For more information, please contact:
©2008 Rothgerber Johnson & Lyons LLP
Tax Law Group at Rothgerber Johnson & Lyons LLP
Our attorneys at Rothgerber Johnson & Lyons advise clients on a broad range of tax issues, from complicated cross-border transactions to tax exempt status qualification and operation of local nonprofit organizations. We offer a thorough knowledge of new business structures, such as limited liability companies, limited liability partnerships and other unincorporated entities.
• Land Banking • Estate Planning • Audit Representation Non-
Qualified Deferred Compensation Plans
• Defined Benefit Plans • Defined Contribution Plans • Business Distributions and
Redemptions • Entity Formation and
Reorganizations • ESOPs & ISOPs • Like-Kind Exchanges • Entity Liquidation or Sales
• Entity Liquidation or Sales• Low-Income Housing Projects • Mergers and Acquisitions • Mineral Taxation • Partnership Planning and Taxation • Business Recapitalizations • Trust and Fiduciary Income
Taxation • Non-Profit Taxation & Tax Exempt
Status • S Corp Qualifications & Taxation • Industry Taxation (banking,
ranching, intellectual property, aeronautics, etc.)
©2008 Rothgerber Johnson & Lyons LLP
Nonprofit Organizations Group atRothgerber Johnson & Lyons LLP
Rothgerber Johnson & Lyons LLP represents numerous local, national Rothgerber Johnson & Lyons LLP represents numerous local, national and international nonprofit organizations in the Rocky Mountain and international nonprofit organizations in the Rocky Mountain Region. These nonprofits provide services in the charitable, Region. These nonprofits provide services in the charitable, educational, health care, social services, housing, public lands, and educational, health care, social services, housing, public lands, and religious sectors. We not only provide representation in the formation religious sectors. We not only provide representation in the formation and organization of tax-exempt organizations, but also regularly and organization of tax-exempt organizations, but also regularly provide counsel on evolving governance standards and day-to-day provide counsel on evolving governance standards and day-to-day operational issues. Our goal is to assist our nonprofit clients with all operational issues. Our goal is to assist our nonprofit clients with all their legal issues so that they can focus on doing their good works here their legal issues so that they can focus on doing their good works here and around the globe.and around the globe.
Our tax lawyers provide advice on the tax issues directly affecting Our tax lawyers provide advice on the tax issues directly affecting nonprofit organizations, including unrelated business taxable income, nonprofit organizations, including unrelated business taxable income, intermediate sanctions, excess private benefit, use in tax-exempt intermediate sanctions, excess private benefit, use in tax-exempt financing and private foundation rules. financing and private foundation rules.
We also assist our nonprofit clients with legal risk management to help We also assist our nonprofit clients with legal risk management to help protect them from liability and unanticipated loss of revenues. Our protect them from liability and unanticipated loss of revenues. Our attorneys conduct reviews of insurance coverage, including directors attorneys conduct reviews of insurance coverage, including directors and officers, errors and omissions, general liability, premises liability, and officers, errors and omissions, general liability, premises liability, and automobile coverage.and automobile coverage.
©2008 Rothgerber Johnson & Lyons LLP
For more information, visit www.rothgerber.com
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