Wednesday, August 20, 2014

By Executive Order – No LGBT Discrimination


President Obama recently signed an executive order prohibiting federal contractors and subcontractors from engaging in employment decisions based on sexual orientation and gender identity.  The President’s order amends previous executive orders regarding employment discrimination dating back to the 1960s, which were implemented to prevent racial discrimination in hiring and contracting decisions made by organizations receiving federal funding.  Previously, the order prohibited employment decisions based on race, color, religion, sex, or national origin.  President Obama extended the order to include sexual orientation and gender identity.  The new order has led a number of nonprofits receiving federal funds to question if, and to what degree, they may be required to comply with these provisions.

In particular, organizations have noticed that no “religious exemption” exists for churches, other religious institutions, and other faith-based nonprofits, to the extent their religious tenets may clash with the new provisions.  Notably, the order leaves a provision intact – as signed by then-President Bush in 2002 – exempting religious organizations from the prohibition against using religion as a factor in employment decisions.  Courts have ruled that this exemption includes taking into account actions by employees or applicants that conflict with the organization’s beliefs.  This leaves a question, for example, as to whether organizations that uphold religion-based sexuality values, but receive federal funding from a contract, can terminate or refuse to hire an individual based on such beliefs. 

What does the President’s order mean for nonprofit organizations?

First, nonprofit organizations should recognize that the order currently only affects federal contractors and subcontractors and federally assisted construction contracts.  If the organization does not have any such contracts, it is not affected by the President’s order. 

Second, note that most federal grants do not fall under the provisions of the order.  That’s because grants are not considered federal contracts.  There is, however, a section of the underlying order amended by President Obama that affects grantees who use grant funds to construct facilities.  The provision states that all executive departments and agencies that provide grants involving construction contracts must require that grant recipients include the anti-discrimination provisions in any construction contract that is paid even in part from federal grant funds.  This does not mean that the grantee organization itself will have to incorporate the anti-discrimination provisions into its hiring policies, but it does  require its construction contractors and subcontractors to do so, which may be of concern to some religious organizations accepting such federal funds. 

Current grant programs that provide nonprofit organizations with funds for construction of facilities to house their charitable programs include Community Facility Grants from the USDA, grant programs for higher education institutions that serve low-income or minority students, and grants through the National Endowment for the Humanities, which awarded over $8 million in the 2013 fiscal year.  If organizations refuse to require their contractors and subcontractors to prohibit employment decisions based on sexual orientation or gender identity, they will not be eligible to obtain such funds for the purpose of construction.

Who else will be affected?

While most funds provided to nonprofits by the federal government have historically come from grants, some change is afoot.  For example, organizations providing support for military troops or engaging in natural disaster or other relief efforts increasingly may find that funds are available through contracts with the federal government to provide such services, rather than through federal grants.

Critics of President Obama’s order have expressed concern that it sets a disturbing precedent for future executive orders, to affect not just federal contractors and federally assisted construction contracts but also grantees in general.  This would force many organizations, which are in the best position to provide cost-effective and beneficial charitable services, to choose between accepting needed government funds and their sincerely held religious beliefs.  A further concern is that such a governmental approach could lead to other restrictions against religious institutions and other faith-based organizations, such as with respect to their tax-exempt status, which would not only impair First Amendment religious liberty interests but also lead to further declines in provision of charity. 

For more information regarding the effect of the President’s order on employment policies of nonprofit organizations, or for questions regarding the law and nonprofits generally, contact one of our attorneys at 312.626.1600 or info@wagenmakerlaw.com, or visit us on the web at www.wagenmakerlaw.com.

Wednesday, August 13, 2014

Section 501(c)(2) Tax-Exempt Title Holding Corporations: The Good, the Bad, and Other Options


 
The problem of risk to nonprofits


            Lawyers often advise to “separate valuable assets from risky activities.”  It’s a legal maxim with which nonprofit directors and officers should be familiar.  Keeping valuable assets away from risky activities may provide an organization with protection in the event of a lawsuit or other liability.  Exempt organizations have sometimes used  501(c)(2) title-holding corporations or other tax-exempt corporate structures to provide such protection.  Nonprofit leaders should be aware of the protections available through such risk management options.

Consider the following scenario: A terrible accident occurs on the grounds of a nonprofit preschool.  Multiple parties later sue the preschool for accident-related injuries.  The preschool has substantial and valuable real property holdings.  If the preschool is held liable for damages resulting from the accident, the outcome for the church may be catastrophic.  The organization’s insurance protection may be stretched beyond policy limits.  If the insurance coverage limits are reached or portions are outside the scope of the coverage itself, the organization is ultimately responsible.  In a worst-case scenario, a court may order liquidation of the organization’s real property to pay the judgment. 

Mitigating Risk and Other Benefits – the 501(c)(2)

            Dating back to 1916, Congress has provided nonprofit entities with a means to mitigate risk.  Presently, the 501(c)(2) title-holding corporation provides such protection.  A 501(c)(2), like its section 501(c) siblings, is exempt from federal income tax.  The (c)(2), however, has a single limited purpose:  to hold title to property on behalf of another exempt entity.  A (c)(2) is generally controlled by a parent tax-exempt organization, and the (c)(2) holds title to property (which can be real, personal, or intellectual property), which may be used for the parent’s exempt purposes.  Income from the (c)(2) passes to the parent.   In theory, if the parent organization is sued, as in the above example, its liability from potential damage suits should be limited to the organization itself, and not the separate legal entity that holds title to the property held.  In reality, the limitation of liability will depend on several variables, such as proper legal structuring of the entities and the organizations’ observance of corporate formalities.  Before structuring such an arrangement, interested entities should consult with experienced legal counsel.   

Beyond the limitation of liability, the IRS has identified the following additional benefits of the 501(c)(2): 
·      enhancement of ability to borrow;
·      limitations imposed in gifts and bequests to exempt organizations that effectively require such gifts to be kept in separate entities;
·      clarity of title;
·      accounting simplification; and
·      limitations imposed by various state laws on organizations that would be recognized as exempt under the federal revenue laws.   

See 1986 EO CPE Text, C. IRC 501(c)(2) - Title-Holding Corporations at 2, “Background.” 

            A further advantage of a c(2) is that only its net income may be available to creditors.  Nonprofits thus may use a c(2) to protect certain revenue streams from access by creditors, which may be a very valuable benefit.

Narrow Focus

            Organizations that consider the benefits of utilizing a 501(c)(2) should also carefully evaluate their limitations.  First, a (c)(2) may not operate a trade or business.  That’s true even if the business is conducted in the building to which the (c)(2) holds title.  According to the IRS, “Where the active operation of any business other than the rental of real estate has been involved, exemption has consistently been denied.”  Accordingly, the charter statement in the (c)(2)’s articles of incorporation should specifically restrict its corporate purposes to comply with 501(c)(2).  Qualified legal counsel should be consulted in the drafting of such articles.  Where the scope of the organization’s activities are not appropriately limited,  tax exemption may be denied.

Potential Alternatives

            Though the 501(c)(2) provides risk diversification, it is not always the best vehicle for nonprofits to utilize.  Often, a nonprofit will elect to establish a supporting organization under 501(c)(3) to hold title to property for risk management purposes.  A supporting organization does not carry the same purpose and operational limitations imposed under (c)(2).  Further, the c(2) is generally not a good choice for religious worshipping bodies, like a church, mosque, or synagogue.  To elaborate, the federal regulations that exempt certain controlled or closely affiliated organizations of religious institutions from also filing Form 990 do not specifically cover 501(c)(2) organizations.  For this reason, many religious institutions have strategically elected to utilize a supporting organization under (c)(3) or a limited liability company, both of which, if structured properly, can qualify as exempt from filing Form 990 and from having to file an application with the IRS for recognition of tax-exempt status. 

            Nonprofit leaders, with the advice and counsel of qualified legal professionals, should carefully vet the advantages and disadvantages of various risk-management structures.  Furthermore, organization leaders must remember that establishing the proper corporate structures is only the beginning of a successful risk-diversification process.  Care must be taken through the organization’s life to ensure that proper corporate formalities are followed.  Otherwise, courts may allow creditors to “pierce the veil” and allow access to valuable corporate assets.

            The adoption and use of a 501(c)(2) title-holding corporation may serve as a valuable tool for tax-exempt organizations for helping protect organizational assets.  The formation of such an entity, however, requires careful evaluation of the c(2)’s purposes and limits. For further information about the 501(c)(2) and its alternatives, or if you have questions about whether a 501(c)(2) title holding company would be a useful corporate structure for your tax exempt entity, please contact one of our attorneys at inf@wagenmakerlaw.com or 312.626.1

Thursday, July 31, 2014

House Approves New Charitable Giving Incentives


On July 17, the US House of Representatives passed the America Gives More Act of 2014 (“Act”).  The package of bills is designed to increase donations to Section 501(c)(3) organizations.  While the prospects of the bill being approved by the Senate may be unlikely, given the current gridlock and partisanship in Washington, its future implications for charitable giving are quite noteworthy.

 The Act contains the following five charitable giving provisions: 

1.     Extends Charitable Deduction.  Currently, charitable contributions may only be deducted if they are made on or before December 31st.  The bill would extend the deadline from December 31 to April 15.  Taxpayers could then claim charitable deductions on their return for gifts given after the close of the tax year.  The idea is to encourage taxpayers to give additional charitable contributions once they have closed their books and have a firm understanding of their tax situation for the preceding year.

2.     Food Donations.  Many businesses and farmers donate excess food inventory to food banks and other charities.  Without such donations, much food would otherwise be wasted.  The bill increases the deduction limit for food donations from 10 to 15 percent.  The bill also simplifies the way businesses and farmers determine the value of the food donated for the charitable deduction.

3.     IRA Distributions.  The bill retroactively allows seniors to distribute funds from IRAs to certain public charities on a tax-free basis.  This was a temporary tax provision that had expired on December 31, 2013.  The bill makes this tax benefit permanent and applies retroactively to cover the 2014 tax year.

4.     Excise Tax for Private Foundations.  Federal law currently imposes a 2% excise tax on the net investment income of private foundations.  This generally includes interest, dividends, rents, royalties (and income from similar sources), and capital gains, less expenses incurred to earn the income.  The Code allows a private foundation to reduce the excise tax rate to 1% provided a number of certain complicated and confusing conditions are satisfied.  The bill would reduce the tax to a simple, flat rate of 1% applicable to all private foundations. 

5.     Conservation Easements.   The bill retroactively extends and makes permanent certain provisions associated with charitable giving incentives for conservation easements. 

The Bill’s Status and Relationship to Tax Reform Act of 2014

While the House passed the Act, as stated above, the prospects of the bill being approved by the Senate are unlikely given the current gridlock and partisanship in Washington.   There is, however, an interesting understory to the legislation that is worth noting and continuing to follow. 

Many of the foregoing charitable giving incentives stem from Republican Congressman Dave Camp’s discussion draft of the Tax Reform Act of 2014 released in February of this year.  The Tax Reform Act is an impressive effort toward comprehensive tax reform.  It includes a wide range of proposals that would significantly affect tax-exempt organizations and charitable giving.  In addition to the foregoing charitable giving incentives, the draft includes significant changes to the unrelated business income tax, executive compensation, supporting organizations, college endowments, donor advised funds, 501(c)(4) organizations, and several other legal issues for tax-exempt organizations.  The draft, when implemented as a whole, was designed to be revenue-neutral. 

While additional action on the discussion draft itself is unlikely, the draft contains legislative language with revenue estimates associated with each proposed change.  In this way it is designed to shape future legislation.  Future bills could adopt provisions of the discussion draft piecemeal.  The America Gives More Act of 2014 is the first such bill and contains two of the draft’s charitable giving provisions (extending the charitable deduction and lowering the excise tax for private foundations). 

Interestingly, the draft had proposed eliminating the other three provisions in the America Gives More Act (the enhanced deduction for food donations, the IRA distribution exclusion, and the limited conservation easements).  Given this phenomenon, we note a couple of important take-aways:  First, it is easier for Congress to vote in favor of a bill that gives away, rather than takes away. 

Second, even if the America Gives More Act never becomes law, nonprofits should familiarize themselves with the various proposals affecting charitable giving and exempt organizations in Camp’s draft Tax Reform Act of 2014.  There is a good chance that the sector will continue to see many of these provisions finding their way into future legislation.

For more information concerning the Tax Reform Act of 2014, the American Gives More Act of 2014, or other emerging state and federal legislation that might affect nonprofits, please contact one of our attorneys at 312.626.1600 or info@wagenmakerlaw.com, or visit us on the web at www.wagenmakerlaw.com.

Wednesday, July 30, 2014

Eavesdropping Revisited – No New Illinois Law Yet…


Our firm has been tracking recent developments regarding eavesdropping laws in Illinois.  When the Illinois Supreme Court struck down the Illinois Eavesdropping Act as unconstitutional back in March, we indicated that there was a window of opportunity for those who want to electronically record communications to do so without fear of criminal prosecution.  Now that the Illinois state legislature has adjourned its 2014 Spring Session without enacting a replacement statute, that window has been extended to at least January 2015, when the next Spring Session begins.   However, those wishing to record private conversations without permission should take note:  Even without the statute, liability stemming from invasion of privacy claims, or copyright infringement could still pose a risk to those who record others without permission.  But for now, Illinois effectively has no statutory criminal prohibitions against eavesdropping. 

            In our firm’s previous blog article, “Who’s Listening?  Illinois Eavesdropping Law Held Unconstitutional,” we summarized the Illinois Supreme Court’s decisions in two cases regarding the Eavesdropping Act.  In both cases, the Court held that individuals could not be criminally prosecuted under the Act because of the unconstitutional burden the Act placed on the individuals’ free speech rights.  We also detailed how this affects organizations that want to prohibit recording of communications and analyzed limitations on individuals wishing to record communications, including privacy interests, contractual obligations, and ethical responsibilities.

            To read our previous article, “Who’s Listening?  Illinois Eavesdropping Law Held Unconstitutional,” click here.  For questions regarding the legal ramifications of recording and publishing communications, please contact one of our attorneys at 312.626.1600 or info@wagenmakerlaw.com, or visit us on the web at www.wagenmakerlaw.com.