Monday, July 28, 2014

Is EZ Better? The IRS Releases New 1023 Form for Small Nonprofits


Obtaining tax exemption just got easier for some nonprofit organizations.  On July 1, 2014, the IRS began accepting the Form 1023-EZ, a streamlined application for exemption from federal income tax under Internal Revenue Code Section 501(c)(3).  Since its release in April, the Form has received widespread criticism in the philanthropic community, concerned that the process is nothing more than a rubber stamp, increasing the risks for fraud and other misuse of charitable assets.

While it is true that the new 1023-EZ creates a possibility for abuse, it also paves the way for more charitable work.  Over the last three weeks, we have organized a handful of new charitable organizations that likely would have been unable to afford legal counsel to complete the full 1023 application.  The 1023-EZ helps lessen that initial burden, allowing such organizations to obtain legal advice on properly organizing and operating the new legal entity and securing tax-exemption at a reduced cost.

Who Can Use the 1023-EZ?

The 1023-EZ is available for many corporations, unincorporated associations, or charitable trusts that qualify for tax-exemption under Section 501(c)(3).  The following organizations, however, may not use the 1023-EZ:  

·       Organizations with gross receipts of more than $50,000 in any of the past three years or projected for any of the next three years, or with total assets of more than $250,000.
·       Organizations formed under the laws of a foreign country or that have a mailing address in a foreign country.
·       Organizations that were formed:
o   as an LLC;
o   as a successor to a for-profit entity; or
o   as a successor to, or under the control of, an entity suspended from tax-exemption as a terrorist organization. 
·       Organizations that had their tax status previously revoked for any cause other than the failure to file a Form 990 for three consecutive years.

In addition to the foregoing limitations, the IRS has also placed restrictions on the use of the 1023-EZ based on the types of activity in which the organization engages.  These restrictions relate to a long list of organizations, including, but not limited to, the following:

1)    Churches and conventions or associations of churches;
2)    Schools, colleges, and universities;
3)    Hospitals, medical research organizations, and cooperative hospital service organizations;
4)    Supporting organizations;
5)    Credit counseling organizations;
6)    Health Maintenance Organizations (HMO’s) and Accountable Care Organizations (ACO’s);
7)    Organizations with donor-advised funds; and
8)    Private operating foundations.

How Does It Work?

The first step for an organization wanting to use the new streamlined form is to complete an Eligibility Worksheet, available on the IRS website.  Using the worksheet, organizations answer “yes-or-no” questions relating to the restrictions above.  The answers to these questions determine eligibility to use the form.  The organization must then complete the 1023-EZ form online.  The form requests basic information, such as the name, address, and Employer Identification Number of the organization, as well as information regarding officers and directors and the organizational structure of the organization.  The rest of the form contains mainly check-boxes and “yes-or-no” questions.  The form must be electronically signed by an officer, director, or trustee who attests to its truth, correctness, and completeness.  The current user fee to file the 1023-EZ is just $400, compared to the $850 user fee of the typical 1023 application, and is paid online at the time the form is submitted.

Should I File Form 1023-EZ?

Even if an organization meets the restrictions above, the organization does not automatically qualify for tax-exemption.  While the IRS has indicated that the new form will enable applications to be processed more quickly, the agency may ask for further information or deny the application if it does not qualify.  The 1023-EZ changes the method for obtaining tax-exempt status, not the laws that govern how a nonprofit organization is to be organized and operated to secure tax-exemption under Section 501(c)(3).  Organizations should not file Form 1023-EZ without first consulting a knowledgeable attorney about whether the organization qualifies for 501(c)(3) status. Consulting an attorney well versed in the law of tax-exempt organizations will ensure that the organization is properly organized and operated in accordance with IRC Section 501(c)(3).  This takes careful planning and guidance at the onset. 

Directors of a nonprofit should be extremely mindful about the legal and operational information to which they are attesting when submitting a 1023-EZ.  The officer, director, or trustee signs the form under penalties of perjury.  Thus, while the questions on the form may appear to be a simple “yes” or “no,” the answers given are significant.  For example, the signer attests to the legal conclusion that the organization is organized and operated exclusively to further one or more exempt purposes, which instead is determined by the IRS when the longer 1023 is submitted.  Exemptions are granted based on the information provided to the IRS.  In some cases, the organization and its leaders may find that filing the longer 1023 application will be preferable to ensure transparency with the IRS from the beginning.  This may be particularly helpful when the organization’s operations or structure raise legal complications under 501(c)(3).  Filing the full 1023 will protect the organization’s leaders from liability for false statements if it turns out that the IRS determines that the organization does not qualify.

Further, the IRS has indicated that its creation of the 1023-EZ will allow the agency to use more of its resources to monitor charitable compliance of existing organizations.  The IRS will also be selecting certain 1023-EZ filers for further investigation at the time of filing. 

Finally, the National Association of State Charity Officials (“NASCO”), the state bodies responsible for overseeing charities, has publicly expressed concern over the filing of a 1023-EZ, stating that the reduced review by the IRS will heighten the burden on state regulators to ensure that charities are being operated properly.

For more information on the 1023-EZ, tax-exemption, or nonprofit organizations generally, please contact one of our attorneys at 312.626.1600 or info@wagenmakerlaw.com, or visit us on the web at www.wagenmakerlaw.com.

Monday, July 14, 2014

Don’t Let Them Eat Cake


Grade school administrators, take note!  The USDA’s new nutrition standards for foods sold in grade schools are now effective for the 2014-15 school year.  The standards apply to all schools that accept federal funding through the National School Lunch and Breakfast programs, including private schools.  What do these changes mean for your school?  The more stringent nutritional standards apply to both meals and other food consumption.  Consequently, schools may need to modify their food-provider contracts, fundraising activities, and vending machines practices.  These changes may particularly impact high schools, which previously operated under more lax legal restrictions than elementary schools. 

How extensive are the new restrictions?

The USDA’s new standards apply to all foods and beverages sold during the school day.  “School day” is defined as from midnight through 30 minutes after the end of official school hours.  The standards apply to food and beverages sold a la carte in the cafeteria, in school stores, at snack bars, in vending machines, and through fundraisers.  Items not available to students, such as those in faculty room vending machines, are not included.

What about food-related fundraising?

First, the new standards do not apply to evening or weekend functions or to fundraisers that take place off campus.  Accordingly, the sale of food and beverages at concession stands for sporting events, taking place outside of the school day, are unaffected.   Booster club fundraisers at local restaurants are thus unrestricted as well. 

Second, the USDA allows a certain number of fundraisers to occur on school grounds during the school day without having to meet the nutritional standards.  State agencies are to determine the limits on the number of such exempt fundraisers.  In Illinois, the current proposal is for a phased-in implementation of limits.  High schools would go from 36 exempt fundraisers this school year, to 18 next year, and then to 9 (one per month of the school year) by the 2018-2019 school year.  Elementary schools would go from 9 exempt fundraisers this year, down to zero by the 2016-17 school year.  Notably, no exempt fundraiser foods or beverages may be sold in competition with school meals in the food service areas during the meal service.

The standards only apply to food both sold and consumed at school.  So schools can have fundraisers such as bake sales and candy bar sales, where the food is packaged for consumption off school grounds.  Schools should use signage and other enforcement tools to ensure that such packaged food is not consumed at school during the school day. 

What are the applicable nutritional standards?

The USDA has prepared standards for both food and beverages.  For food to be allowed under the standards, the food item must be one of the following:

1)   be a whole grain rich product (50% or more whole grains);
2)   have as the first ingredient a fruit, vegetable, dairy product, or protein food (such as meat, beans, poultry, etc.);
3)   be a “combination food” with at least ¼ cup fruit and/or vegetable (such as fruit with yogurt or hummus with vegetables); or
4)   contain 10% of the Daily Value of one nutrient of public health concern (calcium, potassium, vitamin D, or dietary fiber).

All food items must also meet very specific standards for the amount of fat, sodium, calories, and sugar the food contains.  (For a list of these standards, see the USDA publication “Smart Snacks in School,” available at http://www.fns.usda.gov/sites/default/files/allfoods_flyer.pdf.)  Fruits and vegetables are exempt from these “nutrient” standards.

As for drinks, all schools may provide plain water (whether carbonated or not), low fat unflavored milk, non-fat flavored or unflavored milk, and 100% fruit/vegetable juice.  The new standards, however, limit the sizes of these items, except for plain water, to 8 oz. for elementary schools and 12 oz. for middle school and high school.  Caffeine is prohibited in drinks sold in elementary and middle schools, but there is no such restriction for high schools.  High schools may also sell calorie-free beverages and “low-calorie” beverages in accordance with certain standards (see “Smart Snacks in School”).

What about compliance?

State agencies are responsible for monitoring compliance, through review of school-provided records.  If violations occur, so far no financial penalties will be imposed.  Rather, technical assistance and corrective action plans will be required.

How Can I Find Out More Information?

In connection with a school’s receipt of federal funding for food programs, it should have a designated “School Food Authority.”  That person should be fully knowledgeable about these about the new standards and how to maintain compliance.  Additional information is available through the Illinois State Board of Education’s website (www.isbe.state.il.us) and the USDA’s website (www.fns.usda.gov/school).      

For further information on legal compliance matters for schools and other nonprofit organizations generally, please contact one of our firm’s attorneys at 312-626-1600 or info@wagenmakerlaw.com, or visit us online at www.wagenmakerlaw.com.

Tuesday, July 8, 2014

It’s about the Industry: A Peek Into the 501(c)(6)


Tax break for industry developers?  Yes.  Section 501(c)(6) of the Internal Revenue Code provides income tax exemption for organizations that advance a “Line of Business.”  Trade associations are one type of 501(c)(6).  But the category is much more broadly defined.  The statutory definition includes, “Business leagues, chambers of commerce, real-estate boards, boards of trade, or professional football leagues (whether or not administering a pension fund for football players), not organized for profit and no part of the net earnings of which inures to the benefit of any private shareholder or individual.

            In recent months, the media has scrutinized professional sports leagues’ tax-exempt status.  Legislators are taking a closer look at these multi-billion dollar enterprises that enjoy tax exemption.  Critics question the fairness and applicability of tax exemption to such exceedingly profitable businesses.  Such scrutiny invites the more fundamental question:  What is the basis of the 501(c)(6) exemption?  Why should plumbers, for example, be entitled to form an organization whose operations are focused on improving the plumbing line of business? 

The underlying idea is that the nation benefits from efficient and cost-effective lines of business, like plumbing.  In our example, member plumbers collaborate to develop better ways to perform their craft.  The association puts on educational conferences and develops certifications to that end.  Tax exemption relieves the association of a substantial burden so that it might better focus on improvement within the industry.  In the interest of such improvement, the government eliminates the income tax burden.  The result is, arguably, better plumbing (or other services) for the nation. 

            But take note:  If the entity’s operations primarily advance the interests of its members, but not the members’ industry more broadly, the IRS may refuse or revoke exemption.  Business leagues must be directed to the improvement of business conditions of one or more lines of business.  Moreover, 501(c)(6) entities may not direct their particular services for the benefit of individual persons.

Recently, the IRS denied exemption to an organization that claimed it was organized to advance a particular industry.  The organization’s bylaws appeared to state a qualified purpose: “to further define standards for, and promote market acceptance of, next generation technology with security methods that prevent unauthorized use or copying and its applications.”  So far, so good.  The “promotion of next generation technology” has the ring of industry advancement.  Had that been the end of the story, the organization may have received its exemption.

However, upon closer inspection, the IRS decided that the organization’s activities were not directed to the improvement of business conditions of the industry as a whole, but to the performance of particular services for members.  In particular, the IRS noted:

·    The above-mentioned “next generation technology” was proprietary and trademarked;
·    Only members of the organization were permitted to use the technology; 
·    The organization promoted members’ products under a registered logo;
·    The minimum quality standards established by the organization were for members' products; and
·    Members’ products were then sold under registered trademark names.

The IRS determined the organization’s activities were intended to give the members a competitive advantage.  Further, the IRS determined that the association promoted a particular brand on behalf of its members, who were owners/developers of that particular brand.  The IRS thus concluded that the organization did not operate as a “business league” under section 501(c)(6) and denied its exemption application. 

Section 501(c)(6) of the Internal Revenue code provides trade associations a valuable exemption to advance certain lines of business.  In many cases, industries benefit from the collaborations by same-industry professionals.  Such industry collaboration may be greater than the sum of the parts.  And tax exemption helps.  Of course, 501(c)(6) organizations must be careful.  When members take the place of the industry as the central focus, the organization can run afoul of the IRS, and jeopardize its exemption.  Consultation with qualified legal counsel can help the organization identify such trouble spots. 

For further information on 501(c)(6) organizations and their operations, please contact one of our firm’s attorneys at 312.626.1600 or info@wagenmakeraw.com, or visit us on the web at www.wagenmakerlaw.com.

Thursday, July 3, 2014

Celebrating Our Country’s Freedoms


A Day to Reflect       

Independence Day provides a great opportunity not only to light fireworks and the grill, but also to reflect on our country’s freedoms and values.  The First Amendment has been front and center as of late.   Our bedrock democratic values of political discourse, free speech, and religious expression have contributed incredibly and uniquely to the shaping of our pluralistic nation.  They also strongly and increasingly influence laws affecting nonprofit organizations.   

The U.S. Supreme Court’s 2013-2014 term recently ended.  Near the end of the term, the Court issued a flurry of decisions affecting speech and religious liberty rights.   The Supreme Court’s decisions amply demonstrate the critical importance of First Amendment values, as well as their significant tensions.

 Hobby Lobby: First Amendment Rights for Closely Held Corps.

1.         Burwell v. Hobby Lobby Stores. This case involved for-profit companies whose owners objected to the federal government’s requirement that they pay for abortifacient contraceptives offered through employee health insurance.  The companies’ objections were based on their sincerely held religious beliefs that human life begins at conception.  The Court applied the Religious Freedom Restoration Act (RFRA), which was passed in 1993 with broad bipartisan approach and signed by then-President Clinton, to uphold their religion-based claims.  In doing so, the Court recognized that RFRA was intentionally designed to “provide very broad protection for religious liberty,” beyond even what is required under the First Amendment. 

Applying RFRA, the Court initially determined that RFRA’s protections apply to closely-held corporations as “persons,” since they are run by people with protectable religious beliefs.  The Court next applied RFRA’s analytical framework:

·      The Court determined that the HHS contraceptive mandate “substantially burdens” religious exercise, given the high financial cost of noncompliance. 
·      The Court assumed that the government’s interest regarding women’s access to such contraception was sufficiently “compelling.” However, the Court ruled that the government had not utilized the “least restrictive means” to achieve its desired goal. 
·      The Court noted that the government had already developed alternative means  for churches,  religious nonprofits, and other grandfathered plans.  The Court concluded that these same alternatives could be made available to closely-held corporations as a way to “achieve all of the Government’s aims without substantially burdening the religious freedom of the corporations’ owners. 

Implications

What does this case mean for nonprofits?  First, consistent with other Supreme Court precedent (most notably Citizens United), nonprofit corporations are “persons” for purposes of First Amendment protections such as accorded through RFRA.  Accordingly, nonprofit themselves can enjoy greater assurance of free speech, freedom of assembly, freedom of expression, and religious freedom rights.  Second, the next battleground will likely continue to heat up for religious nonprofits that object to the government-proffered accommodations regarding cost-free abortifacient contraceptives provided through employer health insurance, on religious and moral grounds similar to those raised in the Hobby Lobby case.  Third, the case serves as a warning:  four Justices – one vote shy of a majority - were willing to constrain religious liberties in favor of what the government deems best, instead concluding that “the connection between the [owners’] religious objections and the contraceptive coverage requirement is too attenuated to rank as substantial.”

Other Important Cases:

2.         McCullen v. Coakley.  The Supreme Court unanimously struck down a “buffer zone” law in the Commonwealth of Massachusetts that made it illegal to approach people close to a health care facility where abortions are performed.  The Court first recognized the special First Amendment protection generally accorded to public ways and sidewalks held “in trust.”  Such protection stems from their “historic role as sites for discussion and debate.”  Emphasizing the First Amendment’s purpose “to preserve an uninhibited marketplace of ideas in which truth will ultimately prevail,” the Court next analyzed whether the restrictive statute was sufficiently “narrowly tailored to serve a significant governmental interest.”  In other words, a close fit between the ends and means was required.  The Court then found that the buffer zones imposed serious burdens on speech, “substantially more speech than necessary to achieve the Commonwealth’s asserted governmental interests.”   Thus, the Court again favored “vital First Amendment interests at stake” over governmental assertions of countervailing – and legally insufficient – interests.   

3.         Harris v. Quinn.  The Supreme Court struck down an Illinois law affecting home health-care workers.  The law required workers to make payments to unions they did not want to join or support.  The payments were used to subsidize speech on matters of public concern.  The workers were not in agreement with the viewpoints advocated by the union.  The Court analyzed such mandatory payments under the First Amendment, concluding that they infringed protected speech rights.   As the Court concluded, “except perhaps in the rarest of circumstances, no person in this country may be compelled to subsidize speech by a third party that he or she does not wish to support.” 

4.         McCutcheon v. Federal Election Commission.  In a narrow but strong affirmation of First Amendment political speech freedoms, the Court struck down aggregate campaign contributions limits.  The decision upheld the primary importance of keeping political speech as unrestricted as possible.  As Justice Roberts wrote, there is “no right more basic in our democracy than the right to participate in electing our political leaders.”   Further, political speech is to be encouraged, not limited:  “The First Amendment is designed and intended to remove governmental restraints from the arena of public discussion, putting the decision as to what views shall be voiced largely into the hands of each of us.” Bottom line:  Under the First Amendment, a court must err on the side of political speech -  not suppressing it.

             May freedom ring!  For further information on First Amendment protections and other legal considerations for nonprofits, please contact one of our firm’s attorneys at 312.626.1600 or info@wagenmakeraw.com, or visit us on the web at www.wagenmakerlaw.com.