EXEMPT ORGANIZATIONS UPDATE AND SIGNIFICANTLY REVISED FLORIDA CHARITABLE SOLICITATION ACT IN SIX MINUTES PREPARED FOR:

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1 EXEMPT ORGANIZATIONS UPDATE AND SIGNIFICANTLY REVISED FLORIDA CHARITABLE SOLICITATION ACT IN SIX MINUTES PREPARED FOR: PALM BEACH TAX INSTITUTE JOINT MEETING WITH EAST COAST ESTATE PLANNING COUNCIL November 18, 2014 PREPARED BY: MICHAEL A. LAMPERT, ESQUIRE Board Certified Tax Attorney The Forum - Suite Palm Beach Lakes Boulevard West Palm Beach, Florida West Palm Beach (561) michael@lamperttaxlaw.com

2 EXEMPT ORGANIZATIONS UPDATE AND SIGNIFICANTLY REVISED FLORIDA CHARITABLE SOLICITATION ACT IN SIX MINUTES PALM BEACH TAX INSTITUTE JOINT MEETING WITH EAST COAST ESTATE PLANNING COUNCIL November 18, 2014 MICHAEL A. LAMPERT, ESQUIRE Board Certified Tax Attorney The Forum - Suite Palm Beach Lakes Boulevard West Palm Beach, Florida West Palm Beach (561) michael@lamperttaxlaw.com 1. IRS Exempt Organization Division Realignment. On March 20, 2014 both the Services TE/GE Exempt Organizations and Employee Plans Divisions announced major realignments. This will affect applications for exemption, PLRs, TAMs, and most formal guidance (including private foundations) in areas such as regulations, Revenue Ruling, Revenue Procedures, notices and announcements. Many of E/Os attorneys (½ to 2/3) will transfer to Chief Counsel. All of this was to happen by October 1, It s not done yet. Most exempt organization applications will be reviewed by less experienced E/O determination agents in Cincinnati (or elsewhere) rather than D.C. More complex cases will likely take longer as there will be higher level review. Not clear what will happen with technical support for 990 revisions, compliance priorities, support for consumer education and determination, and technical support for exam and determination. It is also not clear how responsive to public E/O Counsel will be. After realignment there will be, under the Director of E/O, the Director of E/O exams with 5 geographical areas and a couple of special groups, and the Director of Rulings and Agreements It remains to be seen what will be left of this area, which has both technical and guidance. 2

3 2. Does the Charitable Organization keep up any required registrations and filings? PRACTICE TIP: Many often simple requirements of a charitable organization are overlooked due to the press of more important issues. Tickler items such as annual corporate renewals, solicitation registration and anything else that has deadlines. Make sure the list is periodically checked, with a second person also responsible, just in case. In the long run this can avoid a lot of stress and aggravation at best and penalties, an unhappy board, and dings on your audit management letter...or worse. 3. Properly Solicit Funds - Are you up on the latest changes to the Florida Solicitation of Contributions Act? Florida, along with other states, regulate fund-raising activities. There are penalties for violation. See Florida Statute Section 496, relating to charitable solicitation in Florida. Section 496 has recently been extensively revised. PRACTICE TIP: Make sure the Charitable Organization is registered with the Florida Department of Agriculture and Consumer Services to solicit donations. PRACTICE TIP: Make sure you always follow the registration disclosure requirements. It is little help to try to get out of the penalty for violation by saying but I am a charity when the penalty is designed to be imposed on charities. PRACTICE TIP: Read the enclosed summary of the new Florida Solicitation of Contributions Act. PRACTICE TIP: Consider adding to your annual letter that your board members sign regarding conflict of interest, etc. that they will promptly notify the charity if they are 3

4 convicted or incarcerated for any felony or any crime involving fraud, theft, larceny, and the like. This needs to be reported to the Department of Agriculture and Consumer Service within ten days. 4. Form 1023-EZ New There is 60,000 plus exempt organization applications pending. This new form was released to help address the backlog. To Summerize: Form 1023-EZ: released by IRS on July 1, 2014 Purposes: minimize the burden on smaller organizations reduce the backlog of exemption applications shift IRS focus from aspirational activities to actual activities of EOs ultimately free IRS resources to be moved to higher-risk areas 2 ½ pages with 6 sections: Identification of applicant (basic identifying info) Organizational structure: filer represents compliance with organizational test Specific activities Filer represents compliance with operational test Checkboxes that may be used to identify applications for further scrutiny or exam Foundation classification Filer represents foundation/public charity status Request for reinstatement (after automatic revocation of exemption for failure to file Form 990-series returns) Signature block (signed under penalties of perjury) Must be e-filed through pay.gov $400 filing fee 4

5 Can only be filed by organizations with annual gross receipts less than $50,000 and total assets less than $250,000 Exemption letter generally issued within a few weeks if form is complete and fee is paid About 20 types of organizations are ineligible to file 1023-EZ, including: Churches Schools Hospitals Supporting organizations International organizations Private operating foundations Organizations engaging in joint ventures with for-profits Form 1023-EZ will be subject to much less IRS scrutiny than From 1023 Processing of Form 1023-EZ will be much faster than Form 1023 processing IRS plan is to shift resources from EO Determinations to EO Exam, to review more applicants after they have begun conducting activities Organizations that are considering formation of exempt subsidiaries or affiliates should consider applying for exemption using 1023-EZ, if eligible Would save time and resources Subject to same public disclosure requirements as full Forms Capital Gymnastics Booster Club Case, Inc. v. Commissioner of Internal Revenue. TCM If you serve on the board of or are otherwise actively involved with a booster club that supports your children s or grandchildren s activities, a recent Tax Court case may be of interest to you. The case involved a parent-run booster club that was associated with a gymnastics program. Like a lot of similar entities such as a PTA or a band or sports organization booster club, the Capital Gymnastics Booster Club (Capital Gym) was organized as a charitable, tax- 5

6 exempt organization and conducted various fundraising activities. In 2005, the IRS audited the entity s activities and when the audit was completed, it issued a notice to Capital Gym that it was revoking its tax-exempt status because the organization s net profits inappropriately benefitted private individuals (i.e., approximately half the organization s 240 member families). After exhausting its appeal rights within the IRS, the organization eventually took its case to court. The Tax Court recently issued its opinion and unfortunately agreed with the IRS that the organization s tax-exemption should be revoked. What did the organization do that was so severe that it lost its tax-exempt status retroactive to its 2003 fiscal year? The answer is the IRS objected to the method by which it allocated the benefits of its fundraising activities. In many organizations, some members participate in fundraising and others don t. In fact, a lot of parents who are pressed for time would prefer to just write a check for their share of whatever the organization is trying to raise and be done with it. In the Capital Gym case, those that participated in the fundraising received substantially all of the benefit of the funds that were raised, allocated based on how much they individually raised. The benefits were delivered in the form of points that were then used to lower the amount of assessments to cover their child s entry fees for meets and share of the coaches travel expenses they would have otherwise been required to pay. The Tax Court upheld the IRS determination that this approach to allocating fundraising profits was inconsistent with an organization eligible for Section 501(c)(3) (charitable) taxexempt status. Thus, unless the organization successfully appeals the decision or changes its approach, it not only becomes a taxable entity, but also presumably becomes much less appealing for businesses to support and may also pay higher sales/use, property, and income tax at the local level, depending on the applicable location. The take-away value of this case is that the IRS is likely to be embolden to challenge other organizations with similar fundraising models. However, there are things most organizations can do to protect themselves from such a challenge. The Girl Scouts, as an example, have reviewed and tweaked the cookie program and the awards given to individual girl scouts. 6

7 6. Sex as a Religion? Ask the IRS. For generations, churches have been exempt from income taxes. All 50 states and the District of Columbia also exempt them from property taxes. For the most part, since the beginning of the U.S., churches have had very favorable treatment for federal income taxes, property taxes and more. However, despite the separation of church and state, the IRS is involved in determining what s a legitimate religion. If you ve been following the IRS problems over the last year, you might think the beleaguered tax agency isn t always objective. The norm is for a putative church to ask the IRS for a ruling that it qualifies. But unlike other exempt organizations, a church need not apply for an IRS ruling. A blessed tax exemption is worth a lot. And it occasionally leads to controversy. For example, the IRS refused to recognize Scientology as a church for decades. Then, after multiple years of litigation and administrative harangues, in 1993, the IRS abruptly ruled Scientology was a church after all. The New York Times claimed the IRS reversed 30 years of precedent to grant Scientology Section 501(c)(3) status. Although the IRS eventually relented about Scientology, some believe the IRS gave up too easily and should never have recognized the organization. Sometimes, though, self-declared churches are hard to take too seriously. Take a spin on religion offered by a group promoting orgies as religious fulfillment. There was established liturgy and dogma something the IRS likes to see and it appeared to be written seriously enough. The organization s clergy hoped it would lead to an IRS ruling that they qualified as a church. From what I could tell though (based solely on reading the material), all they did during services was engage in wild sex. The dogma said it was supposed to energize their religious icon at the center of the room church. Perhaps it did. However, this group decided not to ask the IRS for a ruling. In tax law as in life, don t ask the question if you can t stand the answer. Yet the tax treatment of churches is serious business. People are encouraged to tithe and donate with tax deductions. That encourages churches 7

8 to grow bigger and wealthier. In debt-ridden and cash-strapped Europe, the Catholic Church is a treasure trove arguably ripe for the tax collector. There has even been talk of taxing such sacred institutions, at least for property taxes. Much of the discussion leads back to what constitutes a legitimate church. Churches reap a vast array of tax advantages. Among them are special limits on IRS audit powers. With church status being so desirable, how does the IRS police it? The term church is not defined in the Internal Revenue Code. Yet the IRS looks for: 1. Distinct legal existence; 2. Recognized creed and form of worship; 3. Definite and distinct ecclesiastical government; 4. Formal code of doctrine and discipline; 5. Distinct religious history; 6. Membership not associated with any other church or denomination; 7. Organization of ordained ministers; 8. Ordained ministers selected after completing prescribed study; 9. Literature of its own; 10. Established places of worship; 11. Regular congregations; 12. Regular religious services; 13. Sunday schools for religious instruction of the young; and 14. Schools for preparing its members. The IRS generally considers all facts and circumstances in assessing whether an organization qualifies. But looking beyond definitions, including re-examining fundamentals like the tax exemption afforded churches, can be liberating. We may have a hard time deciding what is a legitimate church or religion. But if we taxed them, it might be a whole lot less important. 7. Fraudulent Transfer to Charities Exemption. In 2013 Florida s governor signed HB - 95 Charitable Contributions. The bill amends 8

9 Florida s Uniform Fraudulent Transfers Act (FUFTA), Florida Statute 726, so that it provides debtors with a defense to a creditor s clawback action on funds transferred to a religious or charitable entity. Effective July 1, 2013, FUFTA will be amended to prevent creditors from attempting to clawback donations made by debtors to qualified religious or charitable organizations, if it can be shown that the organization received the donation in good faith and more than two years before the commencement of an action to set aside the transfer or the filing of a bankruptcy petition. The statute also includes a value defense, which states that a transfer was consistent with past practices of the debtor, or if the transfer was received in good faith and the contribution did not exceed 15% of the gross income of the debtor. These exemptions apply only to individual debtors, and not corporate entities. Florida s charitable contribution exemption now closely resembles that of the federal bankruptcy code, 11 U.S.C. 548(a)(2), the main difference being the Florida law s reference to good faith on the part of the recipient organization. The Florida Statute exemption, (7)(b) will now read: (b) However, a charitable contribution from a natural person is a fraudulent transfer if the transfer was received on, or within 2 years before, the earlier of the date of commencement of an action under this chapter, the filing of a petition under the federal Bankruptcy Code, or the commencement of insolvency proceedings by or against the debtor under any state or federal law, including the filing of an assignment for the benefit of creditors or the appointment of a receiver, unless: (1) The transfer was consistent with the practices of the debtor in making the charitable contribution; or (2) The transfer was received in good faith and the amount of the charitable contribution did not exceed 15 percent of the gross annual income of the debtor for the year in which the transfer of the charitable contribution was made. The bankruptcy code exemption reads as follows: 9

10 (2) A transfer of a charitable contribution to a qualified religious or charitable entity or organization shall not be considered to be a transfer covered under paragraph (1)(B) in any case in which- (A) the amount of that contribution does not exceed 15 percent of the gross annual income of the debtor for the year in which the transfer of the contribution is made; or (B) the contribution made by a debtor exceed the percentage amount of gross annual income specified in subparagraph (A), if the transfer was consistent with the practices of the debtor in making the charitable contributions. 8. Don t Inadvertently Become a Partner. It is increasingly common for nonprofit organizations to partner with other nonprofit organizations. For example, a funder may say they are partnering with a grantee organization, or two or more organizations may coordinate services and market that they are partnering to provide services. Some grantors even encourage and give preference in grant making to charitable organizations that partner with other organizations and even make a joint application for a grant. The risk is that a client or other potential plaintiff could take the partnership term literally and use that to try to create liability to the partner organization. 9. Make Sure the Organization Pays Its Payroll Taxes. On August 13, 2014, the Treasury Inspector General for Tax Administration (TIGIA) issued a report that noted that Internal Revenue Service (IRS) records indicate that the majority of tax-exempt organizations pay their Federal taxes, but a small percentage do not. While tax-exempt organizations are generally not required to pay income taxes, they are required to pay other taxes such as payroll taxes. TIGTA determined that more than 64,200 (3.8 percent) tax-exempt organizations had nearly $875 million of Federal tax debt as of June 16, While some organizations owed minor amounts, approximately 1,200 tax-exempt organizations owed more than $100,000 each. 10

11 Unpaid taxes were often associated with multiple tax periods. For example, nine organizations each had Federal tax debt spanning 10 or more years that collectively totaled more than $5.5 million. Tax-exempt organizations have a responsibility to remit to the IRS taxes that have been withheld from employees as well as other applicable Federal taxes, said J. Russell George, Treasury Inspector General for Tax Administration. Failure to remit these taxes is a very serious matter. The overall objectives of TIGTA s review were to determine if, and to what extent, taxexempt organizations have Federal tax debt and to identity actions the Exempt Organizations function has taken to address known noncompliance. TIGTA reviewed 25 tax-exempt organizations all Internal Revenue Code 501(c)(3) - that appeared to be among the worst examples involving unpaid Federal tax (but not representative of the population of all tax-exempt organizations with unpaid tax). TIGTA determined that these organizations generally received Government payments over a three-year period of $148 million, including Medicare, Medicaid, and Government grants; had annual revenue of almost $167 million; and owned assets of more that $97 million but continued to not remit payroll and other taxes, including penalties and interest, totaling more than $25 million. The Internal Revenue Code does not authorize the IRS to revoke tax-exempt status based on an organization s failure to pay payroll taxes, and most of the organizations that TIGTA reviewed were still recognized by the IRS as tax-exempt as of May The Exempt Organizations function had completed several examinations but was generally not aware of the behavior of the organizations because another IRS business unit is responsible for collecting the delinquent tax debt. TIGTA recommended that the Director, Exempt Organizations: 1) coordinate with Small Business/Self-Employed Division management to receive relevant collection information, 2) periodically complete analyses to identify tax-exempt organizations that potentially abuse their tax-exempt status for examination (if necessary), and 3) work with the Department of the Treasury to evaluate whether a legislative proposal is warranted to strengthen the IRS s ability to enforce payroll tax noncompliance by tax-exempt organizations. 11

12 In their response to the report, IRS management disagreed with the first two recommendations and agreed to apprise the Department of the Treasury of TIGTA s third recommendation. TIGTA believes that the IRS should follow through on all of the report s recommendations to ensure these organizations properly remit all payroll taxes. 10. Careful When Receiving Public Records Requests. While nonprofits have certain records that are required to be available generally under Federal and State law, they generally are not subject to the Florida public records law. However, many nonprofits have contracts with the State. Information regarding these contracts may be subject to public records disclosure. Care is warranted. The requestor does not need to identify himself. There are some in Florida who are making requests to charities and government agencies using ominous sounding accounts. It is important to timely respond to these requests. Many charities in Florida with contracts with the State have been hit. At times a timely response with the reasonable copy cost and requesting up front payment of that amount is all that is needed. The way Florida law is at this point, if the request is ignored, expect a lawsuit, expect to lose and expect to pay the requester s attorney fees. 12

13 MICHAEL A. LAMPERT Michael A. Lampert is a Florida Bar Board Certified tax lawyer in private practice in West Palm Beach, Florida where he concentrates his practice in the areas of taxation and business and estate planning and administration, with an emphasis on tax controversy matters. Mr. Lampert was born in Philadelphia, Pennsylvania and attended the University of Miami (A.B., cum laude, 1979); Tel Aviv Faculty of Law, Joint program with Temple University School of Law, Ramat Aviv, Israel, 1981; Duke University, (J.D., 1983); New York University, (LL.M. in Taxation, 1984). He was admitted to the Florida Bar in 1983, the Bars of Pennsylvania, the District of Columbia and the U.S. Tax Court in 1984, to the U.S. Court of Appeals for the Armed Forces in 1995 and the U.S. District Court for the Southern District of Florida in Mr. Lampert is a member of the Taxation, Real Property, Probate and Trust Law, and Elder Law sections of the Florida Bar and both the National and Florida Associations of Elder Law Attorneys, as well as the South Florida Tax Litigation Association. He a past Chair of the Florida Bar Tax Section and has served as a Director of its Education, Administration and Long Range Planning Divisions. He received the 1993 Tax Law Award from The Legal Aid Society of Palm Beach County and The Palm Beach County Bar Association. He is listed in Who's Who in America, Who s Who in American Law, and selected as a Super Lawyer in Florida Super Lawyers. He is also a Fellow of the American College of Tax Counsel. He served for six years on the Tax Law Certification Committee of the Florida Bar Board of Legal Specialization and Education. He was recently elected to membership in the Gulf Coast Tax Exempt/Government Entities Council. Mr. Lampert frequently lectures before both professional and community organizations, including such organizations as The Florida Bar, the Palm Beach County Tax Institute (past President), Palm Beach County Chapters of the Florida Institute of Certified Public Accountants, the Palm Beach-Martin County Estate Planning Council, the Palm Beach County Bar Association, Hunter College, the University of Florida School of Law Graduate Program in Taxation, the University of Miami School of Law Graduate Program in Taxation and the Tax Section of the American Bar Association. He also served for many years as an Instructor in the Continuing Education Division of Florida Atlantic University and on the editorial board of the CCH Publication Sales and Use Tax Alert. He is also past Chairman of the Palm Beaches - Treasure Coast Region Area Chapter of the American Red Cross.