Tax-Exempt Organizations

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1 Arnold & Porter LLP has a long tradition of providing a full range of legal services on complex tax, governance, and operations matters to tax-exempt organizations. The attorneys in our tax-exempt organizations practice group and firmwide understand the unique role the nonprofit sector plays in our society. Our goal is to help nonprofits pursue their work with dedication, integrity, and innovation in light of increasing calls for greater accountability and effectiveness. Exempt organizations have grown exponentially in number and complexity over the past decades. The almost two million organizations that form the nonprofit sector in the United States, and that employ approximately 10 percent of the workforce, have an impact upon every aspect of our lives. All around the world, they provide critical social services and educate our children, innovate and invest in science and technology, and partner with the private and government sectors to find solutions to the challenges of our times. Due to the growing size and breadth of the nonprofit sector, exempt organizations are subject to an increasingly complex web of laws and regulations at both the federal and state levels. At the same time, the sector is subject to greater scrutiny from sophisticated stakeholders, including the public, the press, donors, regulators, and legislators. In recent years, the Internal Revenue Service (IRS) and state charity regulators have also stepped up their enforcement efforts aimed at rooting out abuse and ensuring that tax-exempt organizations are in compliance with the law. How We Work Through experience with tax-exempt organizations and interdisciplinary collaboration among our practice groups, we are able to offer innovative and effective solutions that further the mission of our clients. We have been retained to serve as creative troubleshooters, to provide "general counsel" services, to lead trainings for staff and boards, to conduct internal investigations, as well as to harness the full capacity of the firm to resolve complex legal and factual issues. We have experience working on all phases of an organization's lifecycle: Sitting with clients at the drawing board sketching organizational structures; laying the groundwork for good governance; assisting with formation; advising on strategic partnerships with tax-exempt and for-profit organizations; and navigating through mergers and dissolutions. Industries and Sectors Our attorneys are experienced in working with many types of tax-exempt organizations and sectors. Advocacy and political organizations o Social welfare organizations (501(c)(4)s) arnoldporter.com

2 Areas o Political organizations (527s) Arts organizations Churches and religious organizations Colleges and universities Hospitals and healthcare organizations o Medical and scientific research organizations Labor unions Pension funds Philanthropic organizations o Community foundations o Donor-advised funds o Private foundations o Supporting organizations Think tanks and policy research organizations Trade associations We counsel tax-exempt organizations on a wide variety of complex issues and have experience in numerous areas, including advocacy and public policy, philanthropy, governance and compensation, operations and transactions, and compliance and enforcement. Advocacy and Public Policy Advocacy, Lobbying, and Election-Related Activities. Tax-exempt organizations must navigate through multiple layers of complex rules when they engage in advocacy and public policy activities. Arnold & Porter has a team of lawyers that concentrates on the substantive laws that apply to political activity: the Internal Revenue Code provisions regarding political activity; the Federal Election Campaign Act, the Lobbying Disclosure Act, the Foreign Agents Registration Act, congressional and executive branch gift rules, federal bribery and gratuity laws, government procurement restrictions, and a host of similar state and local laws. We frequently work with nationally recognized public charities and advocacy groups to structure and review voter education, get-out-the-vote and issue advocacy campaigns, and to implement policies and programs to ensure compliance with the rules. We also advise private foundations on ways they can support public education and advocacy and provide compliance review for grants and grant proposals with significant advocacy activities, as well as training and monitoring of grantees receiving funding for advocacy campaigns. We worked closely with a client in developing an online voter education program that provides information on candidates' views on specific issues, voter registration and ballot information, and links to candidate's web pages and other sites. We worked with the client to obtain approval from the Federal Election Commission and informal guidance from the IRS on the operation of the program. Arnold & Porter LLP 2

3 On an ongoing basis, we provide compliance review for the Bill & Melinda Gates Foundation's grants and grant proposals with significant advocacy activities. Philanthropy Charitable Giving and Wealth Planning. We work closely with our trusts and estates attorneys to advise clients on charitable gift planning and the advantages and disadvantages of the various charitable vehicles available to implement their philanthropic goals. We structure and draft gift agreements on behalf of charities and donors. We have also assisted donors in gifting their private papers and collections to charities, including to the Library of Congress and university libraries. We structured and drafted the gift agreements for an anonymous contribution of US$150 million to the University of California, San Francisco for the creation of a comprehensive cancer research center. The contribution was the largest anonymous gift announced in We provided advice to the NPR Foundation relating to its receipt and use of a US$250 million contribution to its endowment fund from the estate of Joan Kroc. We provide advice on structuring endowment funds, including using supporting organizations to hold endowment assets of charitable organizations. Community Foundations and Advised Funds. We have particular experience in the rules and regulations that apply to community foundations and the various types of philanthropic funds operated by community foundations, including agency endowment funds, donor-advised funds, designated funds, field of interest funds, and others. On an ongoing basis, we provide advice to one of the largest federated charities in the United States on compliance for its endowment funds and donor-advised fund programs. We also assist clients with the formation and operation of supporting organizations. We provided advice to a community foundation on due diligence and compliance requirements for a scholarship fund making grants to students at a foreign university. We assisted a community foundation in responding to a criminal investigation by the IRS of a donor charged with tax fraud and who received impermissible private benefits from distributions from a donor-advised fund. e-philanthropy. We represent tax-exempt organizations that provide online giving platforms that connect individual donors and corporations with charities. Leveraging our experience representing online business ventures and Internet service providers, we advise nonprofit organizations in structuring their e-philanthropy efforts, including online fundraising, developing program-related activities for the Internet, and structuring and negotiating joint ventures, linking agreements and content-sharing arrangements between groups of nonprofits and between nonprofit and for-profit enterprises. International Philanthropy. We work with numerous charities and foundations in developing and implementing strategies and options for effective international giving and ensuring Arnold & Porter LLP 3

4 compliance with the rules for grants to foreign charities. We advise organizations on the use of "friends of" organizations, donor-advised funds and intermediary organizations, and foreign offices and subsidiaries to facilitate international giving and activities. We advise several major corporate foundations and giving programs with significant international grantmaking programs. We work closely with Arnold & Porter lawyers who have significant experience with antiterrorism (Office of Foreign Assets Control) and Foreign Corrupt Practices Act (FCPA) laws and regulations to provide advice in this complex area. We represent the United Nations Foundation, the organization that receives and distributes Ted Turner's US$1 billion gift to the United Nations, on its general operating and philanthropic matters. We have assisted a South African nonprofit organization and its US nonprofit affiliate to develop an innovative program to couple housing loan guarantees for low- and moderate-income South Africans with HIV/AIDS with an AIDS treatment program. We negotiated a US$250 million program-related investment by a US government agency and assisted the US nonprofit in its discussions with major US foundations and pharmaceutical companies regarding participation in this program. We are working with a major charity that operates programs worldwide to develop and implement an FCPA compliance program relating to its grants and corporate donations that it receives. Mission-Related and Social Venture Capital Investments. Mission-related investing is a growing area of philanthropic activity, with foundations and grantmakers investing hundreds of millions of dollars using well established tools, such as program-related investments, and emerging investment vehicles, such as social venture capital funds. We help clients explore these options, in addition to their grantmaking. On an ongoing basis, we work with a congressionally funded nonprofit that invests in small and start-up companies as a way to acquire cutting edge technologies for the US intelligence community. We worked with a corporation and its private foundation, in conjunction with other nonprofit partners, to organize and fund an outreach program to help educate and train minority business owners on how to secure venture capital funding. Private Foundations. We have extensive experience advising private foundations and operating foundations, including family, independent, and company foundations and corporate giving programs, on organizational and operational matters. We assist foundations in complying with the private foundation excise tax regime, including complying with payout requirements, self-dealing, jeopardy investments, and taxable expenditures (grantmaking). We assist clients with negotiating and documenting grants (including international grants), drafting employment agreements, and advising on compensation matters. We frequently work with company foundations and corporate giving programs to assist in implementing their charitable activities, including international grantmaking and projects, and to ensure compliance with the prohibitions on private benefit and selfdealing. We have drafted secondment agreements permitting corporate employees to Arnold & Porter LLP 4

5 operate the corporation's foundation, while continuing to be employed by the corporation and receiving corporate benefits, including corporate stock options. For a large family foundation, we prepared a creative and comprehensive solution for divesting public securities with depressed value, due to poor economic conditions, to comply with limits on excess business holdings, while preserving the potential purchasing power of the securities to fund future charitable activities. The plan enhanced the family's overall philanthropic objectives and involved structuring donor advised fund contributions, supporting organizations, and a medical research organization, and working with the family's charitable lead trust. On an ongoing basis, we provide advice to a private operating foundation that conducts research and educational programs in the US and internationally on nonviolent conflict. Governance and Compensation Compensation Review and Structuring. Information about the compensation of top executives and board members of nonprofit organizations is publicly available and is subject to intense scrutiny by the public, the press, legislators, and regulators. We assist organizations in structuring executive and board compensation that is reasonable and complies with the intermediate sanctions rules for public charities and the self-dealing rules for private foundations. We also advise organizations in developing innovative compensation arrangements when appropriate, such as creating and implementing an "equity-like" compensation program for employees of a tax-exempt organization. Governance. Good governance and effectiveness have been the two most important topics debated by the sector in recent years. The IRS's interest in good governance is clear. It believes that "there is a nexus between good governance and tax compliance." The IRS also believes in greater transparency, as exhibited by the recent overhaul of the Form 990 (annual information return filed by nonprofits) that requires organizations to disclose significantly more information about their governance practices than before. In recent years, we have been retained to handle complex management and governance matters for tax-exempt organizations. We also assist organizations with preparing various governance policies and provide advice on establishing board committees to oversee governance and related practices of organizations. We provide advice to a number of congressionally chartered nonprofits on governance and operational issues. Internal Investigations. We have conducted high-profile and complex internal investigations for tax-exempt organizations. The firm served as counsel to the Independent Review Committee of the Smithsonian Institution and conducted an internal investigation (resulting in a comprehensive report) reviewing the Smithsonian management's expenses, governance, and compensation. The report has been the subject of congressional hearings and was used as a blueprint for governance reforms at the Smithsonian. We have assisted colleges and universities in general legal, compensation, and governance issues and in a high-profile internal investigation into alleged financial Arnold & Porter LLP 5

6 Operations and Transactions improprieties by the president of a university, which also involved subsequent investigations by the US Department of Justice and the Senate Finance Committee. Most recently, the head of our tax-exempt organizations practice group led a team of 47 staff, including 19 attorneys, and worked with a forensic accounting firm, to conduct an independent review (resulting in a report) of the financial, management, and governance policies and procedures of a nonprofit, community-based healthcare provider. The review and report were undertaken in response to a public hearing and requests for information by a legislative body. Economic Development and Public-Private Partnerships. We represent tax-exempt organizations in obtaining tax relief and other financial incentives from state and local governments to operate their businesses particularly in relocation situations. Where the programmatic goal of a tax-exempt organization is economic development, we assist the organization in structuring and implementing tax, special assessment and other economic development tools. We also represent municipalities in a range of real estate and related economic development projects. We represented the Interactive Downtown Task Force in structuring a tax increment financing program for the District of Columbia. Since its inception, this program has successfully financed projects totaling over US$1 billion in cost. Employment and Employee Benefits. Arnold & Porter has a core team of employment lawyers who assist clients with employment litigation, employment law counseling and compliance, and corporate/transactional employment matters. We routinely review and develop employee policies, handbooks, offer letters, employment contracts, separation agreements, and other related documents. Government Contracts. Arnold & Porter's government contracts practice is one of the most extensive in the country. Our attorneys have significant experience with internal investigations and compliance issues. We also have particular experience involving grants. We advise both recipients and subrecipients of grants in the interpretation of grant requirements and compliance with the Office of Management and Budget circulars governing those grants. We have experience with grants issued by the National Institutes of Health, the US Agency for International Development, the US Department of Defense, and other agencies. Intellectual Property (IP). Our attorneys offer an innovative, integrated practice in handling clients' IP rights. We have a broad-based IP practice that counsels both for-profit and nonprofit companies in developing, licensing, protecting, exploiting, and enforcing all types of IP rights. Our recent nonprofit clients have included an international charitable research foundation, for whom we developed an IP and commercialization policy to apply to all funded research. We are also assisting a recently formed nonprofit foundation in establishing a research institute in affiliation with a university and medical school. For university clients, we have counseled on structuring and establishing technology transfer offices, and have prepared the associated template documents (e.g., invention disclosure forms, non disclosure agreements, license agreements, and the like). Arnold & Porter LLP 6

7 We work with many of our corporate clients, including pharmaceutical companies, to negotiate sponsored research projects at universities and research organizations. Joint Ventures, Mergers, Restructurings, and For-Profit Activities. We advise nonprofit organizations in restructuring their activities through, among other methods, mergers, acquisitions, and spin-offs. We have assisted a nonprofit organization that works to increase the critical thinking and literacy skills of students from under-resourced schools to transfer assets, including intellectual property, to a wholly-owned for-profit subsidiary. For a large private university, we devised an organizational structure for participating in for-profit educational ventures. The structure involved the potential creation of a singlemember limited liability company, wholly owned by the university, for participation in ventures that would be unrelated trade or business activities or that could jeopardize the university's exempt status. For the same university, in connection with unwinding a joint venture with a pension fund, we provided a comprehensive analysis of variables affecting a decision to own a commercial office building directly or through a section 501(c)(2) title-holding subsidiary. We have conducted due diligence reviews for organizations planning to merge, including a public foundation that planned to acquire and integrate into its activities a membership organization with chapters nationwide. We are working with a large religious institution with international branches to restructure their entire organizational structure to streamline their operations and activities. The restructuring includes seeking tax-exempt status for churches, integrated auxiliaries, and apostolic entities, and applying for state property tax exemptions for numerous entities. Real Estate Transactions. Real estate transactions play a major role in the operations of taxexempt organizations. We represent colleges, universities, and other nonprofits in the acquisition, development, financing, and leasing of a wide range of facilities. The types of facilities involved in these transactions have included the headquarters of the organizations, college and university campus facilities, student housing, affordable workforce housing for employees, and commercial or other revenue-generating property. Our attorneys have represented hospitals in the construction of facilities, such as critical care towers, medical office buildings, imaging centers, outpatient surgical care facilities, central plants, and research facilities. We have represented hospitals in the acquisition and leasing of off-campus warehouses, data centers, and office space. We have provided advice on transactions that play a role in retention and recruitment of key talent, such as a work force housing program, which will enable an organization to acquire apartment buildings at below market prices, and a home assistance loan program. Arnold & Porter LLP 7

8 Tax-Exempt Bond Financing. Arnold & Porter's tax-exempt bond financing practice focuses on the representation of borrowers rather than issuers or underwriters, although we do from time to time represent those participants as well. We represent both for-profit and nonprofit borrowers in structuring transactions, providing assistance in creating public/private sector partnerships, refinancing existing indebtedness, arranging interest rate hedges, and negotiating and documenting deal terms with issuers, financial advisers, credit enhancers, underwriters, and placement and remarketing agents, as well as other bond transaction participants. Our clients in bond transactions in recent years have included a nonprofit research institute, an international think tank, a private foundation, a public welfare foundation, a private museum, and a law firm. Bond transactions in which we recently have represented borrowers have included section 501(c)(3) bonds, tax increment financing (TIF) bonds, and Enterprise Zone (EZ) bonds. Unrelated Business Income Tax (UBIT). As traditional revenue sources have declined or remained flat, a wide variety of nonprofit organizations have sought additional funding from revenue-producing business activities. Such activities include commercial real estate investments, joint ventures with private parties, privately sponsored research, corporate sponsorship of events and publications, and affinity credit card and other affinity programs. Our senior tax attorneys have more than 25 years of experience each in helping nonprofit organizations avoid subjecting the revenue from these activities to the unrelated business income tax. We have particular experience with respect to the rules governing rents from real property, debt-financed property, title-holding corporations, controlled organizations, royalties, and sponsorship payments. We also have extensive experience in organizing subsidiaries and affiliates of nonprofit organizations in a manner that minimizes UBIT to the entire group. Compliance and Enforcement Tax Controversy. Our attorneys have significant advocacy experience with audits and other administrative proceedings before the IRS, including district offices, appeals offices, the national office, as well as in litigation against the IRS in the federal courts, including the US Tax Court, the US Court of Federal Claims, district courts, courts of appeals, and the US Supreme Court. Members of our tax and estates practice also represent clients in administrative proceedings and litigation involving state and local tax agencies and appearances before international tax agencies. State Charity Regulation. The attorneys in our tax-exempt organizations practice group have an in-depth understanding of the state regulation of nonprofit organizations and can effectively counsel organizations about state law requirements. Charitable organizations are created under and subject to an array of state laws, including requirements related to governance, investment of assets, managing endowment funds (Uniform Management of Institutional Funds Act/Uniform Prudent Management of Institutional Funds Act), charitable fundraising, enforceability of charitable pledges, donor intent, property tax exemption, and sales and use tax exemption. These laws also impose obligations and duties on the fiduciaries (officers and directors) who manage and govern nonprofit organizations. State attorneys general have broad authority to enforce state laws governing charities. These powers extend not only to the charity itself, but also allow enforcement action against the individuals who control the organization. Whereas the IRS can only impose those penalties for legal violations that are included in the tax code, attorneys general can apply a number of broad remedies to correct legal violations. These can include entering into settlement agreements that requires changes in governance, ordering restitution, imposing fines, removing officers and directors, and dissolving an organization. Arnold & Porter LLP 8