What is Giving in L.A.?

Giving in LA Giving in L.A. is a go-to source, an aggregator for strategies and points of view about trends and issues in giving, challenges for philanthropists and philanthropic organizations, tools and techniques for individuals or families, insights and opinions from experts, and more – all centered on Los Angeles County.

August 5, 2014 ~ 3 Comments

“Easier than Getting a Library Card?” Critical Considerations on Using the IRS Form 1023-EZ

1023-EZ Bannerby Ofer Lion

With the release of Form 1023-EZ, Streamlined Application for Recognition of Exemption under Section 501(c)(3) of the Internal Revenue Code, applying for tax-exempt status has never been faster or easier. As Tim Delaney, president and CEO of the Council of Nonprofits, put it, “It’s easier to get tax-exempt status under 1023-EZ than it is to get a library card.”[1] While this new form offers a number of benefits in terms of simplicity and speed, it also comes with some serious potential drawbacks. This post offers some critical considerations you might take into account in deciding whether your organization can and should utilize the new form.

Attesting to a Legal Conclusion under Penalties of Perjury

Form 1023-EZ requires the filer to attest to numerous legal conclusions about the organization under penalties of perjury. If there is any question about the organization’s qualification for tax-exempt status, filing a traditional Form 1023 may actually be the preferred route, as it allows the organization to “test” its detailed qualifications with the IRS and make any adjustments required in the course of its review.

Of note, the Form 1023-EZ filer is required to attest that the organization:

  • is organized and operated exclusively to further one or more exempt purposes;
  • does not further nonexempt purposes (such as purposes that benefit private interests) more than insubstantially; and
  • is not organized or operated for the primary purpose of conducting a trade or business that is not related to its exempt purpose.

Form 1023, on the other hand, allows an organization to present a full description of its operations, leaving it to the IRS to determine whether it qualifies for tax-exemption. For example, a Form 1023 can describe a financial relationship between the organization and a related person, in the hopes that the IRS will issue a determination letter effectively verifying that the arrangement does not further that person’s private interests more than insubstantially.

Should Private Foundations Respect an “EZ” for Expenditure Responsibility Purposes?

Probably not. Revenue Procedure 2014-40 states that a determination letter issued to an organization that submitted a Form 1023-EZ may not be relied upon if it was based on any inaccurate material information submitted by the organization, such as incorrect information regarding the organization’s organizational documents, exempt purposes, conduct of prohibited and restricted activities or its eligibility to file Form 1023-EZ.

Private foundations often don’t need to exercise expenditure responsibility when making grants to many types of organizations. They may, however, find it difficult to rely on a determination letter issued pursuant to a Form 1023-EZ, since they may not be able to determine whether the organization made an “incorrect attestation” without undertaking the type of in-depth review that once would have been done by the IRS.

Can a Donor Rely on an “EZ” For Deductibility Purposes?

Yes. The instructions to Form 1023-EZ state that donors may rely on a favorable determination letter under section 501(c)(3) until the IRS publishes notice of a change in status.

Will Guidestar and the IRS Business Master File Indicate Whether an Organization Filed a Form 1023-EZ?

We assume that either or both Guidestar.org and the IRS Business Master File eventually will somehow indicate whether an organization received its tax-exempt status using a Form 1023-EZ.

Will Attorneys General Take a Closer Look at “EZ” Filers?

It appears that use of Form 1023-EZ may be viewed as a red flag by state regulators. The National Association of State Charity Officials submitted comments to the Department of Treasury recommending against the Form 1023-EZ when it was proposed, stating, “We believe that the Form 1023-EZ will increase opportunity for fraud and heighten the burden on state regulators to compensate for the reduced standards that will be required of the organization to meet federal tax exemption requirements.”[2]

No Expedite Request? No Need

While an expedite request cannot be filed in connection with a Form 1023-EZ, it appears that there is no need. The early returns indicate that determination letters are being issued to Form 1023-EZ filers in two or three weeks’ time.

Can My Organization Replace a Long-Delayed 1023 with an “EZ”?

As long as a filed Form 1023 has not yet been assigned for review, which can take over a year, the IRS will accept a Form 1023-EZ as a replacement. However, the initial filing fee from the Form 1023’s submission will not be refunded, and the submission date of the 1023-EZ will replace the Form 1023’s filing date for purposes of the 27-month general limit on retroactivity, though it does permit the filer to petition the IRS for an earlier effective date.

The Home Address of Every Director and Officer?

When it comes to information regarding officers, directors and trustees, the Form 1023-EZ may actually require more information. While the instructions to Form 1023-EZ require the filer to “Enter the full names, titles, and personal mailing addresses of your officers, directors, and/or trustees,” the instructions to the traditional Form 1023 specifically provide that “Officers, directors and trustees may use the organization’s address for mailing.” It remains unclear whether the IRS will accept the organization’s address for the officers, directors and trustees of Form 1023-EZ filers.

Can a Form 1023-EZ be Filed to Reinstate an Automatically Revoked Organization?

Yes, but not for retroactive reinstatement. If the organization wishes to apply for retroactive reinstatement, it will need to file the traditional Form 1023, along with an appropriate reasonable cause statement and a confirmation that the required returns have been filed.

Conclusion

While the Form 1023-EZ may look like a panacea to any organization qualified to use it, its use can come with serious disadvantages. While it may be easier than ever to get tax exempt status, your organization should consider these issues before making a decision on whether to file a Form 1023 or a Form 1023-EZ.

[1] Massimo Calabresi, “IRS to Rubber Stamp Tax-Exempt Status for Most Charities After Scandal,” TIME, 07/13/2014, available at http://time.com/#2979612/irs-scandal-tax-exempt-tea-party-political-groups-john-koskinen/.

[2] National Association of State Charity Officials’ comment letter is available at: http://www.nasconet.org/wp-content/uploads/2014/05/FINAL-NASCO-comments-re-Form-1023-EZ1.pdf.

OFER  LION  is counsel in the Los Angeles office of Hunton & Williams LLP. He has served as an adjunct professor at the UCLA School of Law, teaching a course in tax-exempt organizations. He can be reached at olion@hunton.com.

July 3, 2014 ~ 0 Comments

The El Monte Promise Foundation: Collaboration and Innovation Brings a Better Future to El Monte

EMPF-combinedKindergartners are encouraged to think about what they want to be when they grow up. In classrooms, they learn about different professions and draw pictures of themselves as firefighters, astronauts, doctors, artists and even U.S. presidents. Their dreams are big and they are unstoppable.

Yet somewhere along the way, far too many children see these dreams fade away amid the challenges of growing up poor. Founded in 2011, the El Monte Promise Foundation works with local school districts, parents, civic leaders nonprofit groups and donors to keep those dreams alive by preparing children for college at an early age.

The El Monte Promise Foundation is an outgrowth of the El Monte Community Building Initiative (CBI), a 10-year, multimillion dollar place-based investment of the California Community Foundation (CCF) designed to build the capacity of local leaders and organizations to work collaboratively on community problem-solving.  After the first few years of planning and community input, El Monte residents and local institutions decided to focus on “ensuring that children in El Monte grow up healthier and better prepared for school, college and a career” as their common agenda and vision. Now in its eighth year, the El Monte CBI offers a learning opportunity on effective approaches to place-based philanthropy, as well as on how to address the “suburbanization” of poverty through locally-designed, resident-driven solutions in communities outside of the inner-cities.

Improving educational outcomes in El Monte, a bedroom suburb of 115,000 predominantly low-income residents just east of downtown L.A., is no small task. In the poorest neighborhoods, just one-third of adults have a high school diploma. While families want to see their children succeed, they lack the resources, the systems in place and the legacies of personal college experience that more affluent families rely upon to send their kids to college.

Explaining the aim of the Foundation, Norma E. Garcia, an El Monte resident and Board President of the El Monte Promise Foundation says, “to succeed, we are seeking to align all of the systems necessary to create the environment whereby all of El Monte’s children will attend college.”

To make this happen, the El Monte Promise Foundation, along with other nonprofit groups, sponsors college and career workshops for middle school students and their parents. Students take an online assessment of their strengths and interests and learn of potential careers, along with college majors that might be of interest and the courses that are important in preparing for them. The Foundation also provides financial aid workshops to connect students and families to available scholarship and loan resources.

The El Monte Promise Foundation is also launching an innovative approach to college savings.  In response to studies showing that a child is seven times more likely to go to college if a college savings account is started for this purpose, the El Monte Promise Foundation announced the launch of the Scholars Savings Program. Starting this fall, students and their families will be encouraged to set up a fund for college savings and, no matter how small each monthly deposit, the Foundation will make a matching contribution. The program was designed after careful study of best practices from across the country and through extensive input from working-class parents on what types of savings programs would fit their families’ abilities and potential to save for their children’s education. At the community launch for the program, Ana Gutierrez, El Monte Promise Foundation parent representative, spoke of the importance of bringing about greater education opportunity to El Monte children, prompting a spontaneous pledge of support from a donor.

The Foundation’s efforts align with other developments in the community to increase student success. El Monte’s two K-8 school districts continue to work tirelessly to align their academic curricula with high school classes that lead to college. Additionally, district officials seek to improve teaching practices and policies for long-term English learners to get them proficient faster.

Focused on increasing college enrollment, the El Monte Union Pledge was created through a partnership of the El Monte Union High School District, Rio Hondo College, UC Irvine and Cal State L.A. The Pledge ensures that all students who graduate from the district are first in line to get the classes they want at Rio Hondo College—a local community college. Students who maintain a 3.0 grade point average and take the required classes are guaranteed admission to UC Irvine and or Cal State L.A. In just two years since the pledge was announced, the number of El Monte high school graduates enrolled at Rio Hondo College has doubled.

As the ten-year initiative moves towards its conclusion, it appears that El Monte’s efforts and innovative approach to community problem-solving will be more sustainable and poised for success with the establishment of The El Monte Promise Foundation. When asked what her dream is for the children of El Monte, Garcia replies, “in the future the children won’t ask themselves ‘Will I go to college?’. They will instead plan for ‘When I go to college…’”

May 16, 2014 ~ 0 Comments

Not Just Numbers: How Tax Form 990 Can Tell An Organization’s Story

990 Main Image This week, hundreds of thousands of nonprofits whose fiscal years ended in December filed a Tax Form 990, the annual return required of many tax-exempt organizations. While the full 990 is required for tax-exempt organizations with average annual receipts of over $200,000 (organizations with receipts between $50,000 and $200,000 file a simpler 990EZ, and those with receipts under $50,000 file a 990N or “Postcard 990”), an increasing number of funders are requiring that all of their grantees provide a full 990.

It can be easy for organizations to see this form as an administrative hurdle, an expensive chore that, once it is completed, is filed and forgotten. In reality, an organization’s 990 can be its first impression to thousands of funders, donors and rating organizations. As such, it’s important to understand its importance and how the 990 tells a story.

Tax Form 990 is a publicly-available report to the IRS on an organization’s structure and activity. Funders use it to evaluate prospective grant recipients or partners. Donors use it as tool to help decide the most effective destinations for their charitable dollars. For charity rating services such as Guidestar and Charity Navigator, it is one of the principle data sources used to create a picture of an organization. In a world where anyone can access 990s online, it is vital that organizations understand the story their 990 is telling.

For example, program officers at the California Community Foundation cite many different narratives within the 990 that drive their review, such as:

Financial Health

  • What is the major source of revenue? How do expenses compare to revenue over time?
  • What are the organization’s total expenses? What percentage goes to staff and officer compensation?
  • How much debt does the organization have outstanding? Is it above 10 percent of annual operating costs?

Governance

  • Is the organization in good standing with the IRS?
  • Does the organization have necessary checks and balances, including policies regarding conflicts of interest and relationships between board and staff?
  • Has the organization participated in transactions with interested parties?

This article focuses on a few key questions that a 990 can answer about an organization: who is the organization, what does it do, and how well does it operate?

1. Who is the organization?

Tax Exempt Status

status

The opening page of a 990 can be used to confirm that the organization is a 501(c)(3) public charity, and if it is a corporation, trust, or association.

Sched A Part 1

Schedule A Part I provides further justification for the 501(c)(3) classification. This information can be especially meaningful to private foundations or donor-advised fund managers, as IRS regulations may affect their giving to certain types of 501(c)(3) organizations.

Financial Summary

financial

990 Form Part I also summarizes an organization’s financials, comparing them against the previous year. Did grants, salaries, or fundraising expenses drastically change? Through this section, readers can identify areas which warrant further analysis using the more detailed sections and schedules follow.

2. What does the organization do?

990 part 3

Part III allows the organization to describe its mission and accomplishments. In Parts IV-VI, the organization attests to its activities and policies through a series of questions. Does it have donor-advised funds, engage in lobbying, or operate in locations outside the United States? Does it maintain a board of directors and a conflict of interest policy and bylaws? These answers can illuminate the governance, structure and business of the organization.

3. How well does the organization operate?

Revenue vs. Expenses

990 Par 8

Part VIII details the organization’s revenue, allowing a reader to understand if income is primarily derived from federal grants, membership dues, fundraising, or general public support. Schedule A Part II additionally supports the organization’s status as a publicly supported organization and offers insight into how revenue has grown or declined over time.

990 part 9

Part IX highlights an organization’s expenditures. A common calculation used by rating services such as Guidestar and Charity Navigator, along with many others, is the percentage of expenses spent on programmatic activities vs. non-programmatic expenses, such as fundraising or operational costs.

All of these sections can help funders, donors, rating services and others to identify areas of further interest, leading them to additional sections and schedules detailing grants, contributions, lobbying, fundraising activity, or compensation.

While the 990 can’t tell the whole story of any nonprofit, the diverse narratives it contains provide valuable information on the organization’s finances, structure, and activity. Increased access and the popularity of online rating services mean that donors and funders are using it more than ever to guide their decisions. By increasing their understanding of what the form says and how it is used, nonprofits can better understand of the story that their 990 tells about them.

What does your 990 say about your organization? How do you use the 990 to guide your giving, funding or partnership decisions? How do you use it to tell your story?

For additional information on reading and preparing 990s, please see the links below:

IRS: Form 990 Instructions

Guidestar: Highlights of IRS Form 990

Nonprofit Coordinating Committee of New York: How to Read the IRS Form 990 & Find Out What it Means

Foundation Center: Diagram of Form 990

Emily Zietlow is the Grants and Funds Operations Manager at the California Community Foundation.