resents p Legal and Tax Issues for Nonprofit Associations Lisa Hix, Esq. Venable LLP Washington, DC

Overview Surveyed Chapter Operations Collected Chapter Questions -Today - Tips for Reducing Liability and Managing Legal Obligations

Four Short Courses 1.Governance and Oversight 2.Programs and Income 3.Contracts 4.Special Issues

Course # 1 Governance and Oversight Governance Documents Managing Your Board IRS “Compliance” Policies (990)

What Governs a Nonprofit, Tax-Exempt Entity? 1.NONPROFIT - State Nonprofit Corporation Law (statute and common law) –Incorporation subjects organization to state corporate laws (defines requirements for organizing documents and decision- making) –Grants organization “corporate shield” so long as operations are consistent with state corporate requirements 2.TAX-EXEMPT Federal Tax-Exempt Status State Tax-Exempt Status

State Status Protecting Your “Corporate Shield” State Filings – Maintain Corporate Status Check Articles/Certificate of Incorporation What is your mission? Must be consistent with 501(c)(3) or 501(c)(6) status & NIGP’s mission

Consistency with State Requirements Board, Ultimate Decision-Making Body Business judgment rule — bad decisions are more easily defended than ignorance; it is the (due diligence) process that matters most –Must Meet and Deliberate –Act in Best Interests of Organization (Conflicts/Recusal) –Must Document through Minutes

Apparent Authority — Ultra Vires As long as a board member/employee reasonably appears to be acting with the Chapter's approval, the Chapter may be liable for the board member’s/employee’s actions Often it is no defense to say that the board member/employee was not acting within the scope of his/her actual authority

Additional Governance Requirements Federal Tax-Exempt Status Questions Regarding Board and Management –Are minutes taken at board and board committee meetings? –Does the Board receive a copy of Form 990 before filed?

Form 990 Governance Policies A written conflict of interest policy –officers, directors, and key employees required to disclose each year interests that could give rise to conflicts –monitor and enforce its conflict of interest policy Maintain compensation review policy - follow the procedures for the “rebuttable presumption” Invest in a joint venture with taxable entity Maintain a written whistleblower policy Maintain a written document retention and destruction policy

Additional Liability Protections 1.Insurance Directors & Officers –Financial protection for the directors and officers in the event they are sued in conjunction with the performance of their duties –Usually includes Employment Practices Liability »Over 50% of D&O claims are employment practices related. Errors and Omissions –Concerned with performance failures and negligence with respect to your products and services, not the performance and duties of management –Covers bodily injury and property damages 2.Informed Consent/Waivers

End of Course # 1 Questions?

Course # 2 Programs & Income Requirements of 501(c)(3) and 501(c)(6) Status Unrelated Business Income Tax Meeting and Program Income

Tax-Exempt Status -Scope of Mission Defined in Articles of Incorporation -Obtained through application or group exemption -Both Federal and State -Federal, Check IRS “Publication 78” -If no application, then self-certify as a 501(c)(6)

Does What Tax-Exempt Status Mean? Activities “related” to tax-exempt mission are not taxed. NIGP Chapters – 501(c)(3) –Educating members in order to enable them to perform their duties more effectively; –“Lessening the burdens of government” by providing training and facilitating procurement NIGP Chapters – 501(c)(6) –“Trade Association” promoting the procurement industry as a whole

When Do Tax Obligations Arise? Unrelated Business Income Tax (UBIT) –It is a trade or business, –It is regularly carried on, and –It is not substantially related to furthering the exempt purpose of the organization. Taxability of the income received will depend on contents of contract, reality of relationship IRS looks to the amount and type of activity that a tax- exempt organization is exerting in support of a program

Is the Income Taxable? Activity itself must be related Using $$ for good works not enough

Is the Income Taxable? Examples of “related activities” –Event registration fees –Exhibit booth rentals Examples of activities that can generate UBIT: –Sale of advertising –Sale of consumer products where selling product does not further mission –Performance of services unrelated to mission –Job referral activities (except might link to 501(c)(3) “lessening”) –Certification activities by 501(c)(3) organizations (can do to limited extent, but note UBIT).

Corporate Partnerships Maximizing Income “Qualified sponsorship payments” are excepted from the definition of UBI - neither gets nor expects any return benefit other than: –Goods or services, or other benefits, the total value of which does not exceed two percent of the sponsorship payment (includes event registrations, etc.); or –Recognition, i.e., use or acknowledgment of the sponsor’s name, logo, or product lines in connection with the nonprofit’s activities.

Corporate Sponsorship Income Permissible forms of use or acknowledgment: –Use or acknowledgment of the name or logo (or product lines) of the sponsor’s business, as long as use is not qualitative or comparative –List of sponsor’s location, telephone number, and/or internet address, including a hyperlink from the exempt organization’s web site to the sponsor’s web site –Product samples okay

Corporate Sponsorship Income Advertising is defined as any message that promotes or markets any trade or business, or any service, facility or product. Messages containing qualitative or comparative language, price information or other indications of savings or value, an endorsement, or an inducement to purchase, sell, or use the products or services, are advertising. If the substantial return benefit is a form of advertising, it is subject to UBIT.

Protect Your Tax-Exempt Status New Form 990 –All tax-exempt entities must file the 990 or 990 EZ –Group Exemption does not include tax filings –Can lose tax-exempt status if fail to file for 3 years. Less than $1,000,000 in total assets for taxable year 2008 $500,000 for 2009 $200,000 for 2010 Be aware of internet presence –Easy for IRS to review Particularly anything that looks like an advertisement Also be aware of state filings, including: –State tax-exempt status –Charitable solicitation requirements

End of Course #2 Questions?

Course # 3 - Contracts Contracts Basics Special Issues for Meetings

Key Contract Provisions Scope Payment Ownership Responsibility Term and Termination

Scope “Four corners rule” – everything should be in the contract. –Almost all litigation arises over lack of clarity. –If they promised something, it should be written into the agreement. Don’t rely on promises. Carefully define what the organization is obligated to do or what you are paying for. Particularly important in “soft” contracts – research, writing. Timelines and deliverables are crucial. BUT, beware of too much control – can lead to “employee” status.

Payment Tie payment to satisfactory delivery of deliverables according to the timeline. Withhold final payment until all items are delivered – always need an incentive to perform. Beware of third parties receiving funds due to you – particularly in this economic climate. Consider audit rights, if needed.

Ownership Absolutely crucial, and often overlooked. Copyright vests in the creator, even if you contracted for the services. Get a perpetual, unlimited license or assignment of all rights. Applies to committees, volunteers too – particularly important in the development of “intellectual capital,” such as certification standards. –Very important for meetings, speakers.

Responsibility (Indemnification) YES Reciprocal - A reciprocal clause is desirable where each party indemnifies the other for (is responsible for) its own negligence (mutual indemnification). Limited to Control - What each party is being asked to be responsible for is within its control. Includes Defense Costs Limit Scope to Insurance Coverage (employees? volunteers? third parties?)

Responsibility (Indemnification) NO “Sole,” “Gross,” or “As determined by a court” –This restriction would limit liability and make it harder for indemnification to kick in. Only one party would have be at fault, whereas removing "sole" distributes liability among the parties according to percentage of fault. Coverage of third party negligence Don’t cover all meeting attendees (expect perhaps board members, etc.)

Term and Termination Match term to your interests. –Particularly for “unknown” partners. Beware of “Evergreen Provisions.” –Note when notice of non-renewal is due. –Generally, no more than 90 days advance.

Special Meetings Issues Force Majeure –Make reciprocal, include events which affect/limit participation Penalties –Attrition & Cancellation Have allowable “slippage” – usually 20% Require hotel to resale rooms Don’t pay penalty until AFTER meeting event Have right to audit

End of Course # 3 Questions?

Course # 4 Special Issues Lobbying Raffles & Prizes

Lobbying

Lobbying and 501(c)(3) Status Lobbying restriction: Section 501(c)(3) of the Tax Code permits lobbying as long as lobbying is not a “substantial part” of organization’s total activities. Political prohibition: Section 501(c)(3) prohibits public charities from engaging in any political activities. The Tax Code provides organizations with two options for tracking and reporting lobbying activities: –“No substantial part” test, or –501(h) election (Form 5768 ).

What is Lobbying?  No 501(h) Election - The definition of lobbying is vague. It includes “attempting to influence legislation by propaganda or otherwise” and advocating, “proposing, supporting, or opposing of legislation.”  501(h) Election – “Influencing legislation” is defined as: –Grass roots lobbying: any attempt to influence any legislation through an attempt to affect the opinions of the general public or any segment thereof; and –Direct lobbying: any attempt to influence any legislation through communication with any member or employee of a legislative body, or with any government official or employee who may participate in the formulation of the legislation.

Exceptions to Definition of “Lobbying” The following activities are excluded from the definition: –nonpartisan analysis, study, or research; Beware of calls to action! –technical advice or assistance to a governmental body/committee in response to a written request by such body; –communications between the organization and its bona fide members with respect to legislation of direct interest to the organization (UNLESS the communication urges members to contact their legislator).

Basic Do’s and Don’ts Therefore, a 501(c)(3) may not: –Support or oppose candidates for public office (absolute prohibition); or –Lobby on specific legislation in substantial part or, under Section 501(h), beyond a certain percentage of its expenditures. However, a 501(c)(3) may: –Lobby on specific legislation within the Code’s lobbying limits; –Advocate for or against passage of ballot measures; –Conduct nonpartisan get-out-the-vote and voter registration drives; –Provide its members with voting records of legislators as long as not limited to just campaign season.

Tracking Lobbying Expenses Under Tax Code and Lobbying Disclosure Act  Lobbying 501 (c)(3)’s are required to track and report their lobbying activities under –the Tax Code on their annual Form 990 informational returns, and –under the LDA if one or more of their employees spends more than 20% of his time on lobbying activities.  Costs of researching, planning, drafting, reviewing, publishing, and mailing—including any amount paid as compensation  The allocable portion of administrative, overhead, and other general expenses attributable to “lobbying”

Related Organizations A 501(c)(3) organization may create a 501(c)(4) or (c)(6) entity. No limits on the amount of lobbying a 501(c)(4) or (c)(6) may conduct as long as the legislation pertains to purpose for which it was formed. A 501(c)(4) or (c)(6) organization may establish a PAC. The related entity must have independent funding sources; no charitable tax deduction will be available.

Raffles & Door Prizes

Raffles/Door Prizes Is Your Promotion a Lawful Sweepstakes or an Illegal Lottery? Lotteries are illegal under the gambling laws in all 50 states unless licensed Lotteries are generally defined as (1) The awarding of a prize (2) By chance, where (3) The participants have been required to submit consideration to enter

Consideration What is consideration? The giving up or undertaking something of value Often defined in in monetary terms Some states take a broader view – consideration may be anything that involves a significant expenditure of one’s time and effort … “shoe leather consideration” Rule of thumb: the less that is required of the participant, the less likely it is to be consideration – limit amount of personal information required

Consideration More on Consideration Consideration issue may generally be avoided if the required action (e.g., attending an event) is not mandatory – provide a free alternative method of entry (FAME)

End of Course # 4 Questions?

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