©2008 Rothgerber Johnson & Lyons LLP Rothgerber Johnson & Lyons LLP THE COLORADO CHARITABLE ENTITY: Where Have We Been? Where Are We Going? Presenter – James R. Walker, Esq. Rothgerber Johnson & Lyons LLP 1200 Seventeenth Street, Suite 3000 Denver, CO

©2008 Rothgerber Johnson & Lyons LLP TAX-EXEMPT ORGANIZATIONS Hostile Regulatory Environment IRS Compliance Checks Media Attention Pension Protection Act New Form 990 Tax Shelter Regulations Tax-Exempt Organizations Congressional Inquiries Doubling of Excise Penalty Taxes Intermediate Sanctions

©2008 Rothgerber Johnson & Lyons LLP TAX-EXEMPT ORGANIZATIONS Nonprofit ≠ Tax-Exempt

©2008 Rothgerber Johnson & Lyons LLP TAX-EXEMPT ORGANIZATIONS Function of state law No distribution of income Not necessarily “tax-exempt” Nonprofit

©2008 Rothgerber Johnson & Lyons LLP TAX-EXEMPT ORGANIZATIONS Primarily a function of federal tax law With few exceptions, must apply to IRS to be “tax-exempt” Tax-Exempt

©2008 Rothgerber Johnson & Lyons LLP TAX-EXEMPT ORGANIZATIONS Nonprofit Corporation Charitable Trust Unincorporated Association Limited Liability Company (“LC3 – Vermont”) Nonprofit Organizational Forms

©2008 Rothgerber Johnson & Lyons LLP TAX-EXEMPT ORGANIZATIONS 501(c)(3) - Religious, educational, charitable, etc. 501(c)(4) - Social welfare organizations 501(c)(6) - Business leagues 501(c)(7) - Social clubs Code Section 501(c)

©2008 Rothgerber Johnson & Lyons LLP TAX-EXEMPT ORGANIZATIONS Deductible Contributions Exempt Income Eligible for Grants Reduced Postal Rates Employment Benefits Benefits of 501(c)(3) Status

©2008 Rothgerber Johnson & Lyons LLP TAX-EXEMPT ORGANIZATIONS Public Charities Private Foundations 501(c)(3)

©2008 Rothgerber Johnson & Lyons LLP TAX-EXEMPT ORGANIZATIONS Publicly Supported Charities Limited Control Absolute Control Private Foundation

©2008 Rothgerber Johnson & Lyons LLP TAX-EXEMPT ORGANIZATIONS Private Foundations Traditional Conduit Operating Exempt Operating

©2008 Rothgerber Johnson & Lyons LLP TAX-EXEMPT ORGANIZATIONS Primarily engage in passive grant-making Traditional Private Foundations

©2008 Rothgerber Johnson & Lyons LLP TAX-EXEMPT ORGANIZATIONS Excise Penalty Taxes for: Self-Dealing Failure to Distribute 5% of Investment Assets Excess Business Holdings Jeopardizing Investments Taxable Expenditures 1% - 2% Tax on Investment Income Lower Deductibility Thresholds Traditional Private Foundations

©2008 Rothgerber Johnson & Lyons LLP TAX-EXEMPT ORGANIZATIONS Distributes 100% of the contributions it receives in a particular year Conduit Foundations

©2008 Rothgerber Johnson & Lyons LLP TAX-EXEMPT ORGANIZATIONS Treated like traditional foundations, except donations may qualify for maximum deduction Conduit Foundations

©2008 Rothgerber Johnson & Lyons LLP TAX-EXEMPT ORGANIZATIONS Conduct direct, active charitable activities rather than simply making grants to other charities Operating Foundations

©2008 Rothgerber Johnson & Lyons LLP TAX-EXEMPT ORGANIZATIONS Treated like traditional foundations, except: Exempt from the minimum distribution requirement Donations qualify for maximum deduction Operating Foundations

©2008 Rothgerber Johnson & Lyons LLP TAX-EXEMPT ORGANIZATIONS Foundations meeting the public support test for at least 10 years are not subject to the 2% / 1% excise tax on net investment income Exempt Operating Foundation

©2008 Rothgerber Johnson & Lyons LLP TAX-EXEMPT ORGANIZATIONS Include - Educational Institutions Hospitals/Healthcare Institutions Operating for “Community Benefit” Religious Organizations Automatic Publicly Supported Charities

©2008 Rothgerber Johnson & Lyons LLP TAX-EXEMPT ORGANIZATIONS All others must meet one of two mathematical public support tests Donative Test – 509(a)(1) Service Provider Test – 509(a)(2) Public Support Tests

©2008 Rothgerber Johnson & Lyons LLP TAX-EXEMPT ORGANIZATIONS One-third of its total income from government grants, grants from private foundations or other public charities, or from members of the public. Donative Test – 509(a)(1)

©2008 Rothgerber Johnson & Lyons LLP TAX-EXEMPT ORGANIZATIONS Donative charities are typically organizations that receive little or no remuneration in connection with their charitable programs Donative Test – 509(a)(1)

©2008 Rothgerber Johnson & Lyons LLP TAX-EXEMPT ORGANIZATIONS One-third of total income from Government grants Grants from other public charities Members of the public Revenues generated by activities within organization’s exempt purpose Service Provider Test – 509(a)(2)

©2008 Rothgerber Johnson & Lyons LLP TAX-EXEMPT ORGANIZATIONS Not more than one-third of total income from investments Service Provider Test – 509(a)(2)

©2008 Rothgerber Johnson & Lyons LLP TAX-EXEMPT ORGANIZATIONS Service provider charities typically operate primarily from revenues generated by activities that are related to their exempt purposes Service Provider Test – 509(a)(2)

©2008 Rothgerber Johnson & Lyons LLP TAX-EXEMPT ORGANIZATIONS Supporting Organizations Donor Advised Funds Hybrids

©2008 Rothgerber Johnson & Lyons LLP TAX-EXEMPT ORGANIZATIONS Enjoys public charity tax status due to its close affiliation with one or more publicly supported organizations Supporting Organization

©2008 Rothgerber Johnson & Lyons LLP TAX-EXEMPT ORGANIZATIONS Disqualified Persons Cannot Control No Public Support Tests Maximum Charitable Deduction Can Operate Active Programs and Make Grants High IRS Suspicion Supporting Organizations

©2008 Rothgerber Johnson & Lyons LLP TAX-EXEMPT ORGANIZATIONS Three Types - Type I — “Operated, Supervised, or Controlled By” Type II — “Operated, Supervised, or Controlled With” Type III —“Operated In Connection With” Supporting Organizations

©2008 Rothgerber Johnson & Lyons LLP TAX-EXEMPT ORGANIZATIONS Low autonomy Supported organization appoints a majority of supporting organization’s board Publicly supported charity retains legal control Type I — Supporting Organization “Operated, Supervised, or Controlled By”

©2008 Rothgerber Johnson & Lyons LLP TAX-EXEMPT ORGANIZATIONS Generally least autonomy Publicly supported charity and supporting organization have identical boards Greatest operational flexibility Type II — Supporting Organization “Operated, Supervised, or Controlled With”

©2008 Rothgerber Johnson & Lyons LLP TAX-EXEMPT ORGANIZATIONS Potentially greatest autonomy Must satisfy both the “Responsiveness” test AND the “Integral Part” tests Founding family cannot control Type III not eligible for foundation grants unless “functionally integrated” Type III — Supporting Organization “Operated, Supervised, or Controlled With”

©2008 Rothgerber Johnson & Lyons LLP TAX-EXEMPT ORGANIZATIONS Component fund of public charity Donor Retains right to advise Charity retains ultimate control Subject to excess business holdings, minimum distribution, and excess benefit and special automatic excess benefit rules Donor Advised Funds

©2008 Rothgerber Johnson & Lyons LLP TAX-EXEMPT ORGANIZATIONS Administering Charity offers expertise and handles compliance Simplified creation via Fund Agreement Donations treated as gifts to public charity Low cost Donor Advised Funds

©2008 Rothgerber Johnson & Lyons LLP TAX-EXEMPT ORGANIZATIONS Donor Advised Fund Within Public Charity Supporting Organization of Public Charity Private Foundation Least Control Most Control Public Charity

©2008 Rothgerber Johnson & Lyons LLP TAX-EXEMPT ORGANIZATIONS

©2008 Rothgerber Johnson & Lyons LLP Thank you! James Walker – For more information, please contact:

©2008 Rothgerber Johnson & Lyons LLP Tax Law Group at Rothgerber Johnson & Lyons LLP Our attorneys at Rothgerber Johnson & Lyons advise clients on a broad range of tax issues, from complicated cross-border transactions to tax exempt status qualification and operation of local nonprofit organizations. We offer a thorough knowledge of new business structures, such as limited liability companies, limited liability partnerships and other unincorporated entities. Land Banking Estate Planning Audit Representation Non-Qualified Deferred Compensation Plans Defined Benefit Plans Defined Contribution Plans Business Distributions and Redemptions Entity Formation and Reorganizations ESOPs & ISOPs Like-Kind Exchanges Entity Liquidation or Sales Low-Income Housing Projects Mergers and Acquisitions Mineral Taxation Partnership Planning and Taxation Business Recapitalizations Trust and Fiduciary Income Taxation Non-Profit Taxation & Tax Exempt Status S Corp Qualifications & Taxation Industry Taxation (banking, ranching, intellectual property, aeronautics, etc.)

©2008 Rothgerber Johnson & Lyons LLP Nonprofit Organizations Group at Rothgerber Johnson & Lyons LLP Rothgerber Johnson & Lyons LLP represents numerous local, national and international nonprofit organizations in the Rocky Mountain Region. These nonprofits provide services in the charitable, educational, health care, social services, housing, public lands, and religious sectors. We not only provide representation in the formation and organization of tax-exempt organizations, but also regularly provide counsel on evolving governance standards and day-to-day operational issues. Our goal is to assist our nonprofit clients with all their legal issues so that they can focus on doing their good works here and around the globe. Our tax lawyers provide advice on the tax issues directly affecting nonprofit organizations, including unrelated business taxable income, intermediate sanctions, excess private benefit, use in tax-exempt financing and private foundation rules. We also assist our nonprofit clients with legal risk management to help protect them from liability and unanticipated loss of revenues. Our attorneys conduct reviews of insurance coverage, including directors and officers, errors and omissions, general liability, premises liability, and automobile coverage.

©2008 Rothgerber Johnson & Lyons LLP For more information, visit This presentation has been prepared by Rothgerber Johnson & Lyons LLP ("RJ&L") for general informational purposes only. These materials do not, and are not intended to, constitute legal advice. The information provided in this presentation is not privileged and does not create an attorney-client relationship with RJ&L or any of the firm's lawyers. This presentation is not an offer to represent you. You should not act, or refrain from acting, based upon any information in this presentation. The hiring of a lawyer is an important decision that should not be based solely on written information about qualifications or experiences.