Transcript Legal Audit Questions for Non

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Originated in 1978
32Attorneys, including 4 of counsel
25 staff, of which 4 are paralegals
Commercial Litigation, including insurance
defense
Intellectual Property (trademarks, copyrights,
patents)
Arbitration / Mediation
Oil & Gas
Real Estate
Employment Law
Family Law
Franchise Law
Wills, Probate, Trusts, Tax
Thomas S. Brandon, Jr.
• J.D., Baylor Law School, 1973
• Baylor University
• Employment Law Litigation /
Litigation Prevention
• Commercial Litigation
• Non-Profit and Religious Organization Law
• Personal Injury Litigation
• Alternative Dispute Resolution
Non-Profit Organizations
(The Good, the Bad, and the Ugly)
lntroduction
According to the National Center for
Charitable Statistics (NCCS), more than
1.5 million nonprofit organizations are
registered in the U.S. This number
includes public charities, private
foundations, and other types of nonprofit
organizations, including chambers of
commerce, fraternal organizations and
civic leagues.
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For Tax Year 2010, over 269,000
charities exempt under section
501(c)(3) filed Forms 990 with the
IRS reporting nearly $3.0 trillion in
assets and $1.6 billion in revenue.
Since the threshold for filing a Form
990 has gone up the number of
required filings has gone down.
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The Exempt Organization Division of
the IRS is now the largest division in
the IRS.
Definitions:
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The Good – listen for the words “immune,”
“immunity,” “limitation of liability,” and
“exemption.”
The Bad – listen for the words “death
penalty,” “automatic revocation,” “the IRS
is here to help”, or if I say the word
“scary.”
The Ugly – listen for the words “penalties,
taxes, sanctions, and dungeons.” Also,
listen for the phrase “we don’t know how
the law will be interpreted.”
Non-Profit Entities in Texas
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Non-Profit Corporations.
Unincorporated Non-Profit
Associations.
Limited Liability Company.
Non-Profit Corporation
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Non-Profit Corporation is a creation of the Texas
Business Organization Code (“TBOC”), Chapter
22.
The corporation is created by filing a Certificate
of Formation with the Secretary of State’s office.
The cost is $25.00. You will start getting a bunch
of harassing correspondence from the Texas
Comptroller’s Office – which serves as a reminder
to apply for your tax exemption and soon.
For a non-profit corporation the TBOC requires:
(1) a designated non-profit purpose not prohibited by
this Chapter (Ch. 22)(i.e., can’t be for illegal purposes or
created as a ruse);
(2) at least three on the Board of Directors (also can
be designed with some other title, such as trustees, elders, or
grand poopahs)(can be managed by the members as well, but
that needs to be spelled out);
(3) adopted bylaws;
(4) specific dissolution provision in accordance with the
TBOC; and,
(5) certain votes needed to approve fundamental
action (§22.164).
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Any conflict between the Certificate of Formation
(COF) and Bylaws, the COF prevails.
Sec. 22.233 – Churches not required to have
officers.
Members and Directors cannot pay dividends to
themselves. (22.053)
Those working for the corporation are entitled to
reasonable compensation (22.054).
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Sec. 22.152 – The members of a non-profit
corporation are immune from liability for the
debts, liabilities, or obligations of the corporation.
Sec. 22.235 – An officer is not liable to the
corporation or any other person unless the
conduct was not exercised:
• in good faith;
• with ordinary care; and,
• in a manner the officer reasonably believes to
be in the best interest of the corporation.
Non-Profit Unincorporated Associations
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Texas Uniform Unincorporated Nonprofit
Association Act (“TUUNAA”)(effective Jan.
1, 2006) is now in the TBOC as Ch. 252.
TBOC defines a “nonprofit association” as
“an unincorporated organization, other
than one created by a trust, consisting of
three or more members joined by mutual
consent for a common, nonprofit
purpose.”
Non-Profit Unincorporated Associations
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As noted, a UNA must have at least three
members. A “member” is defined as “a person
who, under the rules or practices of a nonprofit
association, may participate [1] in the selection
of persons authorized to manage the affairs of
the nonprofit association or [2] in the
development of policy of the nonprofit
association.”
Non-Profit Unincorporated Associations
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A person is not a member simply because the UNA calls a
person a member. A supporter or donor who is not
authorized to “participate in the selection of persons
authorized to manage the affairs” or “in the development of
policy” of the UNA is not a “member” as defined in
TUUNAA.
UNAs can include formal and informal associations. No
filing or writing is required to create a UNA. (Here’s a
scary thought – a UNA may even be created without a
realization on the part of its members that such an
association has been created – almost like a common law
marriage).
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A UNA may institute, defend, intervene, or participate in a
judicial, administrative, or other governmental proceeding
or in arbitration, mediation, or any other form of alternative
dispute resolution. An UNA may sue in its own name, or
the individual members may bring suit on behalf of the
UNA. Under the doctrine of virtual representation, some
members of a UNA may sue on behalf of all members, in
which case all members of the UNA are proper but not
necessary parties.
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A UNA is a legal entity separate from its
members for the purposes of determining and
enforcing rights, duties, and liabilities in contract
and tort. The comments to the UUNAA make it
clear that, because a UNA is a separate legal
entity, its members are not co-principals and
cannot be liable under any theory of
vicarious liability; thus, the members are not
liable on the contracts or for torts for which the
UNA is liable.
What about Federal Tax Exemption?
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The vast majority of tax exempt
organizations (no matter what structure)
are classified as Sec. 501(c)(3)
organizations.
This means that their income is tax
exempt and contributions to these
organizations are deductible.
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Two types of 501(c)(3) organizations:
Publicly Supported organization (organization
that gets most of its revenue from the general
public such as ministries, churches, schools,
etc.)(contributions are deductible up to 50% of
AGI) and,
Private Foundation (funding usually comes from
one or two sources)(contributions are deductible
up to 20% of AGI).
Federal Tax Exemption
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Any Sec. 501(c)(3) organization that
desires to be exempt needs to file a Form
1023 with the IRS – except for churches.
Process used to take about 2 months.
Now it takes as long as 9 months to a
year to get the IRS ruling.
Annual Filings
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Each exempt organization (which normally has
more than $200k in gross receipts or $500k in
assets) has to file an annual informational return
which is a Form 990. (Private Foundations file a
Form 990-PF).
If an exempt organization (no matter the size)
has unrelated business income that grosses (not
nets) at least $1,000 has to file a Form 990-T. If
there is net income from the UBI then the regular
corporate tax rate is applied and taxes have to be
paid. Caveat: What is UBI to the IRS is likely
not considered UBI to the organization.
State Tax Exemption
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After the federal exemption is obtained
you go through application process with
the state comptroller’s office.
This will do a two things. It gets the
franchise tax division off your back and
allows the organization to make purchases
and not pay sales tax.
Property Taxes
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If the non-profit organization owns
real property (and personal property)
an application must be filed with the
local appraisal district requesting
exemption.
Just because you have a religious
organization doesn’t mean the real
property will be exempt. It must be
used for “religious worship.”
Tax Issues
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The Church Audit Procedures Act passed in 1984
but has basically been not used since then as the
IRS cannot or will not determine who is “high
level Treasury official” required to begin an audit
of a church. We don’t know how it will be
interpreted.
However, we have seen recent signs that the IRS
is taking more of an aggressive stance and has
begun visiting and, will likely, began auditing
churches.
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In the late ’90s the Congress and
IRS began to press on the issue of
Private Inurement.
If a tax exempt organization was
found guilty of private inurement the
only action was the revocation of the
tax exemption.
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The IRS and Congress adopted the less punitive
measure now called “Intermediate Sanctions,” as
a possible alternative to revocation.
The most common type of private inurement is
excessive compensation paid to insiders.
There are, however, many other forms of private
inurement that can also result in the revocation
of a charity’s tax-exempt status and/or in the
imposition of significant “intermediate sanctions.”
Other forms of possible private inurement include
but are not limited to, transactions such as:
• the sale of a charity’s asset to an insider;
• the charity’s purchase of an asset from an
insider;
• the charity’s rental of property from, or to,
an insider;
• the charity’s lending of money to an insider;
and
• the use of facilities and/or other assets of
the charity by an insider.
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To help charities comply with this sometimes
complex area of the law, the IRS has established
a “rebuttable presumption” that payments to
insiders are presumed to be reasonable and
not excessive if the following steps were taken:
1.
The charity’s board obtained and relied
on appropriate comparability data prior to making
its determination;
2.
The total compensation package was
approved in advance by the charity’s board, and no
individuals who had an actual or potential conflict of
interest with respect to the compensation
arrangement participated in the deliberations; and
3.
The charity’s board adequately and
contemporaneously documented the basis for its
determination
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It is important to note that participation
includes a board member’s silence or
inaction where he or she is under a duty
to speak or act as well as any affirmative
action by the board member.
Charitable Immunity & Liability Act
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TCPRC Sec. 84.004 limits liability of
volunteers. It says: “…a volunteer of a
charitable organization is immune from
civil liability for any act or omission
resulting in death, damage, or injury if the
volunteer was acting in the course and
scope of the volunteer’s duties or
functions, including as an officer, director,
or trustee within the organization.
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TCPRC Sec. 84.005 limits liability of employees.
It says that in a lawsuit for damages based upon
the act of a person in the course and scope of
employment the employee’s liability is limited to
money damages in a maximum amount of $500k
for each person and $1m per occurrence and
$100k for property damage.
TCPRC Sec. 84.006 limits liability of the
organization by basically providing the same
limits as stated in 84.005.
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The caveat to the limitations in Sections
84.005 and 84.006 is that the
organization must have liability insurance
with at least those limits. (TCPRC Sec.
84.007(g)).
So, this begs the question: How much
liability insurance should the organization
have?
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With what laws do non-profits have to comply?
Basically all of them unless there is some specific
exemption and it is usually based upon a religious basis.
Some non-profits think if they are “exempt” and that then
applies to everything, but it doesn’t.
For example, Non-profits have to comply with the antidiscrimination in employment laws (Title VII, ADA, ADEA,
et.al.) as well as the FLSA, NLRA, FMLA, and, oh yeah, the
ACA.
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The worst place for a non-profit
organization be is in the courtroom.
A typical employment law case to take to
trial will likely cost at least $100,000 in
fees and costs.
A lot of my practice is spent keeping nonprofits (including churches, schools,
universities, seminaries, and other
parachurch ministries) out of court.
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I have been involved in a lot of
church disputes/splits and rarely is
there a winner.
Typically the disputes in non-profits
revolve around control more than
anything, although the issue of
money is a close second.
Thomas Savage Brandon, Jr.
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