Trump Foundation: What To NOT Do as a Private Foundation

November 26, 2016 - Category: Education

Regarding the very surreal 2016 Presidential election one of the more popular topics of discussion which had received heavy media play was the tax-exempt organizations formed and operated by both the Clintons and the Trumps. Specifically, there was significant intense scrutiny on the transgressions committed by each of these tax-exempt organizations. While the Bill, Hilary and Chelsea Clinton Foundation (“Clinton Foundation”) is classified as a public charity, the Donald J. Trump Foundation (“Trump Foundation”) is classified as a private foundation. Focusing on the Trump Foundation of the new President elect, this presents a good opportunity to examine their transgressions through the prism of how private foundations should NOT be operated.

Regarding the Trump Foundation, it was first brought to light by the Washington Post in July of 2016 that, four years ago, the Trump Foundation had spent $12,000 at a charity auction conducted by the Susan G. Komen Foundation to purchase a Tim Tebow (now a minor league baseball player for the New York Mets) autographed football helmet jersey. Regardless of the fact that Tebow is currently out of the NFL, if the Trump Foundation paid for an item that is utilized by a disqualified person (Mr. Trump) of the Trump Foundation, such would be classified as a self-dealing transaction pursuant to §4941 of the Internal Revenue Code. This begs the obvious question regarding what the Trump Foundation is doing with the football helmet; are they displaying such in their offices, are they holding such for resale to raise funds for the Foundation? If the Trump Foundation is not in possession of such helmet and Mr. Trump himself is, then it is very likely that a self-dealing transaction would have arisen in this situation. In those situations where a self-dealing transaction is identified, the self-dealer (in this case, Mr. Trump) and the Board of the Foundation are subject to the payment of excise taxes.

Then, in September of 2016, the Washington Post reported that the Trump Foundation, on at least two occasions, paid amounts to resolve lawsuits or legal disputes related to Mr. Trump’s business ventures. Specifically, it was reported that the Trump Foundation spent a total of $258,000 to resolve these cases having nothing to do with the Trump Foundation. Additionally, as if this was not enough self-dealing for the Trump Foundation, the article also highlighted allegations that Mr. Trump (again, a disqualified person) had utilized Trump Foundation funds the purchase of portraits for Mr. Trump’s personal collections.

As set forth above, the payments made by the Trump Foundation on behalf of a disqualified person (Mr. Trump) would constitute prohibited self-dealing. This is further compounded by what is set forth supra regarding the football helmet, since numerous self-dealing transactions in a relatively short period of time could significantly jeopardize the tax-exemption of a private foundation.

Then it came to light that the Trump Foundation made a $25,000 contribution to a political organization affiliated with the Florida Attorney General. This contribution was made at a time that the Florida Attorney General was considered going forward with legal action against Trump University. Regardless of the reason why the contribution was made by the Trump Foundation, private foundation are NOT permitted to undertake any sort of political activities; if they do, such are considered to be taxable expenditures and subject to an excise tax.

Finally, on October 3, 2016, it was reported that the New York Attorney General, Eric Schneiderman, had issued an order to the Trump Foundation directing it to cease soliciting donations in the state of New York until it complied with the New York state solicitation registration requirements. New York, similar to the great majority of other states, requires charitable organizations which are soliciting in their particular states to register in their state for the privilege to do so. It is alleged that the Trump Foundation had solicited in the state of New York in the absence of registering in New York. The penalties for failure to register in a particular state can range from monetary penalties being imposed on the Foundation to the Foundation being barred from soliciting further in the state of New York.

50/50 Raffles Now Permitted Under California Law

October 5, 2015 - Category: News

 

rafflesIn early October of 2015, California Governor Jerry Brown signed Senate Bill 549 into law. This new law allows certain eligible organizations (foundations affiliated with professional sports franchises) to conduct 50/50 raffles (raffles where a lucky winner takes home 50% of all the proceeds from raffle ticket sales).

Pursuant to California Penal Code Section 320.5, certain non-profit organizations are permitted to undertake charitable raffles as long as those raffles are pre-registered with the California Attorney General (Form CT-NRP-1) and the raffle results are reported after the raffle is conducted (Form CT-NRP-2). Additionally, nonprofit organizations are required (pursuant to California Penal Code Section 320.5) to expend a minimum of 90% of the raffle gross proceeds to directly conduct beneficial or charitable activities. Accordingly, before the enactment of SB 549, a maximum of 10% of the raffle gross proceeds could be utilized for non-charitable or exempt purpose expenditures. As such, an organization could not “split the pot” 50/50 because such would be a violation of the California Penal Code.

This new law now permits a small segment of the exempt organization universe (charities associated with professional sports franchises) to legally conduct a raffle even if at least 90% of the gross proceeds are not spent on charitable or exempt purpose endeavors.

There are many particular requirements of this new law; one of the most significant requirements is that the charity associated with the professional sports franchise would be required to pay the remaining 50% directly to a charitable purpose or to another “private nonprofit” organization. An eligible organization conducting the 50/50 raffle will also have to address strict registration and filing requirements with the California Attorney General. Additionally, the fees to register 50/50 raffles will be $5,000 a year, with an additional $100 fee for each 50/50 raffle to be conducted.

While nothing has changed from a legislative perspective here in California, if a nonprofit (exempt) organization is not associated with a professional sports franchise, such organization can still legally conduct a 50/50 raffle in California if they tread carefully and follow certain exacting procedures.

If you would like any more information about conducting 50/50 raffles in California, please contact Brian Yacker at byacker@yhadvisors.com.

Form 990 Preparation Sequencing

June 13, 2015 - Category: Resources

By virtue of the hundreds of Forms 990 which we annually prepare, we have developed the following sequencing guide to optimally and most effectively prepare the Form 990 since we have found that preparing the Form 990 in the order of which it is presented (Part I, then Part II, then Part III, etc.) is neither effective nor efficient.

1. Heading

2. Part I, Line 1 / Line 6

3. Part III, Line 1

4. Part II – paid preparer information

5. Part XII, Line 1 – method of accounting

6. Part VII, Line 1a – listing of Insiders (voting Board members, Officers, key employees, highly-compensated employees, formers) of the filing exempt organization

7. Schedule R – reporting of all organizations, whether exempt or not, related to the filing organization

8. Schedule L – reporting of insider transactions

9. Part VI – governance + public disclosure

10. Remainder of Part VII – insider compensation

11. Schedule J (if applicable)

12. Part V – information reporting

13. Part VIII – statement of revenue

14. Schedule G, Part II / Part III

15. Schedule A – public support test

16. Schedule B – schedule of contributors

17. Schedule M – non-cash contributions (if applicable)

18. Part IX – statement of functional expenses

19. Schedule C – lobbying + political (if applicable)

20. Schedule G, Part I – professional fundraisers

21. Schedule I – domestic grants (if applicable)

22. Remainder of Part III – program service activities

23. Part X – Balance Sheet

24. Schedule D

25. Part XI – Reconciliation of Net Assets

26. Remainder of Part XII – Miscellaneous

27. Part IV – Schedules checklist

28. Other Schedules as applicable (Schedule E / F / H / K / N)

29. Schedule O

We know this sequencing does not look to be overly efficient, however, based upon our vast experiences with the Form 990 preparation, this ordering is certainly our preferred manner to prepare the Form 990. This ordering is admittedly quite different than what is set forth in the Form 990 Instructions (see General Instruction C of such), however, we are confident in what we set forth above since we certainly prepare far more Forms 990 than the Internal Revenue Service does !!!!

IRS TE/GE Council (Pacific Coast)

June 13, 2015 - Category: News

On June 8, 2015, by virtue of Brian’s participation of the TE/GE Pacific Coast Council, Brian was part of a quarterly conference call with Tammy Ripperda of the Internal Revenue Service. Tammy is the head of the Exempt Organizations division of TE/GE. As usual, Tammy was quite engaging and open, providing updates on the following EO matters:

  • Two new members were recently added to the Advisory Committee to TE/GE (“ACT”).
  • The importance of ensuring that extraneous information (such as Social Security Numbers) does not get reported on the Form 990 or Form 1023; because once it is, the Internal Revenue Service must undertake a burdensome manual process to remove such if they happen to identify the extraneous information.
  • TE/GE has completed their realignment regarding the transferring of their tax lawyers into the Office of Chief Counsel.
  • TE/GE is in the process of a soft launch of a couple of knowledge networks (for example, private foundations) which will help improve the technical capability of Internal Revenue Service staffers.
  • TE/GE has changed their examination focus from one of being a projects approach to a targeted issue approach; this represents a shift to more issue-focused compliance by the Internal Revenue Service; for example, issues that the IRS will focus upon are unrelated business income, employment taxes, foreign reporting, etc.
  • As of March 31, 2015, the Internal Revenue Service had received approximately 31,500 Forms 1023-EZ and closed approximately 30,600 of those; of those closed, approximately 95% were approved; of those not approved by the Internal Revenue Service, the primary reason for rejection was because of an inability of the applicant to satisfy the applicable reinstatement requirements.

Exempt Organizations Tax/Legal Update in the Lone Star State

July 4, 2014 - Category: News

Last November, Brian had the privilege of being asked to present at the Mississippi Nonprofit Conference in Jackson, Mississippi. At a dinner the evening before the Conference commenced, Brian had the opportunity to meet a preeminent EO attorney, Frank Somerville, who was also presenting at the Conference. After they had both presented the following day, Frank inquired of Brian whether he would be interested in presenting at the Texas Nonprofit Conference in May of 2014.

That being said, on May 19-20, 2014, Brian presented an Exempt Organizations Tax/Legal Update in Dallas, Texas. Topics covered during this presentation were as follows:

•    The §501(c)(4) political targeting controversy
•    Realignment at TE/GE within the Internal Revenue Service
•    The Determinations backlog at the Internal Revenue Service and the recently introduced draft of the Form 1023-EZ (Tax Exemption Application)
•    The provisions in the proposed Tax Reform Act of 2014 which could be relevant to exempt organizations
•    Which of the 2014 Internal Revenue Service Dirty Dozen Tax Scams exempt organizations need to be aware of
•    Recent examples of “bad apple” professional fundraisers
•    Revisions of note to the 2013 version of the Form 990
•    One important revision of note to the 2013 version of the Form 990-PF
•    The recent plight of small exempt organizations
•    The Internal Revenue Service’s recent focus on unrelated business activities
•    State charitable solicitation registration updates

Please not hesitate to contact us if you would like to receive a copy of my Texas Nonprofit Conference presentation slides.

photo 2

 

Two May Days in the Nevada Desert

July 4, 2014 - Category: News

photo 1

In mid-May, Brian made the very quick hop across Death Valley to conduct two days of exempt organizations presentations in Las Vegas, Nevada. On the first day, he presented “The Nuts & Bolts of Exempt Organizations” to a group of attorneys at the UNLV Law School. Topics covered during this extremely interactive presentation were as follows:

•    Introduction to the Exempt Organization Universe
•    Summary of all the different types of exempt organizations
•    Differences between a nonprofit and an exempt organization
•    Review of the federal and state tax-exemption processes
•    Start-up issues for exempt organizations
•    The importance of transparency in the exempt organization sector, including the importance of taking contemporaneous Board minutes
•    Accounting issues for exempt organizations, for example, the difficulty for smaller exempt organizations to implement internal controls
•    How to avoid scrutiny if the exempt organization conducts any sorts of insider transactions
•    Nevada’s relatively new registration requirements for charities soliciting donations within the state of Nevada

On Brian’s second day in Las Vegas, he trekked to the offices of the United Way of Southern Nevada to first undertake a short presentation regarding some exempt organization legal basics and then to conduct an exempt organization Workshop for smaller exempt organizations in Southern Nevada. During the Workshop, which Brian participated in along with a couple of Nevada attorneys, he provided pro bono consulting to small exempt organizations in such areas as formation, avoidance of auto-revocation, obtaining reinstatement of tax-exemption, conducting unrelated business activities, governance, and the reporting of special event fundraisers.

Please not hesitate to contact us if you would like to receive a copy of my “Nuts & Bolts” presentation slides.

Potentially Shining a Brighter Light on California Charities

July 4, 2014 - Category: News

In late May of 2014, California AB2077 was introduced by California Assemblyman Travis Allen of Huntington Beach. AB2077 quite simply would permit the Department of Justice in California to access a fund of approximately $7 million to exercise oversight and dispense discipline over charities gone wrong operating within the state of California. This fund of approximately $7 million has been built up over the years as a result of the registration fees paid by California charities when they file their annual Form RRF-1 with the California Attorney General and by the registration fees paid by professional fundraisers operating within California. Nor surprisingly, AB2077 was passed unanimously by the California Assembly and is now being considered by the California Senate.

Specifically, the $7 million fund would be utilized to support positions to handle court actions against California charities, provide outreach to unregistered charities in California, review Forms RRF-1, review audited financial statements of charities and provide public education in California regarding the charitable sector.

On the TE/GE Scene

March 3, 2014 - Category: News

On the TEGE Scene

Baltimore, Maryland |  On Friday February 28, 2014, I traversed the United States from the Best Coast to the frigid East Coast (specifically the Charm City) to personally attend one of the first public speaking appearances of the new IRS TE/GE Commissioner, Sunita Lough (pronounced “Low”). The occasion (get ready for the mouthful) was the Annual Joint Meeting of the Great Lakes Area TE/GE Council, Gulf Coast Area TE/GE Council, Mid-Atlantic Pension Liaison Group, Northeast Pension Liaison Group and Pacific Coast Area TE/GE Council.

Ms. Lough commenced her speech with some personal/professional background (she started in the EO division at the IRS in the mid-1990’s, has worked in many different places within the Internal Revenue Service since then and has currently been the TE/GE Commissioner for less than two months) and an introduction of her key staff within TE/GE (please see the most recent YH Exempt Org Advisor for a summary of these new TE/GE executives).

To  no one’s surprise, Ms. Lough referenced that this is a very challenging time at TE/GE. That being said, she said that she is primed to do whatever it takes to best get through the choppy waters immediately ahead, Regarding the existing personnel within TE/GE, Ms. Lough stated that she is very proud on the immense amount of diversity within the group. Before moving on to addressing specific upcoming initiatives for TE/GE, Ms. Lough set forth that transparency is of over-arching importance to her and she will continually strive for TE/GE to be as transparent as possible.

Also to no one’s surprise, Ms. Lough stated that the immediate top priority of TE/GE is to address the severe backlog of Tax Exemption Applications that has built up in Cincinnati. In past years, the Internal Revenue Service would receive about 60,000 Tax Exemption Applications per year. In 2013 (primarily because of small exempt organizations seeking reinstatement of their automatically revoked exemptions), the Internal Revenue Service received about 80,000 Tax Exemption Applications. In 2009, the Internal Revenue Service employed about 200 workers in Determinations, currently, the Internal Revenue Service is only employing about 155 workers in Determinations. In order to address the ever-increasing backlog, Ms. Lough stated that she is closely scrutinizing all the different Determinations processes in Cincinnati in order to best streamline them. Additionally, the recent issuance of Rev. Proc. 2014-11 should be of significant benefit to reducing the backlog since such sets forth streamlined procedures for exempt organizations to have their exemptions retroactively reinstated whether reasonable cause exists or not.

On a related front, Ms. Lough stated that she is actively working on a Lean Sigma Six (“LSS”) project with Determinations in Cincinnati in order to make all the processes and procedures being undertaken in Cincinnati more efficient and effective. An LSS approach is essentially a corporate-wide process that examines “assembly line” processes to ascertain how such can be improved.

Ms. Lough also mentioned that the new interactive Form 1023 (Tax Exemption Application) appears to be a “success” notwithstanding the fact that it has yet to be utilized enough to render meaningful statistical analysis and conclusions. Additionally, the “Where’s My Application” portion of the Internal Revenue Service’s has been recently improved according to Ms. Lough.

Ms. Lough then addressed the §501(c)(4) Tax Exemption Application process and reported that the Internal Revenue Service had made substantial progress here, for example, the Service has already adequately responded to all nine TIGTA recommendations (please see the Internal Revenue Service web site related to this) in her opinion. Additionally, the Internal Revenue Service is currently developing processes to document why certain Tax Exemption Applications are identified for further review.

Finally, Ms. Lough closed with an assertion of absolutely no shock value in that she stated that TE/GE will not be releasing a 2013 Annual Report / 2014 Work Plan since we are already in March and the Internal Revenue Service’s year-end is September. That being said, I cannot find fault with Ms. Lough here since her plate is currently overflowing with other important initiatives.

 

 

Proposed FASB Changes to EO Reporting

February 4, 2014 - Category: News

Recently, the Financial Accounting Standards Board (“FASB”) proposed changes to existing reporting requirements surrounding the net assets of exempt organizations. FASB is aiming to add clarity to exempt organization financial statements by eliminating the three classifications of net assets. Currently, exempt organizations must record net assets as either unrestricted, temporarily restricted, or permanently restricted based on donor imposed restrictions. The tentative FASB guidance would require exempt organizations to report net assets in one of two classes: either net assets with donor-imposed restrictions or net assets without donor-imposed restrictions.

Additionally, the updated guidance would require additional disclosures regarding net asset restrictions that exist as of the date of the Statement of Financial Position. Such disclosures would include details addressing when and how funds can be used. Included in this additional information, would be any Board designated restrictions as well. According to FASB, these changes would provide a more transparent view of an exempt organization’s liquidity to readers/users of nonprofit financial statements.

Please do not hesitate to contact Stacey Bergman at (310) 982-2805 or sbergman@yhadvisors.com if you have any questions regarding the foregoing or if you need any additional information whatsoever regarding the exempt organization advisory and accounting serviceswhich YH Advisors provides.

Challenging the IRS’ (Non) Filing Requirements for Churches

April 2, 2013 - Category: News

It was recently reported by Giving USA that, in 2011, individuals and corporations donated almost $100 billion dollars to religious organizations. In a single year. Such amount is beyond  comprehension for most anyone. Even more amazing is the two tiers of tax benefits surrounding donations to religious organizations; donors are able to take a charitable contribution deduction when contributing to religious organizations, and secondly, religious organizations do not have to pay income tax on any contributions revenue they receive.

Churches, as being directly referenced in §501(c)(3) of the Internal Revenue Code, are exempt from payment of income taxes because they generally operate in a charitable manner. Additionally, on top of tax-exemption, churches unlike other exempt organizations, have been graced with several additional benefits.

For instance, churches are not required to:

  • file a Tax Exemption Application with the IRS upon formation,
  • prepare and file an annual information return with the IRS (Form 990), and
  • report the identities of their significant donors to the IRS.

Churches also have the benefit of:

  • not being as susceptible to IRS audits as compared to other exempt organizations as a result of Sec. 7611 of the Internal Revenue Code, and
  • the parsonage allowance which permits church ministers to essentially receive tax-free housing.

Since churches are not required to file a Tax Exemption Application or a Form 990, the government as well as the general public has limited visibility into a church’s finances. This is very concerning to many; Including Senator Chuck Grassley (R-Iowa), who has always been a vocal proponent of stringent transparency requirements for exempt organizations, with much of his focus on church reporting (or the lack thereof). In 2011, he issued a report on the financial practices of mega-churches, pressing for greater accountability for churches. However, there has not been much progress on the legislative front since the issuance of the Grassley report.

Times might be a changing. In recent months, three separate lawsuits have been filed against the IRS, challenging the IRS’ “preferential treatment” of churches and some religious organizations. Each lawsuit focuses on the significant advantages bestowed on churches which are not generally available to secular exempt organizations.

It was previously noted that churches are not required to complete a federal Tax Exemption Application to be recognized as tax-exempt by the IRS. As long as a church satisfies a preponderance of factors set forth by the IRS to qualify as a church, such church will be considered tax-exempt without the burden of having to file a Tax Exemption Application or Form 990. Preparation of a Tax Exemption Application is time consuming and costly. Additionally, the annual preparation and filing of a Form 990 is also a burdensome and costly process for most exempt organizations.  As such, being able to avoid the preparation and filing of a Tax Exemption Application and an annual Form 990 is a significant benefit for churches.

In such regard, two exempt organizations, the American Atheists Inc. and the Freedom from Religion Foundation filed lawsuits in December 2012 against the IRS directly related to the Tax Exemption Application and Form 990 filing exclusions available to churches. The lawsuits are each very similar; each argues that since churches are receiving the filing exclusions from the IRS, this violates both the Establishment Clause of the First Amendment of the Constitution as well as equal protection rights mandated by the Due Process Clause of the Fifth Amendment. Additionally, these suits argue that churches also receive additional benefits in addition to the aforementioned benefits, including the parsonage allowance and the reduced susceptibility to IRS audits.

Furthermore, while churches are subject to the same rules and requirements regarding “red flag” exempt organization issues like lobbying, political activities and unrelated business income, churches are less likely to fall below the radar screen because they are not required to file the Form 990. Another lawsuit recently filed relates directly to this “special” treatment. In November 2012, the Freedom from Religion Foundation filed a lawsuit against the IRS (Freedom from Religion Foundation vs. Shulman) over the IRS’s alleged failure to enforce electioneering restrictions against churches and other religious organizations.

The genesis of this lawsuit could have been sparked by numerous news outlets reporting that the IRS has not conducted any audits of churches for a good number of years, despite many reports of clergy and churches engaging in political activities and electioneering. Per the Freedom for Religion Foundation’s press release, the lawsuit that was filed requests that the court orders the IRS “to authorize a high-ranking official within the IRS to approve and initiate enforcement of the restrictions of §501(c)(3) against churches and religious organizations, including the electioneering restrictions, as required by law.”

While these lawsuits have only simply been filed at this juncture, they bring up important questions regarding the perceived and real “preferential” treatment granted to churches by the Internal Revenue Service. Many believe that the IRS is wary to heavily monitor the activities of churches because doing so may be a perceived as a violation of religious civil liberties under the First Amendment. But these lawsuits have flipped this concept, alleging that because the IRS does not require an annual Form 990 to be filed by churches, that this violates the religious civil liberties of non-church exempt entities. “Having tax-exempt status is a great privilege, and in exchange for that privilege, all other groups must file a detailed report annually to the IRS and the public on how we spend donations,” said Annie Laurie Gaylor, FFRF Co-President, “Why should churches be exempt from basic financial reporting requirements? Equally important, why would churches not wish to be accountable?”

Please do not hesitate to contact Lauren Havelock at 310-982-2804 or at lhaverlock@yhadvisors.com if you have any questions regarding churches and religious organizations or the exempt organization services that YH Advisors provides.