guidestar webinar (04/10/12) - grantmaker due diligence in the pension protection act era
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Grantmaker Due Diligencegin the
Pension Protection Act Era:
How to identify supporting organizations and align t d i i t ti ith th 21styour grants administration process with the 21st
century tax code
10 April 2012
1© 2012, GuideStar USA, Inc. All Rights Reserved. This information is copyrighted subject matter owned by GuideStar USA and is protected by United States and international copyright law.
Today’s Facilitators
Pamela Jowdy
Senior Product Manager, GuideStar
pjowdy@guidestar.org
llSuzanne Ross McDowell
Partner, Steptoe & Johnson, LLP
smcdowell@steptoe.com
2
Participant Poll
3#duediligence
1. Internal Revenue Code: Considerations for Grantmakers
Today’s Objectives
Why Verify: Pension Protection Act of 2006
Supporting Organizations: Relationships and Controlpp g g p
Expenditure Responsibility: Defined
Revenue Procedure 2011-33: Practical Implicationsp
Due Diligence: Methods and Best Practices
2. GuideStar Charity Check: Anatomy of a Solutiony y
How it works and what it delivers
Failure to File Automatic Revocations Failure to File Automatic Revocations
Why it’s 100% compliant
New advanced features: streamlining grantee management
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New advanced features: streamlining grantee management
3. Q & A
Internal Revenue CodeImpact of the Pension Protection Act of 2006 on Impact of the Pension Protection Act of 2006 on Grantmakers
llSuzanne Ross McDowellPartnerSteptoe & Johnson LLP
5
smcdowell@steptoe.com
#duediligence
Summary of Pension Protection Act Provisions
Affecting Grants to Supporting OrganizationsSupporting Organizations
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Changes Made by the i i fPension Protection Act of 2006
Private Foundations (PFs) Grants to certain supporting organizations (SOs) do
not count towards minimum distribution• Penalty: 30% of shortfall; must make correction
Grants to certain SOs require expenditure responsibilityp y• Penalty: 20% of grant on foundation; potentially 5% on
directors and officers; must make correction Donor Advised Funds (DAFs)Donor Advised Funds (DAFs)
Grants to certain SOs require expenditure responsibility• Penalty: 20% of grant on sponsor of DAF
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• Penalty: 20% of grant on sponsor of DAF
What is a Supporting Organization?What is a Supporting Organization?
Internal Revenue Code provides-- All 501(c)(3) organizations are either private
foundations or public charitiesp Private foundations are subject to greater regulation
Public charities include: Schools hospitals churches government units Schools, hospitals, churches, government units Organizations that meet specific requirements for
broad public supportSO SOs
All other 501(c)(3) organizations are private foundations
8
What is a Supporting Organization? ( ’d)(cont’d)
SO is a 501(c)(3) organization which is-- Classified as a public charity (not a PF) Because it has a specified relationship with another Because it has a specified relationship with another
public charity (the supported organization) Types of relationships
Type I – Parent-subsidiary Type II – Brother-sister
Type III Operated in connection with Type III – Operated in connection with• Functionally Integrated • Not Functionally Integrated
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Which Supporting Organizations i di ibiliRequire Expenditure Responsibility?
Type III Non-Functionally Integrated SOs All other SOs if--
A di lifi d f h f d i A disqualified person of the foundation making a grant to the SO directly or indirectly controls the SO or a supported organization; pp g ;or
A donor to a DAF, or a person designated by the donor to advise with respect tothe donor to advise with respect to distributions, directly or indirectly controls a supported organization
10
What is Expenditure Responsibility?What is Expenditure Responsibility?
Procedures designed to ensure that PF funds are used for exclusively charitable purposes-- Pre grant inquiry Pre-grant inquiry Written grant agreement with the grantee Grantee must keep funds separate from Grantee must keep funds separate from
noncharitable funds Regular reports from the grantee to PF PF reports to IRS on Form 990-PF that
expenditure responsibility requirements were met
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met
Which Grants Do Not Count Toward a Private Foundation’s MinimumPrivate Foundation s Minimum Distribution?
Grants to-- Type III Non-Functionally Integrated SOs All other SOs if--
A disqualified person of the foundation making a grant to the SO directly or indirectly controls the SO or a supported organization
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When Does a Person Have Control?When Does a Person Have Control?
No IRS guidance provides clear method for determining whether control exists. Control exists when one or more disqualified
persons or donors may, by aggregating their votes or positions of authority require the SOvotes or positions of authority, require the SO or supported organization to make an expenditure or prevent the SO or supportedexpenditure, or prevent the SO or supportedorganization from making an expenditure. See Notice 2006-109.
13
When is a Type III Supporting O i ti F ti ll I t t d?Organization Functionally Integrated?
Proposed Regulations issued on September 24 2009 Proposed Regulations issued on September 24, 2009 Until temporary or final regulations are issued, can
rely on Notice 2006-109 or Proposed Regulationsy p g Notice 2006-109: SO is functionally integrated
• When the activities engaged in for or on behalf of a supported organization(s) are activities to perform the functions of, or to carry out the purposes of, such organization(s), and;p p , g ( ), ;
• But for the involvement of the SO, would normally be engaged in by the supported
i ti ( ) th l14
organization(s) themselves.
When is a Type III Supporting Organization Functionally Integrated?Organization Functionally Integrated? (cont’d)
Proposed Regulations: SO is functionally integrated If engages in activities substantially all of which
directly further the exempt purposes of the supportedy p p p pporganization(s), by performing the functions of or carrying out the purposes of the supportedorganization(s); and
But for the involvement of the SO, would normally be engaged in by the supported organizations
Includes owning and managing exempt-use property Does not include fundraising or managing non-
exempt use property for a supported organization Special rules for hospitals and governmental units
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Special rules for hospitals and governmental units
Conducting Due Diligence to Avoid Excise Taxes
under the Pension Protection Act
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Step 1: Determine if Potential i ( )( ) i iGrantee is a 501(c)(3) Organization
Approved Methods IRS Determination Letter IRS Pub. No. 78
• Pub. No. 78 Weekly Updates in Internal Revenue BulletinRevenue Bulletin
IRS Business Master File (BMF) If grantee is not a 501(c)(3) no new rules If grantee is not a 501(c)(3), no new rules If grantee is a 501(c)(3), must determine if it
is an SO17
is an SO
Step 2: Determine if Potential iGrantee is a SO
d h d Approved Methods IRS Determination Letter
• Section 509(a)(1) and 509(a)(2) organization – not a SOSO
• Section 509(a)(3) organization = SO• IRS letter may be silent
BMF BMF• Direct access (Notice 2006-109)• Access to IRS BMF data through third party such as
GuideStar (Rev. Proc. 2009-32; Rev. Proc. 2011-33)( ; ) Pub. 78 does not include information
If grantee is not a SO, can make grant—no new rules If grantee is a SO must determine the type
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If grantee is a SO, must determine the type
Step 3: If Grantee is a SO, Determine the Type of SO
Method 1: IRS Determination Letter and BMFMethod 1: IRS Determination Letter and BMF Most Determination Letters don’t include Type
• Prior to 2006, no need for Type
May be based on • Advance Notice of Proposed Rulemaking (ANPRM)
issued on Aug. 2, 2007• Prop. Reg. issued on Sept 24, 2009
When Prop. Reg. finalized, rules may change
IRS modifying BMF to show type of SO IRS modifying BMF to show type of SO• Updated monthly• Reflects changes that occur after determination letter
i d
19
issued
Step 3: If Grantee is a SO, Determine h f ( ’d)the Type of SO (cont’d)
Method 2 Reasoned written opinion of counsel of PF or DAF
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Step 3: If Grantee is a SO, Determine h f ( ’d)the Type of SO (cont’d)
Method 3:Method 3: Good Faith Reliance on Written Representation
by Grantee • Representation by officer, director or trustee• Describes how officers, directors and trustees
of grantee are selectedof grantee are selected• For Type I or II, references governing
document provisions establishing relationship p g pwith supported organization
• For Type III-- identifies supportedi ti
21
organizations
Step 3: If Grantee is a SO, Determine h f ( ’d)the Type of SO (cont’d)
Method 3 (cont’d) PF or DAF must review
• Governing documents of SO and supported organization• Governing documents of SO and supported organization • For Type III, representation from supported
organizationso Re types of activitieso Re types of activitieso That, but for SO, supported organization would conduct
activities of SO
Note: cannot rely on Form 990 to determine Type
22
Step 3: If Grantee is a SO, Determine h f ( ’d)the Type of SO (cont’d)
If grantee is a Non-Functionally Integrated Type III SO, then PF or DAF must exercise
dit ibilit d t d texpenditure responsibility and grant does not count toward non-operating foundation’s minimum distributionminimum distribution If grantee is a Type I, Type II or Functionally
Integrated Type III SO must determine if aIntegrated Type III SO, must determine if a disqualified person of a PF or donor or donor’s designee of a DAF has control
23
g
Step 4: Determine if Disqualified Person or Donor has Control over SO oror Donor has Control over SO or Supported Organization
No IRS approved procedure; use definition in Notice 2006-109
Obtain list of supported organization(s) Obtain list of supported organization(s) Identify disqualified persons for a PF and donors and
their designees for a DAFg Determine if disqualified persons exercise control
over SO or supported organizationD t i if d /d i t l t d Determine if donors/designees control supportedorganization
Direct or indirect control
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Direct or indirect control
Step 4: Determine Control (cont’d)Step 4: Determine Control (cont d)
If disqualified person or donor (or donor’s designee) has control, then must exercise
dit ibilit d t d texpenditure responsibility and grant does not count toward a non-operating foundation’s minimum distributionminimum distribution
25
SummarySummary
Type III which is Not Functionally Integrated Grant does not count toward non-operating
foundation’s minimum distribution PFs and DAFs must exercise expenditure
responsibility Type I II or Functionally Integrated Type III withType I, II or Functionally Integrated Type III with
disqualified person or donor control Grant does not count toward non-operating
foundation’s minimum distributionfoundation s minimum distribution PFs and DAFs must exercise expenditure
responsibility
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GuideStar Charity Check®
Anatomy of a SolutionAnatomy of a Solution
Pamela Jowdy Senior Product Manager
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Senior Product Manager
#duediligence
The ChallengeWhy Verify?
gThree Unique Due Diligence To-Do’s:
To Do: Data Source:
Verify Current Charitable Status
To-Do: Data Source:
Publication 78 and
Identify Supporting Organizations IRS B i M t Fil
Internal Revenue Bulletin
with 509(a)(3) status IRS Business Master File
Identify revoked and / or reinstated organizations
IRS Automatic Revocation of Exemption List
28#duediligence
Pub 78 and Internal Revenue BulletinWhy Verify: IRS Data SourcesPub 78 and Internal Revenue Bulletin
Establish Tax Deductibility and Verify Current Charitable Status
IRS Publication 78: Also known as Cumulative List of Organizations Includes all organizations to which charitable contributions are tax deductible Current tax-exempt status, percentage of contributions that are tax deductible Current tax exempt status, percentage of contributions that are tax deductible Deductibility limitations Published monthly (new for 2012); published quarterly previously
IRS Internal Revenue Bulletin:S te a e e ue u et Also known as the ‘IRB’ Lists organizations whose charitable status has been changed or revoked Updated weekly
Rev. Proc. 82-39, 1982-1 C.B. 759 Sec.3.01 and Sec.3.02 states that grantors “may rely on the classification of an organization listed in or covered by Publication No. 78.”
29#duediligence
IRS Business Master FileWhy Verify: IRS Data Sources
Determine 509(a) Status
IRS Business Master File: Lists all tax-exempt organizations registered with the IRS Published monthly (not necessarily on the same day as Publication 78) Includes reason for non-private foundation status, aka “public charity classification” R f i t f d ti t t 509( ) t t Reason for non-private foundation status = 509(a) status
509(a)(1) and 509(a)(2): A public charity that receives a substantial amount of public support to fund its operations
509(a)(3): Supporting Organization A public charity that provides support to one or more publicly supported organizations Must demonstrate that is has a particular type of relationship with the organization it
supports
30#duediligence
IRS Automatic Revocation of Exemption ListWhy Verify: IRS Data Sources
pIdentify Revoked Organizations
Failure to file annual return or notice with the IRS for three consecutive years 990, 990N, 990EZ or 990PF
Federal tax-exempt status revokedp
Subsequently reinstated organizations remain on the Automatic Revocation List
Erroneously listed nonprofits and nonprofits that already hold an IRS determination y p p yof nonfiling requirement will be deleted from the revocation list
http://www.irs.gov/charities/article/0,,id=221600,00.html
Procedures for reinstatement and other helpful FAQs
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Data Source Size and ScopeHow Big?
pIRS Business Master File: March 2012
1,560,339 total organizations
24,626 Supporting Organizations 408 include supporting organization type
73% Type I SO 14.7% Type II SO 6.9% Type III Functionally Integrated SO 5.4% Type III Not Functionally Integrated SO
~2,200 organizations reinstated from a previous BMF
~6,800 organizations not seen in any previous BMF
1,059,911 501(c)(3)s 960K Form 990 / Form 990 EZ / Form 990 N filers 98K Form 990 PF filers
32#duediligence
Data Source Size and ScopeHow Big?
p
IRS Publication 78: March 2012
825,612 total organizations 337,384 subordinate organizations covered under group exemption but not
listed in Pub 78 that GuideStar matches from BMF
IRS Automatic Revocation List: April 2012
443,447 total organizations 2,189 subordinate organizations covered under group exemption but not
listed in Pub 78 that GuideStar matches from BMF
33#duediligence
Grants Administration Milestones
Charity Check v2.0
•100% compliant •Alerts•Parent /
Charity Check v1.5
100% compliant with IRS FAQ and
Revenue Procedure
1969 August March June June
Parent / Subordinate Linkage
Revenue Procedure 2009-32
g2006 2007 20112009
Pension Protection Act
IRS Revenue Procedure 2009-32
Tax Reform Act
Internal Revenue Code
IRS FAQ on Business Master File
IRS Revenue Procedure 2011-33
New requirements on grants to certain
supporting organizations
[509(a)(3)]
Procedure 2009 32
Formalizes March 2007 FAQ
Precedentialinstrument upon
The legal framework for the regulation of private foundations and public charities
is established
Business Master File Reliance
Allows grantors to use third party resources
to obtain required IRS BMF information
Procedure 2011-33
Supersedes Rev Proc 2009-32
Clarifies reliance on BMF, Pub 78,
Definition of Type III supporting
organizations
Definition of Type III
which compliance and grantmakingteams can rely
about a potential grantee’s charity
classification under section 509(a)(1), (2)
or (3)
Revocations Lists and maintains
requirements for third party BMF
resources
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Definition of Type III functionally integrated
supporting organizations
IRS Revenue Procedure 2011-33Why Verify: Pension Protection Act
June 2011
Source: http://www.irs.gov/pub/irs-drop/rp-11-33.pdf
35#duediligence
An Integrated, One-Stop Verification SolutionGuideStar Charity Check
How it Works
g , p
FTF Revocations
Incorporates Weekly Internal Revenue Bulletin Marries Publication 78 data with IRS Business Master File data
Married, but never modified Pub 78 Additions included
OFAC verification included (organization level) 501p suspension messaging included
36
p p g g Parent – Subordinate matching (BMFPub 78) Group Exemption Messaging 12 year track record of consuming and managing IRS data
An Integrated, One-Stop Verification SolutionGuideStar Charity Check
What it Delivers
Date and time stamp
g , p
Electronic or hard copy documentation
Latest Quarterly Pub 78
Verify Current Charitable Status
Latest Quarterly Pub 78
Weekly Bulletin Date
EIN
Reason for Non-Private Foundation Status
EIN
IRS BMF DateIdentify
Supporting Organizations with 509(a)(3)
status
37
An Integrated, One-Stop Verification SolutionGuideStar Charity Check
g , pWhy it Works
Fully compliant with recently issued guidance
The grantees’ name, EIN and public charity classification (aka “reason for non private foundation status”) under
y p y gfrom IRS concerning reliance on third-party
resources for IRS BMF data:
(aka “reason for non-private foundation status”) under section 509(a)(1), (2) or (3) is presented in the report
A statement that the information in the report is from the most currently available IRS monthly update to the BMF, y y p ,
along with the IRS BMF revision date
The date and time of the grantor’s search is included on the treport
The third party IRS BMF data and report must be in a form which the grantor can store in hard copy or
electronically
38
electronically.
The Challenge: RecapWhy Verify?
g pThree Unique Due Diligence To-Do’s:
To Do: Data Source:
Verify Current Charitable Status
To-Do: Data Source:
Publication 78 and
I t l R B ll ti
Identify Supporting Organizations IRS B i M t Fil
Internal Revenue Bulletin
with 509(a)(3) status IRS Business Master File
Identify revoked and / or reinstated organizations
IRS Automatic Revocation of Exemption List
39#duediligence
Charity Check User ExperienceTwo Clicks to Compliance
Pamela Jowdy Senior Product ManagerGuideStar
40
GuideStar
#duediligence
Charity Check v2.0 New Features E Mail Alerts E-Mail Alerts
Customizable based on 9 different events Upload up to 20K EINs Create individual organization alerts Actively track grantee status as events occur Actively track grantee status as events occur Upload Excel files from MicroEdge GIFTS and other grants
management software solutions Easy 3-step configuration Single click access to Charity Check reports from Alert Emails Single-click access to Charity Check reports from Alert Emails
Parent – Subordinate Linkage Identify over 300K subordinate orgs not listed in Pub 78 but covered Identify over 300K subordinate orgs not listed in Pub 78 but covered
under group exemption Single click link to Parent Charity Check Report
Display of IRB Revoked Organizations Condense 20+ minute manual search process to single click Confirm compliance of past grants by viewing date of IRB revocation Link directly to the IRB PDF for documentation
41
Link directly to the IRB PDF for documentation
Charity Check v2.0 New Features
42
Charity Check v2.0 New Features E Mail Alerts E-Mail Alerts
Customizable based on 9 different events Upload up to 20K EINs Create individual organization alerts Actively track grantee status as events occur Actively track grantee status as events occur Upload Excel files from MicroEdge GIFTS and other grants
management software Easy 3-step configuration Single click access to Charity Check reports from Alert Emails Single-click access to Charity Check reports from Alert Emails
Parent – Subordinate Linkage Identify over 300K subordinate orgs not listed in Pub 78 but covered Identify over 300K subordinate orgs not listed in Pub 78 but covered
under group exemption Single click link to Parent Charity Check Report
Display of IRB Revoked Organizations Condense 20+ minute manual search process to single click Confirm compliance of past grants by viewing date of IRB revocation Link directly to the IRB PDF for documentation
43
Link directly to the IRB PDF for documentation
1 H i kl d G id St bli h IRS ti t d?
Common Questions1. How quickly does GuideStar publish IRS revocations once posted?
2. Can I search for revoked organizations by EIN?
3 D i t bl d PDF t h fl f k d i ti ?3. Do printable and PDF reports have a flag for revoked organizations?
4. Can I set up alerts or manage a watchlist?
5 A id tif i S ti O i ti T ?5. Any progress on identifying Supporting Organization Type?
6. Can grantors still rely on Letters of Determination?
7 Wh t ifi ti ti if I d t b ib t G id St Ch it Ch k?7. What are my verification options if I do not subscribe to GuideStar Charity Check?
8. What is OFAC and why is it important?
9 I th Ad R li P l i l ?9. Is the Advance Ruling Process no longer in place?
10. Does the Charity Check web service include revocation data?
11 D P i P A Y G R t i l d ti i f ti ?
44
11. Do Premium Pay As You Go Reports include revocation information?
Isn’t this good enough?The Letter of Determination
g g
What it is
Static, historic snapshot
Only accurate at time of issuance
What it is NOT
Confirms 501(c)(3) status
Does not account for changes in charitable status since date of original issuance g
Some letters include SO Type (2006)
Does not reflect automatic revocations
45
Grantmaker Verification OptionsExempt Organizations “Select Check”Grantmaker Verification Options
IRS Publication 78 Online: “EO Select Check”
IRS website provides search functionality for three databases:
Pub 78 data (eligible to receive tax-deductible contributions)
Form 990-N (e-Postcard) filers
Automatic Revocation dataAutomatic Revocation data
Can only search one database at a time
M t h IRB t l Must search IRB separately
No date or time stamp
No reinstatement flag
46
g
Source: http://apps.irs.gov/app/eos/
Grantmaker Verification OptionsIRS Internal Revenue BulletinGrantmaker Verification Options
Includes status changes and revocations
IRS IRB
g Published weekly in pdf and html format Does not include EIN Not searchable
47Source: http://www.irs.gov/irb
Grantmaker Verification OptionsIRS Business Master File
IRS Downloadable Business Master File
Draft of manual solution for 509(a)verification directly from
IRS BMF txt file
48
Definition and OptionsOFAC and SDNDefinition and Options
http://www.ustreas.gov/offices/enforcement/ofac/
Office of Foreign Assets Control / Specially Designated Nationals
p g
49
Source: Technology Affinity Group and Council on Foundations’ 2007 Grantmakers Information Technology Report, September 2007
Temporary and Final IRS RegulationsAdvance Ruling Process
Issued September 9, 2008 Eliminated the advance ruling process for 501(c)(3) organizations reasonably expected to be publically
supported IRS automatically classifies new 501(c)(3)s as public charities for first 5 years if can reasonably be expected to
be publically supported Includes public charities whose advance ruling period has not yet expired or expired after June 9, 2008 Final Regulations issued September 8, 2011 Charity Check no longer publishes the Advance Ruling date in the body of the report Footer messaging and link to IRS resource persists
50http://www.gpo.gov/fdsys/pkg/FR-2011-09-08/pdf/2011-22614.pdf
XML* Data and PDF Report DeliveryCharity Check Web Service
*Extensible Markup Language =
t h t t d d t easy way to share structured data
via ether
51
Single reports without a subscription Premium Pay As You Go
commitment
52
Suzanne Ross McDowellSuzanne Ross McDowell
Partner, Steptoe & Johnson LLPPartner, Steptoe & Johnson LLP202.429.6209 | smcdowell@steptoe.com
Practice focuses on needs of exempt organizations Member, IRS Advisory Committee on Tax ExemptMember, IRS Advisory Committee on Tax Exempt
and Government Entities, 2004-2007; Chair, Exempt Organizations Group, 2006-07
Chair, ABA Tax Section Exempt Organization Comm, 2011-present; Vice Chair, 2007-2011Chair Tax Section District of Columbia Bar 2005 2006; Chair, Tax Section, District of Columbia Bar, 2005-2006; Vice Chair, 2004-2005
Fellow, American College of Tax Counsel Associate Tax Legislative Counsel, Office of Tax Policy,
US Department of the Treasury, 1984-1987US Department of the Treasury, 1984 1987 Former SVP and Deputy General Counsel, National Geographic Society Frequently speaks and writes about exempt organization issues Listed in Chambers USA, America’s Leading Lawyers for Business, Best
Lawyers in America, and District of Columbia Super Lawyers
53www.steptoe.com
Contact Information
webinars@guidestar.org
Suzanne Ross McDowell
Partner, Steptoe & Johnson, LLP
smcdowell@steptoe.com
54#duediligence
Appendix
55
Access Points: ResultsGuideStar Charity Check
56#duediligence
Access Points: ReportGuideStar Charity Check
p
57
509(a)(3) Supporting OrganizationGuideStar Charity Check
( )( ) pp g g
58
Not Verified in Publication 78GuideStar Charity Check
59
Not Listed in IRS Business Master FileGuideStar Charity Check
60
OFAC Organization: Results GuideStar Charity Check
g
61
OFAC Organization: ReportGuideStar Charity Check
g p
62
Charity Check v2.0 Alerts and Watchlists
y
63
ConsiderationsInternational Grantmaking
Does the foreign charity already have a Letter of Determination? Exercise expenditure responsibility Equivalency Determination International Repository Project:
www.USIG.org [COF-sponsored website]www.ngosource.org [international repository project website]
Become familiar with the USA Patriot Act
64#duediligence
Options and ApproachesSupporting Organization Types
Supporting Organization Guidesheets published by IRS GuideStar Charity Check policy and long term product vision http://www.irs.gov/charities/article/0,,id=174956,00.html Consult your legal counsel!
65
Grantmaker Due DiligenceGrantmaker Due Diligencein the
Pension Protection Act Era:
How to identify supporting organizations and How to identify supporting organizations and align your grants administration process with
the 21st century tax codethe 21 century tax code
66© 2012, GuideStar USA, Inc. All Rights Reserved. This information is copyrighted subject matter owned by GuideStar USA and is protected by United States and international copyright law.
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