The following are some of the highlights from the 2021 Western Conference on Tax Exempt Organizations (WCTEO), with recognition that these just touch the surface and you’ll get so much more by attending:
Lessons from Headlines
Donor Advised Funds: Accelerating Charitable Efforts Act (ACE Act) – probably unlikely to be passed as a whole, but there are several pieces that may eventually find their way into the law. DAF sponsoring organizations need to pay attention. Key DAF Cases – Fairbairn v. Fidelity Investments Charitable Gift Fund and Pinkert v. Schwab Charitable Fund.
State enforcement: Move towards increased enforcement from state charities regulators, especially in CA and NY. Pay attention. See, e.g., Attorney General James Wins Dismissal of NRA’s Fraudulent Bankruptcy, Fight for Dissolution to Continue in New York.
Donor naming rights issues: See, e.g., As Part of a $4.5 Billion Oxycontin Settlement, the Sackler Family Has Promised Not to Lend Its Name to Museums for Nine Years. Key focus areas: gift agreements, gift policies, duty of care, charitable trust obligations (e.g., complying with lawful gift restrictions).
Current Employment Issues
Remote worker considerations: state/local law considerations include: multi-state payroll challenges, payroll & business taxes, wage & hour and other employment laws, workers comp, worker safety laws, employee reimbursement laws (including CA), qualification to do business, charity registration; remote work doesn’t convert an employee to an independent contractor, assuming they have the same job (possibly with very rare exception).
Corporate officers are deemed by statute to be employees of the corporation. See IRC §§3401(c); 3121(d)(1), 3306(i).
COVID-19 Laws and Related Guidance – good starting place resources for California nonprofits: COVID-19 Emergency Temporary Standards Frequently Asked Questions; COVID-19 Testing and Vaccine FAQs; DFEH Employment Information on COVID-19.
Equity Based Compensation
Legal restrictions: nondistribution constraint, private inurement, excess benefit transactions. World Family Corporation v. Commissioner, 81 T.C. 958 (1983) – organization planned to pay fundraisers commissions of up to 20%, with no cap on total amount; Tax Court said no per se private inurement; IRS did not acquiesce. Rev. Rul. 69-383: Hospital paid employee radiologist a percentage of gross receipts of radiology department for managing the department and performing all radiology services, with no cap; IRS ruled no private inurement; the radiologist’s own performance of services was a major factor in producing the department’s gross receipts, so there was an effective cap based on the quantum of services the radiologist could personally perform.
Stock options in taxable subsidiary as compensation to executives of sub: IRS PLR 9722032 (1997) – no private inurement where, among other things, qualified independent consultants opined on reasonableness of transactions and issuance of stock options. Stock in taxable subsidiary as compensation to executives of 501(c)(3) parent: IRS PLR 200225046 (2002) – “An exempt organization may cause shares of its taxable subsidiary to be issued as compensation without contravening the prohibition against inurement and private benefit, so long as the total compensation to be paid … is reasonable in amount.”
Alternative carried-interest type incentive plans are more frequently used to assist nonprofit organizations with rewarding their executives and key employees, often in for-profit subsidiaries. Such plans can be designed to fairly compensate contributing executives and key employees for their work and efforts, while designed to satisfy the reasonableness standards outlined in IRC Section 4958. 4 examples provided by FW Cook.
Establishing the rebuttable presumption of reasonableness for grants of stock or stock options: No presumption for a payment that is not a “fixed payment” until the exact amount of the payment is determined. But a fixed formula may incorporate an amount that depends upon future specified events or contingencies (including the amount of revenues generated by one or more activities of the organization, so long as no person exercises discretion in calculating the amount.
Becoming an Anti-Racist Nonprofit: Legal Issues
Nonprofits are re-examining structures and practices from top to bottom – board of directors, executive leadership and staff (see, e.g., Structuring Leadership: Alternative Models for Distributing Power and Decision-Making in Nonprofit Organizations), programs and community (examining and confronting the organization’s history or legacy of racism or inequitable treatment or practices in a community; addressing barriers to equitable access to programs and resources; targeting resources and programs to BIPOC communities, BIPOC-led groups; letting the affected communities drive the change, play an integral role in shaping the programs and grantmaking for their communities: community voice, self-agency; developing Race+Equity Impact Assessment/Checklist to evaluate significant new programs, policy decisions, publications).
A patchwork of federal and state anti-discrimination laws apply to grantmaking and internal programs relevant to nonprofit organizations: Section 1981 is a federal anti-discrimination statute that prohibits foundations from making and enforcing contracts, including certain grants, on the basis of race; Section 1985(3) is a federal anti-conspiracy statute under which an individual might allege that a foundation has conspired with its grantee organization(s) to engage in race discrimination; Title VII of the Civil Rights Act of 1964 is a federal anti-discrimination statute that prohibits employment decisions on the basis of race or any other protected characteristic; and State and city anti-discrimination laws.
Consequences of Americans for Prosperity Foundation v. Bonta
Supreme Court holding: The compelled disclosure of Schedule Bs is not narrowly tailored to the state’s interest in investigating charitable misconduct; the opinion adopted “exacting scrutiny” which requires a “substantial relation between the disclosure requirement and a sufficiently important government interest” and also requires the disclosure rules to be narrowly tailored (i.e., closely drawn to target only the problem or interest at issue); Roberts’ majority opinion held the disclosure requirement facially invalid in all circumstances, rather than only as applied because “every demand” for information might chill the freedom of association and therefore “a substantial number of its applications are unconstitutional.”
Influence on campaign finance donor disclosure laws (e.g., Gaspee Project v. Mederos (requirements were narrowly tailored to further the important governmental interest of promoting an informed electorate); Lakewood Citizens Watchdog Group v. City of Lakewood (permanent injunction preventing application of challenged provisions to plaintiff, in part because of conclusion that, even assuming informational interest was an important government one, the provisions were not narrowly tailored to further that interest)).
Breakout: Cryptocurrency and Non-Fungible TokensS
Treating cryptocurrency as intangible assets diminishes the value of the holder’s financial statements since only impairment is reflected but not gains in value (until disposal).
NFT using a layer cake analogy: Blockchain on bottom (immutable distributed ledger but ‘garbage in, garbage out’ issue). Cryptocurrencies in middle (note environmental & equity issues). NFTs on top (“smart contract” [misnomer] w/ metadata pointing to content file).
Making a Splash – Charitable Giving Update
Substantiation of charitable contributions – no such thing as substantial compliance? But see Emanouilv. Commissioner, TC Memo 2020-120 (very narrow exception).
CARES Act increased deduction limits that expire after 2021: Individuals – 60% ➔ 100%; Corporations – 10% ➔ 25%; Gifts of food inventory – 15% ➔ 25%.
“Newman’s Own” exception to excess business holdings rule for private foundations: Planning opportunity for business owners seeking to convert their company into a social enterprise 100% owned and controlled by their private foundation; equity-based incentive compensation can still be utilized by the business, including through the use of phantom stock options.
Celebrating Ellen Aprill
Many personal expressions of heartfelt thanks to Ellen Aprill were shared by attendees and presenters for her incredible kindness and brilliance and for making the invaluable WCTEO available to us for the last 25 years! Cheers to her upcoming retirement from Loyola Law & her continuing work!