Post on 07-May-2015
description
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Grantmaker Due Diligence
in the
Pension Protection Act Era:
How to identify supporting organizations and align your grants administration
process with the 21st century tax code
© 2011, 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.
15 February 2011
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Pamela Jowdy
Senior Product Manager, GuideStar
Suzanne Ross McDowell
Partner, Steptoe & Johnson, LLP
Today’s Facilitators
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Participant Poll
#grantmakerdd
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1. Internal Revenue Code: Impacts on
Grantmakers
Why Verify: Pension Protection Act of 2006
Supporting Organizations: Relationships and Control
Expenditure Responsibility: Defined
Due Diligence: Methods and Best Practices
2. GuideStar Charity Check: Anatomy of a
Solution
How it works
What it delivers
Why it works
3. “Automatic” Failure to File Revocations
4. Q & A
Today’s Objectives
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Internal Revenue CodeImpact of the Pension Protection Act of 2006 on Grantmakers
Suzanne Ross McDowell PartnerSteptoe & Johnson LLPsmcdowell@steptoe.com
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Summary of Pension Protection Act Provisions
Affecting Grants to Supporting Organizations
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Changes Made by the Pension 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 responsibility• Penalty: 20% of grant on foundation; potentially
5% on directors and officers; must make correction
Donor Advised Funds (DAFs) Grants to certain SOs require expenditure
responsibility• Penalty: 20% of grant on sponsor of DAF
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What is a Supporting Organization?
Internal Revenue Code provides-- All 501(c)(3) organizations are either private
foundations or public charities Private foundations are subject to greater
regulation Public charities include:
Schools, hospitals, churches, government units Organizations that meet specific requirements
for broad public support SOs
All other 501(c)(3) organizations are private foundations
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What is a Supporting Organization? (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 public charity (the supported organization)
Types of relationships Type I – Parent-subsidiary Type II – Brother-sister Type III – Operated in connection with
• Functionally Integrated • Not Functionally Integrated
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Which Supporting Organizations Require Expenditure Responsibility?
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; or
A donor to a DAF, or a person designated by the donor to advise with respect to distributions, directly or indirectly controls a supported organization
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What is Expenditure Responsibility?
Procedures designed to ensure that PF funds are used for exclusively charitable purposes-- Pre-grant inquiry Written grant agreement with the
grantee 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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Which Grants Do Not Count Toward a Private 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?
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 SO or supported organization to make an expenditure, or prevent the SO or supported organization from making an expenditure. See Notice 2006-109.
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When is a Type III Supporting Organization Functionally Integrated?
Proposed Regulations issued on September 24, 2009
Until temporary or final regulations are issued, can rely on Notice 2006-109 or Proposed Regulations 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;
• But for the involvement of the SO, would normally be engaged in by the supported organization(s) themselves.
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When is a Type III Supporting 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 supported organization(s), by performing the functions of or carrying out the purposes of the supported organization(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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Conducting Due Diligence to Avoid Excise Taxes
under the Pension Protection Act
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Step 1: Determine if Potential Grantee is a 501(c)(3) Organization
Approved Methods IRS Determination Letter; and Verification of listing in IRS Pub. No. 78
• Pub. No. 78 Weekly Updates in Internal Revenue Bulletin
If grantee is not a 501(c)(3), no new rules
If grantee is a 501(c)(3), must determine if it is an SO
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Step 2: Determine if Potential Grantee is a SO
Approved Methods IRS Determination Letter
• Section 509(a)(1) and 509(a)(2) organization – not a SO
• Section 509(a)(3) organization = SO• IRS letter may be silent
IRS Business Master File• Direct access (Notice 2006-109)• Access to IRS BMF data through third party such
as GuideStar (Rev. Proc. 2009-32) 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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Step 3: If Grantee is a SO, Determine the Type of SO
Method 1: IRS Determination Letter Most Determination Letters don’t include Type
• Prior to 2006, no need for Type Prior to February 22, 2007, IRS issued
Determination Letters on FI status based on an Advance Notice of Proposed Rulemaking (ANPRM)
ANPRM superseded by Prop. Reg. but can continue to rely on Determination Letter issued under ANPRM until Prop. Reg. are issued as temporary or final as long as SO meets the requirements of ANPRM or Prop. Reg.
IRS now issuing Determination Letters that a Type III is Functionally Integrated under Prop. Reg. definition
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Step 3: If Grantee is a SO, Determine 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 the Type of SO (cont’d) 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 selected• For Type I or II, references governing
document provisions establishing relationship with supported organization
• For Type III-- identifies supported organizations
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Step 3: If Grantee is a SO, Determine the Type of SO (cont’d)
Method 3 (cont’d) Review by PF or DAF
• Governing documents of SO and supported organization
• For Type III, representation from supported organizationso Re types of activitieso That, but for SO, supported organization would
conduct activities of SO
Note: cannot rely on Form 990 to determine Type
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Step 3: If Grantee is a SO, Determine the Type of SO (cont’d)
If grantee is a Non-Functionally Integrated Type III SO, then PF or DAF must exercise expenditure responsibility and grant does not count toward non-operating foundation’s minimum distribution
If grantee is a Type I, Type II or Functionally Integrated Type III SO, must determine if a disqualified person of a PF or donor or donor’s designee of a DAF has control
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Step 4: Determine if Disqualified Person or Donor has Control over SO or Supported Organization
No IRS approved procedure; use definition in Notice 2006-109
Obtain list of supported organization(s) Identify disqualified persons for a PF and
donors and their designees for a DAF Determine if disqualified persons exercise
control over SO or supported organization Determine if donors/designees control
supported organization Direct or indirect control
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Step 4: Determine Control (cont’d)
If disqualified person or donor (or donor’s designee) has control, then must exercise expenditure responsibility and grant does not count toward a non-operating foundation’s minimum distribution
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Summary
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
with disqualified person or donor control Grant does not count toward non-operating
foundation’s minimum distribution PFs and DAFs must exercise expenditure
responsibility
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GuideStar Charity CheckAnatomy of a Solution
Pamela Jowdy Senior Product Manager
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The Challenge: RecapWhy Verify?
Two Unique Due Diligence To-Do’s:
Verify Current Charitable Status
Publication 78 and
Internal Revenue Bulletin
Identify Supporting Organizations with
509(a)(3) status
IRS Business Master File
To-Do: Data Source:
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Pub 78 and Internal Revenue BulletinWhy Verify: IRS Data Sources
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 Deductibility limitations Published quarterly
IRS Internal Revenue Bulletin: 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.”
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IRS Business Master File
Determine 509(a) Status
IRS Business Master File: Lists all tax-exempt organizations registered with the IRS Published monthly Includes reason for non-private foundation status, aka “public charity classification” Reason for non-private foundation status = 509(a) status
Why Verify: IRS Data Sources
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
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Supporting Organizations SnapshotIRS Business Master File
Why Verify: Pension Protection Act
32,191 509(a)(3) Supporting Organizations:
21,505 have filed a form 990 4% of all 509(a) orgs
12,305 of the 32,000 largest foundations, or 38%, made a grant to any supporting organization between 2000 and 2004
While the supporting organization universe is fairly discrete, failure to identify these organizations creates an exponentially greater fiscal and operational risk for private
foundations and sponsors of donor-advised funds.
509(a) Universe IRS Business Master File
509(a)(1)68%
509(a)(2)28%
509(a)(3)4%
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Internal Revenue Code Grants Administration Milestones
1969 August 2006
Pension Protection Act
New requirements on grants to certain
supporting organizations [509(a)
(3)]
Definition of Type III supporting
organizations
Definition of Type III functionally integrated
supporting organizations
IRS Revenue Procedure 2009-32
Formalizes March 2007 FAQ
Precedentialinstrument upon
which compliance and grantmaking teams can rely
Tax Reform Act
The legal framework for the regulation of private foundations and public charities
is established
December 2006
June 2009
Internal Revenue Code
Interim Guidance Regarding
Supporting Orgs and Donor-Advised
Funds
Grantor may rely on IRS BMF or Letter of
Determination for identifying supporting organization 509(a)
status
March 2007
IRS FAQ on Business Master File
Reliance
Allows grantors to use third party resources
to obtain required IRS BMF information about a potential grantee’s charity
classification under section 509(a)(1), (2)
or (3)
Charity Check v1.5
100% compliant with IRS FAQ and
Revenue Procedure 2009-32
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IRS Revenue Procedure 2009-32
June 2009
Why Verify: Pension Protection Act
Source: http://www.irs.gov/pub/irs-drop/rp-09-32.pdf
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How it Works
Incorporates Weekly Internal Revenue Bulletin Marries Publication 78 data with IRS Business Master File data
Married, but never modified OFAC verification included (organization level) 10 year track record of consuming and managing IRS data
An Integrated, One-Stop Verification Solution
GuideStar Charity Check
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What it Delivers
Date and time stamp
Latest Quarterly Pub 78
Weekly Bulletin Date
An Integrated, One-Stop Verification Solution
GuideStar Charity Check
Reason for Non-Private Foundation Status
EIN
IRS BMF Date
Verify Current Charitable Status
Identify Supporting
Organizations with 509(a)(3)
status
Electronic or hard copy documentation
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An Integrated, One-Stop Verification Solution
GuideStar Charity Check
Why it Works
The grantees’ name, EIN and public charity classification (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,
along with the IRS BMF revision date
The date and time of the grantor’s search is included on the report
The third party IRS BMF data and report must be in a form which the grantor can store in hard copy or
electronically.
Fully compliant with recently issued guidance from IRS concerning reliance on third-party
resources for IRS BMF data:
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Recap
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Charity Check User Experience
Two Clicks to Compliance
Pamela Jowdy Senior Product ManagerGuideStar
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1. IRS Data Sources: Manual Verification Options
Publication 78
Internal Revenue Bulletin
Business Master File
2. The Letter of Determination: isn’t this good enough?
Common Participant Questions
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Grantmaker Verification Options
IRS website provides search functionality for Pub 78 Does not include IRB weekly updates; must search separately for changes and / or
revocations Cannot search by EIN No date or time stamp
IRS Publication 78
IRS Publication 78 Online
Source: http://apps.irs.gov/app/pub78
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Grantmaker Verification Options
Includes status changes and revocations Published weekly in pdf and html format Does not include EIN Not searchable
IRS Internal Revenue Bulletin
IRS IRB
Source: http://www.irs.gov/irb
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Draft of manual solution for 509(a)verification directly from
IRS BMF
Grantmaker Verification OptionsIRS Business Master File
IRS Downloadable Business Master File
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Isn’t this good enough?
What it is
The Letter of Determination
What it is NOT
Static, historic snapshot
Only accurate at time of issuance
Confirms 501c3 status
Does not account for changes in charitable status since date of original issuance
Some letters include SO Type (2006)
IRS suspended letters for Type III functionally integrated SOs 2.22.07
Does not reflect automatic revocations starting in 2011
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Failure to file annual return for 3 consecutive years Pension Protection Act of 2006 provision Forms 990-N, 990-EZ, 990 or 990-PF Religious organizations are still exempt from filing requirement GuideStar estimates 350,000 NPOs may be at risk Many NPOs with annual gross revenues < $25K previously not required to file; now must file 990-N First deadline: 5.17.10 for NPOs with FYE date of 12.31.09
IRS granted “temporary relief” extension until 10.15.10 “At Risk” Organizations: www.irs.gov/thelist
Automatic Revocations
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Failure to file annual return for 3 consecutive years IRS to publish list early 2011 Publication will be ongoing and updated monthly GuideStar working closely with IRS to understand timing, data structure and distribution model into BMF GuideStar Charity Check will include a flag for these “failure to file” organizations GuideStar Premium will include a flag for these “failure to file” organizations
Automatic Revocations
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1. International Grantmaking
2. Supporting Organization Type and Charity Check
3. Advance Ruling Process and Charity Check
4. OFAC: Definition and options
5. XML Delivery Options
Questions Already Submitted
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Considerations 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
International Grantmaking
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Options and Approaches 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!
Supporting Organization Types
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Temporary IRS Regulations 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 Charity Check still publishes the Advance Ruling date in the body of the report, where applicable Footer messaging and link to IRS resource persists
Advance Ruling Process
http://www.irs.gov/charities/charitable/article/0,,id=185568,00.html
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Definition and Options
http://www.ustreas.gov/offices/enforcement/ofac/
OFAC and SDN
Office of Foreign Assets Control / Specially Designated Nationals
Source: Technology Affinity Group and Council on Foundations’ 2007 Grantmakers Information Technology Report, September 2007
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XML* Data and PDF Report Delivery Charity Check Web Service
*Extensible Markup Language =
easy way to share structured
data via ether
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webinars@guidestar.
org
Contact Information
Suzanne Ross McDowell
Partner, Steptoe & Johnson, LLP
smcdowell@steptoe.com
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Appendix
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Access Points: ResultsGuideStar Charity Check
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Access Points: ReportGuideStar Charity Check
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509(a)(3) Supporting OrganizationGuideStar Charity Check
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Not Verified in Publication 78GuideStar Charity Check
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Not Listed in IRS Business Master File
GuideStar Charity Check
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OFAC Organization: Results GuideStar Charity Check
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OFAC Organization: ReportGuideStar Charity Check
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Grantmaker Due Diligence
in the
Pension Protection Act Era:
How to identify supporting organizations and align your grants administration process with the 21st
century tax code
© 2011, 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.