GuideStar Webinar (04/10/12) - Grantmaker Due Diligence in the Pension Protection Act Era

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GuideStar webinar on 04/10/12.

Presenters: Suzanne Ross McDowell, Partner, Steptoe & Johnson LLP, and Pamela Jowdy, Senior Product Manager, GuideStar

http://www2.guidestar.org/rxg/news/webinars/webinar-archive.aspx

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GuideStar Webinar (04/10/12) - Grantmaker Due Diligence in the Pension Protection Act Era

  1. 1. Grantmaker Due Diligence g in the Pension Protection Act Era: How to identify supporting organizations and align your grants administration process with th 21st t d i i t ti ith the century tax code 10 April 2012 1© 2012, GuideStar USA, Inc. All Rights Reserved. This information is copyrighted subject matter owned byGuideStar USA and is protected by United States and international copyright law.
  2. 2. Today’s Facilitators Pamela Jowdy Senior Product Manager, GuideStar pjowdy@guidestar.org Suzanne Ross McDowell ll Partner, Steptoe & Johnson, LLP smcdowell@steptoe.com 2
  3. 3. Participant Poll #duediligence 3
  4. 4. Today’s Objectives1. Internal Revenue Code: Considerations for Grantmakers  Why Verify: Pension Protection Act of 2006  Supporting Organizations: pp g g Relationships and Control p  Expenditure Responsibility: Defined  Revenue Procedure 2011-33: Practical Implications p  Due Diligence: Methods and Best Practices2. GuideStar Charity Check: Anatomy of a Solution y y  How it works and what it delivers  Failure to File Automatic Revocations  Why it’s 100% compliant  New advanced features: streamlining grantee management3. Q & A 4
  5. 5. Internal Revenue CodeImpact of the Pension Protection Act of 2006 onGrantmakersSuzanne Ross McDowell llPartnerSteptoe & Johnson LLPsmcdowell@steptoe.com 5 #duediligence
  6. 6. Summary ofPension Protection Act Provisions Affecting Grants to Supporting Organizations 6
  7. 7. Changes Made by thePension Protection Act of 2006 i i f 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 p y • 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 7
  8. 8. What is a Supporting Organization? Internal Revenue Code provides--  All 501(c)(3) organizations are either private foundations or public charities p  Private foundations are subject to greater regulation Public charities include:  Schools, hospitals churches Schools hospitals, churches, government units  Organizations that meet specific requirements for broad public support  SOs SO All other 501(c)(3) organizations are private foundations 8
  9. 9. What is a Supporting Organization?(cont’d)( ’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 9
  10. 10. Which Supporting OrganizationsRequire Expenditure Responsibility? i di ibili Type III Non-Functionally Integrated SOs All other SOs if--  A disqualified person of the foundation di lifi d f h f d i 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 to distributions, directly or indirectly controls a supported organization 10
  11. 11. What is Expenditure Responsibility? Procedures designed to ensure that PF funds are used for exclusively charitable purposes--  Pre-grant 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 11
  12. 12. Which Grants Do Not Count Toward aPrivate Foundation s Minimum Foundation’sDistribution?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 12
  13. 13. 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 authority, or supported organization to make an expenditure, expenditure or prevent the SO or supported organization from making an expenditure. See Notice 2006-109. 13
  14. 14. When is a Type III SupportingOrganization Functionally Integrated?O i ti F ti ll I t t d? Proposed Regulations issued on September 24 2009 24, Until temporary or final regulations are issued, can rely on Notice 2006-109 or Proposed Regulations y 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 p p purposes of, such organization(s), and; , g ( ), ; • But for the involvement of the SO, would normally be engaged in by the supported organization(s) themselves. i ti ( ) th l 14
  15. 15. When is a Type III SupportingOrganization 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 y p p p pp 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 15
  16. 16. Conducting Due Diligence to Avoid Excise Taxes under the Pension Protection Act 16
  17. 17. Step 1: Determine if PotentialGrantee i a 501(c)(3) Organization is ( )( ) i i Approved Methods  IRS Determination Letter  IRS Pub. No. 78 • Pub. No. 78 Weekly Updates in Internal Revenue Bulletin  IRS Business Master File (BMF) If grantee is not a 501(c)(3), no new rules 501(c)(3) If grantee is a 501(c)(3), must determine if it is an SO 17
  18. 18. Step 2: Determine if PotentialGrantee i a SO is Approved Methods d h d  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  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 SO, 18
  19. 19. Step 3: If Grantee is a SO, Determinethe Type of SO Method 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 • Updated monthly • Reflects changes that occur after determination letter issued i d 19
  20. 20. Step 3: If Grantee is a SO, Determinethe Type of SO ( h f (cont’d) ’d) Method 2  Reasoned written opinion of counsel of PF or DAF 20
  21. 21. Step 3: If Grantee is a SO, Determinethe Type of SO ( h f (cont’d) ’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 p g p with supported organization • For Type III-- identifies supported organizations i ti 21
  22. 22. Step 3: If Grantee is a SO, Determinethe Type of SO ( h f (cont’d) ’d)Method 3 (cont’d)  PF or DAF must review • Governing documents of SO and supported organization • For Type III, representation from supported organizations o Re types of activities o That, but for SO, supported organization would conduct activities of SONote: cannot rely on Form 990 to determine Type 22
  23. 23. Step 3: If Grantee is a SO, Determinethe Type of SO ( h f (cont’d) ’d) If grantee is a Non-Functionally Integrated Type III SO, then PF or DAF must exercise expenditure responsibility and grant does not dit ibilit d td t 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 SO, disqualified person of a PF or donor or donor’s designee of a DAF has control g 23
  24. 24. Step 4: Determine if Disqualified Personor Donor has Control over SO orSupported 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 g Determine if disqualified persons exercise control over SO or supported organization Determine if d D t i donors/designees control supported /d i t l t d organization Direct or indirect control 24
  25. 25. Step 4: Determine Control (cont d) (cont’d) If disqualified person or donor (or donor’s designee) has control, then must exercise expenditure responsibility and grant does not dit ibilit d td t count toward a non-operating foundation’s minimum distribution 25
  26. 26. 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 I, disqualified person or donor control  Grant does not count toward non-operating foundation s foundation’s minimum distribution  PFs and DAFs must exercise expenditure responsibility 26
  27. 27. GuideStar Charity Check ®Anatomy of a SolutionPamela JowdySenior Product Manager #duediligence 27
  28. 28. Why Verify?The Challenge g Three Unique Due Diligence To-Do’s:To-Do:To Do: Data Source: Publication 78Verify Current Charitable Status and Internal Revenue Bulletin Identify Supporting Organizations with 509(a)(3) status IRS B i Business M t Fil Master File Identify revoked and / or IRS Automatic Revocation of reinstated organizations Exemption List #duediligence 28
  29. 29. Why 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 tax exempt  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.” #duediligence 29
  30. 30. Why Verify: IRS Data SourcesIRS Business Master File 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”  RReason f non-private foundation status = 509(a) status for i t f d ti t t 509( ) t t 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 #duediligence 30
  31. 31. Why Verify: IRS Data SourcesIRS Automatic Revocation of Exemption List p Identify 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 revoked p Subsequently reinstated organizations remain on the Automatic Revocation List Erroneously listed nonprofits and nonprofits that already hold an IRS determination y p p y of 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 #duediligence 31
  32. 32. How Big?Data Source Size and Scope p IRS 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 #duediligence 32
  33. 33. How Big?Data Source Size and Scope 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 #duediligence 33
  34. 34. Grants Administration Charity Check v1.5 Charity Check v2.0Milestones 100% compliant with IRS FAQ and Revenue Procedure •100% compliant •Alerts •Parent / Parent 2009-32 Subordinate Linkage 1969 August g March June June 2006 2007 2009 2011 Internal Revenue Code Tax Reform Act Pension Protection IRS FAQ on IRS Revenue IRS Revenue Act Business Master File Procedure 2009 32 2009-32 Procedure 2011-33The legal framework Reliancefor the regulation of New requirements on Formalizes March Supersedes Rev private foundations grants to certain Allows grantors to use 2007 FAQ Proc 2009-32and public charities supporting third party resources is established organizations to obtain required IRS Precedential Clarifies reliance on [509(a)(3)] BMF information instrument upon BMF, Pub 78, about a potential which compliance Revocations Lists Definition of Type III grantee’s charity and grantmaking and maintains supporting classification under teams can rely requirements for organizations section 509(a)(1), (2) third party BMF or (3) resources Definition of Type III functionally integrated supporting organizations 34
  35. 35. Why Verify: Pension Protection ActIRS Revenue Procedure 2011-33 June 2011 Source: http://www.irs.gov/pub/irs-drop/rp-11-33.pdf #duediligence 35
  36. 36. GuideStar Charity CheckAn Integrated, One-Stop Verification Solution g , p How it Works 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 p p g g Parent – Subordinate matching (BMFPub 78) Group Exemption Messaging 36 12 year track record of consuming and managing IRS data
  37. 37. GuideStar Charity CheckAn Integrated, One-Stop Verification Solution g , p What it Delivers Date and time stamp Electronic or hard copy documentation Verify Current Charitable Status Latest Quarterly Pub 78 Weekly Bulletin Date EIN Identify IRS BMF Date Supporting OrganizationsReason for Non-Private with 509(a)(3) Foundation Status status 37
  38. 38. GuideStar Charity CheckAn Integrated, One-Stop Verification Solution g , p Why it WorksFully compliant with recently issued g y p y guidance from IRS concerning reliance on third-party resources for IRS BMF data: The grantees’ name, EIN and public charity classification (aka “reason for non private foundation status”) under non-private 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 dateThe date and time of the grantor’s search is included on the report t The third party IRS BMF data and report must be in a form which the grantor can store in hard copy or electronically. electronically 38
  39. 39. Why Verify?The Challenge: Recap g p Three Unique Due Diligence To-Do’s:To-Do:To Do: Data Source: Publication 78Verify Current Charitable Status and Internal R I t l Revenue B ll ti Bulletin Identify Supporting Organizations with 509(a)(3) status IRS B i Business M t Fil Master File Identify revoked and / or IRS Automatic Revocation of reinstated organizations Exemption List #duediligence 39
  40. 40. Charity Check User ExperienceTwo Clicks to Compliance Pamela Jowdy Senior Product Manager GuideStar #duediligence 40
  41. 41. Charity Check v2.0 New Features E Mail Alerts E-Mail  Customizable based on 9 different events  Upload up to 20K EINs  Create individual organization alerts  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 Parent – Subordinate Linkage  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
  42. 42. Charity Check v2.0 New Features 42
  43. 43. Charity Check v2.0 New Features E Mail Alerts E-Mail  Customizable based on 9 different events  Upload up to 20K EINs  Create individual organization alerts  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 Parent – Subordinate Linkage  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
  44. 44. Common Questions1. How quickly d1 H i kl does G id St publish IRS revocations once posted? GuideStar bli h ti t d?2. Can I search for revoked organizations by EIN?3. Do i t bl3 D printable and PDF reports have a flag for revoked organizations? d t h fl f k d i ti ?4. Can I set up alerts or manage a watchlist?5. Any5 A progress on identifying S id tif i Supporting O ti Organization T i ti Type??6. Can grantors still rely on Letters of Determination?7. What7 Wh t are my verification options if I d not subscribe to G id St Charity Check? ifi ti ti do t b ib t GuideStar Ch it Ch k?8. What is OFAC and why is it important?9. Is the Advance R li Process no longer in place?9 I th Ad Ruling P l i l ?10. Does the Charity Check web service include revocation data?11. Do Premium P A Y G R11 D P i Pay As You Go Reports include revocation information? t i l d ti i f ti ? 44
  45. 45. The Letter of DeterminationIsn’t this good enough? g g What it is Static, historic snapshot Only accurate at time of issuance Confirms 501(c)(3) status What it is NOT 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
  46. 46. Exempt 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 data Can only search one database at a time Must M t search IRB separately h t l No date or time stamp No reinstatement flag g 46Source: http://apps.irs.gov/app/eos/
  47. 47. IRS Internal Revenue BulletinGrantmaker Verification Options IRS IRB Includes status changes and revocations g Published weekly in pdf and html format Does not include EIN Not searchable Source: http://www.irs.gov/irb 47
  48. 48. IRS Business Master FileGrantmaker Verification Options IRS Downloadable Business Master File Draft of manual solution for 509(a)verification directly from IRS BMF txt file 48
  49. 49. OFAC and SDNDefinition and Options Office of Foreign Assets Control / Specially Designated Nationals  http://www.ustreas.gov/offices/enforcement/ofac/ p gSource: Technology Affinity Group and Council on Foundations’ 2007 Grantmakers Information Technology Report, September 2007 49
  50. 50. Advance Ruling ProcessTemporary and Final 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 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 50 http://www.gpo.gov/fdsys/pkg/FR-2011-09-08/pdf/2011-22614.pdf
  51. 51. Charity Check Web ServiceXML* Data and PDF Report Delivery *Extensible Markup Language = easy way to share structured d t t h t t d data via ether 51
  52. 52. Premium Pay As You GoSingle reports without a subscriptioncommitment 52
  53. 53. Suzanne Ross McDowellPartner, Steptoe & Johnson LLP202.429.6209 | smcdowell@steptoe.com Practice focuses on needs of exempt organizations Member, 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, 2007-2011 Chair, Chair Tax Section, District of Columbia Bar, 2005-2006; Section 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, 1984-1987 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 www.steptoe.com 53
  54. 54. Contact Informationwebinars@guidestar.orgSuzanne Ross McDowellPartner, Steptoe & Johnson, LLPsmcdowell@steptoe.com #duediligence 54
  55. 55. Appendix 55
  56. 56. GuideStar Charity CheckAccess Points: Results #duediligence 56
  57. 57. GuideStar Charity CheckAccess Points: Report p 57
  58. 58. GuideStar Charity Check509(a)(3) Supporting Organization ( )( ) pp g g 58
  59. 59. GuideStar Charity CheckNot Verified in Publication 78 59
  60. 60. GuideStar Charity CheckNot Listed in IRS Business Master File 60
  61. 61. GuideStar Charity CheckOFAC Organization: Results g 61
  62. 62. GuideStar Charity CheckOFAC Organization: Report g p 62
  63. 63. Alerts and WatchlistsCharity Check v2.0 y 63
  64. 64. International GrantmakingConsiderations 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 #duediligence 64
  65. 65. Supporting Organization TypesOptions 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! 65
  66. 66. 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© 2012, GuideStar USA, Inc. All Rights Reserved. This information is copyrighted subject matter owned byGuideStar USA and is protected by United States and international copyright law. 66

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