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Navigating the Minefield

Lewis Walton

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Lewis Walton is a tax attorney in Los Angeles. A magna cum laude graduate of the University of San Diego, where he earned nearly a dozen academic awards, he is the author of thirteen books and has lectured around the world. Prior to becoming an attorney, he was a news broadcaster, reporting major stories including the Cuban Missile Crisis and, a year later, the assassination of President John F. Kennedy. Walton practices tax law with his son, Richard, an honors graduate of Georgetown who has served as an attorney advisor to the United States Tax Court.

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  • August 7, 2009
    10:45 AM
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good morning our time is limited so we will began I wonder to myself I'm Lou Walton did you come to know me as a as a writer and speaker on religious topics I perhaps should reintroduce myself I am also tax trial attorney try tax cases in federal court senior counsel in the tax department to the firm but called her name or in Los Angeles those are relevant to the credentials simply because what were talking about this morning has much to do with taxation our topic is tax exempt entities navigating the minefield how you bring them into being and how you run them and how hopefully you avoid getting into trouble because there are traps there in to which you can fall and what were talking about this morning revolves extensively around the term which in the adventurism is almost as frequently used as other terms such as second coming Sabbath spirit of prophecy and vegetarianism and that term is 501(c)(3) now there are in the Internal Revenue Code the thousands of provisions starting with section one which defines the marginal tax brackets we all pay in various forms and entities and representations following down through the seven thousand series of the code which has to do with federal tax crimes most people could not cogently recite a single provision of the Internal Revenue Code except for section 501(c)(3) that one we know well that dentists are entrepreneurs I appreciate that about them they are constantly thinking new and innovative ways in which to do the Lord 's work which is good and in order to do that effectively is very very helpful to become a tax exempt entity which opens doors to a whole galaxy of advantages to you for example exemption from taxation both on the federal and state level in instances where there may be securities regulations that impinge on you you may be exempt from securities regulation and opens the door for dawn hours to your entity to what you tax deductions on schedule a of their return under section one seventy of the code you may be eligible for donations for which the known or can be docked for estate and gift tax purposes you may be eligible for reduced mailing rates and in certain states for property tax exemption so as a whole galaxy of advantages that you enjoy the tax-exempt entity so Advantis will come up with some new and better way to do the will of the Lord 's work and the first enables animal get me a 501(c)(3) and those are the magic terms that open the door for you what you talk about why is it C three simply because section five oh one of the Internal Revenue Code subparagraph C has over twenty different kinds of entities of the law recognizes as being entitled to tax deduction tax exemption and deduction for donations all the way from some collective bargaining entities through homeowners associations and now we get down to some sub part C of section five oh one subparagraph three which allows exemption for charitable religious educational scientific literary public safety amateur sports answer societies for the prevention of cruelty to children and animals that's the best pitcher fallen into all of those things are deemed by Congress to be worthy of a tax exemption under section 501(c)(3) so lots of advantages to it and before I go on I need to make it real clear I do not represent any of you in this room to my knowledge I cannot represent you in the absence of a relationship memorialized in writing you know as a reading retention letter by my firm so I want to be very very clear I am not intending this morning to get any of you specific legal advice you need to get competent professional help where you are okay that's the only legal advice amount to give you this morning yet represented by somebody in your area who knows this stuff and knows it well our purpose this morning is to give you a background by which you can more intelligently decide if you want to maybe pursue the option option of an exempt entity and then more intelligently relate to the tax professionals who will be giving you assistance there in my notes on the California lawyer licensed nowhere else except in the federal tax system I practice before the IRS as well and they are in further mind that what I'm giving you is the law as it exists today that doesn't mean tomorrow it won't change and in today's fluid environment that could change by this afternoon getting all right there are lots of advantages to enjoying tax-exempt status there are disadvantages as well and as you think about whether you want to go down that route think not only of the advantages but of the disadvantages some of which can be encapsulated under the concept that when you build tax exempt you are in a quasi- partnership with whom uncle Sam because Uncle Sam will say you don't have to pay tax on your income with some exceptions will get to your door lowers can deduct from their income tax rate that gives they make to you which means than that in a sense you are using government money and with government participation care what as banks and auto manufacturers have learned significant government intrusion so think them through before you make the decision to go into tax-exempt status as you may be prohibited from engaging in certain activities certain commercial activities may be deemed to be unrelated business income go too far down that road you lose your tax exempt status as did the publishers of Christianity today the Presbyterian reformed publishing house which was doing so much commercial work the IRS finally sit there like a commercial publisher you're no longer tax exempt and they won in court so there are disadvantages there are a lot of recordkeeping requirements that if you do not do them right you can wind up in either a little bit of trouble are a whole lot of trouble depending on just how badly you ignored them there are reporting requirements every year typically will have to file a return call form nine ninety four if you're going to be a private foundation form nine ninety p.m. or if you're engaging in enough business is that the government says that's unrelated business income that's not in furtherance of your exempt purposes the data file in nine ninety two and report data and taken into income and pay income tax on itself there are a lot of technicalities here you may have to file with your state 's attorney general as some exempt entities have to do in California you know when your records to public review and there are severe sanctions for misbehavior let me give you just a little hint of of some of the technicalities you get into when you embark on a tax-exempt entity for example just as an example how do you handle tax deductible gifts twelve O'Donnell or under section one seventy of the code can be dark those on his or her schedule a as a as a charitable deduction to you and give supply check to you which will frequently come in real late in the year are deemed to have been made when the dong are signs the check and puts it in the mail and oftentimes they'll do that late in the day to December thirty one you then have to issue a receipt your receipt will be dated in the next year but the Don Oral-B seeking a deduction for the prior year you get into tiny issues like that gifts by check are ordinarily deemed made a deductible on the check is delivered or mailed to the charitable organization regardless of when you receive it same thing with a credit card without deduction and donation how do you handle donations coming in to you the Internal Revenue Code section 501(c)(3) of the treasury regulations that interpret it require you require you to provide a contemporaneous written acknowledgment of receipt of the gift now when the gift is made on December thirty one and you provide your contemporaneous receipt on January to the next year already begin to see that there are some shining problems and issues there if somebody gives you over two hundred and fifty dollars in cash you have to give a written receipt and you should put on that received whether or not condone nor received anything in response for it sometimes people will send out little gifts we got to account for that if you aren't doing that if you don't horse are simply making donations to you then you should put on their notification that the that no goods or services were received by the dawn nor except for intangible religious benefits be sure the notations on the receipt of your door North don't get that receipt there is a time bomb ticking about a year later when they come under audit or two years there got to come back to you and say where's the receipt I was supposed to get and why is that notation on their and your libel to have some very effective people out there so record-keeping requirements are extremely important ideas under two hundred and fifty dollars don't require that a fee of people aggregate gifts that ultimately add up to over two fifty but no single gift is that large you don't have to provide a receipt if they give you a gift of property property in excess of five thousand dollars may have to have it appraised by a qualified appraiser in order to enjoy a tax deduction you are not and should not assume the responsibility of valuing the property that is not your role in your sticking your neck out to doing okay just an example of some other record-keeping issues that you face when you go in the partnership of Uncle Sam in a tax-exempt entity so point number one a will we want to say this morning as you make the decision don't want to do this or do I want to do it and as I'll be pointing out in my presentation this afternoon back when the leaders of the nine largest banks in America were summoned to the office of the secretary of the treasury they were told we will be handing you billions of dollars and we will be buying stock in your bank some of the bankers and we don't want it and secretary of the treasury said that you sign the document in all nine of them did sometimes you don't have a choice as to whether to get involved with Uncle Sam here you do and make that decision wisely is this the type it are the advantages here sufficient to overcome the disadvantages that's a decision only you can make point number two how to get one of these things started how do you form a tax-exempt entity this morning I went to be discussing just one way to do what you can do it as a sole proprietorship is an LLC as some sort of lesser entity than a corporation I want to discuss and recommend using the corporate form for simplification of our presentation plus I think it's a better way to go to more formalized way to go so you form a corporation or is one of my clients came in one day years ago said Helena Forman incorporation well what's the very first thing you do now we find out just how well I don't want to talk down the Ottawa say things you already know what's the first thing you do when you form a corporation was the first decision you make get to decide what you're going to call it okay to select a name then you just happily put that name into a whole complex structure called corporate articles your corporate charter and send it off to the Secretary of State no you don't because somebody else might I got there ahead of you with that name it for example you decide your economy helped the Lord 's work I'm going to form the foundation for the preservation of health through the Gutenberg diet that's turning your cooperation if just two weeks before somebody else got the same idea and you go to register your corporation are the things it's already formed in somebody else's name foundation for the preservation of health Berger via the Inquirer of the Secretary of State you reserve a name in advance so you know it's good and be real careful that you don't intentionally or unintentionally infringe on the intellectual property of somebody else for example using somebody else's name in your title that may be subject to prior rights either copyright or other commercial rights I think were all aware that the Adventist church has subjected the term Seventh-day Adventist and reasonable derivatives thereof to copyright protection and to use that term may run you a foul of other issues which you would just as soon avoid so as you choose your name choose it carefully don't unintentionally step on a pre-existing proprietary name number two he got a select an agent for service of process a corporation is not a living breathing person you can't find a thing it just exists in the in the records of your states and Secretary of State so most states if not all require that when you form one you designate a living person on whom anybody who wants to sue you can serve basically summons and complaint in a lawsuit see you got to designate a person as the designated agent for service of process number three draft your articles of incorporation and let me tell you how not to do it don't decide you're going to form a charitable organization but you want to save a little money and liar and accounting fees so you save yourself wait a second dinner party several years ago form a tax-exempt entity called the foundation for the preservation of health through the Gutenberg or Diane and comes to me than he did what let's call Archie let's get a copy of his article the Bancorp duration seven copy and send them over to us and will just scratch out what doesn't apply to us and put our name in Dell do it do this thing right draft your articles have been drafted competently by somebody who knows how to do it because if you miss this off once I happen a lot of people say well I want to do something for the Lord I want to do something very special in the form a tax-exempt entity and then they do things in such a slipshod way that the unintended result of all of their efforts is to bring discredit on the work of God rather than credit if you wind up with a tangled mess that it takes several lawyers to untangle you haven't brought credit on anybody and the real risk here is your take and Eleanor 's money and you basically dissipated it in mismanagement I will get over to the rights and liabilities of that and a few minutes get this thing done right for the small amount that it cost you to get your articles drafted properly do so this is not a LegalZoom type of enterprise it needs to be looked at specifically the purposes for which are forming this corporation will be highly specific to you and your ideas of spreading of spreading the gospel the ways in which you do that the services you will be providing all of these are highly specific and will lend themselves to cookie-cutter reproduction now here's something else you need to be aware of in the old days you could get what's called an advance ruling from the IRS should send your whole pack of January apply for tax-exempt status they would issue an advance ruling which is good typically back in those days for a year okay at the end of which time you have to take further affirmative steps to be sure that the IRS still center you to be the entity that they gave you the advance ruling on I can't tell you how many times I looked in the netbooks all I found were the articles sometimes certified sometimes not even certified by the Secretary of State account the other form ten twenty three maybe if they can find it in their file lets the application by which you seek tax exemption and a copy of the initial determination letter in advance ruling from the IRS singer for the next twelve months we consider you to be tax exempt and five years of gone by there is not a single entry in there for board minutes no annual reporting no nothing it is as if people think the one thing when they got an advance ruling it was like capsules indulgence when the money dropped in the chest your soul flew free while the toughest work that way if you're going to do this do it right get yourself a checklist which were meant to be going through this morning and follow it religiously you gals in the audience wouldn't presume to put a dinner together without following the recipe carefully and getting it right and if you don't the result shows up and embarrassing reality on your dinner table you don't take that chance so you do it right we need to do the same thing under going through the process tough for them one of these tax-exempt entity self drafter articles of incorporation get competent help and then what's the next thing you do please that's no longer the case you do not get advance rulings anymore we'll talk about that in a moment of the question was previously due to get an advance ruling is that no longer the case and the IRS is promulgated a new treasury regulation which leaves more room open for a lot of concern about during that period form when you file your application for exemption to when you get some kind of ruling from the service one about the donations made to you this hiatus there is room for concern I am inclined to think of that you know the rationality will prevail and people who when all honesty and good faith to make donations to somebody who's improperly filed an application for exemption will probably have both honored on your tax return but but there's a little bit of uncertainty with respect to that okay so you made a decision you're going corporative director articles of incorporation to do that correctly there tailored for your intended purpose for the intended services you will provide what's the next thing you do find a file will send them typically beer Secretary of State in whatever jurisdiction you're located and when you file him what he was asked for eight in California they'll provide free of charge at the two certified copies you are going to send along a little extra check and say Mister or Ms. Secretary of State sent me four or five certified copy of my articles one of which is going to go where in your minute book in here minute book another one you'll probably need for your nonprofit mailing permit at okay another one you'll probably need for a local licenses or permits another one you'll probably need for a local tax exemption in California where the franchise tax Board Juergen I want to be able to prove not only to the federal government here state that your tax exempt you're going to be wanting to do what open a bank account in the bank will probably want to see certified articles so yielding several copies of that think and just do so up front you can always go back and get him later but that takes probably from two to four weeks depending on how slowly you have people work in California with the guy you know with the state officials working on IOUs for a while I got a little slow getting things particularly if as Governor Schwarzenegger has done these the people to whom you're asking for these services are furloughed from one to four days a month so doing up front send a little extra money get your extra certified copies you don't have to go back to it later and white all right you got your minute book you have your certified articles of incorporation what's the next thing you just might want what's the next document you might want for your organization a set of bylaws because those are the governing blueprint for how you're going to do business get a professional to draft and once again the same legal zone you have a specific idea that you use in the Lords work in a very specific applications of what your ear going to be using the law to accomplish get your bylaws done properly what I copy in the minute book you will want to select a tax year and a method of accounting very important no forget to do that is inevitably counting tax year were tax exempt are we sure but every year Uganda Philemon is a tax exempt organization you have got to file a return call form nine ninety that if you're lucky that if the service determines your a public charity as opposed to a private foundation will get to that in a second you wind up being a private foundation you'll have to file line nine ninety PF and if you fall into one other gopher hole and you engage in business beyond the scope of your exempt purpose and you develop unrelated business in all the data file form nine ninety T okay so you will have to determine a fiscal year they're going to have to determine an accounting method and all that is upfront all that's in the windup where in the minutes of the first meeting of your Board of Directors he will also have to secure off my employer ID number VIN you got us sure an employer ID number even if your organization is very small and for the moment you don't intend to employ anybody wanted union and EI and because that becomes a number by which the IRS recognizes your organization if you don't have a number in this in today's society you don't exist inside your name into the IRS the first thing they respond what is what is your social security number what your taxpayer identification number in the case of an entity they want an employer ID number and you apply for that on IRS form SS okay very easy to do online you can do it online you can do it over the telephone but don't neglect to do it because if you neglect to do it and then you fill out your application for tax exemption there is only one big huge hole on the first page of form ten twenty three that has to be filled in before you can file it you got a get your VIN all right what's another thing you might want to do early on once once you have formed your tax exempt entities you'll want to apply for tax exemption not only from the federal government but if you are local state has income tax might you want also to be exempt from so you want to apply first stated income tax exemption Boston states will will honor a federal determination you file with them a copy of your determination letter by the federal government other housekeeping details to do business you may want to have an office a local municipality may require you to have a local license or permit to do that file for the half and some states as in California say that you are deemed to be a public benefit corporation which is what you're hoping to be also have to file with the state attorney general so he or she is aware you're out there and standing now is an exempt tax-exempt entity in the status of kind of a trustee of funds for somebody out there in the public for whom you are the benefactor is a public benefit is what you want to try to convince the IRS you are if you fail there they will gain mature private foundation then you run afoul of a whole lot issues like a two percent annual excise tax you got a pay and a lot of returns you got a file and a lot of very very specific regulations that you otherwise wouldn't have to encounter if you are deemed to be public benefit so let's summarize up till now questions are for me to your question is basically this public benefit mean a public benefit with United is within the United States and the answer is yes you can then be of benefit to a meal populations overseas entities overseas but if you do not benefit a population within the United States and becomes irrelevant for US tax purposes some of the some public benefit corporations become conduits you know for sending funds overseas which you have to have a on-site domestic constituency okay so the point I'm making here is there just a little bit of detail here I get this very fast and very light what you have here doesn't begin to be a comprehensive checklist of all up and you have to do do you understand that this is the type of thing where you need to stop slow down and look at the checklist look at what the law and the regulations require do it right for to put it in the vernacular on this one you want to measure twice and cut once get it right the first time I can't tell you how many of charitable entities that I have represented work corners were cut where people simply more sloppy the mindset seems to be doing the work and I can't be bothered with this stuff then the problem is you can't be bothered with it but sooner or later Uncle Sam is perfectly capable of bothering you not stay ahead of the power curve angered to find life a whole lot happier whole lot simpler okay point number one do I do this if you do point number two how do you do it how do you get it started this was a very quick trip through now point number three once you have your example and of the file with the Secretary of State so you have become something of a living breathing organization out there recognized by the state we got to go through startup details what's next what would be the first thing you would want to do what you want to hold your first meeting of the Board of Directors now if the articles of incorporation don't specify the names of the directors in the incorporators will have to need to name them but you will need to need to have a board of directors who will then need to hear that you are the actions that want to get your first meeting I'm not run through this rapidly because we don't have a lot of time to dwell on it but here are are the actions that archer first meeting of the Board of Directors you want to consider number one please the question is how many members and that will vary from state to state California typically three but it'll vary from one jurisdiction to another all right number one the Board of Directors will have to determine that the Corporation is duly formed the first thing they do is that you were duly formally accept the fact the corporation exists number two they will want to record in the minutes of the Corporation that the meeting is held you will be held due to pursuant to valid notice meetings that are held without adequate notice under the articles and bylaws are in valid meetings will one certainly require that a quorum was present they will want to approve any minutes of the meeting they should direct the filings already certified by the Secretary of State to become a part of the minute book in other words the Board of Directors is now around I find all this stuff that you have done but in doing so they have now created a set of miniature first organizational minutes work any review or IRS or any critical onlooker to go back and say this was done this was done this was done on this date by these people pursuant to a meeting properly and validly called for a forum was present to you following me is this making sense all right the directors will adopt bylaws a corporate seal and they will go through a whole list of directorial resolutions number one authorizing the opening of the bank account okay pretty important if you can open a bank account if you don't need to open a bank account you didn't need to do all the stuff in the first place goes it is all about money which is the will be transferred into some viable project that will help people in and in helping people help the work of God okay so you want to open a bank account you'll want to select accountants we work really closely with the public accounting community my son is not only a tax attorney but is a CPA and I ate wheat which is worked hand in glove with the public accounting community is very important you you you you get a qualified trained professional on this thing I strongly recommend against TurboTax it didn't work for Gagner okay you probably cannot put down on the product what I'm saying and in organizing a tax-exempt entity it's more complex than may be doing your own income tax you'll want to establish an accounting year that directors should pass a resolution with respect to that they should resolve authorizing you to apply for employer ID number they should authorize your maintaining books and records they should authorize the corporations paying for it start up expenses because you will have encountered some paid professionals and until the directors authorize payment it's not proper to take money out of the corporate bank account to pay for that stuff and then you probably if you're going to have employees will want to register they should authorize your registering with your state 's employment development Department okay and you just might want to secure a nonprofit mailing permit all that stuff if it's in your minute books looks businesslike you know when the action was taken you have authority for taking the action you have avoided what you've avoided the problem later of an auditor coming in the same way you did this this and this Mister President all in all blue burger and foundation for sure for me why no way you pay your side as an independent contractor for doing the following things for the foundation where's your authority did the board vote on this today review and it were they made aware of the relationship between you and your son did they explore the possibility of getting a better deal from a nonrelated party to understand the kind of vortex you can get sucked into it you don't have record-keeping that shows you went through this thing item by item the board made intelligently informed decisions case any questions on that am I making myself reasonably clear is what worked there was navigate you through the minefield of sale stuff on one of these things okay yes there is in the out some of the things of the directors should memorialize and I recognize I'm talking fast because I'm also looking at my clock that makes me more nervous than retrying a case in court and as I'm trying the case the judge is writing down and looking up at the clock okay is I know and she knows that the case was known to have ended by a certain time and so I found kind of hurrying and in order to make the time but let's go over that real quickly year resolutions the director should adopt authorizing actually ratifying the filing of the articles with the Secretary of State Kate bylaws they should adopt those bank accounts authorize the opening of those select your paid professionals accountants and legal counsel establish an accounting year which typically probably will be a calendar year but it may be different since you or your employer ID per by the rise startup expenses you will hopefully hired some competent professional to help put this together for you he or she deserves to be paid that however should be authorized by the Board of Directors as should every other major issue to register with your state 's employment development Department CQ are a nonprofit mailing permit one other that I didn't mention earlier is determined a formal address for the principal office now all this didn't sound terminally silly if we back ten yards and recognize that awful lot it is to be happening around the kitchen table okay a lot of these foundations when they get started are very informal very small and therein lies the risk because the Board of Directors may be bad mom and junior and will get the form ten twenty three in just a few minutes when they ask you are you as your Board of Directors all related to the IRS by the way has an enforcement campaign on ongoing now because a lot of abuses have taken place in the name of tax-exempt organizations people have used tax exemption order to take private money and somehow recirculated for private benefit the service just thinks that they are looking at it with a magnifying glass that's why form ten twenty three S a lot of embarrassing questions including when you hire your top five people anybody are earning over fifty thousand dollars a year did you do a community study to determine whether salaries or even reasonable in comparison with the kind of salaries other people and light positions in the community are earning services really tightening up on using these things for what is called private in your mind that is taking tax-exempt money and somehow carefully filtering that thing back into somebody's private hands okay enough said on that for the moment Board of Directors will also let me continue in response to your question removing Fard respectively elect a chairman of the board that makes ants and the president or more both notes and/or a secretary and chief financial officer and finely they will authorize the doing of what up why for tax exempt status visually area just because your nonprofit doesn't mean you're recognizably tax-exempt in today's society a lot of for-profits are also nonprofit you following me just because you filed articles with the Secretary of State this is where nonprofit no part of the proceeds of this foundation shall be applied to private environment to go through all the boilerplate language required by 501(c)(3) in the rags and then you get nothing filed are you now exempted tax exempt know your what you have to do next please question you don't have to have three separate the president and secretary typically have to be two different people think that again I'm giving it to California law and the question was basically to have three people and one person served you know in the various capacities president CFO Secretary in California's secretary should be a separate and discrete individual okay on a very very quickly talk about the light abilities directors here's where you get hurt typically a director of a nonprofit corporation has to act in what he or she believes to be the best interests of the Corporation including reasonable inquiry that an ordinarily prudent person in a like position would use that's the nuclear option what I just said what I said is that the law has created a standard for you is the director of a nonprofit corporation a tax-exempt entity that anybody can Monday morning quarterback later that's my wife's phone and we will discuss this in further detail later in everyone should know she answered the thing in a all right the reasonable prudent person standard is nothing more than the court with the luxury of looking backward and everything you did the court can say well under those circumstances we would have done the following when under the gun you might not have met that standard there is the risk you run the reasonable prudent standard is one that you require to operate under as a as a director of a nonprofit those are fateful words because they allow an awful lot of second-guessing of what's going on there one time sat on the board of a very very large nonprofit corporation where management was stealing from I could see if I could smell you look to live the thing stank I could not get the board to take action on that thing I tried everything I could until the IRS came along and said we found out about it and your tax exemption is now at his to him I thought like a tiger to keep that Kennedy from losing its exemption the guy that was stealing what the federal prison and after that he went the state prison not you suppose under those circumstances there can be officer and director liability and that your life how we say that one but you can always save okay so you've got to be very very careful of officer and director that you act in good faith and review the things that are necessary with you and as you make your decisions as you memorialize this stuff in the minute book think to yourself if I were looking at this thing from the outside from the luxury of the future and anything goes wrong here have my actions been reasonable prudent halite reasonably inquired if I were sitting in judgment on myself as a as a separate and apart individual how would I judge my behavior okay that suggests that you just might want to have insurance so another action of the board might take with you authorized at the very least commercial general liability insurance you probably would also want to have coverages for the employees if you're going to have employees you will want to have workers comp coverage most states will require that you might seriously want to consider getting directors and officers liability coverage that would cover you for claims we just talked about in the moments preceding here and you might also want to have professional liability insurance if for example your clinic and your daughter Annie hands-on procedure you're doing besides you're doing of diabetic testing sellers a fingerprint be sure that you have licensed people doing this kind of thing and it would be very very wise for you to have shell liability insurance in case one of the individuals whom wander the corporate charters you exist to benefit doesn't later come back and say I was feeling grateful I went in there Annette Dell put her hands on me I been walking crooked ever since okay professional liability insurance a good idea for the board to adopt that be aware that there is a federal law while volunteer protection act of nineteen ninety seven you'll find and forty two US code fourteen five oh one and following where there is limited federal protection for volunteers who are providing services to a nonprofit entity and it were its current limited to the following circumstances if the volunteer was acting within the scope of his or her responsibilities very easy to later go back and see when he stepped outside the scope of your responsibilities but if you're acting within the scope of your responsibilities of volunteer protection act helps if the volunteer held in a requisite license or certification as for example phlebotomist when you're doing diabetic testing and how a licensed individual are doing those finger sticks that will help to protect you one of the volunteer protection act and ninety seven you've got to be really sure the act of the damage to the Corporation Republic did not result from willful or criminal misconduct gross negligence reckless misconduct or conscious flagrant indifference to the rights and safety of the individual involved that's what the colored sections that an appointment plaintiff 's lawyer that's the first thing I know the alleged in my lawsuit that you didn't know it's easy all you need is a couple hundred dollars for filing fee you can file a lawsuit season and one of the early allegations in the lawsuit will be on or about a certain date the plaintiff was injured by someone so Corporation and their employees who operated with willful gross negligent misconduct and a conscious flagrant the first of the rights and safety of the plaintiff here defending a lawsuit for you may need now at least fled out of the umbrella protection of the volunteer protection act of nineteen ninety seven South Holland same as they are is designed to kind of make it safer to be a volunteer but it has holes in it and it doesn't cover the operation of a motor vehicle so if you're a volunteer for tax exempt and you have a traffic accident your you're not protected from Jay let's move on very quickly looking at the time recordkeeping and reporting requirements we talked about the importance of having good records Keaton but especially keep your financial records real clear terribly important that you do that if you're ever audited figure tax exempt his father did you're not the one I have financial records that are clear that don't require all lot of embarrassing explanation yes he will restate your donations are are sometimes done by e-mail I can be printed out on the other and easily enough and the timing is is now conveniently subject to verification because of your e-mail record so yes I I see no problem in issuing receipts by e-mail were moving to that now were moving rapidly into an era in which people can effectively wind up signing documents without meaning to simply by responding to inquiry for example not a contract and you sign them to sign off on that thing and hit send and you may have been deemed to have issued electronic signature that would validate an otherwise invalid unenforceable oral contract be really careful as a whole different the arena were talking about that you are moving into an era in which you can easily make that mistake all right yes reasonable time the question is how soon you have to send a receipt after somebody yes and you would get benefits over two hundred and fifty dollars you you have to do so within a reasonable time commercially reasonable time and probably didn't have to be within two weeks I would make it more than a month and that you have some very upset and on ours if you exceed that yes all right let's talk about now applying for exemption would have to release them through this book point number four number one we made the decision whether to go or not go with the tax-exempt we decided were going will play number two we formed the think number three what we've just been talking about is your start off evolution the things you got to do now let's talk about applying for an exemption nonprofit status does not automatically mean sure and exemptions you have to affirmatively apply for it and here is how you do it there is form ten twenty three fall twenty six pages of it plus a checklist to run through a little bit of this because I want to emphasize on you how seriously the service takes this stuff and how concerned they are the tax-exempt entities might be misused for personal benefit form ten twenty three want to be done by a qualified tax professional you will have to list the primary kind of contact person officer director trustee who will be signing this thing under penalty of perjury you are making representations to the government under penalty of perjury you better get it right they are in line that's where Martha Stuart was then the mountains ensure I do not recommend everybody else do it she might not have gone the federal prison but when she tried to play acute with respect to truth or lack thereof with respect to the federal government you get into real trouble you've got a list your website they assume you will have some videos of optional requirements your e-mail address is optional your website is not you are assumed to have a website you have to listed there you have to give a narrative interactivity Jenna tell it on here is what we propose to do here is the population group we propose to benefit at the here are the people were gathering together and their expertise that can deliver the goods in a way that justifies a tax exemption then I'll even give you room to write it herein part four they just tell you what to write they are so you will attach a lengthy narrative of what it is exactly you propose to do and then part five get some really charming compensation and other financial arrangements with your officers directors trustees employees and independent contractors listen to question one A list the names titles and mailing addresses of all your officers directors and trustees for each person listed their total annual compensation once the IRS worrying about here on a diagram it for you if I can find an eraser Cialis Viagra here Isabella nor as the IRS conceives him to be okay the proverbial fatcat as I be exempt organization which is nominally designed to benefit a population group and the larger the better the service prefers to see a large population group benefited by this point they are concerned about ideas some of that money comes out to guess who this guy 's daughter who is taken on as an employee for a hundred and fifty thousand year obscure some hair okay who then hires her son for eighty thousand dollars a year who also hires her mother for a substantial sum who contracts with him who is saying just ABC a building contractor to engage in building projects for example the new office for the exempt organization this is what the services concerned about money flowing from a private party to a nominally exempt entity and then trickling back through various means either to the bill nor for two unintended improper beneficiaries now with that little drawing in mind let's go through some of the questions they got for whole pages of this stuff and form ten twenty three first one is listing the names of the officers directors and trustees I be part five list the names titles and mailing addresses of each of your five highest compensated employees receiving more than fifty thousand dollars per year and fifty Valley debt much anymore item C list the names business and mailing addresses of your five highest compensated independent contractors who will receive more than fifty thousand a year now listen to the follow-up questions are any of your officers directors or trustees related to the age of her through family or business relationships that's what were drawn here in the STS identify the individuals on the relationships questioned me you have a business relationship with any pure officers directors or trustees other than through their position as an officer director trustee in other words does this guy have a partner from the drive for you I will do it in another color here this guy 's got a partner also conceived of by the IRS is being a fat cat okay who is in some way going to benefit from the exempt entity see this is a and B partnership and the partner here now benefits is not a family member so he doesn't have to be disclosed as a relative but the questions entitled to poke into the area of potential abuse is not a business relationship with any of these people are in a your officers directors or trustees related to your highest compensated employees you see one by one door slamming shut here through which we could play little games and used to play games with the IRS and this thing is the subject of a national enforcement campaign they are looking for this kind of thing yes sir under what circumstances do what you typically thought out once unless you change the purpose for your organization or the way you operate it if you if you wait if you fill this thing out into the Iressa profile and you say this is who we are this is what worked on the new war in the business of providing massage services for people suffering from fibromyalgia and it's free you later decide you know there a lot of kids in the inner city you need laptops and so you expand now from giving massage services for fibromyalgia victims to providing laptops for inner-city kids you change the purposes the IRS will save you need to submit a new ten twenty three without a rule on it change your purposes change your mode of cooperation and the IRS can on their own motion revoke your tax exempt status not the what you're doing guy and in the new activity is bad just different and they don't like to be surprised the IRS is very surprised adverse yes sir well he has suggested that the way to get around this is basically rephrase my old college history professors typical exam question please explain the causes of events and results of the universe and I sounds real good until you get down to your narrative in which you're going to say how you do each of the you say the reviewer the review is this thing that IRS Covington Kentucky Tennessee okay that is either a protester or is playing games with us and back it comes to that's the likely result of that I don't mean to dwell on this extensively but I just wanted to get a feel for how Snoopy you know Uncle Sam is getting with respect to this type of thing and the possible abuses that can occur and perhaps an upset on map on page eleven I'm sorry page twelve is where you sign this thing let's assume near the Incorporated assume you're the one applying just above your signature line is as I declare under penalties of perjury I am authorized to sign this application I have examined that Angela best of my knowledge it is true correct and complete in the next thing that appears there is your signature and the date be careful is what you're signing is the penalty of perjury they will hold you to fill out the forms one ten twenty three and you're curious about how complex this is there the instructions for the form another thirty eight pages together with I think it's not like twelve pages while they suggested conflict of interest policy which you should adopt in which your Board of Directors is one of the initial meeting actions your board should take they should adopt a conflict of interest policy designed to make this kind of thing impossible to move on very quickly his time is short we've talked about getting the exemption one thing you hope to do is to describe a a scope of activities him as enough people at the IRS will see you as a public charity public benefit corporation as opposed to a private foundation one question please the question basically is can you delegate Fallot of board discretion to an executive committee and the answer is of course you can very proper that you do that but when the executive committee has made major decisions I strongly urge at the very next board meeting Google back review completely describe them and ratify him that way nobody's necklace hanging out it's far better to ratify you can do this in retrospect let me add one other thing with respect to this if you get behind and it's easy to do we get busy abuse understaffed and you get behind on your board meetings in your board minutes please please don't go back and create them as if they had been made back then you know the easiest mistake to make there were be to do it on your computer save it all is to do is capture your hard drive and say wait a second the date stamp on this thing is March two thousand nine and you're reporting this to be board actions as a video September two thousand six know you're involved in creating fraudulent minutes what you want to do is instead ratify see the following actions were taken and September of two thousand six the board ratifies these as of two thousand nine there are right ways and wrong ways to do things please note this ought to be self evident what is the what is the good book talk about in the ten Commandments about the idea of being honest and everything we do as was the case with Daniel should be transparent as sunlight he wrote the top of two world empires antagonistic empires he rose to the top of both partly because he was transparently honest if he had to face death he would gladly do it but he one given up his principles and in doing the Lords work we ought to do it in the same way some of these IRS regulations are onerous there are other time-consuming but the AMT and he is to avoid misuse of the system and I think we can all respect that even though sometimes we find a little bit of a heavy guilt of their high respect I'm adverse to my counterparts in government legal hammer and tongs in federal court but I respect them I know the job they have to do I treat them with respect and once word not in our adverse to each other on on a federal tax case were friends and as you believe me you get a lot further doing that when you call the IRS up and and the word gets out in the service center your talk in the walking talking you know whatever whatever he says you can take it to the bank it's true is not to play games with his extremely important to have that relationship you get a whole lot more for your client when you do that and if you come across basically being dishonest so I just basic honesty is all I heard you okay let's move on to one more area here as time is about to expire on us and that is the concept of unrelated business income is very easy if you're engaging any sort of commercial activity to maybe step outside the bounds of what the IRS says is really related to your exempt purpose for limited however simple example let's assume your music and your Museum of Native American culture and art it is perfectly proper for you to sell from your museum store items of Native American manufacturer of culture art and so forth entirely really is your purpose but if summer what you selling your museum store are trinkets made in the People's Republic of China they will know they may have the word and not already across at some point when you're merely selling souvenirs the irises and as a way to second give us a break that he is unrelated to your exempt purpose that is unrelated business income case let's talk a little bit about that because if you engage in any commerce at all it's very easy to fall into that trap that's another trap in the minefield there are three criteria under which your tax exempt entity can be taxed can be subject to income tax number one you're engaging in something that's a trade or business for example a hospital 's pharmacy dispenses drugs that's a trade or business but is it unrelated business income of the longest step number two the activity has to be regularly carried on okay and number three has to be not substantially related to your exempt function of the charitable functions that that she started out to do all right now let's put some flesh on that skeleton we created a skeleton here let's put some flesh on one of the strongest evidences of unrelated business income is a profit motive for selling for example of trinkets nominally in the name of Native Americans but having nothing to do with legitimate native culture that's clearly a profit motive selling souvenirs as a profit motive selling Native American genuine artifacts is obviously a legitimate extension of the culture you're seeking to make people aware of when you solicit a sum but he somehow he will be used to do this all at times sometimes I think some of our entities to sue Bill send out a little item I basically request a young adult nation the value of the item that was given to the dull nor should be subtracted from the tax-deductible balance if the item that you send out is worth the buck and you're asking for five hundred donation really amounts to four dollars I gets reasonably clear all right regularly carried on the second item here as to whether your business is regularly carried on is simply the frequency and continuity with diverse with respect to which it's done and there is an examples here that are quite interesting there was a Symphony Orchestra that was tax-exempt and every year than have a benefit concert be with you just a moment and they would have a concert book so they would sell advertising in that but their efforts to sell this advertising went on all year long even though the concert only happen once a year and the IRS and

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