Over the past few years an increasing number of nonprofit organizations have considered the possibility of merging with another nonprofit organization. This is due both to the impact of the economic crisis on nonprofit organizations, which has greatly reduced public support and other revenues, and a growing trend toward consolidation of services.
So what does a "merger" mean, and how do you go about considering the possibility of a merger?
Here is a starting point:
The Internal Revenue Service (IRS) recently released a report (Report) summarizing its findings after a multiyear compliance examination of tax-exempt colleges and universities following the distribution of detailed questionnaires to 400 randomly selected entities. As the Report outlines, the IRS chose 34 of the 400 for examination because of their responses and reporting on their Forms 990-T, which indicated potential noncompliance in the areas of unrelated business income and executive compensation.
The Report provides that the examinations uncovered substantial underreporting of unrelated business taxable income (UBTI). By way of background, unrelated business income (UBI) is income derived from a trade or business regularly conducted by an exempt organization that is not substantially related to its exempt purpose. UBTI is the UBI that is taxable after deducting expenses directly connected to the trade or business. Because UBTI is calculated by totaling the UBI from all activities and subtracting the total allowable deductions, losses from one activity can offset profits from another.
The Report outlines that the 34 examinations resulted in the following:
Unlike Section 501(c)(3) organizations, which must apply to the IRS for recognition of tax-exempt status, Section 501(c)(4) social welfare organizations, Section 501(c)(6) business leagues and others are able either to apply to the IRS for a determination letter recognizing tax-exempt status or to "self-declare" tax-exempt status by conducting operations in a manner consistent with tax-exempt status.
Until recently, if a self-declared organization later applied for a determination letter from the IRS, it would usually receive a letter recognizing its tax-exempt status retroactively to the date of that organization's formation, regardless of the length of time between the date of its formation and the date of its application to the IRS.
However, on January 7, the IRS issued Revenue Procedure 2013-9, which provides, among other things, that a self-declared organization that applies for a formal determination letter more than 27 months after its formation will now normally receive a letter recognizing its tax-exempt status from the date of its application rather than from the date of its formation. This is similar to the rules that always applied to Section 501(c)(3) organizations, which allow for retroactive recognition of determination only if the organization applies within 27 months of its formation.
In addition, the IRS recently announced it is undertaking a voluntary compliance check of more than 1,300 self-declared organizations. Selected organizations will be asked to complete a questionnaire (Form 14449) designed to provide extensive information to the IRS as to the organization's operations. Completion of the questionnaire is voluntary, but the IRS may choose to open a formal audit investigation into any organization that refuses to participate. Of course, the IRS may open a formal audit investigation in any event, based on the information disclosed by an organization that voluntarily completes the questionnaire.
The questionnaire requests information regarding revenues, expenses, activities (including political campaign activities), executive compensation and benefits. Perhaps most important, question 6 in Part I asks the organization to describe the reasons why it did not apply to the IRS for recognition of its tax exemption. The questionnaire can be found at http://www.irs.gov/pub/irs-tege/Form14449.pdf.
Of course, at this time there are ongoing congressional hearings to investigate the IRS' use of inappropriate criteria to delay the exemption applications of certain social welfare conservative groups (based on names such as "Tea Party" and "Patriot"), and it is unclear what impact this may have on the IRS' planned voluntary compliance check of self-declared organizations. As a result of this scandal, new leadership is in place at the IRS; acting IRS Commissioner Steven Miller has resigned and Lois Lerner (director of exempt organizations at the Internal Revenue Service) has been placed on administrative leave.
In addition, new regulations adopted on June 5 by New York State Attorney General Eric T. Schneiderman (which are effective immediately) now require certain disclosures by Section 501(c)(4) organizations and other nonprofits that are registered with the New York Attorney General under Article 7-A of the New York Executive Law and/or Article 8 of the New York Estates, Powers and Trusts Law.
These organizations (other than Section 501(c)(3) organizations) must now submit itemized schedules with their annual financial reports, disclosing the amount and the percentage of the organization's total expenses during the reporting period that are "election related expenditures" (those made for express election advocacy or election targeted issue advocacy, as defined in the regulations).
In addition, organizations that spend more than $10,000 per year on New York state and local elections must also disclose:
Effective December 28, 2012, the Internal Revenue Service (IRS) issued final and temporary regulations regarding "Type III supporting organizations" under Internal Revenue Code §509(a)(3)(B)(iii). "Supporting organizations" are entities that are not themselves publicly supported but rather have public charity status by virtue of supporting a public charity. Supporting organizations are further classified into "Types" (I, II or III) depending on the relationship between the supporting organization and its supported public charity. The Pension Protection Act of 2006 added provisions to the Internal Revenue Code intended to more tightly regulate supporting organizations because of actual and perceived abuses in the operation of Type III supporting organizations, those that have the loosest connection with their publicly supported charities (are operated "in connection with" a supported public charity).
In order to qualify as a supporting organization, an entity must meet an organizational test, an operational test, a disqualified person control test and a relationship test. The newly issued regulations focus mainly on the relationship test and clarify that Type III supporting organizations must meet (i) a notification requirement -- requiring it to annually provide particular documents to its supported public charity; and (ii) a responsiveness test -- requiring the supported public charity to have a significant voice in its operations. Type III supporting organizations are further classified into those that are functionally integrated (FI) and those that are non-functionally integrated (NFI) with their supported public charity.
To further determine whether a Type III supporting organization is FI or NFI, the entity must meet an integral part test, which is satisfied if substantially all of the entity's activities are "direct furtherance activities" (i.e., those that directly further the exempt purposes of the supported public charity and would be undertaken by it if not for the entity). Merely controlling the assets of a supported public charity, such as managing its endowment fund or fundraising, is not a direct furtherance activity (unless the entity is the parent of its supported public charity). Rather, running specific charitable programs on behalf of the supported public charity is a direct furtherance activity.
A Type III supporting organization that does not meet the integral part test is classified as NFI. NFI Type III supporting organizations are subject to a mandatory payout requirement (not unlike that required for private foundations), and they must annually distribute the greater of 85 percent of adjusted net income from the prior tax year or 3.5 percent of the fair market value of nonexempt-use assets. At least one-third of this distribution must be to one or more supported public charities that are "attentive" to the supporting organization, defined with respect to the amount of support received by them from the supporting organization.
The new regulations are complex, and the above is only a broad overview of some of the changes imposed. If you have any questions about how these regulations affect your organization, you should contact your tax advisor.
All employers, including nonprofit organizations, are required to verify the identity and employment authorization of individuals hired to work in the United States, citizens and noncitizens alike, within three business days of the first date of active employment. An employer satisfies this requirement by completing Employment Eligibility Verification Form I-9 (Form I-9), as provided by the Department of Homeland Security's U.S. Citizenship and Immigration Services (USCIS). Earlier this year, USCIS published an updated Form I-9 that employers were required to use commencing on May 7, 2013. Prior versions of Form I-9 no longer can be used for new hires or necessary re-verifications, and failure to use the updated Form I-9 could subject an employer to monetary penalties. The new Form I-9 is available for free download here.
In general, the updated Form I-9 contains several revisions that USCIS states are "designed to minimize errors in form completion." Such revisions include a) adding data fields; b) improving the form's instructions; and c) revising the layout of the form and expanding the core form from one to two pages.
The most common question we anticipate from the new Form I-9 is, "For whom do I need to complete this updated Form I-9?" As stated above, all employers must use the updated Form I-9 going forward for all new hires and re-verifications. Although the term "new hires" is self-explanatory, there may be some confusion regarding re-verifications. As a threshold matter, employees who are U.S. citizens never need re-verification. For all other employees, the employment authorization must be re-verified upon the expiration of their employment authorization and/or immigration status. Thus, while employers must remain cognizant of the expiration dates of these documents, they also should be careful not to seek or require unnecessary re-verifications, because such action could lead to claims of race or national origin discrimination.
For further information, you may want to review the Notice from the Federal Register regarding the updated Form I-9 and USCIS' Guidance for Completing Form I-9.
On February 24, Partner Carl A. Merino spoke on "Reporting by U.S. Person of Foreign Income, Assets and Transactions" at a webinar hosted by STEP Colorado Formation and STEP Chicago.
Liza Hecht authored a chapter for the eleventh edition of Wolters Kluwer's 403(b) Answer Book.
Barbara Freedman Wand spoke at a program, "The Philanthropy Talk: How Do I Do It...and Why Do I Have To?," presented by The Boston Foundation in partnership with The Philanthropic Initiative, Massachusetts Society of CPAs, and the Boston Estate Planning Council.
Day Pitney LLP, along with Caritas Partners (the Philanthropic Trading Division of Celadon Financial Group, LLC), Essential Fund Services International, LLC (ESFI) and WithumSmith+Brown, recently co-hosted "An Evening of Hope: Maximizing Philanthropic Outreach," an invitation-only event at the American Cancer Society's Hope Lodge Jerome L. Greene Family Center in New York City.
On October 17, Day Pitney LLP's Individual Clients Department and Family Office Practice hosted "Investing in Art," a private, invitation-only program in the firm's ongoing Family Office Investing Series, held at the Downtown Harvard Club of Boston.
Day Pitney has pledged $5,000 to the University of Miami School of Law's Ray H. Pearson Memorial Scholarship Fund.
Day Pitney Press Release
On March 11, Day Pitney Counsel Jordana G. Schreiber spoke on the "Basics of Estate Planning" for physicians at Massachusetts General Hospital.
Day Pitney Press Release
Day Pitney Press Release