©2008 Rothgerber Johnson & Lyons LLP Rothgerber Johnson & Lyons LLP THE COLORADO CHARITABLE ENTITY: Where Have We Been? Where Are We Going? Presenter –

©2008 Rothgerber Johnson & Lyons LLP

Rothgerber Johnson & Lyons LLP

THE COLORADO CHARITABLE ENTITY:

Where Have We Been?Where Are We Going?

Presenter – James R. Walker, Esq.

Rothgerber Johnson & Lyons LLP1200 Seventeenth Street, Suite 3000Denver, CO 80202303-623-9000


TAX-EXEMPT ORGANIZATIONS

Hostile Regulatory Environment

IRS Compliance Checks

MediaAttention

Pension Protection Act

New Form 990

Tax Shelter Regulations

Tax-Exempt Organizations

Congressional Inquiries

Doubling of ExcisePenalty Taxes

Intermediate Sanctions



Nonprofit ≠

Tax-Exempt



• Function of state law

• No distribution of income

• Not necessarily “tax-exempt”

Nonprofit



• Primarily a function of federal tax law

• With few exceptions, must apply to IRS to be “tax-exempt”

Tax-Exempt



• Nonprofit Corporation

• Charitable Trust

• Unincorporated Association

• Limited Liability Company (“LC3 – Vermont”)

Nonprofit Organizational Forms



• 501(c)(3) - Religious, educational, charitable, etc.

• 501(c)(4) - Social welfare organizations

• 501(c)(6) - Business leagues

• 501(c)(7) - Social clubs

Code Section 501(c)



• Deductible Contributions

• Exempt Income

• Eligible for Grants

• Reduced Postal Rates

• Employment Benefits

Benefits of 501(c)(3) Status



Public CharitiesPrivate

Foundations

501(c)(3)



Publicly Supported Charities

Limited Control

Absolute ControlPrivate Foundation



Private Foundations

Traditional

Conduit

Operating

Exempt Operating



Primarily engage in passive grant-making

Traditional Private Foundations



• Excise Penalty Taxes for:• Self-Dealing• Failure to Distribute 5% of Investment

Assets• Excess Business Holdings• Jeopardizing Investments• Taxable Expenditures

• 1% - 2% Tax on Investment Income• Lower Deductibility Thresholds

Traditional Private Foundations



Distributes 100% of the contributions it receives

in a particular year

Conduit Foundations



Treated like traditional foundations, except

donations may qualify for maximum deduction

Conduit Foundations



Conduct direct, active charitable activities rather

than simply making grants to other charities

Operating Foundations



Treated like traditional foundations, except:• Exempt from the minimum

distribution requirement• Donations qualify for maximum

deduction

Operating Foundations



Foundations meeting the public support test for at least 10 years are not subject to the 2% / 1% excise tax on net

investment income

Exempt Operating Foundation



Include -

• Educational Institutions

• Hospitals/Healthcare Institutions Operating for “Community Benefit”

• Religious Organizations

Automatic Publicly Supported Charities



All others must meet one of two mathematical public support tests

• Donative Test – 509(a)(1)

• Service Provider Test – 509(a)(2)

Public Support Tests



One-third of its total income from

• government grants,

• grants from private foundations or other public charities, or

• from members of the public.

Donative Test – 509(a)(1)



Donative charities are typically organizations that receive little or no remuneration in

connection with their charitable programs

Donative Test – 509(a)(1)



One-third of total income from

• Government grants

• Grants from other public charities

• Members of the public

• Revenues generated by activities within organization’s exempt purpose

Service Provider Test – 509(a)(2)



Not more than one-third of total income from

investments




Service provider charities typically operate primarily

from revenues generated by activities that are related to

their exempt purposes




Supporting Organizations

Donor Advised Funds

Hybrids



Enjoys public charity tax status due to its close

affiliation with one or more publicly supported

organizations

Supporting Organization



• Disqualified Persons Cannot Control

• No Public Support Tests

• Maximum Charitable Deduction

• Can Operate Active Programs and Make Grants

• High IRS Suspicion




Three Types -

• Type I — “Operated, Supervised, or Controlled By”

• Type II — “Operated, Supervised, or Controlled With”

• Type III —“Operated In Connection With”




• Low autonomy

• Supported organization appoints a majority of supporting organization’s board

• Publicly supported charity retains legal control

Type I — Supporting Organization“Operated, Supervised, or

Controlled By”



• Generally least autonomy

• Publicly supported charity and supporting organization have identical boards

• Greatest operational flexibility

Type II — Supporting Organization“Operated, Supervised, or

Controlled With”



• Potentially greatest autonomy

• Must satisfy both the “Responsiveness” test AND the “Integral Part” tests

• Founding family cannot control

• Type III not eligible for foundation grants unless “functionally integrated”

Type III — Supporting Organization“Operated, Supervised, or

Controlled With”



• Component fund of public charity

• Donor Retains right to advise

• Charity retains ultimate control

• Subject to excess business holdings, minimum distribution, and excess benefit and special automatic excess benefit rules

Donor Advised Funds



• Administering Charity offers expertise and handles compliance

• Simplified creation via Fund Agreement

• Donations treated as gifts to public charity

• Low cost

Donor Advised Funds



Donor Advised Fund Within Public

CharitySupporting

Organization of Public Charity

Private Foundation

Least Control

Most Control

Public Charity




Thank you!

James Walker – [email protected]

For more information, please contact:


Tax Law Group at Rothgerber Johnson & Lyons LLP

Our attorneys at Rothgerber Johnson & Lyons advise clients on a broad range of tax issues, from complicated cross-border transactions to tax exempt status qualification and operation of local nonprofit organizations. We offer a thorough knowledge of new business structures, such as limited liability companies, limited liability partnerships and other unincorporated entities.

• Land Banking • Estate Planning • Audit Representation Non-

Qualified Deferred Compensation Plans

• Defined Benefit Plans • Defined Contribution Plans • Business Distributions and

Redemptions • Entity Formation and

Reorganizations • ESOPs & ISOPs • Like-Kind Exchanges • Entity Liquidation or Sales

• Entity Liquidation or Sales• Low-Income Housing Projects • Mergers and Acquisitions • Mineral Taxation • Partnership Planning and Taxation • Business Recapitalizations • Trust and Fiduciary Income

Taxation • Non-Profit Taxation & Tax Exempt

Status • S Corp Qualifications & Taxation • Industry Taxation (banking,

ranching, intellectual property, aeronautics, etc.)


Nonprofit Organizations Group atRothgerber Johnson & Lyons LLP

Rothgerber Johnson & Lyons LLP represents numerous local, national Rothgerber Johnson & Lyons LLP represents numerous local, national and international nonprofit organizations in the Rocky Mountain and international nonprofit organizations in the Rocky Mountain Region. These nonprofits provide services in the charitable, Region. These nonprofits provide services in the charitable, educational, health care, social services, housing, public lands, and educational, health care, social services, housing, public lands, and religious sectors. We not only provide representation in the formation religious sectors. We not only provide representation in the formation and organization of tax-exempt organizations, but also regularly and organization of tax-exempt organizations, but also regularly provide counsel on evolving governance standards and day-to-day provide counsel on evolving governance standards and day-to-day operational issues. Our goal is to assist our nonprofit clients with all operational issues. Our goal is to assist our nonprofit clients with all their legal issues so that they can focus on doing their good works here their legal issues so that they can focus on doing their good works here and around the globe.and around the globe.

Our tax lawyers provide advice on the tax issues directly affecting Our tax lawyers provide advice on the tax issues directly affecting nonprofit organizations, including unrelated business taxable income, nonprofit organizations, including unrelated business taxable income, intermediate sanctions, excess private benefit, use in tax-exempt intermediate sanctions, excess private benefit, use in tax-exempt financing and private foundation rules. financing and private foundation rules.

We also assist our nonprofit clients with legal risk management to help We also assist our nonprofit clients with legal risk management to help protect them from liability and unanticipated loss of revenues. Our protect them from liability and unanticipated loss of revenues. Our attorneys conduct reviews of insurance coverage, including directors attorneys conduct reviews of insurance coverage, including directors and officers, errors and omissions, general liability, premises liability, and officers, errors and omissions, general liability, premises liability, and automobile coverage.and automobile coverage.


For more information, visit www.rothgerber.com

This presentation has been prepared by Rothgerber Johnson & Lyons LLP This presentation has been prepared by Rothgerber Johnson & Lyons LLP ("RJ&L") for general informational purposes only. These materials do not, ("RJ&L") for general informational purposes only. These materials do not, and are not intended to, constitute legal advice. The information provided and are not intended to, constitute legal advice. The information provided in this presentation is not privileged and does not create an attorney-client in this presentation is not privileged and does not create an attorney-client relationship with RJ&L or any of the firm's lawyers. This presentation is not relationship with RJ&L or any of the firm's lawyers. This presentation is not an offer to represent you. You should not act, or refrain from acting, based an offer to represent you. You should not act, or refrain from acting, based upon any information in this presentation. The hiring of a lawyer is an upon any information in this presentation. The hiring of a lawyer is an important decision that should not be based solely on written information important decision that should not be based solely on written information about qualifications or experiences. about qualifications or experiences.

Documents

©2008 Rothgerber Johnson & Lyons LLP Rothgerber Johnson & Lyons LLP THE COLORADO CHARITABLE ENTITY: Where Have We Been? Where Are We Going? Presenter –