Formation and Tax-Exempt Status

Fleming Petenko can assist you with forming a new nonprofit organization and applying for federal tax-exempt status.  As part of this process our lawyers will:

• Guide you through each step of the formation process and the IRS approval process to obtain tax-exempt status
• Engage in a strategic discussion to determine the best entity type and structure for your new organization
• Prepare initial organizational documents, which may include formation documents, bylaws, policies, and other important governance documents
• Discuss the various types of tax-exempt entities to determine the type that best fits your organization’s mission, activities, and goals
• Complete and file an application for tax-exempt status with the IRS (Form 1023, 1023-EZ, or 1024, as appropriate)
• Provide you with information regarding ongoing state and federal compliance requirements

Board Governance and Training

As the governing body tasked with overseeing and advancing a nonprofit organization’s mission, the Board of Directors (or Trustees) must establish and follow good corporate governance practices.   The Board, as a unit, must carefully make decisions that are in the best interests of the organization while individual Board members must act in a manner designed to satisfy various fiduciary duties.

Fleming Petenko’s lawyers routinely counsel Boards of Directors and individual Board members on good governance practices and procedures and often provide training on matters such as:

• Establishing good governance policies
• Conducting board meetings
• Adopting best practices
• Reviewing and updating Bylaws
• Satisfying fiduciary duty obligations
• Drafting resolutions and other necessary documents
• Assessing Board operations
• Analyzing risk management practices
• Addressing Board diversity issues
• Implementing conflict of interest procedures

Compliance and Best Practices

Nonprofit and tax-exempt organizations must comply with a myriad of federal, state, and local laws to ensure that they operate in an appropriate manner and do not jeopardize their tax-exempt status.  Boards of Directors are also required to meet minimum fiduciary requirements under state law that help protect individuals from personal liability and prevent claims that seek to pierce the corporate veil of limited liability.

Fleming Petenko regularly advises nonprofit, tax-exempt organizations on all aspects of federal and state regulatory compliance.  We create sophisticated strategies to safeguard our clients’ assets and reputations and help them to focus on pursuing their tax-exempt objectives with confidence.

As an integral part of our compliance practice, we often perform a “best practices” compliance review that focuses on strengthening and/or adopting corporate governance practices, procedures, or policies that may be necessary or appropriate to help clients meet basic compliance standards.  Such an evaluation may involve reviewing, amending, or adopting the following documents, practices, policies, or procedures:

• Bylaws
• Conflict of Interest Policy
• Whistleblower Policy
• Document Retention and Destruction Policy
• Executive Compensation Policy
• Privacy Policy
• Form 990 Review Procedure
• Charitable Solicitation Registration
• Charitable Contribution and Substantiation Disclosure
• Excess Benefit Transactions Review
• Rebuttable Presumption of Reasonableness Procedure

Business Operations, Transactions, and Contracts

Although nonprofit organizations differ from their for-profit counterparts in numerous ways, they often face many of the same issues in their day-to-day operations.  Fleming Petenko’s lawyers are well-versed in handling all manner of business transactions and developing creative solutions to address unique challenges.  We provide practical advice on legal issues related to an organization’s operations, regulatory compliance, and tax matters.  Some of the services we provide include:

• Entity formation, including the formation and operation of corporate subsidiaries
• Contract review, negotiation, and drafting
• Planning and implementing mergers, affiliations, and other restructurings
• Tax planning, including ongoing compliance with tax and charitable organization laws

Fundraising and Charitable Solicitation Registration

Fundraising is the life blood of a tax-exempt organization and can be essential in keeping the organization afloat so that it can pursue its mission.  However, there are many state-specific rules that regulate how organizations may fundraise and that dictate when they must register with each state.

Fleming Petenko’s lawyers can help your organization navigate the many various requirements of charitable solicitation registration.  Our lawyers can also help organizations interested in exploring unique types of fundraising such as:

• Sponsorships
• Planned giving
• Commercial co-ventures
• Matching gift programs
• Restricted gifts
• Crowdfunding
• Gambling (Bingo, raffles, etc.)

Grantmaking

Whether your organization is a public charity or a private foundation, if it makes grants to other organizations, whether they are nonprofit or for-profit, or to individuals, it should adopt robust grantmaking policies and procedures to better ensure it complies with applicable law. Fleming Petenko’s lawyers routinely help organizations develop the policies and procedures they need for their grantmaking activities both within the US and internationally.

Fleming Petenko’s lawyers can assist organizations with their grantmaking including:

• Creating scholarship programs
• Drafting grant applications and grant agreements
• Navigating the private benefit rules
• Addressing expenditure responsibility
• Evaluating grants to foreign organizations, including preparing equivalency determinations
• Creating impact investing strategies (PRIs, MRIs, etc.)
• Implementing fiscal sponsorship arrangements

Joint Ventures, Co-ventures, and Other Commercial Relationships

Joint ventures, co-ventures, and other commercial relationships offer nonprofits a valuable way to expand their reach and scope and to generate additional revenue.  Such arrangements can involve the formation of a separate legal entity or can be achieved through contractual mechanisms that allow nonprofits to collaborate with other nonprofit organizations or for-profit entities.  While these relationships can be very beneficial to tax-exempt organizations, they often raise unique and interesting challenges that require careful planning and implementation to protect the nonprofit’s tax-exempt status and important assets.

Fleming Petenko’s lawyers routinely work with nonprofit organizations to appropriately structure joint ventures, co-ventures, and other commercial relationships.

Unrelated Business Income Tax

In general, revenue received by a tax-exempt organization from conducting its day-to-day activities is excluded from federal and state income tax.  However, if an organization receives income from operating an unrelated business (typically income from activities not related to its core exempt purpose), that income may be subject to so-called unrelated business income tax (“UBIT”).

An unrelated activity for this purpose is a trade or business that is regularly carried on and that is not substantially related to furthering the organization’s exempt purpose. The term “trade or business” includes any activity which is carried on with a profit motive even if it does not result in profit.  Whether an activity is regularly carried on will be determined based on a comparison to the frequency in which the activity is carried on by taxable organizations.  The need for income is not enough to cause an activity to rise to the level of being substantially related to the organization’s exempt purpose.

The rules relating to the taxation of otherwise tax-exempt organizations are confusing, complex, and everchanging.  There are also many exclusions and exceptions that are not intuitive, but that can be beneficial when utilized appropriately.

Fleming Petenko’s lawyers are well-versed and experienced in these UBIT rules.  We often advise clients on the best way to structure transactions to efficiently navigate the rules to achieve the optimal tax benefits.

Mergers, Affiliations, Dissolutions, and Other Restructures

There are many reasons why nonprofit organizations may wish to pursue mergers, acquisitions, or other corporate restructurings.  Some nonprofit organizations do so to strengthen their existing programs or add new ones, to reduce the cost of back office functions, or to develop a road map for future succession planning.  Other organizations undertake them as a way to avoid financial collapse, gain access to another organization’s endowment, or other investments, obtain access to a specialized group of employees, prepare for future legislative changes, or to reduce service confusion in the marketplace by creating a single entity.

Whatever the reason, all such corporate reorganizations implicate various aspects of both state and federal laws and raise many different strategic and operational issues.  As such, they must be carefully planned and structured to ensure that the desired benefits can be achieved in a manner that does not cause other legal or operational issues.

Fleming Petenko’s lawyers have extensive experience helping nonprofit organizations appropriately plan, evaluate, and implement mergers, acquisitions, and other corporate restructurings.  We identify, evaluate, and weigh the strategic reasons and objectives for undertaking a corporate restructuring and coordinate and communicate with the organization’s Board of Directors and selected executive personnel to frame the issues and discuss the potential strategic advantages and disadvantages of the transaction.

Lobbying and Political Activities

Tax-exempt charitable organizations are subject to very restrictive limitations on the amount of lobbying and political campaign activity they may conduct.  In general, a tax-exempt charity may not conduct more than an “insubstantial” amount of lobbying and may not engage in any political campaign activity whatsoever.

Fleming Petenko’s lawyers help organizations understand these lobbying restrictions and political campaign limitations and advise how to safely achieve their goals without risking their tax-exempt status.  Our lawyers frequently advise clients concerning:

• Political activity
• Grass roots versus direct lobbying
• Substantial part test
• Section 501(h) elections
• Acceptable forms of advocacy
• Primary purpose test for 501(c)(4), (c)(5), and (c)(6) organizations
• Tax issues for Section 527 organizations

IRS Audits and Controversies

The prospect of an IRS audit is daunting under any circumstances.  But, when that audit involves a nonprofit, tax-exempt organization, it presents unique challenges and concerns.  That’s why it is imperative to have an experienced and talented lawyer advocate on your behalf to guide you through the process and help ease the pain on the road to a satisfactory resolution.  Each of Fleming Petenko’s lawyers has experience practicing before the IRS and representing clients in IRS audits, examinations, and other controversies.

Impact Investing

In today’s socially-conscious world, nonprofit organizations are rightfully concerned about the types of investments they make.  Impact investing is a term used to describe a series of investing techniques that seek to direct capital to enterprises and activities that promote measurable social benefits while simultaneously generating the requisite financial return.  Nonprofit organizations may adopt an impact investing strategy that focuses on: (i) program-related investments (“PRIs”); (ii) mission-related investments (“MRIs”); (iii) socially responsible investing; or (iv) some combination of the above.

A PRI is an investment that is made to accomplish the investor’s charitable purposes, rather than being significantly motivated by the prospect of financial gain, while still seeking to generate at least a moderate rate of return.

An MRI is an investment that is expected to generate a rate of return slightly lower than the highest rate possible in the marketplace while also furthering the investor’s charitable purposes. Such an investment often focuses on promoting certain environmental, social, or governance factors.

Socially responsible investing is one of the terms often used to describe a method of investing that uses “negative screening” filters to exclude undesirable investments in companies that, for example, manufacture or use products such as oil, weapons, or tobacco.

While impact investing is growing in popularity, certain nonprofit organizations (most especially private foundations) are subject to various rules about how their assets may be prudently invested.  Fleming Petenko’s lawyers can help you navigate these rules so that you can implement an investment strategy that meets your charitable goals while complying with applicable laws.

International Charitable Operations and Transactions

In today’s global economy, nonprofit, tax-exempt organizations regularly engage in cross-border transactions. Without careful planning and consideration, however, they may run into trouble and inadvertently violate US regulations when operating or fundraising internationally. Fleming Petenko’s lawyers help both US organizations doing work abroad and foreign organizations seeking to enter and operate within the US to navigate and comply with applicable legal requirements.

Our lawyers can assist clients with:

• Forming and operating “friends of” organizations
• Engaging foreign donors taking into account solicitation and privacy laws
• Conducting international grantmaking while considering:
• Equivalency determinations
• Expenditure responsibility
• Anti-terrorist laws
• US tax issues