Issue Spotting for Tax Exempt Organizations

Attorneys are often called upon to serve on boards of charities and other tax exempt organizations, and to provide them with pro bono legal services.  When working with charities, it is important to have some familiarity with the rules governing tax exempt organizations.  Failure to comply with the tax rules can, in some circumstances, result in a loss of an organization’s tax exempt status.  As proof, you need only see that recently the IRS revoked the tax-exempt status of over 17,000 charities, just in Florida, for failure to file a tax return for three consecutive years.  Undoubtedly, many of these charities were no longer in operation, but certainly some of them remain a going concern.  These charities will have to reapply for tax exempt status, a time consuming and costly project.
Below is a summary of several common issues that attorneys should be aware of when working with non-profits.
Florida Application to Solicit Contributions
In Florida, many charities are required to register with the Florida Department of Agriculture and Consumer Services (“DACS”) prior to engaging in fundraising activities.  This registration must be renewed annually, and the fee ranges between $10 and $400, depending on the contributions received by the organization in the preceding fiscal year.  Late renewals are subject to a $25 fee for each month or part thereof after the registration due date.
Organizations that are exempt from the registration requirement include religious organizations, educational institutions, state agencies or other government entities, and professional fundraising consultants.  Under Fla. Stat. §496.404(8), “educational institutions” include non-profit schools and organizations which raise funds for schools, such as most booster clubs, alumni organizations, and parents groups.
Pursuant to Fla. Stat. §496.411(3), charities which have registered with the Florida DACS are required to display the following statement in capital letters on every printed solicitation, written confirmation, receipt, or reminder of a contribution:
To determine whether a particular organization has registered, you can visit HYPERLINK “” and click on the link that says “Gift Givers’ Guide.”  This website also provides some basic financial information about the charities that have registered.
IRS Reporting Requirements
Exempt organization tax returns are due on the 15th day of the 5th month after the end of the organization’s fiscal year.  For organizations operating on a calendar year, tax returns are due May 15th.  As discussed earlier, an organization which fails to file a return for three years will have its tax exempt status revoked.  To be reinstated, the organization will have to reapply for tax exempt status by filing Form 1023 with the IRS and paying a substantial “user fee.”
For public charities with annual gross receipts of less than $50,000, the only reporting requirement is Form 990-N, otherwise known as an e-postcard, which is filed online at the IRS website, HYPERLINK “”  For organizations with gross receipts in excess of $50,000, income is reported on Forms 990 or 990-EZ.  Private foundations file Form 990-PF.  Churches and other places of worship are generally exempt from the requirement to file, regardless of their income.
Prohibited Activities
There are several prohibited activities that will result in the loss of a §501(c)(3) organization’s tax exempt status, including:
Devoting a substantial part of the organization’s activities to lobbying, or encouraging members of the organization to contact their legislators about a particular issue; however, the organization may conduct voter registration drives and non-partisan voter education activities, including presenting public forums and publishing voter education guides.
Participating, intervening in, or contributing to a political campaign supporting or opposing a candidate for public office.
Allowing net earnings to inure to the private benefit of insiders of the organization.
Providing a substantial benefit to the private interests of an individual or organization, i.e., the organization’s beneficiaries must be recognized objects of charity, such as the poor or distressed, or the community at large.
Having a purpose or participating in activities that are illegal or violate fundamental public policy.
Failing to file a tax return for three consecutive years.
Unrelated Business Taxable Income
Unrelated Business Taxable Income (UBTI) is income from a trade or business, regularly carried on, that is not substantially related to the charitable, educational, or other purpose that is the basis for the organization’s exemption.  Exempt organizations may produce income unrelated to their tax-exempt purpose, as long as the income-producing activities are not a substantial part of the organization’s activities.
Generally, rents from real property, capital gains, interest and dividends are not considered UBTI unless they are financed with borrowed money.  Whether income is UBTI depends on the facts and circumstances, but examples of UBTI include income from advertising in publications and from the sale of merchandise unrelated to the organization’s exempt purpose.  An organization with more than $1,000 of annual gross UBTI must file Form 990-T in addition to the Form 990.  Income that is UBTI is subject to standard income tax rates.
Disclosure Requirements
§501(c)(3) organizations must make certain records available for public inspection, including their tax-exemption application (Form 1023), tax-exempt determination letter, and their last three annual tax returns.  The organization must provide copies of these documents to individuals who request them, immediately in the case of in-person requests, or within 30 days in the case of written requests.  Organizations may make these documents available on their website to avoid the requirement to supply copies of the documents, but they are still required to make the documents available for public inspection.
Individuals who serve on boards of directors should tax a moment to review the organization’s bylaws to determine whether the organization will indemnify the board members from personal liability for actions taken (or not taken) on behalf of the organization.  The prospect of personal liability may be enough to scare highly qualified, talented individuals away from serving on charity boards, but a well-drafted indemnification clause should help allay those concerns.  The organization may also consider purchasing insurance to cover the indemnification.
Although not always glamorous, these issues are important to be aware of when working with non-profits.  Often, very well-intentioned people get together to create a charity, and these details are not properly addressed.  By being prepared to spot these issues, we can better serve our community by protecting charities from inadvertently running afoul of the requirements facing tax exempt organizations.

Leave a Reply