Nonprofit Law Update

November 2006

Corinne Gartner, Associate, Downey Brand LLP

From Poker Nights to Electric Lights: Federal and State Lawmakers Enact Reforms Affecting Nonprofit Organizations

It's been a big year for nonprofit and tax-exempt organizations in the federal and state legislatures. Lawmakers in Washington, D.C. and Sacramento have been busy enacting reforms affecting charities and other exempt organizations large and small. How will these laws affect your organization? Read on to find out.

Federal Changes

The big news this year out of Washington is the passage of H.R. 4, the Pension Protection Act of 2006 (the “Act”), which was signed into law by President Bush on August 17, 2006. The new law contains numerous changes to the tax law provisions affecting charitable and other exempt organizations. Key reforms include the following:

  • Increased excise taxes. The Act doubles certain private foundation excise taxes and excess benefit penalty taxes. The increases apply to taxable years beginning after the date of enactment.

  • More stringent substantiation requirements. For charitable contributions made in taxable years beginning after the date of enactment, taxpayers must have a bank record or written acknowledgment from the charity in order to claim a charitable contribution deduction, regardless of the amount of the contribution. Under previous law, the IRS only required such records for contributions of $250 or more. If you manage a charity, you may want to consider updating your organization's gift acknowledgement policies accordingly.

  • Filing requirements and penalties for failure to file. Beginning in 2008, small charities that are not required to file a Form 990 because their gross receipts are normally below $25,000 will have to electronically file an annual notice with the IRS. Failure to make the required filing for three consecutive years will result in revocation of exempt status. In addition, organizations that are required to file Form 990 will lose their exempt status if they fail to file for three consecutive years.

  • Public disclosure of UBIT returns. Charitable organizations must now disclose unrelated business income tax returns (Form 990-T) and make them available for public inspection. The new rule applies to returns filed after the date of enactment.

  • New requirements for donor advised funds, supporting organizations, and credit counseling agencies. The Act includes numerous reforms to improve accountability of DAFs and SOs. The Act also contains new standards that credit counseling organizations must meet in order to qualify as tax-exempt.

  • Changes in charitable contribution deductions . Corporate and individual donors to charities, as well as charity managers, will be interested to learn that the Act also increases charitable contribution deductions for donations of food inventory, book inventory, and certain conservation property, and limits deductions for clothing and household goods, certain easements, and certain other items.

For more details on the Act, click here to visit the IRS website.

California: Charitable poker nights and other charitable gaming now legal (A.B. 839)

Nonprofits across California are celebrating the passage of A.B. 839, the much anticipated bill permitting eligible organizations to conduct fundraisers involving controlled games (albeit with stringent controls and conditions). The effect of the bill is to legalize charitable gaming events such as poker tournaments and “Monte Carlo” or “Casino Night” events. Here are the highlights of the new law:

  • Eligible nonprofits may conduct no more than one charitable gaming fundraiser per calendar year, though nonprofits that have multiple chapters may hold one such fundraiser per chapter per calendar year.

  • The fundraiser itself can last no longer than five consecutive hours.

  • The organization must register with the Attorney General's Division of Gambling Control in advance of the event.

  • No cash prizes or wagers may be awarded to participants, but winners can receive a prize that has been donated to the fundraiser. However, the cash value of each donated prize cannot exceed $500, and the total cash value of prizes awarded at the event cannot exceed $5,000.

  • At least 90% of the gross revenue from the fundraiser must go directly to the nonprofit, and no more than 10% of the gross receipts may be paid as compensation to the person or entity conducting the fundraiser on the nonprofit's behalf.

  • To be eligible to conduct a fundraiser using controlled games, an organization must have been in existence and in operation in California for at least three years, and must also be tax-exempt under California law.

Other California Reforms

California lawmakers enacted several other reforms in 2006 that are worth a mention:

  • Let ‘em stay for one more year: Corporations Code § 5220 has been amended to allow California nonprofit public benefit corporations with voting members to elect directors for terms of up to 4 years. Under prior law, the longest permissible term for directors of such organizations was 3 years.

  • One more form to file?: New charities should be on the lookout for changes coming soon from the California Attorney General's Office, which will be revamping its initial registration procedure for charitable organizations.

  • Turn on the lights: A.B. 423 permits electric service providers to donate electrical power to 501(c)(3) organizations whose primary purpose is serving the needs of the poor or the elderly – a transaction that would otherwise be prohibited due to existing laws that suspend the right of most retail end-use customers to acquire service through a direct transaction with an electric service provider.

As the 2006 legislative session draws to a close, board and staff members of nonprofit and exempt organizations of all sizes would be wise to familiarize themselves with these new state and federal laws. We would also be happy to discuss any specific questions and concerns about how the new laws may affect your organization.

 

© 2006 All rights reserved. Please note that the information contained herein is not intended to provide specific legal advice. You should consult with an attorney and not rely on any information contained herein regarding your specific situation.