New IRS Procedure Grants Charities Greater Mobility Thursday, Mar 1 2018 

The IRS has recently released a revised Revenue Procedure giving tax exempt entities greater flexibility.  Previously an organization needed to decide at the onset where they wanted to be incorporated for the long haul, knowing that any future adjustment to the organization’s home state would require that organization to file the IRS Form 1023 “Application for Exemption” all over again.  These restrictions were unambiguous in the 40 and 50 year-old Revenue Rulings 67-390 and 77-469 which spelled out the requirements and provided clear examples.  As a result, it was unusual to see a charity switch locations due to the associated paperwork and hassles involved.

But now the IRS has expressly abandoned the restrictions of those Revenue Rulings and opened the door to new strategic possibilities for charities to consider.

With the same stroke the named regulations also stated that entities moving from one qualifying exempt structure to another would be excused from the need to reapply.  For example, an unincorporated association that has been approved for exemption and later becomes incorporated would – under the old rules – be required to apply all over again because a new legal entity had been created.  The rules now do not require reapplication in that scenario.

Rationale.  The rationale given for these changes is one of consistency.  The previous rules governing when an organization must re-apply for a FEIN, and when it must re-apply for exemption were not in line with one another, leading to somewhat irrational results.

Presumably this change will simplify matters for the IRS by creating a reduction in its workload once the redundant examination of “old-but-newly-headquartered” charities is eliminated.  The old law requiring a thorough examination of a charity which had changed nothing in terms of its exempt purposes, but merely its address may not have been the best allocation of scarce IRS resources – especially since the exempt organization would have already been scrutinized by the Service in determining qualification for exemption.

State Law.  This change in the rules will highlight the different corporate codes of the various states.  It will now be state rules that govern whether a charity can successfully transfer operations in one fluid motion, as opposed to the herky-jerky dissolution and reincorporation process.  The state tools to be used to make changes to an entity’s jurisdiction are the articles of domestication and articles of conversion, options currently available on a state-by-state basis.  It remains to be seen whether any changes to state codes or attempts at uniform protocol will follow this change in an effort to make the new IRS’s Procedure more seamless.

Potential Pitfall?  A conceivable area where the gate-keeping function might fall through the cracks, however, is in the case of a true “reincorporation” into another state, rather than just the filing of articles of conversion which could move the corporation to its new home under the same charter.  When unsupervised charities are writing their own articles of incorporation, things tend to go amiss.  One of the most-cited reasons for the rejection of a Form 1023 application is that the founding document either didn’t have a proper purpose clause or the required dissolution clause.

On the other hand, to the average visionary the idea of moving state locations might appear to be just the sort of legal matter that might warrant hiring an attorney for the process, which would (generally) lower the incidence of improperly scribed articles of incorporation.  Additionally, it might be assumed that an organization that was originally required to get it right in the first state would have a higher likelihood of getting it right in the second state, but time will tell.

It will be interesting to watch whether the added privileges of movement will lead to increased productivity in the exempt world, or if the released grip of IRS oversight will simply allow early-stage carelessness to sneak into the process.  Mistakes made in founding documents can lead to undesirable results.  If an entity builds on an improper foundation, the tax consequences can be bleak when the error is finally discovered.  Of course, the new IRS guidelines make clear that the organizational and operational tests are still required for any relocated entity, but how will this compliance be verified?  A relocated entity will, of course, be required to report the change on the following annual report to the IRS (Form 990), but the level of scrutiny given to the new incorporation documents remains to be seen.

Anecdotally, when the IRS made the Form 1023-EZ available, the rules regarding proper formation were still in place, but many start-up founders breezed right over these requirements.  This resulted in many improperly formed “charities” that had false assurances of status because they had forked over the $275 and gotten an official notice from the IRS.  The appeal of the “EZ” form has made it altogether too easy for well-intended charities to develop on improper foundations.

It will be interesting to watch guidance emerge to accompany this new latitude in the nonprofit world.

Name Selection for a 501(c)(3) Public Charity Tuesday, Dec 13 2011 

Most clients that approach me for assistance with the § 501(c)(3) application have already determined a preferred organizational name and may have already put it into use.  However, many organizations that will depend largely upon public support from diverse donors do not fully grasp the significance of how name selection may impact fund raising.

A common practice is to select an organizational name that is internally significant, but which may not give any clues to the external world what the organization actually does.  While a name may not have universal appeal, it should appeal to those in the support base.  For example, terms that have common Christian connotation, such as “great commission,” may not be recognized by the secular world,

The chosen name should also be distinctive and not one likely to be confused with organizations having a similar name. Common terminology such as “New Hope” or “World Outreach” should be avoided for this reason.  While such terms may be meaningful to the organization itself and even vaguely communicate the organization’s activities to potential donors, the name is likely to be lost in the crowd.

While an organization’s founders may have opportunity to explain what the name means, this may not always be the case.  A prospective donor may encounter an organization’s name through a Google search, a listing on the ECFA’s website, or a list of ministries supported by a church.  In such cases it is best that the name appeals to the particular interests of potential donors.  If one has a strong interest in such areas as nursing home ministry, Hindu evangelization, or veteran care, for example, that person will be drawn to a name that informs them of an organization with that particular focus.  “New Hope” does not provide any helpful guidance as to the primary thrust of an organization.  There are many opportunities for giving through churches and various ministries for those desiring to “give” without a specific need in mind.  A ministry really needs to set itself apart by providing greater insight as to the actual work being performed.  Those who share an organization’s passion should be attracted by the name to support the work.

In addition to these practical considerations, state and national laws also addresses the name selection process.  All states have a requirement that a new corporate name not be confusingly similar to another name already registered in that state.  Also, the name generally must not be misleading by indicating that it is involved in certain activities when it is not.  These rules are defined for each state in the corporate or nonprofit corporate section of the state’s code.  For example, the name requirements for Georgia are found in § 14-3-401 of Georgia’s Code.

Federal trademark and servicemark law speaks to the use of the same name as an organization in another state.  One can search the website ( to ascertain what names are registered.  But while it is clear that an organization may not use a name that is registered as a trademark by another organization, there is less clarity on the use of an existing name that is unregistered.  Such questions generally fall to the common law of trademarks.  An existing organization may well seek legal redress if a new organization attempts to use the same name in the same market area. The possible related complications make it critical to avoid name duplication. Basic internet searches can alert an organization of potential duplications while other nonprofit listing sites such as are invaluable in establishing whether a particular name is already in use.

Legal & Governance Issues of Grant-Seeking Friday, Feb 4 2011 

By Michelle A. Adams

As appears in: High, William F., ed. Grants for Christian Ministries and More. Xulon Press, 2010.

Overview.  As charitable organizations begin applying for grants, there are several legal aspects to consider.  The first logical question that arises concerns the proper legal formation of the grant-seeking organization.  A second consideration is the importance of good organizational governance in obtaining grants.  Lastly, some key distinctions between seeking private and public grants will be addressed.

Importance of Proper Formation

Many grant applications stipulate that the grantee organization must be “properly formed” and the requesting entity’s constitutional documents reflecting this will be requested.

Tax Exemption.  The vast majority of private and public grantors require that the grant recipients be tax exempt nonprofits.  They will often ask for a copy of the Letter of Determination from the Internal Revenue Service (“IRS”) in demonstration of this.  Such status is important to the grantor for several reasons.  Firstly, the organizations giving the grants are tax exempt entities themselves which necessitates that their dollars be used to further tax exempt purposes.  If the money is not given to an IRS-recognized charity there is a much greater administrative burden to ensure the money is used properly.

Private foundations have strict requirements that minimum distributions be made each year.  One of the simplest ways to fulfill these distribution requirements is to grant money to tax exempt IRC § 501(c)(3) public charities (or private foundations[1]).  If a private foundation grants money to an organization that does not fall into this category, it becomes responsible for administering ongoing “expenditure responsibility,”[2] which means that it must oversee, verify, and document that the money was used for charitable purposes.  This is strictly enforced.[3] If the granting private foundation fails to comply, an excise tax of 20% of the amount given may be required of the giving foundation,[4] as well as 5% from the manager that approved the expenditure.[5] Additionally, thorough reports on such grants must be filed with the IRS.[6] Because it is presumed that grants to § 501(c)(3) organizations will be spent in a tax exempt manner (or there are at least accountability structures in place to effect that end), there is less oversight responsibility for grants to them.

Section 501(c)(3) public charities must maintain “discretion and control” [7] when making grants to organizations that do not have charitable exempt status. Public charities have a fiduciary responsibility over their funds and must assure that they are spent for exempt purposes.[8] Exercising discretion means using reasonable judgment in selecting recipients and projects.  Grants should be limited to specific programming, avoiding distributions to the non-exempt organization’s general fund.  The fund use must be monitored with the grantee providing regular reports on such use and returning any unused funds.[9] The grantor § 501(c)(3) charity may be jeopardizing its own tax exempt status if it does not adhere to these procedures.

Furthermore, an organization that does not have its tax exempt status riding upon its conduct will lack the accountability structure that is in place for exempt organizations.  Since a non-exempt grantee’s status does not pend upon charitable use of funds, such grantee would have less incentive to maintain integrity, aside from any commitments made to the grantor.  The accountability and transparency promoted in § 501(c)(3) organizations by way of the annually required information return (Form 990) and other requirements make exempt organizations more desirable grantees.

Organizational Form.  Tax exempt organizations can take the form of nonprofit corporations, charitable trusts, or more recently, LLCs.  It frequently makes a difference whether a nonprofit is a “charitable” organization or another type of tax exempt organization (there are dozens).  Some government grants are only available to the former.[10] Private foundations are required to distribute only to public charities as described in § 509(a)(1), (2), or (3).

Internal Restrictions.  An organization must make sure that its own governing documents do not prohibit it from seeking and receiving grants from certain kinds of organizations.

International Charities Seeking US Grants.  To improve their chances, international charities seeking US grants are advised to pursue IRS tax exemption recognition.  Private Foundations are often reluctant to make international grants to unrecognized entities as it would normally require them to exercise the aforementioned expenditure responsibility (which may be difficult to administer given the geographical considerations).  Alternately the donor can make what is called an “equivalency determination.”[11] This means that the granting foundation has made a good faith determination that the foreign charity is the equivalent of a US public charity.[12] Either of these options necessitates further actions on the part of the grantor which may bias a decision against the grantee.

Since September 11, 2001 there has been a regulatory push to tighten donations to foreign organizations in an effort to prevent them from ultimately ending up in the wrong hands.[13] Even more recently measures taken towards greater accountability and transparency among charities in general have also resulted in greater scrutiny of international grant-making.

There are two options for foreign charities to obtain recognition by the IRS.  The international charity can apply directly for recognition as a foreign § 501(c)(3) charity, but this approach only carries benefit in the context of organizational grants and not for individual donors.  Since individual donations are often expected and, under this approach, no tax deduction accrues to the donor this option is rarely employed.

The other option is to establish a separate § 501(c)(3) public charity in the United States, allowing it to raise funds then make grants back to the foreign charity.  This requires the extra effort of establishing and managing a separate corporation or other nonprofit entity, but this scenario affords the domestic entity the same advantages as any other US charity – including the ability to offer income tax deductions for its individual donors.

Importance of Good Governance

The Internal Revenue Service believes that “a well-governed charity is more likely to obey the tax laws, safeguard charitable assets, and serve charitable interests than one with poor or lax governance.”[14] Few “best practices” of nonprofit governance are codified in the law – and yet they are considered vitally important to the basic health of an organization.  They will also usually be an area of inquiry by grantors who will want assurance that the funds distributed will be handled in a responsible, effective, and efficient manner.  As is typical, one grant application considered specifically asks for “evidence that you meet or are taking specific steps to meet best practice standards in fiscal accountability and governance.”

In 2007 the IRS published a list of what it considered to be good governance practices.[15] The list has since been removed from the IRS website as the revised Form 990 has incorporated these concepts; the list still provides instructive guidance however on what the IRS and the philanthropic community expect in terms of best practices.  Several of the topics from that list and associated recommendations are discussed below.

Strong Mission Statement.  The first item mentioned in the publication was a “strong mission statement.”  In the context of grant-seeking, an organization’s mission statement needs to be specific, compelling, and feasible.  It serves both to popularize and explain the existence of the organization.  Grantors will be looking for evidence of sound strategic planning and a demonstrated record of success in the organization’s area of focus.  That focus must be in line with the aim of the granting organization.  Every grant seeking organization must also guard against “mission creep” – allowing the focus of the organization to morph by pursuing grants that are available but do not align with its mission.  The governing board should make periodic reviews of the vision and mission statement to stay on track.

Ethics.  The IRS publication advised organizations to develop a written “Code of Ethics” to demonstrate a commitment to legal and ethical integrity.  Included in this code should be a Whistleblower Policy to protect employees that choose to reveal their good faith suspicions of inappropriate or illegal behavior within the organization.  The 2002 Sarbanes-Oxley Act, though created in response to for-profit entities, fueled the trend towards an expectation of whistleblower policies in all types of entities.  In fact, the revised Form 990 for the tax year 2008 now asks nonprofits to reveal whether they have such a policy in place.

While private schools are required to have a racially non-discriminatory policy to be tax exempt, most organizations applying for grants – schools or otherwise – will also be asked to produce a non-discriminatory policy or include a statement affirming that they follow such a practice.  Some applications will specify the type of policy they are looking for, such as the process for hiring employees, selecting clients, and providing services.  The basis upon which the discrimination policy applies, such as race, color, religion, gender, national origin, ancestry, age, medical condition, disability, veteran status, marital status, sexual orientation, or any other characteristic protected by law, may be requested.  Although such a policy is not required by law, the fact that most grant applications request it and the IRS asks about it on the publically viewable Form 990 makes it important that each charity adopt one that is appropriate to them.

Due Diligence.  Another aspect addressed by the earlier guide was that of due diligence on the part of the leadership.  The typical legal standard of care for board members is that they act in good faith with the care that an ordinarily prudent person in a like position would exercise under similar circumstances.  Both the IRS and grantors are interested in seeing that the board has put policies in place to promote due diligence.  Some of the IRS-recommended policies include making sure that each director is familiar with the charity’s activities and knows whether those activities promote the charity’s mission and achieve its goals, that each director is fully informed about the charity’s financial status, and that each has full and accurate information to make informed decisions.  Among others questions that probe levels of communication and involvement, common grant applications inquire about the level of commitment and advocacy on the board, the qualifications of leadership, and the frequency of board meetings.

Duty of Loyalty.  One of the pillars of being a tax-exempt charity is that its directors act in the best interest of the organization, demonstrating what is termed “duty of loyalty.”  Neither board directors nor key employees may benefit from the charity doing business with an entity in which they have an interest.  If someone in the organization stands to benefit from a transaction with the organization, it must be scrutinized carefully.  It must be exposed early on for the rest of the board to vote upon in the absence of the interested director.  The transaction must actually be advantageous to the charity, and not a worse deal than could be obtained on the open market.

The IRS has shown favor towards certain common practices and disfavor towards others.  The increasing importance of independent[16] board members grows clear.  Lois G. Lerner, director of the exempt-organization division of the IRS was quoted, “While the IRS cannot require groups to have a conflict-of-interest policy or independent board members, the lack of those policies could trigger other questions about how a nonprofit organization would prevent abuses and insider dealing.”[17] Boards composed entirely of family members are also disfavored;[18] some states even disallow it.[19] There seems to be a presumption against their impartiality.  Such boards have been perceived as more prone to serve the interests of the family rather than the organization as a whole.

This quest for board independence and accountability is what motivates grantors to ask potential grantees about such things as their policy on length of board terms; they will inquire into the identity of the board members, their employers, areas of expertise, and relations to the staff – professional and familial.

Compensation Practices.  Another facet of good governance is the prohibition against private inurement.[20] The charity does not exist for the benefit of private individuals.  Compensation for employees and directors as well as reimbursement policies are among the factors considered in evaluating policies pertaining to this area.  A charity should always be able to demonstrate how a salary figure was established.  It should document its research into similar positions in the nonprofit and for-profit world to be able to demonstrate that it is reasonable.[21] Soaring salaries for nonprofit executives is no longer being ignored.  The salaries of top employees are publically available on the charity’s Form 990.  Charities should have a reimbursement policy in place, more as a response to misinformation than for prevention of intentional abuse.  IRS rules in this area are more clearly set forth than in many related governance areas but they are largely ignored in many church and charity circles.  Without clear policies and consistent practices in this area both the charity and affected individuals are subject to penal actions on the part of the IRS.

Transparency & Financial Audits.  Grant applications commonly require evidence of financial transparency and accountability.  With the advent of the revised Form 990 beginning in tax year 2008, charities are being pushed to display greater transparency.  This more detailed form can be an opportunity for a charity to showcase its accomplishments, fiscal health, and the strength of its governance policies, somewhat in compensation for the greater effort required to complete it.

Although small charities may not find independent audits financially feasible, organizations seeking larger donations will need to consider them.  The US Treasury recommends such an audit when the charity’s gross income exceeds $250,000 annually.[22] An audit is mandatory for each year that the federal grant exceeds $500,000.[23]

Diverse Support.  Not mentioned in the IRS publication, but an important consideration in grant seeking, is the level of support for the prospective program.  Aside from the need for publically supported charities to meet a required “support test,”[24] regular financial support from diverse sources assures a grantor that the organization has something that others have seen and believe in.  It also indicates that the programming will have enough support to continue after the grant funding has expired.  Commonly grantors desire to see strong constituency support through annual giving and a professional approach to the relationships with major donors.  Contributions personally made by the board as a whole to the organization in each of the last three years is information grantors often require.  An organization may also be asked to describe its collaboration efforts with other organizations.

References from reputable individuals and organizations outside the organization speak volumes as well.  Obtaining a stamp of approval from organizations such as the Evangelical Council for Financial Accountability is a meaningful benchmark in the world of Christian philanthropy.  The governance standards that accompany such recognition require more accountability and transparency than the legal requirements alone or the status quo, and donors are also able to weigh an approved organization’s effectiveness in terms of dollars spent on administration versus actual program work through publically available data.

Other Grant-Associated Legal Obligations

Certain governance practices become requisite when an organization accepts a grant.  This transaction is the equivalent of entering into a contract with the grantor.  An organization can potentially be in breach of contract in the following ways: 1) not using the funds as directed; 2) not reporting back to the grantor of the funds as required; and 3) not returning surplus funds if that is stipulated.

Charities applying for and receiving grants may be required to register in the state where they are applying.  Charitable Solicitation Registration (CRS) laws exist in most states and on some local levels as well.  Some CSR laws specifically include grant-seeking as an activity that triggers the need for registration (before seeking charitable gifts in locations with these laws, a charity must register itself – regardless of whether the gift is ultimately received).[25] Some exclude certain kinds of grant-seeking, such as government grants.[26] Because of the diversity of requirements, it is important to investigate the CSR laws in each location where an organization plans to request funds.  Fines have been imposed when charities have ignored these regulations.[27]

Government Grants

The federal government awards over $350 billion of grant money each year, but this funding does not come without strings.

Bookkeeping.  The grant-seeking organization should be aware that government grants are accompanied by increased paperwork.  This can include certifications, budget reports, and other reporting documentation to prove that the organization’s programs are staying on task in meeting objectives and using designated funds appropriately.  For federal grants financial reporting is done on Standard Form 269.  In the case of a federal grant an audit can be performed at any time, making accurate bookkeeping of vital importance.  As stated earlier, an audit is mandatory for each year that the federal grant exceeds $500,000.

Governance.  Certain governance issues can develop when accepting government funding.  Dependence upon these grants is a real temptation for many charities, resulting in the aforementioned mission creep where the original purpose of the organization changes to chase the available funds.  Government grants often require matching funds, something the charity needs to consider before applying for the grant.  Funding from another government grant will not constitute matching funds in fulfillment of this requirement.  If an organization is considering using part of its funds for political activity, it should seek private rather than government funding and make certain it is properly structured to engage in such activity.[28] By law, federal funds may not be used for lobbying.

In addition to governance and extensive reporting issues, constitutionality is an important consideration when accepting government money.  Specifically, because the Establishment Clause prevents the government from advancing or inhibiting any religion, government funds cannot be used to support religious activities.[29]

In two major cases in recent years the actions of religious organizations in accepting government grants were declared to be unconstitutional.[30]

In the first case Prison Fellowship Ministries (“PFM”) accepted a grant from a local government to carry on a rehabilitation program.  Because there was a religious component to the voluntary rehab program, taxpayers brought suit and won on the basis of the Establishment Clause.  Even though the governmental agency that awarded the grant knew what the program would involve, it was later declared unconstitutional.  The second case involved a federal grant to Notre Dame for the distribution of a training program for teachers.  This training also involved a religious component which encouraged spiritual development in the Catholic faith – something known to the Secretary of Education when the grant was made.  This grant was also found to violate the Establishment Clause.

Although the faith-based organization in neither case was ultimately required to return the funds that were issued prior to the declaration of unconstitutionality, the penultimate court in each case had ordered that the entire grant be repaid – including funds which had long been spent.

The first thing to note from these cases is that simply because a government entity bestows a grant does not ensure that it was constitutionally done.  It is not enough to rely upon the giver of a grant to know the constitutional boundaries; the organization must be proactive in evaluating the situation before accepting the money to avoid a potentially expensive lawsuit and disruption of its plans.  Secondly, although the cited organizations were not forced to return grant money that had already been disseminated, it is not possible to rely on this precedent for future cases; if the Flast v. Cohen case is ever expanded beyond its narrow facts (as the lower courts attempted to do), it could change the results for other faith-based organizations that accept government grants.  Thirdly, it is imperative that faith-based organizations keep very strict and separate accounts when accepting government funds so that in the case of a lawsuit accusing them of spending significant portions for religious purposes, the organization will have a defense.  PFM would have had a better defense if it could show that all funding that supported any religious activities or materials came solely from private sources.  Instead government money was used to fund publications, small religious gifts for prisoners, all phone calls, and postage costs.[31] Employees did not keep a log of religious and nonreligious hours spent, though part of their salary was paid through public funds.   As scrutiny increases upon faith-based organizations, accepting government funding, while not impossible, will call for the highest standards of record-keeping and integrity.

The goal of any grant applicant, private or public, is to stand out among other seekers.  Going above and beyond in terms of the above cited best practices will help accomplish that, and will also serve to push a charity to an even greater level of organizational excellence.

[1] Bruce R. Hopkins, The Law of Tax-Exempt Organizations (9th ed. 2007) p. 383 (“For this purpose, exempt operating foundations (see § 12.1(c)) are regarded the same as public charities.”).

[2] I.R.C. § 4945(d)(4) (2005); Reg. § 53.4945-5(a).

[3] See e.g., Hans S. Mannheimer Charitable Trust v. Commissioner, 93 TC 35 (1989), where the Tax Court found that a taxable expenditure existed even though the proper oversight had, in fact, occurred.  The private foundation failed to document this oversight as required by law, so it did not count.

[4],I.R.C. § 4945(a)(1); Reg. § 53.4945-1(a)(1).

[5] Reg. § 53.4945-1(a)(2).

[6] Reg. § 53.4945-5(d).

[7] Rev. Rul. 68-489, 1968-2 C.B. 210.

[8] D. Greg Goller, Grant problems: Being hurt by good intentions, in The Nonprofit Times (2002).

[9] D. Greg Goller, Grant problems: Being hurt by good intentions, in The Nonprofit Times (2002).

[10] Bruce R. Hopkins, The Law of Tax-Exempt Organizations (9th ed. 2007) p. 55.

[11] Rev. Proc. 92-94, 1992-1 C.B. 507, Reg. § 53.4945-6(c)-(2)(ii), § 53.4942(a)-3(a)(6), and § 53.4945-5(a)(5).

[12] This can be done through reasonable reliance upon a written legal opinion of the equivalence, through analysis of facts contained in an affidavit by the foreign charity leading the foundation to find equivalence, or through reliance on recognition of the foreign entity by the IRS as a 501(c)(3) public charity.

[13] See e.g., the 2005 version of its Voluntary Best Practices for U.S.-Based Charities available at

[14]Internal Revenue Service, Governance and Related Topics, (Feb. 4, 2008), available at

[15]Internal Revenue Service, Good Governance Practices For 501(c)(3) Organizations, (Feb. 7, 2007),  available at

[16] As used on Form 990 “independent” generally refers to directors that are not financially significantly benefited by the organization (nor are their family members or business interests).

[17] Eric Kelderman, IRS Discloses 2009 Plans for Reviewing Tax-Exempt Organizations, in The Chronicle of Philanthropy (November 25, 2008).

[18] Bubbling Well Church of Universal Love, Inc. v. Comm’r, 74 T.C. 531 (1980), (“The domination of an organization’s board by one family does not necessarily disqualify it for exemption, however it does provide an obvious opportunity for abuse of tax-exemption, and therefore there must be open and candid disclosure of all facts of the organization, including its finances and operations.”)

[19] New Hampshire, e.g.

[20] Regs. 1.501(c)(3)-1(c)(2)

[21] Barry S. Bader & Elaine Zablocki, Executive Compensation: Prepare to Defend Your Process and Executive Pay, in Great Boards (Spring 2009).

[22] This recommendation, found in the 2005 version of its Voluntary Best Practices for U.S.-Based Charities available at is based upon the June 2005 final report to Congress of the Panel on the Nonprofit Sector available at .

[23] Beverly A. Browning, Winning Strategies for Developing Grant Proposals p.20 (2d ed. 2005) (“For organizations that spend a total of $500,000 or more in federal funds (calculated based on awards from all federal programs) – an audit by a private, independent outside legal or accounting firm is required.”)

[24] The support test requires that 1/3 of our total support comes from the public.  In figuring this 1/3, the most noteworthy part of this test is the 2% rule.  This rule takes 2% of the total support and says that is the amount that any one donor (including private individuals as well as corporations and other organizations) can give to be counted as public support.  Anything in excess of that 2% figure is considered “non-public” support.

[25] Bruce R. Hopkins, The Law of Fundraising § 3.2 (4th ed. 2009).

[26] Bruce R. Hopkins, The Law of Fundraising § 3.2 (4th ed. 2009) (“About a dozen states exclude from the term solicitation the process of applying for a government grant.  Occasionally state law provides that the word contribution includes a grant from a government agency or excludes the quest for a grant from a private foundation.”).

[27] For a discussion of recent actions taken against charities and fines imposed, see Jamie Usry’s 2008 article Charitable solicitation within the nonprofit sector: Paving the regulatory landscape for future success pp. 23-24 available at

[28] Beth L. Leech, Funding faction or buying silence? Grants, contracts, and interest group lobbying behavior, in Policies Study Journal (Feb. 1, 2006).

[29] County Allegheny v. American Civil Liberties Union, 492 U.S. 573, 591 (1989).

[30] Laskowski v. Spellings, 443 F.3d 930 (7th Cir. 2006); Americans United for Separation v. Prison Fellow., 509 F.3d 406 (8th Cir. 2007).

[31] Americans United at 418.

Alternatives to Forming a Charitable Nonprofit Friday, Aug 7 2009 

In the July/August 2009 edition of the American Bar Association’s Business Law Today, nonprofit attorney Gene Takagi and assistant Emily Chan write about the alternatives to setting up a tax exempt charitable organization. They point out that in an environment that is increasingly competitive, the majority of new charities do not succeed.

Charity founders and their attorneys should consider many things before proceeding to file for exemption – beyond the simple questions of how, when, and what are the costs.  First, the authors stress the importance of good planning and research.  The charity should develop a business plan.  “The plan should define the nonprofit’s mission and identify its core activities, potential supporters, and targeted beneficiaries. It also should contain an assessment of the nonprofit’s environment, including its potential allies and competitors, and a projected multiyear budget.”  If there is not a “plan for viability,” good intentions alone will not provide for the needs of the intended recipients.

Secondly, charity founders need to be aware of the implications of tax exemption.  The prohibition of private inurement is a pillar of a nonprofit organization.  An ignorance of these rules could result in heavy penalties for the leadership or even a loss of tax exemption.  In addition, charities must comply with many ongoing reporting and governance obligations.

Takagi and Chan recommend considering the following alternatives:  (1) an alliance with an existing nonprofit, (2) fiscal sponsorship, or (3) a donor-advised fund.

There is no need to reinvent the wheel.  The authors point out that many charity founders do a poor job scanning other charities (over 1.8 million nonprofits last year) to find out if there are other that are already doing the same kind of work.  Collaboration may reduce a beginner’s risks while also giving the benefit of the older charity’s experience and established access to the contribution market.

A “fiscal sponsorship” is when the founders of a new charitable project form a relationship with an existing charity.  This can be set up many different ways, but it usually involves the sponsoring charity allowing the new project to benefit from its tax exempt status and other administrative support in exchange for a small portion of the funds generated for the new project.  The authors commend this arrangement but stress the importance of a well-drafted fiscal sponsorship agreement.

Takagi and Chan would direct those planning to form a grant-making private foundation to consider the benefits of using a donor advised fund instead.  These funds allow the donors to advise the sponsoring organization how they would like their contributions to be used, and these wishes will be consistently honored, though the donor technically loses control over the direction of money.  The authors list some advantages of using this method: 1) No formation costs, 2) Possibility of making immediate deductible contributions, 3) More generous deduction limits (because the sponsoring organization is a public charity), 4) No administrative, investment, or governance responsibilities (and associated risks), and 5) No need to provide oversight over grants.

The authors encourage both charitably-minded individuals and the attorneys they approach to consider some of the alternatives to forming a new tax exempt organization before assuming there is but one way to accomplish their charitable goals.

The complete article can be found at