Nonprofit & Tax-Exempt Organizations

In my post yesterday about The Extraordinary Give, I mentioned that each participating organization must be a 501(c)(3) organization. If you’re anything like me, you may have wondered – how did those organizations get to be a 501(c)(3)?

I’m glad you asked: here’s an overview of the typical process of starting a community benefit organization in Pennsylvania.
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The 6th annual Extraordinary Give is coming soon: this year on Friday, November 17, 2017 from midnight to 11:59 pm, you’ll be able to support the community benefit organizations that you love by donating with your dollars. In addition to benefiting from your donations, there are several additional prizes that the participating organizations will be eligible to win.

Hosted by the Lancaster County Community Foundation, the Extraordinary Give is Lancaster County’s largest day of charitable giving, and over the past five years, over 500 organizations have benefitted from the event, with more than $22.5 million in total donations.

To learn more about the Extraordinary Give, check out their website here: extragive.org. There, you can browse the participating community benefit organizations by category or see a full list of all participating organizations. On November 17, you can keep track of all donations in real time on The Extraordinary Give Leaderboard.
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Although I don’t spend much time watching TV, I came across the new Netflix series House of Cards in which all 13 episodes were released at once for back to back watching. I enjoyed the series for its political perspective, but found it interesting as an employment lawyer as well.

Claire Underwood played by Robin Wright is the cold and beautiful wife of Francis Underwood, House Majority Whip (Kevin Spacey). Claire is the director of the non-profit Clean Water Initiative (CWI). In the beginning of the season, she fires half her staff, assigning the actual serial ax job to the office manager, who is terminated by Claire immediately after the firings are completed. She then actively recruits Gillian Cole (Sandrine Holt). When Claire first interviews Gillian, she is ill and, even before she is hired, Claire sends her to her personal physician, all expenses paid, a novel recruiting tool. Once she is on the job for a few months, Gillian tells Claire that she is pregnant as an explanation of why she cannot fly on CWI business. Gillian begins missing work periodically, and childless Claire makes a remark questioning her priorities and commitment to CWI. Ultimately, Gillian defies Claire on a matter of principal and Claire fires her on the spot for her insubordination. When Claire is later visited by counsel, we find out that not only has Gillian sued CWI but that she will not accept any monetary amount to settle her claim. Gillian tells Claire that the publicity resulting from her suit will cost CWI, Claire and her high profile politician husband more than any settlement payment and insure a better world for her unborn child. She also has many witnesses happy to testify for her including the former office manager, and adds that any embellishment of her testimony is justified by the need to expose CWI as a sell-out to corporate interests.  


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One challenge many nonprofit organizations face is competing against for-profit businesses to attract key employees and administrators to run their operations. More often than not, nonprofits just do not have the funds to match their for-profit counterparts. Fortunately, there are plenty of qualified administrators out there who are willing to take a lower salary from a nonprofit because they believe in that organization’s mission. However, there is another incentive that most nonprofits have that is not available to for-profit businesses:  Section 457 Deferred Compensation Plans (“457 Plans”). 

As the name suggests, 457 Plans are authorized by Section 457 of the Internal Revenue Code. This section allows tax-exempt organizations and government agencies to establish a deferred compensation plan for key employees. Each year the nonprofit can divert a portion of the employee’s salary (up to $17,500 in 2013) into the 457 Plan instead of paying it directly to the employee. Because those funds go into the Plan the employee is not taxed at that time. Instead, taxes on the amount diverted into the Plan are postponed until the Plan is authorized to dispense funds from the 457 Plan to the employee.

The Plan then acts similarly to a pension or 401K plan in that the money accumulates from year to year in the Plan and generates income on investments. As a result, these Plans are extremely helpful in helping a nonprofit’s key employees plan and save for retirement. Another advantage of a 457 Plan is that the tax on the income on those investments is also postponed until the employee actually starts receiving benefits from the Plan.


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In the wake of the devastation caused by Hurricane Sandy, the Internal Revenue Service announced an expedited review and approval process for organizations formed to aid victims of Sandy that are seeking tax-exempt status.  Qualifying organizations still need to apply for tax-exempt status by filing a Form 1023 with the IRS. However, if they write

The Lancaster County Community Foundation has announced “The EXTRAordinary Give,” a unique event that will help local community benefit organizations raise funds.  The Foundation has set aside $250,000 to match a portion of donations made to preregistered nonprofits on November 30, 2012.  There will also be an additional $50,000 in prizes.  This  program will be

Some charities and other tax exempt organizations rely heavily on contributions from generous donors. On the other hand, those donors benefit by being able to deduct those donations from their taxes. However, a recent decision by the US Tax Court makes it clear how a simple mistake by the tax-exempt organization can prevent a donor from making the deduction.

In Durden v. Commissioner, TC Memo 2012-140, the Court prevented a married couple from claiming $25,000 in charitable deductions. The donations had been made to a church in various amounts throughout 2007. The Internal Revenue Service initially disallowed the deductions, and the taxpayers responded by producing records of their donations, which included a January, 2008 letter from their church acknowledging the donations.

Unfortunately, the 2008 letter did not include any statement that the church had not provided goods or services to the taxpayers in return for their donations. Because applicable tax laws specifically require such a statement, the IRS rejected the 2008 letter as an adequate acknowledgment of the donations. 

In response, the taxpayers obtained a June, 2009 letter from the church that included the required statement, however the IRS rejected the 2009 letter as untimely. The IRS based their decision on a specific tax law that requires taxpayers to receive acknowledgments from charities by the date on which they file their returns for the year the deduction is claimed, or by the return due date, including any extensions, whichever occurs earlier. In this instance, the 2009 letter was received by the taxpayers well after the return was filed in 2008.


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On November 14, 2012, Matthew Grosh will be a course instructor for the Nonprofit Resource Network’s Fall training. The session, entitled “Are You Legal? Ensuring the Integrity of Your Community Benefit Organization,” will assist organizations in managing risk.

Attorney Grosh is a Preferred Consultant for Millersville University’s Nonprofit Resource Network.

See the Nonprofit Resource