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Sunday, February 10, 2013


TRADE SECRETS AND ASSOCIATIONS

Would you be upset if an employee leaves your association and starts a competing entity using your association's membership, vendor or sponsor list?  

How about a vendor using your membership directory to market directly to every one of your members?  

Would any of your members object to their membership records in your possession (such as continuing education courses taken, private telephone numbers, plans to attend an upcoming trade show, names and contact information of the members office staff, and similar information) be accessed or used by anyone other than association staff to provide membership services to that member?  

If you answered "yes" to any of these questions, then this blog posting will be of interest to you.

Almost every association has "confidential" and "trade secret" information.  That confidential and trade secret information may be legally protectable in many instances if the right steps are taken by the association to safeguard that information.  

Confidential Versus Trade Secret Information

First, what is the difference between "confidential" and "trade secret" information?  A trade secret is a subset of confidential information; only some confidential information also meets the definition of a trade secret.  Confidential information is information that is intended to be held in confidence or kept secret.  

In contrast, “trade secret” refers to information that (1) has economic value from not being generally known to, and not being readily ascertainable by proper means by, others, and (2) is the subject of reasonable efforts to maintain its secrecy.

Examples of Confidential and Trade Secret Information

The information an association member provides to the association about his or her employees or business may be confidential information, particularly when the member disclosed the information with the understanding or expectation that it would be held in confidence.  So, a member that routinely advertises its business address would probably not have an expectation that that information would be held as confidential by the association.  On the other hand, that member would probably expect that his or her plans to attend your next conference, or his or her back office telephone number would not be disclosed to others.

The association's membership database (which is presumably more complete than a mere membership list) may be trade secret.  It probably has economic value because it is not generally known to others, and is not readily ascertainable by others.  However -- and this is a problem in many instances -- the information must be maintained with reasonable secrecy.  So, if an association publishes its membership directory on its website, its membership directory is not being maintained as secret, and is not a trade secret (which is why it is not unlawful or actionable if a vendor uses an association’s membership directory if that directory is not maintained as a secret).  If however, there are components of membership data that are NOT included in the membership directory, then that information might be trade secret if reasonable steps are taken to maintain its secrecy.

The existence and terms of association's contracts with its vendors are probably confidential, and may also be trade secret to the extent that the information holds economic value, is not readily ascertainable by others (very probable), and it is the subject of reasonable efforts to maintain secrecy.

Protecting Trade Secrets

As noted above, the efforts taken to maintain secrecy of the "secret" information is absolutely critical.  Unless the information is maintained as a trade secret, it can be difficult to enforce trade secret law when a misappropriation occurs.  In order for trade secret law to be enforceable, the trade secret information must be treated as secret on an everyday basis.  This is frequently the reason that trade secret obligations cannot be enforced.

Trade secret files should be locked up in a file cabinet or restricted-access room, or password protected.  Access to and use of this information should be governed by carefully crafted policies and procedures to ensure that only those persons with a need to have access to the information have that access.  Log-in and log-out records are helpful.  Do not give customers or members your address labels or data file; rather, have them give you the materials they want mailed, and charge them a reasonable fee for doing so.  Employees or contractors having access to that information should be required to sign nondisclosure and confidentiality agreements.  

These measures not only help ensure the enforceability of trade secret laws, they go a long way towards avoiding theft and misappropriation in the first place.   Beef up your security protocols, and treat your key information as secret, and make your employees and contractors do the same.  And when a violation of the information occurs, your association will have a reasonable chance to do something about it.

More on trade secrets soon...

Tuesday, February 5, 2013


Associations and "Unclaimed Property"

By Mark Alcorn and MaryAnne Bobrow

A relative passes away.  Charged with administering the estate, all due diligence is taken to ensure all property of the decedent had been property disbursed and/or disposed of in accordance with the decedent’s wishes.  Yet several years later, a notice arrives from the state of California that there exists unclaimed property of the decedent that will belong to the state unless it is claimed following procedures specified in the notice.  If you were in this situation, you would take all steps necessary to resolve the issue.  As an association professional, what does your association do when faced with similar dilemmas?

Does your association possess "Unclaimed Property"?  Before you answer “no,” consider that unclaimed property includes such items as dues that were supposed to be returned, a refundable deposit on booth space, a check that was returned to the association due to lack of current mailing information, wages for a former employee that can no longer be found, and/or uncashed payments to vendors that have become stale?  While the temptation may be great to void transactions such as those described above, the association or business does not get to keep this property.  In fact, possession of this property triggers significant responsibilities for the holder.

Unclaimed Property Legal Requirements

Many associations and businesses do not realize that they hold unclaimed property, or that they are subject to reporting requirements and possibly the obligation to turn the unclaimed property over to the state.  

In California and many other jurisdictions, the law requires associations and businesses to give written notice to the owner of the unclaimed property.  If the property is not claimed, the association must report that it is holding the property to the State Controller on state issued forms.  Then, if the property remains unclaimed, the association must pay or deliver to the State Controller the "abandoned" property.  Property is presumed to have been abandoned when it remains unclaimed by the owner for more than three years after it became payable.  

Additionally, an association or business must maintain records concerning unclaimed property for a period of seven (7) years.  

Significant penalties can be incurred for failure to abide in these laws.  These penalties include fines and interest at a whopping 12% per year.  Some penalties can be excused under limited circumstances.

Recommendations

How can you ensure your association complies with laws governing unclaimed property?  We recommend that association bylaws make it clear that dues, booth fees, sponsorship fees, and similar funds are not refundable.  We also recommend that a special account be established for unclaimed property, and that the association adopt internal policies that help ensure that unclaimed property is handled properly.  If possible, return unclaimed property to its rightful owner not later than three (3) years from the date it first became payable/returnable.

We also recommend that associations inform and educate their respective memberships about laws pertaining to unclaimed property.  An informative summary of the law, an excerpt of the law, and simple forms the members can use could be a great service to the membership.

Resources

Information about California's unclaimed property law can be found at http://sco.ca.gov/upd_faq_about_q01.html.  Unclaimed property law and regulations are available at http://www.sco.ca.gov/Files-UPD/guide_upd_updlaw.pdf.


Thank you for the help with this posting:

MaryAnne P. Bobrow, CAE, CMP, CMM, CHE
Bobrow & Associates
Association and Meetings Management
6060 Sunrise Vista Drive, Suite 1300
Citrus Heights, CA  95610
Phone:       (916) 722-8168
Fax:             (916) 722-8149
Email:         maryanne@bobrowassociates.com


Wednesday, March 7, 2012

Social Media and Employment Background Checks

It's almost too tempting.  And too easy.  And too inexpensive.   With little or no effort, you can use the Internet to learn more about candidates for open positions in your nonprofit organization.  The more you know about the candidate, the better, right?  Besides, who will know?

For that matter, why not check the background of current employees to see what they are up to.  Are they bashing the nonprofit online?  Are their off-hours activities reflecting poorly on the organization?  Are they making purchases that they cannot afford on their paltry salary?

As is the case with so many shortcuts, there are a number of problems and risks that arise from these kinds of social media background checks carried out by employers and prospective employers.  Such background checks can be traced in many cases, and lay the groundwork for claims of unlawful discrimination, among other things.  For example, a terminated employee or job applicant may assert that they were fired or denied employment for being gay, being in the wrong political party, for having a health problem, having children to care for, or innumerable other reasons, and that the employer wrongfully discovered these things through a social media background check.

Additionally, background checks on current and prospective employees probably amount to a “consumer investigative report” that is subject to increasing state and federal law and regulation.  (See the Fair Credit Reporting Act and Civil Code section 1786-1786.2.)

It is important that all nonprofits (and other employees, for that matter), consider the following recommendations:

1.  Adopt a policy prohibiting employees, other than the designated human resources professional, from authorizing or conducting any background checks on current or prospective employees.

2.  If conducting a social media background check, it is recommended that the background be checked by an independent, qualified professional (yes, numerous background check companies do exist).

3.  If a nonprofit or company wishes to do its own background checks using social media, it should consider – (at a minimum) – adopting the following guidelines:

¡  Decide beforehand what you are looking for (for example, illegal activity)
ú   List the topics to be examined
ú   Review the topics with counsel or HR expert
¡  Limit checks to finalists only
¡  The “searcher” and decision maker should be different people.  The searcher should not be a hiring manager.
ú   Ignore all materials not on the approved list of topics
¡  Maintain documentation of what was searched, topics and findings
¡  Inform the job applicant/employee that you will be doing the search
¡  Share search results with the candidate/employee if a negative determination is made
¡  Educate your staff concerning the risks of informal background checking

Questions relating to this subject should be referred to a professional human resources advisor or legal counsel.

Tuesday, February 28, 2012

Guidelines for CA Associations and Nonprofits Regarding Exempt vs Non Exempt Employees

One of the most difficult and important assessments an employer must make is whether an employee is exempt or non-exempt from wage and hour laws.

Wage and hour laws exist at both the Federal and California level.  Employers are required to comply with BOTH sets of laws.  However, California wage and hour laws are, for the most part, more onerous than Federal wage and hour laws.  Consequently, compliance with California wage and hour laws will almost always ensure compliance with Federal wage and hour laws.

California wage and hour laws are administered by the Industrial Wage and Hour Commission (IWC), which issues Wage Orders.  The applicable actual wage order for associations is almost always Wage Order #4.

Steps to Proper Classification of Employees

1. Clarify the detailed job requirements and functions of the position
2. Identify the appropriate wage order; review
3. Identify the correct category of the position (executive, administrative, professional), review
4. Determine whether all of the Wage Order exemption requirements are met

Wage Order #4

The following outline pertains to the Administrative Exemption rules:
  • A person employed in an administrative capacity means any employee:
  • Whose duties and responsibilities involve either:
  • The performance of office or non-manual work directly related to management policies or general business operations of his or her employer or his or her employer's customers, or
  • The performance of functions in the administration of a school system, or educational establishment or institution, or of a department or subdivision thereof, in work directly related to the academic instruction or training carried on therein; and
  • Who customarily and regularly exercised discretion and independent judgment; and
  • Who regularly and directly assists a proprietor, or an employee employed in a bona fide executive or administrative capacity, or
  • Who performs, under only general supervision, work along specialized or technical lines requiring special training, experience, or knowledge, or
  • Who executes, under only general supervision, special assignments and tasks, and
  • Who is primarily engaged in duties which meet the test for the exemption.
An administrative employee must also earn a monthly salary equivalent to no less than two times the state minimum wage for full-time employment. Full-time employment means 40 hours per week as defined in Labor Code Section 515(c).

Critical Requirements of the Wage Order

It is critical to note that an employee subject to the Administrative Exemption must be engaged primarily (more than half of the time worked) in activities that entail the regular exercise of discretion and independent judgment.   It is also critical to distinguish between “the exercise of discretion and independent judgment” and “skills and knowledge.”   These concepts are discussed in a California legal case entitled Nordquist v. McGraw-Hill Broadcasting Company, Inc. (1995), 32 Cal.App.4th 555 (available via a Google search).   The case involved a television news anchor/news director, finding that the anchor was not exempt from California wage and hour laws.  The court stated the following:

"The most frequent cause of misapplication of the term 'discretion and independent judgment' is the failure to distinguish it from the use of skills and knowledge. An employee who merely applies his or her knowledge in following prescribed procedures or in determining which procedures to follow, or who determines whether specified standards are met ... is not exercising discretion and judgment of the independent sort associated with administrative work....

A second cause of the misapplication of the term 'discretion and independent judgment' involves employees who make decisions, but not at a level appropriate to administrative work. In some sense, almost every employee is required to use discretion: the shipping clerk may decide the method of packing, the truck driver decides the route, the bookkeeper decides which ledger to post first, but none of these decisions are important enough to count as part of an administrative function. Matters of consequence are those of real and substantial significance to the policies or general operations of the business of the employer or the employer's customers. This does not mean that exemptions are limited to persons who participate in the formulation of overall policies regarding the operation of the business as a whole-the tasks may be directly related to merely a particular segment of the business, but still must have a substantial effect on the whole business.” 

The court further noted:

“The DLSE Manual provides that the use of "discretion and independent judgment" are distinguishable from the use of skills and knowledge.  An employee who merely applies his knowledge in following prescribed procedures is not exercising discretion and judgment of the independent sort associated with administrative work. (DLSE Manual, § 10.62.)”

Important Tip

More often than not associations miscategorize meeting planners, membership directors and coordinator positions as exempt probably based on their misapplication of the administrative exemption.  While these positions entail the use of critical thinking, they primarily involve the application of skills, not judgments of material importance to the organization.  These positions should be carefully analyzed to ensure they truly meet the criteria for exemption.


Conclusion

Unless the position falls clearly within one category or the other (exempt or not exempt), the matter should be referred to a competent advisor.  The decision concerning whether a position is exempt or not should not be made by the person holding that position.   Records should be maintained concerning the basis for the determination.

Wednesday, February 22, 2012

Member Record Inspection Rights (California Outline)

It is not unusual for an association to receive requests for information from its members.  Sometimes the member making the request has a genuine concern about the well-being of the association, and sometimes they have a personal agenda.  Many times the member incorrectly believes that the association is a like a public agency, such as a school district or city council, and subject to more onerous disclosure requirements.  In fact, associations are not public entities, and not subject to those requirements.  This outline explains California mutual benefit and public benefit corporation member inspection rights, and the obligations placed on those corporations/associations.

Member Inspection Demands

An association’s obligations to respond to a member record inspection demand begin upon receipt of a written inspection demand.  A sample demand is provided at the end of this outline.  The association may also wish to respond to verbal requests for information, but it is advisable to always require a written request, and to respond to all written requests for information in a uniform manner.  Doing so helps avoid the appearance of favoritism, and helps ensure that the rights of the member and the association are protected.

The most important components of a record inspection demand are (1) a statement of exactly what is being requested, and (2) a statement of the purposes for which the information is being requested.  This information must be evaluated, as discussed below, to respond appropriately to the request.

Nonprofit Members have Inspection Rights

Members of California nonprofit organizations, including mutual benefit and public benefit corporations have inspection rights that may not be taken away, not even by the bylaws.  See Corporations Code sections 6310-6338, and 8310-8338.  All references in this outline are to the California Corporations Code.

The documents must be produced in writing, or in a format readily capable of being converted into a tangible form.  6320(b), 8320(b).  Alternatively, the entity can provide access to the documents (6330(a) (1) and 8330(a)(1)), and the member has the right to copy the documents.  6311, 8311.

(Note:  It is important to note that member inspection rights vary substantially from director inspection rights.  Directors have “absolute” rights to inspect corporate documents (6334, 8334), subject to various limitations and exceptions.)

What May be Inspected by a Member:

Articles, bylaws, and all amendments to articles and bylaws
5160, 7160
Adequate and correct books and records of account
6320(a)(1), 8320(a)(1)
Minutes of all board, committee and member meetings
6320(a)(2), 8320(a)(2)
Member lists
6320(a)(3), 8320(a)(3)

The meaning of “books and records” is not clearly defined by the Corporations Code, but is widely believed to refer to the journals and ledgers, but not to source documents such as checks and invoices, or specific documents not relating to the operation of the corporation as a whole.

May “the budget” be inspected by a member?  The answer is not entirely clear, but it seems likely that a non-detailed budget is probably subject to inspection.  Should the association provide a budget that shows the exact amounts paid to each contractor or employee?  Probably not.  It would be important to examine the inspection demand and its purposes to assess the circumstances.

It is not uncommon for an unhappy member to demand to see the salaries of staff members, and to plan to use this information to attack the association (oftentimes senior staff members earn higher salaries than the typical member of their association).  Although it is important for many reasons that staff salaries be reasonable, it seems unlikely that disclosing the salaries would benefit the association.  In fact, publication of staff salaries would be harmful in most instances, because of its effect on staff morale, and because it would make it easier for other entities to “poach” the association’s top performers.

Time for Response to Inspection Demands

Within a “reasonable time” after receipt of a written demand.  6333, 8333.  No specific deadlines are included in the law, except for membership list inspections (see below).

Special Rules for Membership Lists

Different, more restrictive rules apply with respect to membership lists. 6330, 8330.  Specifically, a member has the right to inspect and copy all members’ names, addresses, e-mail addresses and voting rights (“the membership list”) at any reasonable time, on five (5) business days’ advance notice (the notice must state the proposed use of the list).  Further, a nonprofit must respond to a member’s request for a copy of the organization’s membership list within 10 days after receipt of the request, or the date specified in the request, whichever is first.  6330(a)(2), 8330(a)(2).  The organization may impose a “reasonable charge” for producing the list.

The nonprofit may respond with an “alternative method” of achieving the same purpose. 6330(c), 8330(c).  The alternate method often takes the form of offering to mail particular materials to the desired members of the organization.  It makes a great deal of sense to offer the alternate method of providing the membership list in most instances.

Members Must have a “Permitted Purpose” For Inspection

A member’s inspection rights are conditioned upon the member demonstrating that the demand is reasonably related to his or her interests as a member.  6330, 6333, 8330, 8333.  This is generally held to refer to “the interests of members” in general, and not the individual interests of the member.  Further, there should be a logical nexus between the documents sought and the interests (of the members in general) to be protected.  Thus, a demand for accounting books and records of a corporation that made available audited financial statements would seem to advance the members’ interests very little, unless there is cause to doubt the competence or integrity of the auditing firm.

Purposes that require Board consent: 

  • Solicitation of money or property
  • Any purpose not reasonably and in good faith benefit the corporation
  • Any commercial purpose
  • For sale to any person
  • 6338, 8338


Use of the member list to solicit votes for a director election is regarded as a legitimate use, and does not require the board’s consent.  Use of the list to encourage votes for a candidate for Congress or other public office is not a proper purpose, and could even jeopardize the corporation’s tax exempt status.

Satisfying the Member

Responding to a member records inspection demand is more of an art than a science.  It is the obligation of the association to comply with the law while protecting the association from unnecessary risks.  Even if an inspection demand is unreasonable, it can be risky to stonewall it.   Stonewalling it merely fans the flame of conspiracy and cover-up theories.   The association should strive to find the right balance in its response to meet its legal obligations, to protect the association and to calm the skeptical or unreasonable member.

Sometimes a member simply cannot be satisfied.  Sometimes the member, upon completion of the lawful inspection, has many questions, demands explanations and wants to argue the merits of this or that.  While a brief discussion might satisfy the member, it generally does not.  Further, it is important not to confuse the obligation to respond to an inspection demand with an obligation to satisfy the member.  The association is legally obligated to respond to the inspection demand, it is not legally obligated to answer the members questions, or to explain the documents to the member.  Again, the association should strive for balance.

Tips for Responding to Inspection Demands

One tip to consider in dealing with an angry or suspicious member who is not satisfied with the association’s lawful response to the inspection demand is to simply state that the concerns the member is expressing will be shared with the board.  This gives the member the sense that they have been heard, and keeps the board in the loop concerning the dispute about records.

Another tip to consider is posting the organization’s tax exemption application, tax exemption letter, and three most recent Form 990 filings on the organization’s website.  This provides a feeling of openness and transparency, while disclosing no more than is required by law anyway.  It also simplifies response to the demand.

Finally, when responding to a hostile or aggressive member, it is wise to draft all responses as if they were being sent to the general membership.  Leave out any indignation or retaliation.  It is the general membership that matters, not the member who cannot be satisfied anyway.  And, third parties seeing the correspondence – a judge, for example – will be able to see that you have been reasonable and cordial.  This can make a big difference in terms of how members and judges will view the dispute.

Judicial Involvement

A corporation may petition a superior court for an order setting aside the inspection demand. 6331(a), 8331(a).  Various technical rules and requirements apply to this process, and it is necessary to involve legal counsel in this process.

A corporation may recover damages that arise from improper use of a membership list (6338(a), 8338(a)), and any profits derived from such misuse, and possibly even exemplary damages.  6338(b), 8338(b).

A member may petition a superior court for an order compelling the association to comply with the demand.  6331(i), 8331(i).  A court may award a member court costs and attorney fees if it finds that the corporation’s failure to comply with a proper inspection demand was unjustified.  6323(h), 6331(h), 6337, 8323, 8331(h), 8337.

Conclusion

Associations have a legal obligation to respond to written record inspection demands.  It should do so methodically and consistently, and attempt to balance the situation to satisfy the member while conforming to the law and protecting the association.

It makes sense to involve counsel when a member inspection demand is received, even if only to ensure that the organization is aware of any changes to the inspection laws.  If it is suspected that the member has hostile intentions concerning the organization, it is important to do so.  In many cases, inspection demands may be addressed by providing access to 990 returns, which must be made available for inspection anyway.

*****
Sample Records Inspection Request

Dear ___:

Pursuant to California Corporations Code section (select one: 6310-6338 or 8310-8338), I request access to the following documents of ______ for the purpose of viewing and copying them:

1. The minutes of all meetings of the board of directors commencing on January 1, 2008 through the present.
2. The budget, annual reports and financial statements for 2008, 2009, 2010 and 2011.
3. The minutes of all meetings of the members commencing on January 1, 2008 through the present.
4. The minutes of all meetings of the Finance Committee, Executive Committee, Building Committee, and Membership Committee commencing on January 1, 2008 through the present.
5. All versions of the bylaws from January 1, 2000 through the present.

The purpose of this request is _____ (that I am concerned that the organization has improperly revised its bylaws and failed to hold elections, that the organization may be near insolvency, and that organization funds may have been misused, etc.).  I wish to review these records in order to determine whether or not my concerns are valid.  The information sought shall be used solely for these purposes, and shall not be used for any commercial purpose.

I am an active member of the organization.  My membership number is _____.

Please provide access to these documents, or copies of them, not later than ______.  Please do not hesitate to contact me at this office with any questions or concerns.

Best regards,


__________________

Thursday, February 16, 2012

Association Mergers (California Outline)

The process of merger or consolidation of two or more nonprofit mutual benefit corporations is simpler than one might think in many cases.  It involves relatively few steps, certain approvals by the board and sometimes the members, and filings with the Secretary of State.  If charitable assets are held by either merging corporation, approval by the Attorney General is also required, ostensibly to ensure that the charitable assets continue to be used for charitable purposes, and to prevent those assets from wrongly inuring to the benefit of any individual or entity.  The process describe here is for a California entity, but the laws are similar in most jurisdictions.

For purposes of mergers, a “survivor” or “surviving corporation” is the corporation into which other entities are merged. A “disappearing corporation” is the corporation that does not survive the merger.

The merger process is carried out approximately as follows:

1. The merging organizations meet and agree to the basic concept of exploring a merger.  At that point, the parties should enter into a written agreement (a letter of intent) obligating the parties to explore the matter in good faith, addressing confidentiality, and addressing termination of the exploration (used when one or more of the parties decides not to move forward with a merger).  At this point, a “due diligence” review process may begin.  

2. The due diligence review should be tailored to the circumstances.  With large and complex entities, the review should be much more involved than reviews necessary for merging very small entities.  I recommend that a checklist for a merger be established at the time the letter of intent is drafted, so that all of the parties will know what to expect.  I recommend that both the chief staff officer and chief elected officer sign the letter of intent, just to be sure that everyone is on the same page.

3. Upon approval of the concept and due diligence review by each organization, a detailed Merger Agreement and Certificate of Approval of Merger Agreement (for each merging corporation) is drafted and approved.  (If either corporation has members, the members of that corporation (and any other entity specified in the Articles of Incorporation) must also approve.  This is sometimes complicated when there are different classes of members.  If so, the matter should be reviewed with counsel.)

4. The surviving corporation files the Certificate of Approval of the Merger, along with the Agreement of Merger and the written consent of the Attorney General (if required), with the Secretary of State.

Upon completion of this process, the separate existence of each “disappearing” corporation ceases.  The surviving corporation succeeds to all rights and property, and is subject to all debts, liabilities and trust obligations of the disappearing corporation.  Corporations Code section 6020(a).  The surviving corporation succeeds to any bequest, devise, gift, grant, or promise in a will or other donation.

Although the merger process is not necessarily complex, it makes a lot of sense to involve your business, tax and legal advisors in your discussions of merger or consolidation.

Wednesday, November 16, 2011

Automatic Revocation of Tax Exemptions - An Outline of Issues

This is outline of issues pertaining to the automatic revocation of tax exemptions by the IRS that occurred as a result of failing to file a tax return for three consecutive years.

BASICS OF AUTOMATIC REVOCATION

Exempt entities required to file returns (990, 990EZ, 990PF), with exceptions:

  • $25K - Years ending prior to January 1, 2010
  • $50K - thereafter  [See IRC section 6033(a)(3)]

2006 law, the Pension Protection Act of 2006, revised prior law to ADD ANNUAL NOTIFICATION REQUIREMENT

  • Applicable to all entities not required to file returns
    • Must file Form 990-N e-Postcard (or other 990 form)  [IRC 6033(i)]
    • Applicable for all tax years past 2006
    • 2007, 2008, 2009 were first years for which Annual Notification Requirement was in place
  • First automatic revocations took place in 2010
    • Effective dates of automatic revocation: date third consecutive 990N not filed by the 15th day of fifth month following the close of the fiscal year
  • IRS sends notices of automatic revocation to "last known address"

EFFECT OF AUTOMATIC REVOCATION

  • Entity is no longer exempt, and is subject to regular income tax
  • Contributions might not be tax deducible (especially if charitable)
  • Issues to consider:
    • Need we notify the board?  (Yes)
    • Need we notify the members?  (Unclear)
    • No change in corporate status  (Still a corporation, simply not tax exempt)
    • File different returns?  (Unclear.  Depends on whether exemption is reinstated.)
  •    Challenges to automatic revocation difficult
    • IRS taken hard line
    • Declaratory judgment court action prohibited [IRC 7428(b)(4)]
    • Long story short, you must apply for reinstatement of the exemption

REINSTATEMENT

Two options/"Transitional Relief":

  • Reinstatement - a new Form 1023 (501(c)(3)) or 1024 (501(c)(4-6) and others)
    • Effective the date of application for reinstatement; date of filing
  • Retroactive Reinstatement - a new Form 1023 or 1024
    • Effective the date of automatic revocation
    • Must establish "reasonable cause" for the failure to file  [IRC 6033(j)(3)]
    • Describe reasonable cause factors such as:
      • volunteer responsibility/lack of awareness of filing requirement
      • good faith reliance on information provided by IRS
      • circumstances beyond the control of the taxpayer
      • substantial, written procedures to prevent future failures
      • do above for every year for with a return or notification was not filed
    • Must file within 15 months of automatic revocation

Application required, even if not required in past (eg: group exemption)

  • User fee $850
  • Reduced user fee $100 under Revenue Procedure 2011-36
  • Eligibility
    • The entity was NOT required to file notices/returns prior to 2007
    • The entity was eligible to file Form 990N e-Postcard
    • The entity had annual gross receipts of not more than $25,000 in 2007, 2008 and 2009             based on averaged gross annual receipts for current filing year plus the two preceding years
  • File not later than 12/31/2012
  • Write "Notice 2011-43" on top of Form 1023/1024, AND on the envelope
  • Include properly completed 990/990EZ forms for 2007, 2008, 2009 and interim years
  • Attach letter with declaration:

"[Name of organization] was not required to file annual information returns for taxable years beginning  before 2007; was eligible in each of its taxable years beginning in 2007, 2008 and 2009 to file a Form 990-N e-Postcard; and had annual gross receipts of normally not more than $25,000 in each of its taxable years beginning in 2007, 2008 and 2009.

I, [insert name and title of an officer or director] declare, under penalties of perjury, that I am authorized to sign this request for retroactive reinstatement on behalf of [insert name of organization], and I further declare that I have examined this request for retroactive reinstatement, including the written explanation of all the facts and information pertaining to the claim for reasonable cause and the evidence to substantiate the claim for reasonable cause, and to the best of my knowledge and belief, this request is true, correct and complete."

CHAPTERS/SUBORDINATE UNITS

  • Same rules apply, even if group letter exemption
  • Parent responsibility to verify?
  • Parent responsibility to assist chapters with revoked exemptions?
  • Records and record keeping challenges
  • Management of chapter risks
    • Separate incorporations
    • Affiliation agreements
    • Supporting chapters

HELPFUL LINKS/RESOURCES

Automatic Revocation of Exemption

Automatic Exemption Revocation for Non-Filing: Reinstating Tax-Exempt Status

Annual Exempt Organization Return: Who Must File

Automatic Exemption Revocation for Non-Filing: Requesting Retroactive Reinstatement

Rules concerning reduced User Fee

Rules Concerning "Transitional Relief"

Automatic Revocation of Exemption List -

Annual Electronic Filing Requirement for Small Exempt Organizations — Form 990-N (e-Postcard)

Form 990 Series - Which Form to File (Filing Phase-In) 

Form 1023 Application

Form 1024 Application