Go slow with bingo

Certain tax-exempt organizations are authorized by state law and local ordinance to raise money from bingo, provided that the following criteria are met: 1) the proceeds must be used only for charitable purposes; 2) the games must be conducted by volunteer members of the organization; 3) no salaries can be paid with bingo proceeds; 4) there can be no commingling of bingo money with any other funds (the charity must set up a special bank account just for bingo proceeds – separate from its general operating fund); 5) the organization conducting the bingo game must hold a valid license/permit issued by the city or county in which the bingo is played; and 6) specific rules regarding the location of bingo games must be followed.

Charity Poker Nights

NEW LAW FOR CHARITY“POKER NIGHT” FUNDRAISERS

Beginning January 1, 2007, a new California law allows eligible nonprofit organizations that have been in existence for at least three years and register with the Division of Gambling Control to hold “charity poker night” fundraisers under specified circumstances. To learn more about the permitted controlled games, see Division of Gambling Control.

AG registration change

NEW REQUIREMENTS FOR INITIAL AG REGISTRATION

Nonprofit organizations registering for the first time with the Attorney General’s Registry of Charitable Trusts must now complete a new form, the CT-1, and provide the materials and information required by newly amended section 300 of the Attorney General’s regulations. For a summary of the principal documents and information needed to register, check the initial registration guide. The new initial registration requirements became effective January 10, 2008.

501(c)(4) orgs - should you be registered?

Everyone thinks registration with the California Attorney General's Registry of Charitable Trusts is only for 501(c)(3) organizations.

To the contrary, the AG's office says that certain 501(c)(4) orgs must also register. According to the AG, California's registration and reporting requirements are based on how the organization is incorporated, not the subsection of Internal Revenue Code 501(c) under which exemption from taxation was granted. This means that a 501(c)(4) organization incorporated as a California nonprofit public benefit corporation must register and file annual reports with the Attorney General's Registry of Charitable Trusts.

Surprised? So are most of my c4 clients.

Exempt status under Section 501(c)(4) is provided to nonprofit "civic leagues" and similar organizations operated exclusively for the promotion of social welfare. While similar in some ways to both 501(c)(3) charitable orgs and 501(c)(6) trade associations, the 501(c)(4) designation is really a catch-all between the two for organizations that don't clearly fall into either of the other categories.

Because many 501(c)(4) orgs began life assuming they would be a 501(c)(3) or a 501(c)(6), the incorporation status of these entities in California is a mixed bag. Some of my c4 clients are incorporated as public benefit corps and some are incorporated as mutual benefit corporations.

So find out. Pull out those dusty old articles of incorporation, and if "public benefit" lurks in the verbiage, you need to get registered.

Don't gamble with your c3 status

Most of us involved with charitable organizations in California know that raffles and bingo nights are legal (though governed by extensive rules and conditions). I also know that many charities think they can legally hold a "casino night" or poker tournament. Not so unfortunately.

The following caution from the Attorney General's website says it best:

"While eligible tax-exempt organizations registered with the Attorney General’s Registry of Charitable Trusts may conduct fundraising raffles, charities and anyone other than a licensed gaming establishment are not allowed to offer poker tournaments, “Monte Carlo” or “Casino Night” events, or casino games such as craps or roulette. It is the Attorney General’s view that anyone other than a licensed gaming establishment holding controlled card games would violate state law (Penal Code §§ 330;337j). The only exception is for games played with cards in private homes or residences in which no person makes money for operating the game, except as a player."

Legislation has been introduced to allow charities to legally conduct poker and casino nights as fundraisers, but to date, the AG's notice above still represents the current state of the law in California.

Better late than never

Recently, several unrelated clients have asked me about the timing/deadline for filing the IRS application for tax exempt status. Although I knew the general rules, my conversation with an IRS technical assistance agent the other day clarified a few nuances. . . . All the info below assumes an incorporated nonprofit entity.

If the organization is applying for 501c3 status and the application is submitted within 27 months of incorporation, then exempt status will be retroactive back to the date of incorporation. If the application is submitted after that 27 month deadline, then the applicant can still obtain 501c3 exempt status but with the following caveat. For the period between the incorporation date and the date the organization filed the application more than 27 months later, the organization will be deemed to have had 501c4 status rather than 501c3 status. The 501c3 status will be effective only as of the date the organization filed the application and thereafter - not back to the incorporation date.

With respect to applications for other types of exempt status (e.g. 501c4, c5 or c6) there is no hard deadline to file the application according to the agent I spoke with - a nonprofit organization can apply anytime and exempt status will be retroactive back to the date of incorporation if it's granted.

Another question I've been asked lately by several clients is "what tax return do we file while exempt status is pending?" The IRS agent told me the following:

If 2005 was the organization's first year of operation, for instance, and the organization had less than $37,500 in revenue for 2005, then it does not have to file the 990 for 2005 at all if an application for exemption is pending.

If 2005 was the organization's first year of operation and it had $37,500 or more in revenue (and it has an application for exemption pending), then it must file the 990 and check the box that says tax exempt status is pending.

But, I asked the agent, "What if the organization has been incorporated a long time, 2005 was the first year it had any revenue, and it has never filed for exempt status? What return do they file then?" Unfortunately, where there is no exemption or pending application on file, the organization must file a Form 1120 (corporate return) and pay any tax that is owed. Of course, if the organization's expenses for 2005 offset the revenue, then little or no tax may be owed, and if the organization receives exempt status later, it can apply for a refund of the taxes paid. However, wouldn't it be smarter to just get the exempt status in the first place?

Do you know the difference?

Every year I have at least a couple clients who unwittingly mischaracterize would-be employees as "independent contractors". Baaaaaaaaaad idea.

In determining whether the person providing the service is an employee or an independent contractor, the IRS looks at a variety of factors, commonly referred to as the "20 factor test". All 20 don't have to be in favor of independent contractor or employee status in order to find one way or the other, but the direction in which most of the factors point will generally be the result. Particularly important in the analysis is the degree of direction and control the employer has over the worker.

The more control the employer has, the more likely it is that the worker is an employee under the law. Even "the right to direct and control" will be considered - whether or not the employer actually directs or controls the worker.

So what's the big deal? A nonprofit employer can be held liable for back employment taxes, plus interest and penalties, if a worker is incorrectly classified as an independent contractor. Depending on the number of workers misclassified, the amounts paid to them, and the length of time they were misclassified, the "hit" to a nonprofit's bottom line can be substantial.

It's your ass[ets] . . .

Many nonprofit organizations don't realize that the governance of the organization and the conduct of its directors and officers can significantly effect the corporate shield / personal liability protection that everyone seems to take for granted. Yes, if your nonprofit is incorporated in California, the volunteer directors and officers have some statutory protection from personal liability. But only if the corporation is operated correctly, follows corporate formalities, adopts appropriate procedures, and only if the directors and officers conduct themselves within the required standards of good faith and prudent decision-making. Otherwise, in the event of a lawsuit, a good plaintiff's attorney may be able to "pierce the corporate veil" - making the personal assets of the directors and officers vulnerable to a damage award. Think a day of "Board training" is too expensive, or a waste of time? Think again.

Even if you have a well-run corporate nonprofit and generally prudent directors and officers, don't confuse the protection provided by the statute with the need for good insurance coverage. In fact, for California public benefit corporations (501c3 organizations), insurance - or a good faith attempt to get insurance - is required as part of the criteria to qualify for the personal liability protection offered by the statute. And, just because the statute may protect directors and officers from a finding of liability, it doesn't cover the attorneys' fees that will be incurred in fighting the lawsuit. But a good insurance policy just might . . . .

"R" you protected?

You know that little "R" in the circle you see next to product names and logos? It means that the owner of that mark has registered the name (or slogan, or logo design) with the US Patent and Trademark Office. If you see the "R" next to a name or logo associated with a product/good, it's a registered trademark. If it's next to the name or logo of a non-product-oriented group (like a charity or association) it's a registered service mark.

Businesses have always recognized the importance of "trademarking" their goods, and protecting (fiercely) their brand identity. Nonprofit organizations are often slower to "get that", but the importance of protecting their names, logos, and catchy slogans is no less important. If you run a nonprofit and want to create (or already have) a recognizable identity for your organization via its name or logo, an important step is applying for a service mark registration at the US PTO. Yeah, it's a process (takes a while to wade through it), and there's a fee ($335 last I checked), but if you have a cool logo design, or a catchy slogan that distinguishes you from the rest of the crowded nonprofit field (and you plan to use it for more than a couple years) - get registered!

Can't afford it? Or don't think you'll use a particular slogan or logo design for very long? YES, you can still protect it - even without the formal registration process. Assuming nonprofits generally aren't branding goods, your name, logo design, and slogans are service marks (not trademarks), and you can achieve some level of common law protection from others infringing on these assets by simply putting the little "sm" (with or without the circle) next to the name, logo design, or slogan when you use it on your letterhead, educational materials, website, etc. How easy is that?