GuideStar webinar on 04/10/12. Presenters: Suzanne Ross McDowell, Partner, Steptoe & Johnson LLP, and Pamela Jowdy, Senior Product Manager, GuideStar http://www2.guidestar.org/rxg/news/webinars/webinar-archive.aspx

1. Grantmaker Due Diligence
g
in the
Pension Protection Act Era:
How to identify supporting organizations and align
your grants administration process with th 21st
t d i i t ti ith the
century tax code
10 April 2012
1
© 2012, GuideStar USA, Inc. All Rights Reserved. This information is copyrighted subject matter owned by
GuideStar USA and is protected by United States and international copyright law.

2. Today’s Facilitators
Pamela Jowdy
Senior Product Manager, GuideStar
pjowdy@guidestar.org
Suzanne Ross McDowell
ll
Partner, Steptoe & Johnson, LLP
smcdowell@steptoe.com
2

3. Participant Poll
#duediligence
3

4. Today’s Objectives
1. Internal Revenue Code: Considerations for Grantmakers
 Why Verify: Pension Protection Act of 2006
 Supporting Organizations:
pp g g Relationships and Control
p
 Expenditure Responsibility: Defined
 Revenue Procedure 2011-33: Practical Implications
p
 Due Diligence: Methods and Best Practices
2. GuideStar Charity Check: Anatomy of a Solution
y y
 How it works and what it delivers
 Failure to File Automatic Revocations
 Why it’s 100% compliant
 New advanced features: streamlining grantee management
3. Q & A 4

5. Internal Revenue Code
Impact of the Pension Protection Act of 2006 on
Grantmakers
Suzanne Ross McDowell ll
Partner
Steptoe & Johnson LLP
smcdowell@steptoe.com
5
#duediligence

6. Summary of
Pension Protection Act Provisions
Affecting Grants to
Supporting Organizations
6

7. Changes Made by the
Pension Protection Act of 2006
i i f
 Private Foundations (PFs)
 Grants to certain supporting organizations (SOs) do
not count towards minimum distribution
• Penalty: 30% of shortfall; must make correction
 Grants to certain SOs require expenditure
responsibility
p y
• Penalty: 20% of grant on foundation; potentially 5% on
directors and officers; must make correction
 Donor Advised Funds (DAFs)
 Grants to certain SOs require expenditure
responsibility
• Penalty: 20% of grant on sponsor of DAF
7

8. What is a Supporting Organization?
 Internal Revenue Code provides--
 All 501(c)(3) organizations are either private
foundations or public charities
p
 Private foundations are subject to greater regulation
 Public charities include:
 Schools, hospitals churches
Schools hospitals, churches, government units
 Organizations that meet specific requirements for
broad public support
 SOs
SO
 All other 501(c)(3) organizations are private
foundations
8

9. What is a Supporting Organization?
(cont’d)
( ’d)
 SO is a 501(c)(3) organization which is--
 Classified as a public charity (not a PF)
 Because it has a specified relationship with another
public charity (the supported organization)
 Types of relationships
 Type I – Parent-subsidiary
 Type II – Brother-sister
 Type III – Operated in connection with
• Functionally Integrated
• Not Functionally Integrated
9

10. Which Supporting Organizations
Require Expenditure Responsibility?
i di ibili
 Type III Non-Functionally Integrated SOs
 All other SOs if--
 A disqualified person of the foundation
di lifi d f h f d i
making a grant to the SO directly or indirectly
controls the SO or a supported organization;
pp g ;
or
 A donor to a DAF, or a person designated by
the donor to advise with respect to
distributions, directly or indirectly controls a
supported organization
10

11. What is Expenditure Responsibility?
 Procedures designed to ensure that PF funds
are used for exclusively charitable purposes--
 Pre-grant
Pre grant inquiry
 Written grant agreement with the grantee
 Grantee must keep funds separate from
noncharitable funds
 Regular reports from the grantee to PF
 PF reports to IRS on Form 990-PF that
expenditure responsibility requirements were
met
11

12. Which Grants Do Not Count Toward a
Private Foundation s Minimum
Foundation’s
Distribution?
Grants to--
 Type III Non-Functionally Integrated SOs
 All other SOs if--
 A disqualified person of the foundation
making a grant to the SO directly or indirectly
controls the SO or a supported organization
12

13. When Does a Person Have Control?
 No IRS guidance provides clear method for
determining whether control exists.
 Control exists when one or more disqualified
persons or donors may, by aggregating their
votes or positions of authority require the SO
authority,
or supported organization to make an
expenditure,
expenditure or prevent the SO or supported
organization from making an expenditure.
See Notice 2006-109.
13

14. When is a Type III Supporting
Organization Functionally Integrated?
O i ti F ti ll I t t d?
 Proposed Regulations issued on September 24 2009
24,
 Until temporary or final regulations are issued, can
rely on Notice 2006-109 or Proposed Regulations
y p g
 Notice 2006-109: SO is functionally integrated
• When the activities engaged in for or on behalf
of a supported organization(s) are activities to
perform the functions of, or to carry out the
p p
purposes of, such organization(s), and;
, g ( ), ;
• But for the involvement of the SO, would
normally be engaged in by the supported
organization(s) themselves.
i ti ( ) th l
14

15. When is a Type III Supporting
Organization Functionally Integrated?
(cont’d)
 Proposed Regulations: SO is functionally integrated
 If engages in activities substantially all of which
directly further the exempt purposes of the supported
y p p p pp
organization(s), by performing the functions of or
carrying out the purposes of the supported
organization(s); and
 But for the involvement of the SO, would normally be
engaged in by the supported organizations
 Includes owning and managing exempt-use property
 Does not include fundraising or managing non-
exempt use property for a supported organization
 Special rules for hospitals and governmental units
15

16. Conducting Due Diligence to
Avoid Excise Taxes
under the
Pension Protection Act
16

17. Step 1: Determine if Potential
Grantee i a 501(c)(3) Organization
is ( )( ) i i
 Approved Methods
 IRS Determination Letter
 IRS Pub. No. 78
• Pub. No. 78 Weekly Updates in Internal
Revenue Bulletin
 IRS Business Master File (BMF)
 If grantee is not a 501(c)(3), no new rules
501(c)(3)
 If grantee is a 501(c)(3), must determine if it
is an SO
17

18. Step 2: Determine if Potential
Grantee i a SO
is
 Approved Methods
d h d
 IRS Determination Letter
• Section 509(a)(1) and 509(a)(2) organization – not a
SO
• Section 509(a)(3) organization = SO
• IRS letter may be silent
 BMF
• Direct access (Notice 2006-109)
• Access to IRS BMF data through third party such as
GuideStar (Rev. Proc. 2009-32; Rev. Proc. 2011-33)
( ; )
 Pub. 78 does not include information
 If grantee is not a SO, can make grant—no new rules
 If grantee is a SO must determine the type
SO,
18

19. Step 3: If Grantee is a SO, Determine
the Type of SO
 Method 1: IRS Determination Letter and BMF
 Most Determination Letters don’t include Type
• Prior to 2006, no need for Type
 May be based on
• Advance Notice of Proposed Rulemaking (ANPRM)
issued on Aug. 2, 2007
• Prop. Reg. issued on Sept 24, 2009
 When Prop. Reg. finalized, rules may change
 IRS modifying BMF to show type of SO
• Updated monthly
• Reflects changes that occur after determination letter
issued
i d
19

20. Step 3: If Grantee is a SO, Determine
the Type of SO (
h f (cont’d)
’d)
 Method 2
 Reasoned written opinion of counsel of PF or DAF
20

21. Step 3: If Grantee is a SO, Determine
the Type of SO (
h f (cont’d)
’d)
 Method 3:
 Good Faith Reliance on Written Representation
by Grantee
• Representation by officer, director or trustee
• Describes how officers, directors and trustees
of grantee are selected
• For Type I or II, references governing
document provisions establishing relationship
p g p
with supported organization
• For Type III-- identifies supported
organizations
i ti
21

22. Step 3: If Grantee is a SO, Determine
the Type of SO (
h f (cont’d)
’d)
Method 3 (cont’d)
 PF or DAF must review
• Governing documents of SO and supported organization
• For Type III, representation from supported
organizations
o Re types of activities
o That, but for SO, supported organization would conduct
activities of SO
Note: cannot rely on Form 990 to determine Type
22

23. Step 3: If Grantee is a SO, Determine
the Type of SO (
h f (cont’d)
’d)
 If grantee is a Non-Functionally Integrated
Type III SO, then PF or DAF must exercise
expenditure responsibility and grant does not
dit ibilit d td t
count toward non-operating foundation’s
minimum distribution
 If grantee is a Type I, Type II or Functionally
Integrated Type III SO must determine if a
SO,
disqualified person of a PF or donor or
donor’s designee of a DAF has control
g
23

24. Step 4: Determine if Disqualified Person
or Donor has Control over SO or
Supported Organization
 No IRS approved procedure; use definition in Notice
2006-109
 Obtain list of supported organization(s)
 Identify disqualified persons for a PF and donors and
their designees for a DAF
g
 Determine if disqualified persons exercise control
over SO or supported organization
 Determine if d
D t i donors/designees control supported
/d i t l t d
organization
 Direct or indirect control
24

25. Step 4: Determine Control (cont d)
(cont’d)
 If disqualified person or donor (or donor’s
designee) has control, then must exercise
expenditure responsibility and grant does not
dit ibilit d td t
count toward a non-operating foundation’s
minimum distribution
25

26. Summary
 Type III which is Not Functionally Integrated
 Grant does not count toward non-operating
foundation’s minimum distribution
 PFs and DAFs must exercise expenditure
responsibility
 Type I II or Functionally Integrated Type III with
I,
disqualified person or donor control
 Grant does not count toward non-operating
foundation s
foundation’s minimum distribution
 PFs and DAFs must exercise expenditure
responsibility
26

27. GuideStar Charity Check ®
Anatomy of a Solution
Pamela Jowdy
Senior Product Manager
#duediligence 27

28. Why Verify?
The Challenge
g
Three Unique Due Diligence To-Do’s:
To-Do:
To Do: Data Source:
Publication 78
Verify Current Charitable Status and
Internal Revenue Bulletin
Identify Supporting Organizations
with 509(a)(3) status IRS B i
Business M t Fil
Master File
Identify revoked and / or IRS Automatic Revocation of
reinstated organizations Exemption List
#duediligence 28

29. Why Verify: IRS Data Sources
Pub 78 and Internal Revenue Bulletin
Establish Tax Deductibility and Verify Current Charitable Status
 IRS Publication 78:
 Also known as Cumulative List of Organizations
 Includes all organizations to which charitable contributions are tax deductible
 Current tax-exempt status, percentage of contributions that are tax deductible
tax exempt
 Deductibility limitations
 Published monthly (new for 2012); published quarterly previously
 IRS Internal Revenue Bulletin:
S te a e e ue u et
 Also known as the ‘IRB’
 Lists organizations whose charitable status has been changed or revoked
 Updated weekly
Rev. Proc. 82-39, 1982-1 C.B. 759 Sec.3.01 and Sec.3.02 states that grantors “may rely on
the classification of an organization listed in or covered by Publication No. 78.”
#duediligence 29

30. Why Verify: IRS Data Sources
IRS Business Master File
Determine 509(a) Status
 IRS Business Master File:
 Lists all tax-exempt organizations registered with the IRS
 Published monthly (not necessarily on the same day as Publication 78)
 Includes reason for non-private foundation status, aka “public charity classification”
 RReason f non-private foundation status = 509(a) status
for i t f d ti t t 509( ) t t
 509(a)(1) and 509(a)(2):
 A public charity that receives a substantial amount of public support to fund its operations
 509(a)(3): Supporting Organization
 A public charity that provides support to one or more publicly supported organizations
 Must demonstrate that is has a particular type of relationship with the organization it
supports
#duediligence 30

31. Why Verify: IRS Data Sources
IRS Automatic Revocation of Exemption List
p
Identify Revoked Organizations
 Failure to file annual return or notice with the IRS for three consecutive years
 990, 990N, 990EZ or 990PF
 Federal tax-exempt status revoked
p
 Subsequently reinstated organizations remain on the Automatic Revocation List
 Erroneously listed nonprofits and nonprofits that already hold an IRS determination
y p p y
of nonfiling requirement will be deleted from the revocation list
 http://www.irs.gov/charities/article/0,,id=221600,00.html
 Procedures for reinstatement and other helpful FAQs
#duediligence 31

32. How Big?
Data Source Size and Scope
p
IRS Business Master File: March 2012
 1,560,339 total organizations
 24,626 Supporting Organizations
 408 include supporting organization type
 73% Type I SO
 14.7% Type II SO
 6.9% Type III Functionally Integrated SO
 5.4% Type III Not Functionally Integrated SO
 ~2,200 organizations reinstated from a previous BMF
 ~6,800 organizations not seen in any previous BMF
 1,059,911 501(c)(3)s
 960K Form 990 / Form 990 EZ / Form 990 N filers
 98K Form 990 PF filers
#duediligence 32

33. How Big?
Data Source Size and Scope
p
IRS Publication 78: March 2012
 825,612 total organizations
 337,384 subordinate organizations covered under group exemption but not
listed in Pub 78 that GuideStar matches from BMF
IRS Automatic Revocation List: April 2012
 443,447 total organizations
 2,189 subordinate organizations covered under group exemption but not
listed in Pub 78 that GuideStar matches from BMF
#duediligence 33

34. Grants Administration Charity Check v1.5 Charity Check v2.0
Milestones 100% compliant with
IRS FAQ and
Revenue Procedure
•100% compliant
•Alerts
•Parent /
Parent
2009-32 Subordinate Linkage
1969 August
g March June June
2006 2007 2009 2011
Internal Revenue Code
Tax Reform Act Pension Protection IRS FAQ on IRS Revenue IRS Revenue
Act Business Master File Procedure 2009 32
2009-32 Procedure 2011-33
The legal framework Reliance
for the regulation of New requirements on Formalizes March Supersedes Rev
private foundations grants to certain Allows grantors to use 2007 FAQ Proc 2009-32
and public charities supporting third party resources
is established organizations to obtain required IRS Precedential Clarifies reliance on
[509(a)(3)] BMF information instrument upon BMF, Pub 78,
about a potential which compliance Revocations Lists
Definition of Type III grantee’s charity and grantmaking and maintains
supporting classification under teams can rely requirements for
organizations section 509(a)(1), (2) third party BMF
or (3) resources
Definition of Type III
functionally integrated
supporting
organizations 34

35. Why Verify: Pension Protection Act
IRS Revenue Procedure 2011-33
June 2011
Source: http://www.irs.gov/pub/irs-drop/rp-11-33.pdf
#duediligence 35

36. GuideStar Charity Check
An Integrated, One-Stop Verification Solution
g , p
How it Works
FTF Revocations
 Incorporates Weekly Internal Revenue Bulletin
 Marries Publication 78 data with IRS Business Master File data
 Married, but never modified
 Pub 78 Additions included
 OFAC verification included (organization level)
 501p suspension messaging included
p p g g
 Parent – Subordinate matching (BMFPub 78)
 Group Exemption Messaging 36
 12 year track record of consuming and managing IRS data

37. GuideStar Charity Check
An Integrated, One-Stop Verification Solution
g , p
What it Delivers
Date and time stamp
Electronic or hard copy
documentation
Verify Current
Charitable Status
Latest Quarterly Pub 78
Weekly Bulletin Date
EIN Identify
IRS BMF Date Supporting
Organizations
Reason for Non-Private with 509(a)(3)
Foundation Status status
37

38. GuideStar Charity Check
An Integrated, One-Stop Verification Solution
g , p
Why it Works
Fully compliant with recently issued g
y p y guidance
from IRS concerning reliance on third-party
resources for IRS BMF data:
The grantees’ name, EIN and public charity classification
(aka “reason for non private foundation status”) under
non-private
section 509(a)(1), (2) or (3) is presented in the report
A statement that the information in the report is from the
most currently available IRS monthly update to the BMF,
y y p ,
along with the IRS BMF revision date
The date and time of the grantor’s search is included on the
report t
The third party IRS BMF data and report must be in a form
which the grantor can store in hard copy or
electronically.
electronically
38

39. Why Verify?
The Challenge: Recap
g p
Three Unique Due Diligence To-Do’s:
To-Do:
To Do: Data Source:
Publication 78
Verify Current Charitable Status and
Internal R
I t l Revenue B ll ti
Bulletin
Identify Supporting Organizations
with 509(a)(3) status IRS B i
Business M t Fil
Master File
Identify revoked and / or IRS Automatic Revocation of
reinstated organizations Exemption List
#duediligence 39

40. Charity Check User Experience
Two Clicks to Compliance
Pamela Jowdy
Senior Product Manager
GuideStar
#duediligence 40

41. Charity Check v2.0 New Features
 E Mail Alerts
E-Mail
 Customizable based on 9 different events
 Upload up to 20K EINs
 Create individual organization alerts
 Actively track grantee status as events occur
 Upload Excel files from MicroEdge GIFTS and other grants
management software solutions
 Easy 3-step configuration
 Single click access to Charity Check reports from Alert Emails
Single-click
 Parent – Subordinate Linkage
 Identify over 300K subordinate orgs not listed in Pub 78 but covered
under group exemption
 Single click link to Parent Charity Check Report
 Display of IRB Revoked Organizations
 Condense 20+ minute manual search process to single click
 Confirm compliance of past grants by viewing date of IRB revocation
 Link directly to the IRB PDF for documentation
41

42. Charity Check v2.0 New Features
42

43. Charity Check v2.0 New Features
 E Mail Alerts
E-Mail
 Customizable based on 9 different events
 Upload up to 20K EINs
 Create individual organization alerts
 Actively track grantee status as events occur
 Upload Excel files from MicroEdge GIFTS and other grants
management software
 Easy 3-step configuration
 Single click access to Charity Check reports from Alert Emails
Single-click
 Parent – Subordinate Linkage
 Identify over 300K subordinate orgs not listed in Pub 78 but covered
under group exemption
 Single click link to Parent Charity Check Report
 Display of IRB Revoked Organizations
 Condense 20+ minute manual search process to single click
 Confirm compliance of past grants by viewing date of IRB revocation
 Link directly to the IRB PDF for documentation
43

44. Common Questions
1. How quickly d
1 H i kl does G id St publish IRS revocations once posted?
GuideStar bli h ti t d?
2. Can I search for revoked organizations by EIN?
3. Do i t bl
3 D printable and PDF reports have a flag for revoked organizations?
d t h fl f k d i ti ?
4. Can I set up alerts or manage a watchlist?
5. Any
5 A progress on identifying S
id tif i Supporting O
ti Organization T
i ti Type??
6. Can grantors still rely on Letters of Determination?
7. What
7 Wh t are my verification options if I d not subscribe to G id St Charity Check?
ifi ti ti do t b ib t GuideStar Ch it Ch k?
8. What is OFAC and why is it important?
9. Is the Advance R li Process no longer in place?
9 I th Ad Ruling P l i l ?
10. Does the Charity Check web service include revocation data?
11. Do Premium P A Y G R
11 D P i Pay As You Go Reports include revocation information?
t i l d ti i f ti ?
44

45. The Letter of Determination
Isn’t this good enough?
g g
What it is
 Static, historic snapshot
 Only accurate at time of issuance
 Confirms 501(c)(3) status
What it is NOT
 Does not account for changes in
charitable status since date of
original issuance
g
 Some letters include SO Type
(2006)
 Does not reflect automatic
revocations
45

46. Exempt Organizations “Select Check”
Grantmaker Verification Options
IRS Publication 78 Online: “EO Select Check”
 IRS website provides search
functionality for three databases:
 Pub 78 data (eligible to
receive tax-deductible
contributions)
 Form 990-N (e-Postcard)
filers
 Automatic Revocation data
 Can only search one database
at a time
 Must
M t search IRB separately
h t l
 No date or time stamp
 No reinstatement flag
g
46
Source: http://apps.irs.gov/app/eos/

47. IRS Internal Revenue Bulletin
Grantmaker Verification Options
IRS IRB
 Includes status changes and revocations
g
 Published weekly in pdf and html format
 Does not include EIN
 Not searchable
Source: http://www.irs.gov/irb 47

48. IRS Business Master File
Grantmaker Verification Options
IRS Downloadable Business Master File
Draft of manual solution for
509(a)verification directly from
IRS BMF txt file
48

49. OFAC and SDN
Definition and Options
Office of Foreign Assets Control / Specially Designated Nationals
 http://www.ustreas.gov/offices/enforcement/ofac/
p g
Source: Technology Affinity Group and Council on Foundations’ 2007 Grantmakers Information Technology Report, September 2007
49

50. Advance Ruling Process
Temporary and Final IRS Regulations
 Issued September 9, 2008
 Eliminated the advance ruling process for 501(c)(3) organizations reasonably expected to be publically
supported
 IRS automatically classifies new 501(c)(3)s as public charities for first 5 years if can reasonably be expected to
be publically supported
 Includes public charities whose advance ruling period has not yet expired or expired after June 9, 2008
 Final Regulations issued September 8, 2011
 Charity Check no longer publishes the Advance Ruling date in the body of the report
 Footer messaging and link to IRS resource persists
50
http://www.gpo.gov/fdsys/pkg/FR-2011-09-08/pdf/2011-22614.pdf

51. Charity Check Web Service
XML* Data and PDF Report Delivery
*Extensible Markup Language =
easy way to share structured d t
t h t t d data
via ether
51

52. Premium Pay As You Go
Single reports without a subscription
commitment
52

53. Suzanne Ross McDowell
Partner, Steptoe & Johnson LLP
202.429.6209 | smcdowell@steptoe.com
 Practice focuses on needs of exempt organizations
 Member, IRS Advisory Committee on Tax Exempt
and Government Entities, 2004-2007;
Chair, Exempt Organizations Group, 2006-07
 Chair, ABA Tax Section Exempt Organization Comm,
2011-present; Vice Chair, 2007-2011
 Chair,
Chair Tax Section, District of Columbia Bar, 2005-2006;
Section Bar 2005 2006;
Vice Chair, 2004-2005
 Fellow, American College of Tax Counsel
 Associate Tax Legislative Counsel, Office of Tax Policy,
US Department of the Treasury, 1984-1987
1984 1987
 Former SVP and Deputy General Counsel, National Geographic Society
 Frequently speaks and writes about exempt organization issues
 Listed in Chambers USA, America’s Leading Lawyers for Business, Best
Lawyers in America, and District of Columbia Super Lawyers
www.steptoe.com 53

54. Contact Information
webinars@guidestar.org
Suzanne Ross McDowell
Partner, Steptoe & Johnson, LLP
smcdowell@steptoe.com
#duediligence 54

55. Appendix
55

56. GuideStar Charity Check
Access Points: Results
#duediligence 56

57. GuideStar Charity Check
Access Points: Report
p
57

58. GuideStar Charity Check
509(a)(3) Supporting Organization
( )( ) pp g g
58

59. GuideStar Charity Check
Not Verified in Publication 78
59

60. GuideStar Charity Check
Not Listed in IRS Business Master File
60

61. GuideStar Charity Check
OFAC Organization: Results
g
61

62. GuideStar Charity Check
OFAC Organization: Report
g p
62

63. Alerts and Watchlists
Charity Check v2.0
y
63

64. International Grantmaking
Considerations
 Does the foreign charity already have a Letter of Determination?
 Exercise expenditure responsibility
 Equivalency Determination
 International Repository Project:
 www.USIG.org [COF-sponsored website]
 www.ngosource.org [international repository project website]
 Become familiar with the USA Patriot Act
#duediligence 64

65. Supporting Organization Types
Options and Approaches
 Supporting Organization Guidesheets published by IRS
 GuideStar Charity Check policy and long term product vision
 http://www.irs.gov/charities/article/0,,id=174956,00.html
 Consult your legal counsel!
65

66. Grantmaker Due Diligence
in the
Pension Protection Act Era:
How to identify supporting organizations and
align your grants administration process with
the 21st century tax code
© 2012, GuideStar USA, Inc. All Rights Reserved. This information is copyrighted subject matter owned by
GuideStar USA and is protected by United States and international copyright law.
66