Articles Posted in Non-Profit Organizations

iStock-621263016-300x97We previously discussed the Business Entity Harmonization Bill (Senate Enrolled Act 443 or P.L. 118-2017) passed last year by the General Assembly in the following posts:

iStock-621263016-300x97[March 3, 2018. The General Assembly amended some of the provisions created the Business Entity Harmonization Bill, as discussed in a Postscript to this series.]

This is the last in four-part series. The first three parts are here: here, here, and here.

This Part IV describes some flaws of Senate Enrolled Act 443 that we ran across while writing the first three parts.  We hope the General Assembly will address them, either in the 2018 session or another.

iStock-621263016-300x97[March 3, 2018. The General Assembly amended some of the provisions created the Business Entity Harmonization Bill, as discussed in a Postscript to this series.]

This is the second of a four-part series discussing the Business Entity Harmonization Bill passed by the Indiana General Assembly in 2017. An overview of the bill is provided in Part I.

Senate Enrolled Act 443 creates, effective as of January 1, 2018, a new Article 0.5 in Title 23 of the Indiana Code, the Uniform Business Organizations Code, that includes a number of provisions that apply to Indiana business corporations (including professional corporations and benefit corporations, but excluding insurance companies), limited liability companies (LLCs, including series LLCs), limited partnerships (LPs), limited liability partnerships (LLPs), and nonprofit corporations, eliminating a number of inconsistencies between similar provisions for different types of entities. The following discussion is a brief description of some of the more important provisions, drawing attention to new or substantially changed provisions.

iStock-621263016-300x97[March 3, 2018. The General Assembly amended some of the provisions created the Business Entity Harmonization Bill, as discussed in a Postscript to this series.]

Indiana law provides for several types of business and nonprofit entities, each of which is governed by one or more articles of Title 23 of the Indiana Code, all of which require similar filings with the Indiana Secretary of State, and all of which are capable of undergoing transactions such as mergers and conversions into other types of entities. The types of entities and the governing portions of Title 23 are:

iStock-91632872-244x300Although the tax reform bill just passed by the U.S. House of Representatives retains the income tax deduction for individuals who make contributions to charitable organizations (i.e., organizations that are tax exempt under Section 501(c)(3) of the Internal Revenue Code), it may nonetheless have significant effects on the amount of charitable giving by Americans. The reason lies in the increase in the standard tax deduction for individuals and the elimination of other deductions.

Increasing the Standard Deduction

The tax code provides several types of deductions that reduce the amount of tax owed by individual taxpayers, including deductions for home mortgage interest and contributions to charitable organizations. However, the tax code also provides a minimum “standard deduction” for taxpayers who have less than that amount in itemized deductions. Taxpayers who itemize deductions receive a tax benefit by making a charitable contribution, but not those who take the standard deduction. For example, the after-tax cost of a $100 contribution by most itemizing taxpayers in the 25% tax bracket is only $75. For taxpayers who take the standard deduction, the cost of a $100 contribution is $100 in both before- and after-tax dollars.

[This post is one in a series written by Smith Rayl’s newest member, Rose Shingledecker.]

Earlier this month, the Seventh Circuit Court of Appeals decided Doermer v. Callen, No. 15-3734 (7th Cir. Feb. 1, 2017). In a previous post, we reviewed the facts and explored what the case had to say about the board of directors and directors’ terms. Today we’ll inch closer to the issue at the center of the case: whether a non-member director of an Indiana nonprofit corporation has standing to bring derivative claims on behalf of the corporation.

But before getting to derivative claims, let’s consider what it means to be a member of a nonprofit corporation. Perhaps you’ve made a donation to a nonprofit in your community and been recognized as an “annual member” for your contribution. Generally it is okay for an organization to refer to its donors and other people who support the organization as members. However, these types of donor membership programs usually do not grant the donor legal or statutory membership in an organization.

[This post was authored by Smith Rayl’s newest member, Rose Shingledecker.]

Last week, the Seventh Circuit Court of Appeals decided Doermer v. Callen, No. 15-3734 (7th Cir. Feb. 1, 2017), a case that illustrates and implicates several important aspects of Indiana nonprofit corporation law. Over the next few posts, we’ll explore some of the key aspects of the case and what it has to say about Indiana nonprofit law.  First up: the board of directors and directors’ terms.

At the center of the case is the Doermer Family Foundation, Inc., a nonprofit corporation formed under the Indiana Nonprofit Corporation Act of 1991 (the “Act”). The initial board of directors consisted of a father; a mother; their son, Richard Doermer; and daughter, Kathryn Callen. Each initial director had a lifetime appointment.

gavel-1238036Last July, the Indiana Court of Appeals decided Rogers v. State, 60 N.E.3d 256 (Ind. Ct. App. 2016), in which the attorney for a criminal defendant had deposed an employee of a charitable organization who held a degree in social work from an accredited university but not a license from the Behavioral Health and Human Services Licensing Board of the Indiana Professional Licensing Agency. The attorney for the organization advised the social worker not to answer certain questions on the grounds that the information was subject to the privilege for communications between a social worker and her client.  The defendant filed a motion to compel the social worker to answer the questions, and the court denied the motion. The court gave the defendant permission to file an interlocutory appeal with the Indiana Court of Appeals, which reversed the trial court’s decision, holding that the privilege does not apply to unlicensed social workers. The State sought transfer to the Indiana Supreme Court, which held oral argument before denying transfer.  Because transfer was denied, the decision of the Court of Appeals is now final.

Ind. Code 23‑25.6‑6-1 provides that, with some exceptions, a “counselor” cannot be compelled to disclose communications with a client.  Counselor is defined by Ind. Code 25‑23.6‑1‑3.8 as “a social worker, a clinical social worker, a marriage and family therapist, a mental health counselor, an addiction counselor, or a clinical addiction counselor who is licensed under this article.”  The question put to the Court of Appeals was one of statutory interpretation:  Does the phrase “who is licensed under this article” apply to all six professions in the list, or does it apply only to the last one, clinical addition counselors?

In arguing that the modifying phrase applied only to the last item in the list, the State relied in part on a canon of statutory construction (i.e., a rule a court sometimes uses as a guideline for interpreting statutes) called the doctrine of the last antecedent, which says that when a list of nouns is followed by a modifier, the modifier is presumed to apply only to the last one in the list (i.e., the “last antecedent”) unless there is a comma between the last item and the modifier.  Because there is no comma between “clinical addiction counselor” and “who is licensed under this article,” the State argued, the phrase does not apply to “social worker.” Therefore, an unlicensed social worker is within the definition of “counselor;” and the privilege applies.

ReportsIndiana nonprofit corporations are being converted to a new schedule for filing business entity reports with the Indiana Secretary of State.  In the past, a business entity report has been due every year in the same month in which the organization was incorporated. Nonprofit corporations will now file business entity reports every other year, the same schedule that applies to business corporations and LLCs. The filing fee will double from $10 to $20 for reports filed on paper.  Online filings will cost $22.

The transition began on July 1, 2016, when existing organizations began filing biannual reports and paying the $20 filing fee. Organizations that file a business entity report in July through December 2016 will file their next business entity reports in 2018 and then will continue to file reports in every even numbered year (still in the same month in which they were incorporated). Organizations that file their first biannual report in January through June of 2017 will file their next reports in 2019 and then in every odd numbered year.

New organizations incorporated in an even numbered year will file business entity reports in the same month of every even numbered year thereafter. New organizations incorporated in an odd numbered years will file business entity reports in the same month of every odd numbered year.

iStock_000018610908Small.jpgAs anticipated, the Internal Revenue Service announced a streamlined, much simpler and shorter version of Form 1023, the Application for Recognition of Tax Exempt Status.

Standard Form 1023

The standard Form 1023 is 26 pages long, not counting a 38-page instruction booklet, 3 additional pages of instructions the IRS has added to the front of the form making changes to the form and the instructions, and a 2-page checklist to make sure the entire submission package is complete and compiled in the correct order. But that’s not all — one of the most important sections of the form, Part IV, is only about a quarter-page long but it calls for the applicant to attach a detailed narrative description of the organization’s activities explaining how each of them supports the organization’s charitable purpose, and several other sections leave so little room to include all the necessary information that most applicants find it necessary to attach addtional pages. With all that, and with the other information that must be submitted, such as articles of incorporation and bylaws, Form 1023 submission packages can easily reach 50, 60, or 70 pages.

The IRS says that they currently have a nine-month backlog of Form 1023 applications, and it is possible that number is actually an understatement. Once received by the IRS, Form 1023 applications go through a sort of triage process. Applications that are complete and do not appear to pose significant obstacles to approval are directed into a queue to be processed more quickly than applications that will require the IRS to request significantly more information. Just this week our office received a determination letter for a Form 1023 that had been pending for more than seven months, and that application was, presumably, directed through the quicker process.

Form 1023-EZ

In contrast, Form 1023-EZ is less than three pages long, although that is a little misleading because it still requires an instruction booklet with 10 pages of instructions to explain how to complete the form, a 7-page worksheet that must be completed in order to determine if the organization is eligible to use the streamlined form, and a 3-page list of National Taxonomy of Exempt Entities (NTEE) Codes from which the applicant must select the code that best fits the organization. Nonetheless, Form 1023-EZ should be considerably less burdensome than the standard form.

After completing the worksheet, the applicant must file the form online at www.pay.gov, which requires a username and password obtained through free registration. Any applications submitted on paper are automatically deemed incomplete.

Eligibility

Most organizations with annual revenues less than $50,000 for the current year, each of the previous three years, and the next two projected years are eligible to submit Form 1023-EZ. However, some types of organizations must submit the standard Form 1023 regardless of revenues. Here is a partial list of organizations that are ineligible for Form 1023-EZ:

  • Those organized as limited liability companies.
  • Churches and associations or conventions of churches. (Note: Churches are not required to submit an application for recognition of tax exempt status, but if they do not, they will not have a determination letter from the IRS, which can be useful for various reasons. Those that wish to receive a determination letter will continue to submit Form 1023 rather than 1023-EZ.)Schools, colleges, and universities.
  • Hospitals, medical research organizations, and hospital organizations.
  • Health maintenance organizations (HMOs).
  • Accountable care organizations (ACOs).
  • Supporting organizations (i.e., charitable organizations that are derive their status as public charities from their supporting relationship to another charitable organization that is a public charity).
  • Credit counseling organizations.
  • Organizations that have previously had their tax exempt status revoked except organizations that have had their tax exempt status revoked for failing to file Form 990 (or 990-EZ or 990-N) for three consecutive years.

That last part is significant because many smaller organizations have lost their tax exempt status for failure to file Form 990, and Form 1023-EZ will be available to those wishing to have their tax exempt status reinstated.
Continue Reading