Hunton Law

Legal Counsel for Nonprofit & Tax-Exempt Organizations

Legal Counsel for Nonprofits, Foundations & Social Enterprises

Praise and Handclapping for Unicorns Unite

At a time when writing a journal entry for work seemed about as appealing as doing my taxes, I came across a book that I had ordered in 2018.  Unicorns Unite had been sitting on my office bookshelf, among various books on nonprofit effectiveness, philanthropy, social enterprise, and nontraditional legal careers.  I had intended to read it as soon as it was delivered, but between trips to the Eastern Sierra and Oregon, hosting my parents, taking care of my toddler, and running my law practice, I hadn’t even cracked open the book until recently.  From the moment I started reading, I was whisked into a humorous, creative, and open-minded space where I could explore how things currently are in the nonprofit sector and how things could be.  Authors Jessamyn Shams-Lau, Jane Leu, and Vu Le have written an excellent book that is both lighthearted and serious.  The book defines “unicorn” as “a persistent, visionary, and dedicated nonprofit or foundation professional who shines with brilliance and practices humility”.  It is to this audience of unicorns that the book calls to action, providing charts, exercises, and methods for fixing the relationship between foundations (funders) and nonprofits (grantseekers and doers). I highly recommend it to anyone in the nonprofit sector. The full title of the book is Unicorns Unite: How Nonprofits & Foundations Can Build Epic Partnerships.

IRS Will Be Focusing on These Exempt Organization Issues

In early October the IRS released its Fiscal Year 2019 Program Letter explaining which areas of tax-exempt organization compliance it will be focusing on in the coming year.   

The following bulleted list is copied directly from the Program Letter and represents areas of concern to the IRS.  Accordingly, the IRS will be devoting more resources to detecting noncompliance in the following areas:

  • Internal Revenue Code (IRC) Section 501(c)(7) entities: focus on investment income, non-member income and non-filers of Form 990-T, Exempt Organization Business Tax Return, by tax-exempt social clubs.

  • IRC Section 4947(a)(1) Non-Exempt Charitable Trusts (NECTs): focus on organizations that under-report income or over-report charitable contributions.

  • Previous for-profit: focus on organizations formerly operated as for-profit entities prior to their conversion to IRC Section 501(c)(3) organizations.

  • Self-dealing by private foundations: focus on organizations with loans to disqualified persons.

  • Early retirement incentive plans: determine whether federal, state or local governmental entities that provide cash (and other) options to employees as an incentive for early retirement have applied proper tax treatment to these benefits.

  • Forms W-2/1099 matches: compare payments reported on Form 1099-Misc., Miscellaneous Income, with wages reported on Form W-2, Wage and Tax Statement, and subject to Federal Insurance Contribution Act (FICA) tax and income tax withholding.

  • Notice CP 2100 (backup withholding): determine whether mismatched and/or missing taxpayer identification numbers on Form 1099 indicate failure to comply withbackup withholding requirements.

  • Worker classification (misclassified workers): determine whether misclassified workers result in incorrectly treating employees as independent contractors.

The entire Program Letter is available at this link:

New Online Tool to Check Tax-Exempt Status

In May 2018 the IRS replaced the “EO Select Check” online tool with a more comprehensive online tool called “Tax Exempt Organization Search” (TEOS). 

EO Select Check was a limited, albeit useful, tool that provided the following information to the public: whether an organization is eligible to receive tax-deductible contributions; whether an organization has had its tax-exempt status revoked for failure to file required forms or notices for three consecutive years; whether an organization filed a Form 990-N (e-Postcard) annual electronic notice with the IRS.  EO Select Check was particularly helpful for running a quick check to see if an organization was listed as a Section 501(c)(3) public charity or private foundation.   

The new tool, TEOS, provides the same information previously available on EO Select Check, in addition to offering users the ability to:

  • View images of Forms 990, 990-EZ, 990-PF, and 990-T filed by 501(c)(3) organizations. Currently, only 990 series forms filed in 2018 are available, and new filings are being added monthly. 
  • Conduct mobile-friendly searches on smartphones and tablets.
  • View favorable tax-exempt status determination letters issued by the IRS since January 2014.

The IRS allows users to rely on information provided on TEOS in determining the deductibility of their contributions.

501(c)(3) Tax Exemption Application Updates

The IRS recently changed several rules and processes relating to the application for Section 501(c)(3) status (IRS Form 1023 and Form 1023-EZ). 

IRS Form 1023 was revised in December 2017.  The IRS cautions applicants to use the most recent versions of tax exemption applications and instructions to avoid processing delays.  The most significant revisions to the Form 1023:

  • Eliminated a question about the advance ruling process
  • Eliminated an outdated question about organizations applying for 501(c)(3) recognition more than 27 months after formation
  • Increased financial data reporting requirements for organizations older than one year

Good news!  The user fee for Form 1023 has been reduced from $850 to $600.  Instructions to Form 1023 indicate that user fees are subject to change, so always check the current user fees before submitting your application.

Processing times for Form 1023 continue to vary, although overall processing times have significantly decreased in the past several years.  Many applications are reviewed in as few as four weeks, while some applications are reviewed in six months.  Applications that require additional information will undergo a lengthier review period, often around six months or more.  An organization that has submitted Form 1023 to the IRS is permitted to solicit and receive contributions while its application is pending, provided that it discloses to funders that it has not yet obtained recognition of tax-exempt status. 

The IRS continues to accept Form 1023-EZ from small nonprofit organization applicants that meet the eligibility criteria.  Form 1023-EZ requires less information from applicants than Form 1023, yet Form 1023-EZ was revised recently to require additional information about the applicant’s mission, activities, annual gross receipts, total assets, and public charity classification.  The user fee for IRS Form 1023-EZ is $275. 

The IRS website is a great source for helpful articles, issue snapshots, podcasts, and videos for tax-exempt organizations and applicants, such as reporting requirements while Form 1023 is under review, filing deadlines for employers, and charitable deductions. 

Benefit Corporations Supporting Charitable Causes

A recently released Internal Revenue Service Information Letter has practical implications for social enterprises formed as benefit corporations that wish to support charitable organizations and causes in connection with the benefit corporation’s public benefit purpose. 

In the Information Letter, the IRS stated that payments made by a benefit corporation to an Internal Revenue Code Section 501(c)(3) nonprofit charitable organization for the purpose of “institutional or goodwill advertising to keep the benefit corporation’s name before the public” will be treated as valid business expenses under IRC Section 162(a).  Section 1.162- 20(a)(2) of the Income Tax Regulations provides, in part, that expenditures for institutional or goodwill advertising which keeps the taxpayer’s name before the public are generally deductible as ordinary and necessary business expenses provided the expenditures are related to the patronage the taxpayer might reasonably expect in the future.  So long as the benefit corporation satisfies the above standard, the benefit corporation’s payments to charities will be treated as fully deductible business expenses rather than partially deductible charitable contributions (limited to 10% of the corporation’s taxable income under IRC Section 170).   

Since 2010, when the first benefit corporation state statutes were enacted, benefit corporations have been subject to the same federal tax laws as regular business corporations.  With the issuance of the recent IRS letter above, we are now seeing the emergence of certain tax benefits offered to benefit corporations, signaling that regulatory agencies view benefit corporations as generating sufficient public benefit to justify some level of tax preference.  We will have to wait and see whether further tax benefits will be extended to benefit corporations in the coming years.

Announcing “Rewards and Risks of Fiscal Sponsorship” Panel on April 26th

“Rewards and Risks of Fiscal Sponsorship”

Wednesday, April 26, 2017, 8:00am-9:30am

DZH Phillips, 135 Main Street, First Floor Lobby, San Francisco, CA 94105

Join us for a panel program on fiscal sponsorship.  We will discuss financial implications, insurance liabilities, and legal obligations when considering fiscal sponsorship opportunities.

Panelists include: Janet Holland, Partner, CPA, DZH Phillips; Karen Frost, Chief Financial Officer, Larkin Street Youth Services; and Zoe Hunton.  Moderated by Cole Kinney, Nonprofit Practice Leader, G2 Insurance Services.

Please register for this complimentary program via EventBrite.

Watch the Recording of the March 21st Impact Investing Panel

In case you missed it, the video recording of “The Many Ways Impact Investing Affects Nonprofits” is available for on-demand viewing on the Foundation Center's YouTube channel.  During this 90 minute panel, Zoe Hunton, Stephanie Cohn Rupp, and Ruth Shaber discussed characteristics of impact investments, legal issues relating to impact investing, and ways that nonprofits participate in impact investing and benefit from impact investments.  If you have any questions, please do not hesitate to contact Zoe at  

Announcing Impact Investing Panel on March 21st

“The Many Ways Impact Investing Affects Nonprofits”

Tuesday, March 21, 2017, 3:00-4:30pm PT

Foundation Center West, 312 Sutter Street, San Francisco, CA 94108

Join Foundation Center West for a panel event on impact investing – how nonprofits participate in impact investing, why the increase in impact investing matters to nonprofit organizations, legal issues relating to impact investing, and developments in the impact space. 

Panelists include: Stephanie Cohn Rupp, Managing Director, Impact Investing, Threshold Group; Ruth Shaber, MD, President, Tara Health Foundation; and Zoe Hunton. 

Register here.  

Greater Assurance for Impact Investors

Four years after the Internal Revenue Service issued proposed regulations regarding program-related investments by private foundations, the regulations were finalized and published in the Federal Register on April 25, 2016.  The final regulations contain nine new examples of permissible program-related investments (PRIs) to for-profit businesses, individuals, and nonprofit organizations, adding to the nine examples that existed previously.  For a definition of a PRI, see Section 4944(c) of the Internal Revenue Code and  my journal post published on 12/31/12. 

To read the text of the Regulations, see this Internal Revenue Bulletin

The new examples of PRIs provide assurance to private foundations that a wider range of investments can qualify as PRIs.  Furthermore, the examples reduce the perception that PRIs are perilous, expensive, and appropriate only for the largest foundations that have significant resources and investment professionals and lawyers on staff.  As a consequence, we will likely see a rise in the number of smaller foundations (note that the majority of California foundations have $1-5 million in assets) participating in social enterprise funding transactions structured as PRIs.  This should come as good news for for-profit social entrepreneurs seeking funding, as impact investing represents a bridge to philanthropic funders.  


Fast Forward Accelerator for Tech Nonprofits Continues to Thrive

Earlier this month I had the pleasure of meeting the incredible teams participating in this summer’s Fast Forward Accelerator for tech nonprofits.  Cofounded in 2014 by Shannon Farley and Kevin Barenblat, Fast Forward is an accelerator designed exclusively for nonprofits using technology to improve the world. 

This year Fast Forward received three times the number of applications than in its first year, showing a deepening commitment to designing technology applied to a breadth of social justice, educational, and environmental causes. 

All of the accelerator participants use technologies to solve issues like education, health, and human rights, and are organized as nonprofit corporations.  Like other Section 501(c)(3) nonprofits, they must address issues relating to fundraising, financial sustainability, board governance, risk management, security and privacy, unrelated business income, political activities, international operations, and others.

This 2016 accelerator cohort includes:

  • CommonLit: equips educators with high-quality, standards-aligned digital literacy tools
  • Democracy Earth Foundation: incorruptible digital voting technology
  • Hack Club: platform for high schoolers to start awesome after-school coding clubs
  • Intelehealth: open-source mobile telemedicine platform for last mile health care delivery
  • arming tenants in neglectful housing situations with tech for legal empowerment
  • Learn Fresh: education game developer integrating professional sports to teach math
  • Open Media Project: live and on-demand searchable media software for governments
  • Think of Us: tech that improves the lives of foster youth and systems they are connected to
  • We The Protesters: digital tools for activism to end police violence and systemic racism in the US

I look forward to seeing their growth, successes, and challenges over the coming months and years. 

Podcast: What Every Social Entrepreneur Should Know About Fiscal Sponsorship

Check out my recent podcast on fiscal sponsorship, a unique tool that can increase access to funding, validity, and resources for social enterprises.  This episode is part of Innov8Social and The Impact Podcast series which feature interviews, live events, and reflections on social impact, hosted by Neetal Parekh. 

More about Innov8Social at:

Must-Read New Book on Social Enterprise

I have been thoroughly enjoying reading Neetal Parekh’s recently published book, 51 Questions on Social Entrepreneurship, on how to create social impact through business.

The book has already received numerous stellar reviews, but if you need even more reasons to pick up a copy:

  • The book is fun to read!  Its question and answer format, woven throughout a cohesive story of three social entrepreneurs, grabs the reader’s attention and effectively teaches legal and business concepts.

  • If you are ever having a slow day, or have hit an inspiration slump, then this book will pick you up and recharge you.  The author’s enthusiasm for all topics at the intersection of social innovation and law is irresistible.

  • The book gracefully challenges notions that the law is hesitant to adapt and timid in the face of change, highlighting examples of new legislation, regulations, and policies that represent the building blocks of the legal infrastructure for social impact.

  • The case studies on social enterprise throughout the world illustrate the range of efforts emerging globally.  The array is stunning!

Check out the book on the Innov8Social website, along with other tools, resources, and services available from Innov8Social.

Private Foundation Investments

The Internal Revenue Service recently issued guidance (see IRB 2015-39 dated September 28, 2015) that allows private foundations greater flexibility in making investments of foundation capital while avoiding excise taxes on jeopardizing investments.  The Notice addresses questions surrounding whether a private foundation investment whose purpose is the production of income or the appreciation of property (i.e., investments other than program-related investments) would be taxable under Internal Revenue Code section 4944.  The Notice explains that foundation managers may consider the relationship between a particular investment and the foundation’s charitable purposes in deciding whether to make an investment, and offers the following example: “a private foundation will not be subject to tax under section 4944 if foundation managers who have exercised ordinary business care and prudence make an investment that furthers the foundation’s charitable purposes at an expected rate of return that is less than what the foundation might obtain from an investment that is unrelated to its charitable purposes.”  This investment standard is now more consistent with the Uniform Prudent Management of Institutional Funds Act (UPMIFA), adopted by most states.  

Recap of “Starting & Scaling Social Enterprises” at Stanford Law School

Members of the Stanford law school, business school, and other departments, local attorneys and legal professionals, social entrepreneurs and investors attended the May 27, 2015 presentation on “Starting & Scaling Social Enterprises: A Crash Course on Social Enterprise”. 

The presenters included attorneys Zoe HuntonNeetal Parekh (lawyer, entrepreneur, cofounder of Thinktomi, and blogger at Innov8Social), and Natalia Thurston (Director of Legal Services, Social Venture Law in Oakland).  Monica Lienke, start-up attorney at Springmeyer Law and Stanford Law School Alumni Class of 2014, moderated the discussion, and Kaleisha Stuart, Stanford Law School Class of 2015, organized the event. 

The presenters offered an overview of the following topics:

  • defining social enterprise
  • development of legal infrastructure to support social enterprise
  • nonprofit and philanthropic sector issues
  • structure and funding considerations in starting and scaling a social enterprise
  • case study of Etsy’s recent IPO illustrating the unique challenges that arise from the growth and scaling of a B-Corp
  • integrating social enterprise into a legal career

Slides from the event can be viewed here.

Setting Up a Scholarship Program

Section 501(c)(3) public charities are allowed to establish scholarship programs to grant funds to individuals, subject to the following rules:

  • The scholarship program must further charitable and educational purposes within the meaning of Section 501(c)(3), as stated in the charity’s organizing document. For example, providing school tuition scholarships to individuals based on financial need and merit furthers charitable and educational purposes.
  • Scholarships must be offered to a large enough group to constitute a charitable class. Scholarships cannot be limited to designated individuals or members of a narrowly defined group. A sufficiently broad and open-ended charitable class would include, for example, low income students or female students.
  • Selection of scholarship recipients must be made in a nondiscriminatory fashion in terms of racial preference, and in an objective manner based on need and/or merit. No grants may be awarded to an officer or director of the charity, nor to a member of the scholarship selection committee, nor to a substantial contributor to the charity. Family members of these individuals are also not eligible to receive scholarships. 
  • The charity must keep adequate records and case histories to demonstrate that grants to individuals further charitable and educational purposes and that grant funds are not misused. 
  • The charity is not required to obtain advance approval from the IRS in order to make scholarship grants to individuals, however it must comply with the above rules. If the charity is applying for 501(c)(3) status and plans to conduct a scholarship program, it should describe its scholarship grant procedures on Schedule H of Form 1023. Note that private foundations are required to seek approval from the IRS prior to distributing scholarship grants.

Cooperatives as Revolutionary Business Models for Social Impact

Impact Law Forum kicked off its 2015 event series with a well-attended presentation on how cooperative businesses are shaping the landscape of the new economy and what legal practitioners need to know to support the growth of these revolutionary business models for social impact. 

The presentation was led by Sushil Jacob, Director of the Green-Collar Communities Clinic (GC3) and Staff Attorney at the East Bay Community Law Center (EBCLC), and Ricardo Nunez, Director of Legal Services and Cooperatives Program Director at the Sustainable Economies Law Center (SELC).  Attendees included practicing attorneys, staff at legal organizations, clinics, and firms, law students and individuals interested in becoming lawyers. 

Ricardo and Sushil’s presentation slides can be accessed here:

For substantive legal information on cooperative models, including legal guides and resources for practical use, visit SELC’s website. 

Be sure to check the event listings for GC3, EBCLC, and SELC, where you can learn about upcoming workshops and legal cafes covering community enterprise, justice, and advocacy issues. 

IRS Form 1023-EZ

Since July 2014, applicants seeking Section 501(c)(3) status have had the option of using a short-form e-version of the federal tax exemption application, or IRS Form 1023-EZ.  Form 1023-EZ is intended to streamline the application process for very small organizations.  At first glance, the form appears to be an exciting way to obtain expedited approval of tax-exempt status; however, applicants need to know that the form is only available to those organizations whose actual and projected gross annual revenues will not exceed $50,000.  In addition to meeting the revenue threshold requirement, applicants must meet all other eligibility requirements, as listed in the Form 1023-EZ Instructions.  Many applicants who have used Form 1023-EZ have experienced shorter wait times between submitting the electronic filing and receiving a favorable determination letter.  That said, applicants need to know that streamlined, expedited processing is not guaranteed, and the IRS may contact applicants for additional information, resulting in longer processing times.  The IRS has also stated that it will select a statistically valid random sample of applications for pre-determination reviews, which may also result in longer processing times.  

Private Operating Foundations

A private operating foundation (“POF”) is a type of private foundation that directly conducts tax-exempt activities (i.e.g, activities that can be described as charitable, educational, religious, scientific, and other Section 501(c)(3) exempt purposes). 

Unlike a private nonoperating (grant-making) foundation, which is required to distribute funds in furtherance of tax-exempt purposes, a POF may only devote a small portion of its resources towards grant-making.

Like a public charity, a POF must meet the Section 501(c)(3) organizational and operational tests.  Unlike a public charity, however, a POF does not have to demonstrate that it is publicly supported.

Let’s say a founder is considering creating an exempt organization from a single funding source or a handful of funding sources (such as a contribution from one or several individuals and/or companies), and the organization's main focus will be to develop and operate programs, rather than to distribute funds to other exempt organizations.  In this example, the organization will (i) spend a significant portion of its funding to create a public information campaign that increases awareness about new health insurance options available under the Affordable Care Act, and (ii) spend a small portion of its funding to award grants to other organizations that play a strategic role in implementing this public information campaign.  This type of exempt organization described here would be a good candidate for POF status. 

Two significant benefits of POF status: (1) a POF is not required to annually distribute income like a grant-making foundation is required to do, and (2) contributions to a POF are generally deductible by donors to the extent of 50 percent of the donor’s adjusted gross income, whereas contributions to all other private foun­dations are gen­erally limited to 30 percent of the donor’s adjusted gross income.

Fast Forward Accelerator for Tech Nonprofits

I am delighted to serve as a mentor for five stellar startups participating in this summer’s Fast Forward accelerator program.  Launched in early 2014 by cofounders Shannon Farley and Kevin Barenblat, Fast Forward is an accelerator designed exclusively for nonprofits using technology to improve the world. 

All of the startups use technologies to dramatically improve health and education outcomes for individuals living in poverty.  This summer’s cohort includes:

Medic Mobile: Mobile communication platform for remote health workers, started in a Stanford dorm room and now helping reach the 1B people who will never see a doctor in their lives.

MoneyThink: Tech-enhanced personal finance mentorship for underserved teens, targeting those under 25 (America's fastest growing group filing for bankruptcy).

Noora Health: Low-cost interactive patient care education platform, lowering hospital readmissions and saving lives.

One Degree: Yelp for social services, building a discovery platform for the 1.3M Bay Area residents living in poverty trying to navigate thousands of local offerings.

SIRUM: for medicine, a platform connecting the $5B of unused medicine that goes to waste each year with the institutions and populations that need it most.

Each of the teams has great potential to bring about significant impact.  I look forward to seeing their growth, successes, and challenges over the next months and years. 

Using a Nonprofit Corporation versus a Hybrid Form for Social Enterprise

In choosing a form for social enterprise, founders should consider the following:

  • If leaning towards one of the new hybrid forms, closely evaluate the state of incorporation due to the variations in the new forms of hybrid entity types being adopted across the U.S.
  • Whether revenues from contributions can sustain ongoing operations.
  • What will be the source(s) of startup capital?  Nonprofit corporations can issue debt, not equity.  Hybrid for-profit entities can issue both debt and equity.
  • Whether the entity will generate revenue from a trade or business, and whether that revenue will be subject to unrelated business income tax.
  • Whether the entity’s purposes would qualify under Section 170(c)(2) and Section 501(c)(3) organizational and operational tests.
  • Whether the founder(s)’s personal goals would be better fulfilled by a for-profit entity.