Hunton Law

Legal Counsel for Nonprofit & Tax-Exempt Organizations

Legal Counsel for Nonprofits, Foundations & Social Enterprises

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.

Recap of the Berkeley Law Social Enterprise Finance Symposium

On April 3rd, the Boalt Social Enterprise Group and Impact Law Forum presented a ground-breaking symposium on social enterprise law and finance. The symposium explored cutting-edge legal issues faced by social enterprises in different stages of growth.  Two panels consisting of social enterprise attorneys, investors, and entrepreneurs discussed the unique legal issues faced by social enterprises raising capital in both early and late stages of growth. The first panel focused on the legal issues of securing early stage financing, and the second panel focused on overcoming challenges in later stage financing such as preserving social mission on exit and the potential legal implications for a social enterprise seeking exit through an IPO or merger/acquisition.  

Panelists included Berkeley Law faculty Susan Mac Cormac (of Morrison & Foerster) and Eric Talley, Will Fitzpatrick of Omidyar Network, Kendall Baker of Revolution Foods, Mark Perutz of DBL Investors, Ayesha Wagle of Komaza, Rick Moss of Better Ventures, and Jan Piotrowski of Credit Suisse. The symposium was sponsored by Berkeley Center for Law, Business and the Economy.  BCLBE is the hub of Berkeley Law’s research and teaching on the impact of law on business and the U.S. and global economies.

Additional event coverage can be found on:

 The video recordings are available here

IRS Posts Additional Instructions to Help 501(c)(3) Applicants

For many 501(c)(3) applicants, completing the IRS Form 1023 (application for federal tax exemption) can be a time-consuming endeavor involving guesswork as to the type of explanation and level of detail expected by the IRS reviewers.  In an effort to reduce the amount of such guesswork and to clarify their expectations for what constitutes an acceptable and complete response to various portions of the 1023, the IRS recently posted on its website information that all applicants should review in conjunction with the IRS Form 1023 Instructions (last revised June 2006).  Although the IRS has not provided (and probably never will provide) a “model template” for a completed Form 1023 application, the information posted on the IRS website provides helpful guidance to applicants and their advisors who wish to submit an application that has the greatest chance of being processed quickly by the IRS and obtaining a favorable determination letter of tax-exempt status.