Private Foundations and New Regulations Regarding Program-Related Investments
Written by Susan Maslow
As the calendar year comes to a close, all corporate entities, profit and nonprofit, look to their books and make end of year decisions to best avoid the pitfalls of the clear and concise (NOT!) Internal Revenue Code (the “Code”). Private foundations have a unique challenge in their efforts to avoid excise taxes which are imposed on them, as well as their managers, in accordance with Section 4944(a)(1) of the Code if it is found that such foundations made investments that jeopardize the private foundation’s exempt purposes. Such “jeopardizing investments” generally occur when foundation managers fail to exercise ordinary business care and prudence, under the facts and circumstances prevailing at the time of making the investment, in providing for the long and short term financial needs of the private foundation.
On May 21, 2012 the Service published proposed regulations that provide nine new examples of types of private foundation investments that qualify as Program Related Investments (“PRIs”). PRIs are not classified as investments which jeopardize the carrying out of exempt purposes of a private foundation because they possess the following characteristics:
a. have as the primary purpose the accomplishment of one or more charitable or educational purposes defined by Section 170(c)(2)(B) of the Code;
b. do not have as a significant purpose the production of income or the appreciation of property; and
c. do not further one or more of the purposes described in Section 170(c)(2)(D) of the Code (relating to prohibited political activities and lobbying).
To be certain both the foundation and the recipient of the PRI are on the same page (and to also prove the foundation is exercising “expenditure responsibility” to the Internal Revenue Service), a private foundation must secure a written commitment from the recipient of the PRI which specifies the purpose of the investment and contains an agreement by the organization:
a. to use all amounts received only for the purposes of the investment and to repay any amount not used for these purposes back to the foundation, provided that, for equity investments, the repayment is within the limitations concerning distributions to holders of equity;
b. to submit, at least once a year, a full and complete financial report together with a statement that it has complied with the terms of the investment;
c. to keep adequate books and records and to make them available to the private foundation; and
d. not to use any of the funds to carry on propaganda, influence legislation, influence the outcome of any public elections, carry on voter registration drives or make grants that do not comply with the requirements regarding individual grants or expenditure responsibility.
Examples of acceptable PRIs in the proposed new regulations are based on published guidance and on financial structures that had previously been approved in private letter rulings. The regulations do not modify the existing regulation but illustrate certain principles and current investment practices. Where the examples in the older regulations focused on domestic situations principally involving economically disadvantaged individuals in deteriorated urban areas, the new examples include a broader range of opportunities that might be presented to a private foundation.
The new examples demonstrate that a PRI may accomplish a variety of charitable purposes, such as advancing science, combating environmental deterioration and promoting the arts. Several examples also demonstrate that an investment that funds activities in one or more foreign countries, including investments that alleviate the impact of a natural disaster or that fund educational programs for individuals in poverty, may further the accomplishment of charitable purposes and qualify as a PRI. One example specifically illustrates that the existence of a high potential rate of return on an investment does not, by itself, prevent the investment from qualifying as a PRI. Another illustrates that a private foundation’s acquisition of an equity position in conjunction with making a loan does not necessarily prevent the investment from qualifying as a PRI and two examples illustrate that the private foundation’s provision of credit enhancement (such as a deposit agreement or a guarantee) can qualify as a PRI.
As a result of the new examples, the Service has made it clear that the recipients of PRIs do not need to be within a charitable class if they are the instruments for furthering a charitable purpose.
Thus, an investment in a for-profit that develops new drugs may qualify as a PRI if the for-profit business agrees to use the investment to develop a vaccine distributed to impoverished individuals at an affordable cost. Similarly, the purchase of equity in a benefit corporation or L3C that engages in the collection of recyclable solid waste or a below market rate loan to allow a social welfare organization formed to promote the arts purchase a large exhibition space may each also qualify for a PRI from the right foundation.
The new regulations should provide private foundation boards and managers in the second half of 2012 with the additional assurance they needed to make PRIs not only to traditional non-profits but to for-profit, benefit corporations and L3Cs with an articulated social enterprise consistent with the foundation’s exempt activities. Rejecting traditional boundaries between nonprofit and for-profit sectors, the PRI regulations can help encourage the most creative business minds achieve ‘double bottom line’ (financial and social) and sometimes ‘triple bottom line’ (financial, social and environmental) results. By expanding the base for PRIs, we move beyond traditional conception of society as divided neatly into three sectors (business, nonprofit and government) help develop a new forth sector that encompasses elements of both business and nonprofit sectors.
Starting a business can be an exciting and challenging time. There are complex legal issues to take into consideration, but the rewards are often worth the trouble. The Corporate practice group at Antheil Maslow & MacMinn, LLP understands that it is important to construct a solid foundation as you begin to build your business enterprise, and there are fundamental decisions that a business owner must make.
To make your business’s start easier, better organized, and more cost effective, our practice offers new small business owners bundled entity formation services which include the following:
1. Formation Documents – Our office will prepare and file the appropriate formation
documents for your new business, including:
a. Corporations: Articles of Incorporation, Bylaws, Stock Certificates, Waiver Agreement and preparation of
legal publications*
b. LLCs: Certificates of Organization, Operating Agreement
2. Tax – Our office will ensure that your new business has filed and made the appropriate tax
filings and elections at the direction of your accountant:
a. SS4/EIN application
b. S-Election/Check-the-box
3. Our office will provide you with a detailed instruction letter along with the organizational
documents to make sure that you and your business do not have a rough start.
Fee Structure:
Fixed Fee for Corporations of $1,000 (includes all filing fees & minute book)*
Fixed Fee for LLCs of $750 (includes all filing fees & minute book)
*Legal publication fees are not included.
Tom Donnelly, a partner of Antheil Maslow & MacMinn, LLP, represented Prospere, Inc. in applying for tax exempt status under Section 501(c)(3) of the Internal Revenue Code. Recognition of exemption status was granted on October 18, 2012.
Tom is proud to support the efforts of Prospere, Inc., a not-for-profit corporation dedicated to the creation, administration and funding of a young adult outward bound program of treatment and rehabilitation. Operating in conjunction with the Bucks County Court of Common Pleas, graduates of the outward bound program may have criminal sentences reduced so as to facilitate reentry into society. The program is based upon personal experiences faced by young adults involved in the criminal justice system, with the hope that with the right treatment and rehabilitation, these young adults can reach a level of success which the traditional criminal justice system may have prevented.
Prospere, Inc. provides funding for participants to the program; however, its resources are limited. By obtaining tax exempt status under Section 501(c)(3) of the Internal Revenue Code, Prospere, Inc. can accept donations from the general public, including individuals with ties to the criminal justice system, and such donations may be deducted on the donor’s individual income tax returns.
Should you have questions concerning the creation of a non-profit entity or the acquisition of recognition of exemption under Section 501(c)(3) of the Internal Revenue Code, do not hesitate to contact Tom.
Why Representations in an Agreement are Important
Written by Thomas P. Donnelly
Often, in the business context, agreements contain representations and warranties of the parties to the agreement. The representations and warranties can range from general items such as business forms and the payment of taxes, to more specific items, such as the accuracy and reliability of financial information. While such representations and warranties are commonplace in business agreements, their importance should not be overlooked.
Under Pennsylvania law, when performance of a duty under contract is due, any non-performance is a breach. If a breach constitutes a material failure of performance, the non-breaching party is discharged from its duties under the contract. A party who has materially breached a contract may not complain if the other party refuses to perform. In other words, a material breach of contract may excuse performance by the non-performing party.
In the context of representations and warranties contained in a business agreement, should the representations and warranties contained in the agreement prove to be false, the party to whom the representations and warranties were made may raise the falsity of the representations and warranties to excuse further performance of any contractual obligations under the agreement. Such a circumstance could spell disaster in the business context – particularly in a case where the payment of money is due at some time after closing.
Pennsylvania courts impose an element of materiality to the breach of a representation or warranty. The elements of materiality under Pennsylvania law include the extent to which an injured party will be deprived of the benefit which he reasonably expected, the extent to which the injured party may be adequately compensated for that part of the benefit of which he will be deprived, the likelihood that the party failing to perform or offer to perform will cure, and the extent to which the party failing to perform comports with the standards of good faith and fair dealing.
Accordingly, representations and warranties contained in an agreement should not be taken lightly, but should be made with any eye toward the potential ramifications in the event of breach.
Sue Maslow and Tim White of Antheil Maslow & MacMinn, LLP will be presenters at the National Business Institute's Seminar entitled "How to Keep Tax-Exempt Organizations in Compliance" on November 13th in Allentown, PA. This seminar offers invaluable insights into compliance with the complex rules governing tax-exempt organizations. For anyone involved in non-profit work, you should know that even inadvertently breaking the rules can jeopardize tax-exempt status. This seminar will provide the information you need to stay current on the latest regulations, study the impact of Sarbanes-Oxley on tax-exempt organizations, avoid intermediate sanctions and ensure accounting practices are up to par. The program will supply answers to questions about tax-exempt compliance and operational issues. Here are some of the topics covered:
• Gaining strategies for safeguarding directors, officers and executives from potential liability;
• Creating an environment of accountability by establishing comprehensive internal controls;
• Following annual reporting requirements and compliance with the rules governing disclosures and solicitation;
• Learning to identify what qualifies as unrelated business income - and what the exceptions are.
Anyone who works in the Nonprofit sector may want to register for this comprehensive educational program.
Sue Maslow and Tim White of Antheil Maslow & MacMinn, LLP will be presenters at the National Business Institute's Seminar entitled "How to Keep Tax-Exempt Organizations in Compliance" on November 13th in Allentown, PA. This seminar offers invaluable insights into compliance with the complex rules governing tax-exempt organizations. For anyone involved in non-profit work, you should know that even inadvertently breaking the rules can jeopardize tax-exempt status. This seminar will provide the information you need to stay current on the latest regulations, study the impact of Sarbanes-Oxley on tax-exempt organizations, avoid intermediate sanctions and ensure accounting practices are up to par. The program will supply answers to questions about tax-exempt compliance and operational issues. Here are some of the topics covered:
- Gaining strategies for safeguarding directors, officers and executives from potential liability;
- Creating an environment of accountability by establishing comprehensive internal controls;
- Following annual reporting requirements and compliance with the rules governing disclosures and solicitation;
- Learning to identify what qualifies as unrelated business income - and what the exceptions are;
- Adhering to the accepted guidelines for determining appropriate executive compensation.
If you work for a tax-exempt organization, you may want to sign up for this valuable seminar. You can register by visiting www.nbi-sems.com or call 800-930-6182.
An Employment Lawyer’s View of “Binders Full of Women”
Written by Patricia CollinsActually, this blog post is not really about binders full of women – the title is pure, unadulterated pandering. But it is about the conversation that generated that Tweet-worthy sound bite. In case your computer, smartphone, television and ears were down this week, let’s recap. At the October 16, 2012 town hall Presidential Debate, an undecided voter asked how the candidates would address pay inequality for women. President Obama answered by referencing his support of the Lilly Ledbetter Act. Governor Romney answered with a story about binders full of women searching for female candidates, and providing flexibility for female employees. An employment lawyer drooled. Please note that this is not a political discussion, but a legal one, and the analysis that follows is about whether the law would permit the approaches recommended by the candidates.
President Obama had the easy path. The Lilly Ledbetter Act is now the law. Under the civil rights laws, employees have 180 days from the alleged discriminatory act to file a complaint with state or federal equal employment commissions. If the employee fails to file the claim in the time required, the employee’s claim is forever barred. Poor Ms. Ledbetter discovered, too late, that she was paid less than a male employee for the same work. The court dismissed her claim because she filed it more than 180 days after the first discriminatory paycheck. The Lilly Ledbetter Act states that the statute of limitations for an equal pay claim resets with each paycheck. It was the first statute that President Obama signed into law.
Governor Romney’s answer invites employment lawyer criticism. To be clear, this is not political criticism, but legal criticism. The answer essentially had two parts: first, his search for female candidates and second, his willingness to provide flexibility to female employers who needed to get home to make dinner. Let’s start with the search for female candidates. The civil rights laws prohibit discrimination on the basis of gender. It was not clear from Governor Romney’s answer whether or not he was referring to an affirmative action program, or whether there was a written diversity plan at issue. But, certainly, the goal of employing an underrepresented group in the office of the governor is a laudable one.
Nevertheless, an employment lawyer worries. Imagine two candidates, both with comparable education and experience, both interviewed well, and, in all respects were both qualified candidates. One is male, one is female. Could the governor decide to hire the female candidate solely because she was female? Put another way, would it be discrimination on the basis of gender for an employer to deny employment to the equally qualified male candidate solely on the basis of his gender? The legal answer is yes. An interesting defense to such a claim is that the governor had made a policy decision that his cabinet must reflect the views of qualified women. Employers should always base their decisions on qualifications for the job. Where an employer has decided that gender, for example, is part of the qualifications for the job, they must also articulate a legitimate business reason for such a qualification.
Governor Romney also talked about the need for flexibility for female employees. Tsk tsk, Governor Romney, tsk tsk. The law requires that Governor Romney provide the same level of flexibly for all of his employees, regardless of gender. The law also requires that Governor Romney avoid making employment decisions based on gender stereotypes (i.e., the woman needs to get home to make dinner). An employment lawyer loses a few hours of sleep.
Interestingly, this is the place where the candidates intersect. The law requires equal pay for equal work, and the Lilly Ledbetter Act keeps that claim alive with each new paycheck. But employees, male and female, do ask for flexible work schedules, and many employers are happy to oblige to keep good candidates. Our advice: don’t be like Governor Romney! Make sure flexibility is available to all employees, and that the pay is commensurate with the work provided.
The candidates’ discussion does highlight the challenges for employers: sometimes, an employer’s good intentions, the realities of the workplace, and the requirements of the law seem at odds with one another. Even presidential candidates struggle with these competing concerns. It is our experience that employers can work through these complex issues and strike a balance with good legal and human resources advice.
AMM Partner Tom Donnelly participated in the MS 150 City to Shore bike tour September 29 and 30, 2012. As a member of team VCI Mobility, Tom helped raise over twelve thousand dollars for the National MS Society. The event raised more than 5 million dollars and was attended by nearly eight thousand riders. To learn more about this great event, or to contribute to help those with Multiple Sclerosis, click here
We are so grateful to all who took the time to help us celebrate our 20th Anniversary by attending our Barbecue. It was a picture perfect day, and we really enjoyed catching up with our friends and watching the bike race from our "front yard". We had a great turn out for our event, and we hope our guests enjoyed it as much as we did. Thanks to all who attended, and if you weren't able to join us, we hope you'll keep us in mind for next year.
We are very proud to announce the addition of Thomas P. Donnelly as a Partner of the firm. Tom joins the firm's Litigation, Business & Finance and Employment Practice Groups. His practice focuses primarily on commercial litigation and transactions. Throughout his career, he has undertaken the representation of both individual and corporate clients in subject matters concerning fraud, contracts, employment agreements, breach of fiduciary duty, securities violations, real estate and insurer bad faith.
Tom’s clients include individuals and businesses local to the Philadelphia area, as well as national corporations. In commercial transactions, Tom is experienced in businesses purchases, financing, asset and stock sales, real estate and employment issues. Restrictive covenants attendant to business and employment agreements are a focal point of Tom’s practice. Tom has also been appointed a corporate receiver in the Bucks County Court of Common Pleas.
Tom is an active member of the Bucks County Public Service Community. In this regard, Tom has been appointed a lifetime member of the Board of Directors for the United Way of Bucks County. In addition, he is past President of the Bucks County Bar Association, past President of the Young Lawyers Division, and a member of the Board of Directors.
Tom Donnelly has deep roots in our community, and he is a well-respected member of the Bar, he is a perfect complement to our team.