Saturday, December 20, 2014

Using Analytics to Clean Out the ESI Garage

Using Analytics to Clean Out the ESI Garage
 by Robert D. Brownstone and Gabriela P. Baron

As time passes and we acquire more "stuff," it gets harder to winnow down our possessions. Who longs to spend the weekend cleaning the garage? It's easier to keep piling up things up, with no discipline for storage or removal. Thus, many a garage keeps getting fuller and more chaotic until two distinct problems emerge: difficulty finding a particular object and increased risk of hidden hazards.
The same issues pervade the electronic information management (EIM) environment. The overwhelming volume of data generated daily leads to a similar approach to electronically stored information (ESI) for organizations of all shapes and sizes. Especially as companies grow, they are lulled into the sense that it is easier and better to focus on the urgent matters at hand and let the emails, electronic files and database contents keep stacking up.
But there are many risks inherent in saving all ESI forever. Potentially harmful content resides all over the place, whether it's a "smoking gun" message, or something written and kept so long that it becomes susceptible to misinterpretation when taken out of context years later.
Within an organization that has a save-everything policy, there likely are redundant copies of information, resulting in sourcing and paying for extra storage space. These costs are multiplied by the "rule of three," by which all live data is backed up in at least two places. Moreover, the search for particular information becomes a near impossible and expensive chore. Additionally, more personally identifiable information (PII) and sensitive confidential data (i.e., intellectual property and trade secrets) stored at more locations means big risks.
The ESI garage model is the information governance (JG) strategy upon which organizations have traditionally relied. Even when an IT department is tasked with the responsibility of managing the data, this strategy falls flat. The primary reason: IT focuses on what it does best, maintaining access to data rather than extracting the most value from data.
The notion of IG is vague, and no panacea but organizations need to start somewhere. An IG initiative should entail the use of advanced analytics and intelligent automated assessments of big data sets to cull out irrelevant data, keep relevant data, and identify PII, intellectual property and other sensitive data that must be kept and segmented in order to ensure data security and privacy.
Savvy C-suites are adopting sound IG policies to not only promote efficiency when locating information, but to facilitate greater compliance with electronic discovery, data security and privacy legal compliance. IG can help contend, for example, with thorny international legal issues in cross-border data transfers day-to-day, as well as in e-discovery. Furthermore, as corporations look toward the next generation of technology and archiving systems, a solid JG program make moving data from one system to another and retrieving it easier.
Companies implementing effective JG will also benefit from enhanced visibility of corporate data, enabling the use of more in-depth analytics and the discovery of valuable insights and trends to maximize the value of retained data. If data is a crystallization of a moment in time, then IG is the storyteller, piecing together facts and information into a narrative.
Even more significant, IG enables multiple cost savings. In proactive mode, JG-savvy organizations experience lower storage costs for live and backed-up data. In reactive mode - for example, addressing a lawsuit - they will see reduced e-discovery costs. Indeed, because IG and e-discovery have parallel workflows (finding relevant data is always the first step), JG-strong corporations will be in a stronger litigation posture.

WHERE TO BEGIN

Embarking on an JG program is daunting for any organization. In a packed garage, one would start by manually reviewing and organizing what's been tucked away, shelf by shelf, until the space is neat and tidy. With ESI, the concept is similar. Cull through the data in discrete chunks until all of it has been reviewed, and a system is in place for future storage. By tackling small portions at a time, organizations will see results and a return on investment.
A careful, considered approach is key when starting to parse organizational data via this "data remediation" process. As a first step, Legal and Compliance should ensure the organization's IG policies and procedures are sound. Some organizations may need to start by designing and implementing a corporate governance framework, while others will need to update their existing records retention policies and procedures.
This first step is critical from a risk and compliance standpoint because it can guard against future spoliation allegations. The organization's data deletion project must be defensible, meaning it has memorialized reasons for the data destruction, covering what, why, how, by whom and when the ESI was destroyed.
Defensible deletion involves careful consideration of what ESI the organization intends to exercise its discretion to retain or purge, bearing in mind the nuances and contents of ESL Different file types are used for different job functions. In addition, Legal should ensure retention of ESI that may be subject to a litigation hold or relevant to issues in litigation or government inquiries.
Once the process is clearly defined and memorialized, there are two approaches for data remediation. The first approach is akin to damming a stream. With this approach, the organization must adopt a disciplined plan for newly generated data and information. The second approach is akin to cleaning a swamp. With that approach, companies must cull through existing data troves and purge the excess.
Interestingly, some organizations find the latter approach the easier to implement because most already have at least some applicable e-discovery tools in place. These work to automatically classify ESI using specified criteria, such as date and keywords.

THE RIGHT TOOLS

Using the right tools is essential for maximizing efficiency and cost-effectiveness. Some e-discovery analytics can be applied to IG simply by being deployed upstream in the process. Those analytical tools, usually used for making sense of large data sets in incident-response scenarios, include:

• De-duplication: identifying exact copies or similar versions of documents and messages.
• Concept analysis: clustering of e-documents, messages, etc. under substantive topics chosen/created by software.
• Email redundancy: separating last message from each string.
• Relationship analysis: graphically depicting who knows/communicates with whom.

Another key e-discovery analytical tool is artificial intelligence-based, technology-assisted review, often called "predictive coding," which uses statistical modeling and machine learning. The technology underpinning predictive coding software functions like spam filters and targeted advertising. Predictive coding leverages machine learning and human review of samples in an iterative process, until the team is comfortable with the system's decision-making.
In e-discovery, that person-plus-machine process parses relevant from irrelevant documents. In IG, that same process can parse to-be-retained from to-be-deleted documents.
Lawyers and records managers should stay abreast of ESI technologies. Pertinent innovative technologies are evolving from the e-discovery and enterprise content management fields. Savvy e-discovery providers will incorporate ECM technology into their existing review and analysis tools to help organizations save money by tackling ESI for both IG and e-discovery.

DEPLOYMENT: STARTING THE CLEANUP

A data remediation program can begin anywhere the organization prefers. Tools can be deployed as part of a legacy data clean-up project, a litigation hold tracking system, a data loss prevention initiative, a big data analytics project or an enterprise-wide archiving migration plan.
Many organizations prefer to start by tackling unstructured data (i.e., email or instant messaging), because it is riskier than structured data (i.e. database-stored). Individuals often feel freer to express themselves in informal, unstructured environments, and unstructured ESI is more difficult to parse than already automatically-classified information.
                No matter where the process begins, cull through the ESI first, then move data to new locations after remediation. Before you get to the details of deployment, vet any e-discovery or ECM platform for sufficient scalability to your IG initiative.
Ensure that IG becomes part of the corporate culture. Employees need to be aware of the corporation's records retention and information-management policies just as they are mindful of corporate expectations regarding HR practices, regulatory compliance or confidentiality requirements. Like violations in those areas, amassing large ESI volumes companywide can have a very high ultimate price.
                Training on IG should teach managers and staff to rethink how they use data, so that they keep only what is required or needed, and no more. Individuals should be guided by the Legal and Compliance specialists as well as e-discovery specialists conversant in defensible deletion. Training contemporaneous with regime change also provides an opportunity to emphasize the importance of litigation holds.
Once IG becomes embedded in the fabric of corporate culture, organizations will reap the rewards from a cost-savings, risk-mitigation and business-value perspective. While cleaning up decades of ESI is daunting, it only becomes more so as more data is stuffed into the company storage bin. The time to start the clean-up is now.

Authors

Robert D. Brownstone is Technology and E-discovery Counsel, Litigation, and co-chair of the Electronic Information Management group at Silicon-Valley headquartered Fenwick & West LLP. He advises clients on a wide range of legal and IT issues. He has also taught e-discovery law and process as adjunct professor at a number of universities, and in 2015 will teach the course at the Brooklyn and University of San Francisco schools of law.
rbrownstone@fenwick.com

Gabriela P. Baron is the Senior Vice President of Xerox Litigation Services (XLS). She has assisted clients with regulatory investigations, major class actions, employment matters and commercial cases filed in federal and state courts.
Gabriela.Baron@xls.xerox.com


Today’s General Counsel, Nov 2014, 22.

Developments In Mobile Device Electronic Discovery

Developments In Mobile Device Electronic Discovery
 by Michael Weil And Mark Michels

Legal counsel and their supporting forensic teams face vexing challenges when it comes to preserving and collecting mobile device data. Smartphones and tablets frequently contain unique data that must be preserved, collected, processed, reviewed and produced in litigation just like any other form of electronically stored information.
Mobile device data is often critical for internal and regulatory investigations, as well. Unlike personal computer data that can often be collected remotely with relatively little impact on custodians, mobile device data collection usually requires separating custodians from their phones, sometimes for a very long time. Fortunately, there have been some important breakthroughs that may allow for remote, over-the-air, data collection from mobile devices, permitting a more efficient and less disruptive process.
It is not uncommon for a litigation matter or investigation to involve a large number of custodians, sometimes into the hundreds. In general, computer forensics professionals can gain access to the mobile device ESI only by physically connecting specialized forensic collection tools directly to the smartphone or tablet. This is unlike personal computer or server data collection, where they can remotely access hard drive files, or export email from a server for preservation, collection, processing and hosting.
Since physical access to the mobile device is the only way to collect email, text messages and other ESI, the custodian must part with the phone, causing serious "separation anxiety," and loss of a business tool and a personal lifeline. In some cases, companies have found that they must immediately issue new phones to custodians.
Mobile device management (MDM) systems allow IT teams to provision devices, maintain some level of security, and otherwise track mobile devices over-the air. Some MDMs also enable recording of SMS messages, not other text messaging applications. MDMs cannot access all of the files on the device because the mobile device operating system's security scheme does not allow remote level of access to some critical data. For example, mobile devices may hold SMS messages that have not been logged, third party text messages and other application data that cannot be accessed remotely through the MDMs.
There is some cause for hope, however. At the 2014 Barcelona World Mobile Congress there were a few companies that showcased some remote collection concepts. Furthermore, through some of our R&D efforts we have completed a proof-of-concept that demonstrated viable over-the-air remote data collection for most of the data on a smartphone.
While these remote-collection developments are encouraging, it will take some time for the operating system owners and the forensic tool developers to create protocols for complete remote over-the air mobile device data collection. Until they do, counsel and their forensic team will need to contend with in-person device collections or cumbersome mobile device backups. 

Authors
Michael Weil is a Chicago-based director for Deloitte Discovery in Deloitte Financial Advisory Services LLP, where he leads the Computer and Cyber Forensics Market Offering. He has 16 years of computer forensic examination experience, including criminal, civil, and national security matters.
miweil@deloitte.com
Mark Michels is a San Jose-based director for Deloitte Discovery in Deloitte Transactions & Business Analytics LLP. He has 15 years of experience managing corporate discovery issues as well as 8 years of experience in patent litigation, pre-merger reviews and internal investigations.
mmichels@deloitte.com


Today's General Counsel, Nov 2014, p34.

Best Books of 2014 - NYTimes recommendations

Redeployment by Phil Klay

Little Failure: A Memoir by Gary Shteyngart



The Dog: Stories by Jack Livings

Lila by Marilynne Robinson

All Our Names by Dinaw Mengestu


We Are Not Ourselves by Matthew Thomas






Foreign Gods, Inc. by Okey Ndibe

Being Mortal by Atuil Gawande

Fourth of July Creek by Smith Henderson


Art in America, 1945-1970 edited by Jed Perl

The Empathy Exams: Essays by Leslie Jamison

10:04 by Ben Lerner

How to Build A Girl by Caitlin Moran

My Struggle: Book Three: Boyhood by Karl Ove Knausgaaard


Slant Six by Erin Belieu




Thursday, November 06, 2014

College-Application Essay by Paul Rudnick

To the Admissions Committee:
As the gatekeepers of your fine university's selection process, you are probably asking yourselves, "Why in hell should we even consider the application of Adam Harper Steinem Mandela Kellowitch-Frane?" My answer? "Let's find out together."
From my earliest childhood, all I've ever wanted was to attend either an Ivy League school, a still respectably expensive party school, or a so-called safety school, where the standards are so low that I'd be a shoo-in, and which my parents could tell their friends was "a better fit." Although, of course, as a biracial child, I wasn't sure if higher education would even be an option for me. And, when I say biracial, I mean that my father went to Harvard and my mother attended Oberlin. When I was young, this situation tore me apart, because I never knew which world I belonged in. Should I follow my dad and become hugely successful and condescending to everyone, or should I dream of becoming every bit as creative yet talentless as my mom? I still don't know the answer, but maybe not knowing is my greatest strength.
When I was twelve, I first became aware of the world's suffering, and I used the dividends from my trust fund to fly to Berlin to help the victims of the recent tsunami. Upon my arrival, I discovered that, while the tsunami hadn't affected Berlin, I could still express my empathy for the victims by joining an activist performance troupe and mounting a piece entitled "Younami: The Superstorm Inside Us All."
Upon my return to the States, I was accepted as a legacy to the prestigious St. Callowmere Academy, where I pursued my passionate yet quirky interests in designing chairs without legs for people who'd rather sit on the floor; developing alternative fuels, including my rage at my stepmother; and writing, directing, and starring in a Web series about my dorm room (inspired by my unpublished graphic novel about the mouse who lived in my desert boots). I have also volunteered as a tutor, helping public-school children learn to lie about it, and to stop already with the colorful backpacks, because it's a dead-ass giveaway. I have also excelled at lacrosse, wakeboarding, and riding the subway while thinking, Look at me, I'm riding the subway!
But all this was just a prelude to meeting a very special person, who changed not only my life but my perspective on humanity. He was someone I'd seen every day but had never focussed on, until I came home late one night from this amazing club in Bushwick, which was really more of an opium den with banjos and decent frittatas. When I got back to our building, I had to be carried out of the Uber car by the guy I'm talking about, although I'd never said more to him than a casual "Hey" or "Are you the new one?" His name was Patrick, and he's one of our doormen.
That night, once Patrick had helped me stumble up to our penthouse and had brewed me a perfectly acceptable cup of whatever Cuban-Laotian blend Fresh Direct had delivered, we started to talk, and a new world opened up. Patrick had come to this country many years ago, from a place he called "somewhere else," by which I assumed he meant a much lower floor in our building. Patrick also told me that he'd always dreamed of wearing a fine uniform and signing for mysterious packages that had been Fed Exed to what he called "impressive young people like yourself" and then, later, "telling the detective everything I could remember." Then he laughed and asked if l'd like to hear a story, and even though I'd already clamped on my headphones and was lost in my tunes, I nodded: whatevs.
"I was once a boy just like you," Patrick began, "and everyone kept telling me that I should go to college. So I applied everywhere, and I was accepted at Yale, Harvard, and Princeton, although I was waitlisted at Stanford, because I'd made the mistake of combing my hair for the application photo. So I decided to spend one year at each school I'd got into, and then pick the place I liked best to graduate from. Things were going just fine, and I was meeting many kinds of people, all wearing moccasins and Shetland sweaters with holes in them, although the young ladies often added pearls and bits of canned frosting around their mouths. I studied pre-law and pre-med and business, and also Persian enamels, the evolution of the Iberian ribbed newt, and the films of Sandra Bullock. But then, after those three years, I dropped out and crowdfunded a startup called SnitSnot.com, for people who want to send photos of the beer they're drinking, along with their net worth, scrawled across the chest of a fashion model, to everyone within a five-block radius. I sold this app for $2.8 billion, and I used the money to buy a private island in the Pacific. I surrounded myself with the planet's foremost artists and economists and scientists, and, just as we were about to unlock the secret of a peaceful and happy world, I thought, You know, I really wish I were standing in the sleeting rain, helping kids with too many names to drag their duffelbags filled with smelly laundry into the elevator. So here I am."
Of course, I never spoke to Patrick again. But his words meant so much to me, because I knew that I could include them in this essay, which would make me stand out among all the other kids with perfect S.A.T. scores and Arizona rock-climbing epiphanies, or siblings who'd died in their arms. So, please, Admissions Committee, don't you need someone like me, someone who hired a bitter thirty-eight-year-old with a useless doctorate in English literature to write this essay for him? An essay that I, Adam Harper Steinem Mandela Kellowitch-Frane, have never even bothered to read?
Fingers crossed,

 An Incoming Freshman!!!

Thursday, October 30, 2014

Gateway to Freedom - Review

"Gateway to Freedom liberates the history of the underground railroad from the twin plagues of mythology and cynicism. The big picture is here, along with telling details from previously untapped sources. With lucid prose and careful analysis, Eric Foner tells a story that is at once unsparing and inspiring. For anyone who still wonders what was at stake in the Civil War, there is no better place to begin than Gateway to Freedom." -James Oakes, author of Freedom National, winner of the Lincoln Prize

Between 1830 and 1860, operatives of the underground railroad in New York helped more than 3,000 fugitive slaves reach freedom. Their defiance of the Fugitive Slave Law inflamed the slave states and contributed to the secession crisis. In GATEWAYTO FREEDOM: The Hidden History of the Underground Railroad [W.W. Norton & Company; January 19, 2015; $26.95 hardcover], Pulitzer Prize-winning historian Eric Foner gives us a sweeping history of the underground railroad that shows for the first time how strong and active the resistance to slavery was in the North. Long relegated as a subject to local folklore, the underground railroad emerges as a key element in the history of slavery and freedom in the United States.

Foner's story centers on New York City, strongly proslavery at the time, and an abolitionist newspaperman in the city, Sydney Howard Gay, whose courageous undercover work helped save fugitive slaves and fight the epidemic kidnapping of the city's free blacks into slavery. Gay's "Record of Fugitives," a remarkable document that Foner dug up from deep in the Columbia University archives, is a meticulously detailed accounting of the inner workings of the underground railroad in New York City in the 1850s. It records the personal stories of escaped slaves; their stop-by-stop movements from the slave South through the networks of antislavery operatives in Pennsylvania, Delaware, New Jersey, and into New York; the aid given these fugitives in the city; and finally their movements to safety in Albany, Syracuse, and Canada. Gay capped every episode with a detailed accounting of cost – the underground railroad was always strapped for funds.

For Foner, this document was the missing puzzle piece in the broader history of the underground railroad.  It
enabled him to assemble a complete picture of the network of antislavery activists, black and white, prominent and humble, who worked together, at great personal risk, to bring fugitive slaves to freedom along the northeast corridor. Foner's masterful use of this new evidence once again demonstrates his deep knowledge of the period and his ability to make compelling reading of authoritative history.

GATEWAY TO FREEDOM is a vivid history with an amazing cast of characters, many of whom make their first appearance on the historical stage. Foner takes us inside a waterfront boarding house for black sailors where fugitives lay hidden. Their route to freedom depended on a little-known African American furniture polisher, Louis Napoleon, who worked closely with Gay and John Jay II, grandson of the first chief justice of the Supreme Court. Together they smuggled fugitives out of the city and went to court to press for the rights of fugitives in custody. Their dramatic story marks a significant chapter in the ongoing struggle between slavery and freedom, and a stirring testament to individuals' capacity for courage and idealism.

Eric Foner is the DeWitt Clinton Professor of History at Columbia University. His previous book, The Fiery Trial:Abraham Lincoln and American Slavery, was awarded the Pulitzer Prize as well as the Lincoln and Bancroft Prizes.

Review by Rachel Salzman  rsalzman@wwnorton.com

Tuesday, August 26, 2014

SAN DIEGO ACCESS TO FREE LEGAL ASSISTANCE

Available to lower-income individuals and families

UNIVERSITY OF SAN DIEGO - SCHOOL OF LAW

 

APPELLATE: Handles an entire appeal from start to finish - brief to oral argument. These cases are referred from the pro bono panel at the Ninth Circuit Court of Appeals.

CIVIL: Includes consumer issues, breach of contract, uninsured motorist defense, fraud, landlord/tenant issues, and consumer debt collection disputes.

EDUCATION & DISABILITY: Represents the parents of students with disabilities in cases ranging from IEP eligibility and services, placement, discipline and expulsions, 504 Plans, Early Start, Regional Center eligibility and services, and limited conservatorships.

ENTREPRENEURSHIP: Provides comprehensive legal assistance to individuals or groups who have questions about small business ventures, including non-profit corporations, whether starting or expanding a business; advises on trademark and copyright issues.

FEDERAL TAX: Represents lower-income taxpayers who have disputes with the Internal Revenue Service. Assists with matters such as collection action, audits, tax.credits and offers in compromise. Also makes appearances at U.S. Tax Court.

IMMIGRATION: Offers assistance for immigration-related problems including asylun, immigrating family members, naturalization and deportation. Provides legal infonnation, consultation and opportunity for representation in Deferred Action for Childhood Arrivals (DACA).

SMALL CLAIMS: Provides assistance to individuals filing in the Small Claims Court (claims less than $10,000), and represents clients in small claims appeals in Superior Court.

STATE INCOME TAX: The "Taxpayer Appeals Assistance Program" is a joint effort between the USO Legal

Clinics and the California State Board of Equalization (BOE). Under supervision of an attorney from the BOE's Taxpayer Rights Advocate Office, students assist taxpayers with state income tax disputes against the California Franchise Tax Board (FTB).

STATE SALES & USE TAX: This clinic is a joint effort between USO Legal Clinics and the California State Board of Equalization (BOE). Under the supervision of an attorney from the BO E's Taxpayers' Rights Advocate Office, students will represent clients who are appealing California Sales and Use Tax determinations.

VETERANS CLINIC: Provides free legal assistance to veterans, limited to disputes with for-profit institutions over the use of GI Bill funds and predatory lending, discharge upgrades, and VA Disability Claims appeals. Legal services range from advice to identification of potential claims to representation of veterans in litigation, arbitration and before governmental review boards.

 

University of San Diego Legal Clinics

619.260.7470  Mon-Fri, 8:30AM-5PM

www.sandiego.edu/law/free_legal_assistance/

 

Disclaimer: The Legal Clinics at University of San Diego School of Law provide training to upper-level law students while providing needed legal services to the community. All Legal Clinic students are supervised by a practicing attorney. We will make appointments for individuals to meet for an intake with a law student, on a space available basis. We do NOT accommodate walk-in clients. You can schedule an appointment at the Legal Clinic by calling (619) 260-7470.

Monday, August 25, 2014

Intro to Forming a Nonprofit

by Anthony Mancuso, Esq.

For-profit corporations can usually be formed for "any lawful purpose" under state statutes.  Nonprofit corporations, on the other hand, generally must be established to accomplish one or more specific purposes that benefit either the public at large, a segment of the community, or a particular membership. While it may be easy for your group to incorporate as a nonprofit in your state, this is only the first hurdle. The next important step is to obtain tax-exempt status under state and federal tax statutes. To do this, your group must meet specific-purpose requirements contained in state and federal tax statutes.

Is your organization a nonprofit corporations that could qualify for federal income tax exemption under Section 501(c)3 of the Internal Revenue Code? This means that your nonprofit corporation must be formed for religious, charitable, scientific, literary, and/or educational purposes. There are other types of groups-labor unions, chambers of commerce, social and recreational dubs, fraternal societies, credit unions, farmers' coops, and legal service organizations, to name a few-that may be eligible for tax-exempt status under other sections of the Internal Revenue Code.

If you plan to incorporate your nonprofit in California and want additional information about incorporating there, see How to Form a Nonprofit Corporation in California, by Anthony Mancuso (Publisher, Nolo).

HOW TO FORM A NONPROFIT CORPORATION

Corporation Basics - You don't have to understand all there is to know about corporations in order to follow this book or form your nonprofit. But there are a few basic concepts you'll want to have under your belt as we go through the process. Here they are, with special emphasis on any differences between forprofit corporations and nonprofits:

A corporation is a separate legal entity. A corporation is a legal entity that allows a group of people to pool energy, time, and money for profit or nonprofit activities. It acquires legal existence after its founders comply with their state's incorporation procedures and formalities. The law treats a corporation as a separate person, distinct from the people who own, manage, or operate it. The corporation can enter into contracts, incur debts, and pay taxes. Corporations are either for-profit (business corporations) or nonprofits.

For-profit, or business, corporations versus nonprofits. Business corporations can be formed for any legal purpose. They can issue shares of stock to investors in return for money or property, or services performed for the corporation. Shareholders receive a return on their investment if dividends are paid or if, upon dissolution of the corporation, any corporate assets remain to be divided among the shareholders after payment of all creditors.  Nonprofits, on the other hand, generally cannot issue shares of stock or pay dividends under state law (unless they are some type of hybrid such as consumer or producer co-ops). The federal tax code also prohibits 501(c)(3) tax exempt nonprofit corporations from paying dividends or profits to their members or other individuals. When a 501(c)(3) tax-exempt nonprofit corporation dissolves, it must distribute its remaining assets to another tax exempt nonprofit group.

In-state and out-of-state corporations. A corporation formed in a particular state is known as a domestic corporation in that state. Corporations formed in other states, even if physically present and engaging in activities in a state, are called foreign corporations in that state. For example, a corporation formed in California is a domestic corporation as far as California is concerned, but a foreign corporation when considered by other states.

Limited Liability Entities (LLC) - A number of states allow the formation of hybrid limited liability entities (LLCs and/or corporations) that can make a profit yet also do good. For example, some states authorize the formation of low-profit LLCs (also called "L3Cs") for educational or charitable purposes as well as for making a profit. States initially created this special type of hybrid entity to allow foundations to more easily distribute funds to a qualified social-purpose organization, although the IRS has not yet formally approved L3Cs for this purpose.

Flexiable Purpose Corporation (FPC) - California is the only state that authorize the formation of flexible purpose corporations or benefit corporations, which can be formed to do good works as well as to make money. The FPC is distinguished from the L3C and Benefit Corporation in that it is primarily intended for use by for-profit companies seeking traditional capital market investment. The advantage of these hybrid entities is that they can allow the principals to spend time and money trying to do good without having to worry about stakeholders' being upset (and suing them) for not spending all their time trying to turn a profit.

Benefits of the Nonprofit Corporation - The relative importance of each of the following benefits will vary from group to group, but at least one of them should be very significant for your organization. Many groups accomplish their nonprofit purposes just fine as unincorporated nonprofit associations, without formal organizational paperwork or written operational rules. If you can continue to accomplish your nonprofit purposes and goals informally, you may be happier staying small.

Tax Exemptions - Nonprofit corporations are eligible for state and federal exemptions from payment of corporate income taxes, as well as other tax exemptions and benefits. At federal corporate tax rates of 15% on the first $50,000 of taxable income, 25% on the next $25,000, and 34% and higher on income over $75,000, it goes without saying-at least if you expect to earn a substantial amount of money (from services, exhibits, or performances, for example)-that you'll want to apply for an exemption. In states with a corporate income tax, a state income tax exemption is equally attractive, as are local, county, real property, and personal property tax exemptions.  See an expert or obtain the help of a competent tax adviser as soon as you decide to incorporate. Make sure you choose someone experienced in the special field of nonprofit bookkeeping and reporting. Ask the advisor to help you (especially your treasurer) set up a good record-keeping system, which you can use to prepare your annual federal and state nonprofit tax forms and reports. Have the tax helper periodically review the system to be sure that you are maintaining your financial records properly and have filed your tax forms on time.

Receiving Public and Private Donations - One of the primary reasons for becoming a 501(c)3 nonprofit corporation is that it increases your ability to attract and receive public and private grant funds and donations from sources such as: Public sources. Tax-exempt government foundations (like the National Endowment for the Arts, the National Endowment for the Humanities, or the Corporation for Public Broadcasting), as well as private foundations and charities (such as the Ford Foundation, the United Way, or the American Cancer Society), are usually required by their own operating rules and federal tax regulations to donate their funds to only 501(c)3 tax-exempt organizations.  Individual private donors can claim personal federal income tax deductions for contributions made to 501(c)3 tax-exempt groups. At a donor's death, a complete federal estate tax exemption is available for bequests made to 501(c)3 groups.  In short, if you plan to ask people to give you significant amounts of money in furtherance of your nonprofit purpose, you need to demonstrate to your donors that you have 50l(c)3 tax-exempt status.

Protection From Personal Liability - Protecting the members of your group from personal liability is one of the main reasons for forming a corporation (either profit or nonprofit). Once you're incorporated, directors or trustees, officers, employees, and members of a corporation usually won't be personally liable for corporate debts or liabilities, including unpaid organizational debts and unsatisfied lawsuit judgments against the organization, as they normally would be if they conducted their affairs without incorporating. Creditors can go after only corporate assets to satisfy liabilities incurred by the corporation-not the personal assets (cars, homes, or bank accounts) of the people who manage, work for, or volunteer to help the nonprofit corporation.  For example, A member of the audience sued a nonprofit symphony orchestra when the patron fell during a concert, claiming that the symphony (which also owned the concert hall) provided an unsafe ramp. The patron won a judgment that exceeded the orchestra's insurance policy limits. The amount of the judgment in excess of insurance is a debt of the corporation, but not of its individual directors, members, managers, or officers.  By contrast, had the orchestra been an unincorporated association of musicians, the principals of the unincorporated group could be held personally liable for the excess judgment amount.

In a few situations, however, people involved with a nonprofit corporation may be personally liable for the corporation's liabilities. Here are some major areas of potential personal liability:

• Taxes: State and federal governments can hold the corporate employee who is responsible for reporting and paying corporate taxes personally liable for any unpaid taxes, penalties, and interest due for failure to pay taxes or file necessary returns (for example, the treasurer if the nonprofit board has given this officer full authority to pay all taxes as they become due). With proper planning, your nonprofit corporation should be tax exempt, but you still have to file federal and state informational returns and annual reports to the secretary of state and state attorney general, as well as pay employee withholding and other payroll taxes and taxes on income unrelated to your nonprofit purposes. IRS penalties for delinquent tax payments and returns are substantial, so keep this exception to limited liability in mind-particularly if you will be the treasurer or a board member who specifically approves the payment of taxes on behalf of your corporation.

• Dues: Members of a nonprofit corporation are personally liable for any membership fees and dues they owe the corporation. In most cases, this is a minor obligation because dues are normally set at modest amounts.

• Violations of statutory duties: Corporate directors are legally required to act responsibly (not recklessly) when managing the corporation. They may be held personally financially liable if they fail to act responsibly. Personal liability of this sort is the exception, not the rule. Generally, as long as directors attend meetings and carry out corporate responsibilities conscientiously, they should have little to worry about: The corporate limited liability shield insulates directors from all but the most reckless and irresponsible decisions.

• Intermingling funds or other business dealings:  A nonprofit corporation must act so that its separate existence is clear and respected.  If it mixes up corporate funds with the personal funds of those in charge, fails to follow legal formalities (such as failing to operate according to bylaws, hold director meetings, or keep minutes of meetings), or risks financial liability without sufficient backup in cash or other assets, a court may disregard the corporate entity and hold the principals responsible for debts and other liabilities of the corporation. In legalese, this is known as piercing the corporate veil. Piercing the veil is the exception, not the rule, and only happens when a court decides that it is necessary to prevent a gross injustice or fraud perpetrated by the founders or principals of a corporation.

• Private foundation managers: If the nonprofit corporation is classified as a private foundation, foundation managers can be held personally liable for federal excise taxes associated with certain prohibited transactions. They may also be held personally liable for penalties and interest charged for failing to file certain tax returns or pay required excise taxes. (A private foundation is a 501(c)3 corporation and does not qualify as a public charity. You'll see that most 501(c)3 nonprofits qualify as public charities and are not subject to the private foundation requirements.)

• Loans: When a nonprofit corporation takes a loan to cover its operating costs or buys property subject to a mortgage, banks and commercial lending institutions sometimes insist on the personal guarantee of its directors or officers. If the directors or the founders could decide to continue this way indefinitely. However, the founders want to expand the activities and revenues of the collective. Let’s say as an example, they decide to form a 501(c)3 nonprofit corporation in order to be eligible for tax-deductible contributions and grant funds from the city, and to qualify the group to employ student interns and workstudy students. This will require them to prepare and file articles of incorporation and a federal corporate income tax exemption application. They must select an initial board of directors and prepare organizational bylaws and formal written minutes of the first board of directors meeting. After incorporation, the group holds regular board meetings documented with written minutes, sets up and uses a double entry bookkeeping system, implements regular federal and state payroll and tax procedures and controls, files exempt organization tax returns each year, and expands its operations. A full-time staff person is assigned to handle the increased paperwork and bookkeeping chores brought about by the change in structure and increased operations of the organization. This example highlights what should be one of the first things you consider before you decide to incorporate: Make sure that you and your coworkers can put in the extra time and effort that an incorporated nonprofit organization will require. If the extra work would overwhelm or overtax your current resources, we suggest you hold off on your incorporation until you get the extra help you need to accomplish this task smoothly (or at least more easily).

Restrictions on Paying Directors and Officers - As a matter of state corporation law and the tax exemption requirements, nonprofits are restricted in how they deal with their directors, officers, and members. None of the gains, profits, or dividends of the corporation can go to individuals associated with the corporation, including directors, officers, and those defined as members in the corporation's articles or bylaws. State self-dealing rules apply as well, regulating action by the board of directors if a director has a financial interest in a transaction.  Officers and staff can be paid a reasonable salary for work they do for the corporation.  State laws often provide for this type of compensation, and even if nothing is specified, it is permissible. Directors can also be paid for their expenses and time for attending director meetings. In all cases, however, these payments should be reasonable. Lavish payments or undeserved payouts characterized as "salaries" or "compensation" can be challenged by the IRS and can lead to penalties and even a loss of tax exemption.

Restrictions Upon Dissolution - One of the requirements for the 501(c)3 tax exemption is that upon dissolution of the corporation, any assets remaining after the corporation's debts and liabilities are paid must go to another tax-exempt nonprofit, not to members of the former corporation.

Restrictions on Your Political Activities - Section 501(c)3 of the Internal Revenue Code establishes a number of restrictions and limitations that apply to nonprofits.  Specifically, your organization may not participate in political campaigns for or against candidates for public office, and cannot substantially engage in legislative or grassroots political activities except as permitted under federal tax regulations.  If a substantial portion of the group's efforts will consist of legislative lobbying, the group's 501(c)3 tax exemption probably will be denied by the IRS. Instead, the group should seek a tax exemption under IRC § 501( c)4 as a social welfare group, which is not limited in the amount of lobbying the group can undertake. Of course, the benefits of 501(c)4 tax exemption are fewer too-contributions to the group are not tax deductible, and grant funds will be more difficult to obtain.

Oversight by the Attorney General - Each state's attorney general has broad power to oversee the operations of 501(c)3 nonprofits.  The attorney general can take the corporation to court to make sure it complies with the state corporation law. This usually doesn't happen, however, unless an organization commits a serious offense (such as the founders' diverting contributions for their personal use) and the organization is on the state attorney general's enforcement division radar (through a complaint filed by a disgruntled group or a member of the public who feels aggrieved by the nonprofit's actions or policies).  Religious 501(c)3 nonprofit corporations have wider flexibility in managing their internal affairs. A state attorney general is less likely to step in and sue a religious nonprofit to enforce compliance with state corporate laws, except in the most extreme and unusual cases of fraud or misappropriation by the principals of a religious-purpose nonprofit.

How Nonprofits Handle Money - Most nonprofits need to deal with money indeed, being able to attract donations is a prime reason for choosing nonprofit status.  Nonprofits can also make money. Nonprofit does not literally mean that a nonprofit corporation cannot make a profit. Under federal tax law and state law, as long as your nonprofit is organized and operating for a recognized nonprofit purpose, it can take in more money than it spends in conducting its activities.  A nonprofit may use its tax-free profits for its operating expenses (including salaries for officers, directors, and employees) or for the benefit of its organization. What it cannot do under IRC § 501(c)3 is distribute any of the profits for the benefit of its officers, directors, or employees (as dividends, for example).

How to Avoid Self-Dealing - Directors must guard against unauthorized self-dealing-that is, involving the corporation in any transaction in which the director has a material, or significant, financial interest without proper approval. The self-dealing rules and proper approval requirements can arise in many different types of transactions, including the purchase or sale of corporate property, the investment of corporate funds, or the payment of corporate fees or compensation. The nonprofit corporation laws of most states include special rules for validating self-interested director decisions of this sort. In most cases, the interest of the director must be disclosed prior to voting, and only disinterested members of the board may vote on the proposal.  For example, a board votes to authorize the corporation to lease or buy property owned by a director, or to purchase services or goods from another corporation in which a director owns a substantial amount of stock. Either of these could be considered a prohibited self-dealing transaction if not properly disclosed and approved, because a director has a material financial interest in each transaction and neither falls within one of the specific statutory exceptions.

Loans and Guarantees - Most states expressly prohibit a nonprofit from making or guaranteeing a loan to a director, or require approval by special disclosure or voting rules. Because of the strict rules prohibiting individuals involved with a nonprofit's operations from personally benefiting from the nonprofit, it's easy to see why a loan to a director from tax-exempt funds over which he or she exercises control might appear questionable. We suggest that you carefully review your state's nonprofit statutes before considering approval of loans or guarantees to directors-and, as always, ask a nonprofit lawyer for advice if you have questions.

Director Indemnification and Insurance - In addition to director and officer immunity statutes, most states have director indemnification laws. These laws typically require a corporation to indemnify (reimburse) a director for legal expenses incurred as a result of acts done on behalf of the corporation, if the director is successful in the legal proceeding. Directors' (and officers') liability coverage (also called errors and omissions coverage) is, of course, one way to insulate directors from possible personal liability for their actions on behalf of the corporation. This type of insurance, however, is normally priced far beyond the reach of the average small nonprofit organization. Rather than worrying about trying to obtain this kind of coverage, it often makes more sense to do everything possible to minimize potential risks that might arise in the pursuit of your nonprofit purposes. For example, try to make sure that employees perform their work in a safe manner and that anyone required to perform skilled tasks is properly trained and licensed. In addition, the corporation should obtain specific coverage for any likely risks: motor vehicle insurance to cover drivers of corporate vehicles, general commercial liability insurance to cover the group's premises, and so on.

Nonprofit Officers - Most states require a nonprofit corporation to have a president, secretary, and treasurer.  Nonprofits often appoint additional officers, such as a vice president, or use different tides for their officer positions, such as a chief operating officer instead of president, or chief financial officer instead of treasurer. One person can usually hold two or more offices, but some states prohibit one person from serving simultaneously as both the president and treasurer and/ or secretary of the corporation. For proper nonprofit operation (and to help avoid an IRS implication that you are forming a "closely held" nonprofit to serve the interests of a small group of founders), it usually is best to appoint separate people to your nonprofit officer positions.

Duties and Responsibilities - The powers, duties, and responsibilities of officers are specified in the corporation's articles or bylaws, or by resolution of the board of directors. Generally, officers are in charge of supervising and implementing the day-to-day business of the corporation. This authority does not usually include the authority to enter into major business transactions, such as the mortgage or sale of corporate property. These kinds of major transactions are left to the board of directors. If the board wants the officers to have the power to make one or more major business decisions, special authority should be delegated by board resolution.  Officers have a duty to act honestly and in the best interests of the corporation. Officers are considered agents of the corporation and can subject the corporation to liability for their negligent or intentional acts if their acts cause damage and are performed in the scope of their employment.

Officers May Bind the Corporation - Generally, the actions and transactions of an officer are legally binding on the corporation. A third party is entitled to rely on the apparent authority of an officer and can require the corporation to honor a deal, regardless of whether the officer was actually empowered by the board to enter into the transaction. To avoid confusion, if you delegate a special task to an officer outside the realm of the officer's normal duties, it's best to have your board pass a resolution granting the officer special authority to enter into the transaction on behalf of the corporation. And, of course, any action taken by an officer on behalf of a corporation will be binding if the corporation accepts the benefits of the transaction or if the board ratifies the action, regardless of whether or not the officer had the legal authority to act on the corporation's behalf.

Compensation of Officers - Officers can receive reasonable compensation for services they perform for a nonprofit corporation. It is appropriate to pay officers who have day-to-day operational authority, and not to pay the officers who limit themselves to presiding over the board of directors or making overall nonprofit policy decisions. In smaller nonprofits, it is more common for officers and directors to also assume staff positions and be paid for performing these operational tasks.  In a larger nonprofit organization, a paid executive director or medical director (these are staff positions, not board of director posts) might oversee routine operations of a medical clinic, and the paid principal or administrator (also staff positions) will do the same for a private school. However, in a smaller nonprofit, the corporate president or other officer may assume these salaried tasks.

Loans, Guarantees, and Immunity Laws - Loans and guarantees to nonprofit officers are either prohibited or very strictly regulated, as they are with directors (see "Loans and Guarantees,'' above). Officers have a duty to act honestly and in the best interests of the corporation. Officers can be insured or indemnified against personal liabilities, and they can benefit from the same immunity statutes that relieve volunteer, and in some states paid, directors from personal liability for monetary damages. See your state nonprofit statutes before approving loans or guarantees to officers.

Employees - Employees of nonprofit corporations work for and under the supervision of the corporation and are paid a salary in return for their services. Paid directors and officers are considered employees for purposes of individual income tax withholding, Social Security, state unemployment, and other payroll taxes the employer must pay. Employees have the usual duties to report and pay their taxes, and the usual personal liability for failing to do so.

Employee Immunity - Employees are generally not personally liable for any financial loss their acts or omissions may cause to the corporation or to outsiders, as long as they are acting within the course and scope of their employment. If the harm is done to outsiders, it is the corporation, not the employees, which must assume the burden of paying for the loss. Caution: employees may be personally liable for taxes. An important exception to the rule of employee nonliability concerns the employee whose duty it is to report or pay federal or state corporate or employment taxes. The responsible employee (or officer or director) can be held personally liable for failure to report or pay such taxes. The IRS may take a broad view as to who is responsible for such duties.

Employee Compensation - Salaries paid to officers or regular employees should be reasonable and given in return for services actually performed. A reasonable salary is one roughly equal to that received by employees rendering similar services elsewhere.  If salaries are unreasonably high, they are apt to be treated as a simple distribution of net corporate earnings and could jeopardize the nonprofit's tax-exempt status. Nonprofits should avoid paying discretionary bonuses at the end of a good year as it may look like a payment from the earnings and profits of the corporation, a no-no for 501(c)3 tax-exempt nonprofits. In reality, since the pay scale for nonprofit personnel is usually lower than that of their for-profit counterparts, most of this cautionary advice shouldn't be needed for smaller nonprofits. If you have any question about whether a transaction, contract, or compensation decision, or another economic decision is reasonable or whether it may be outside the safe harbor provisions of the excess benefit rules, ask a nonprofit lawyer for help. The last thing you want to have happen is to subject board members, officers, contractors, sponsors, donors, and others who deal with your nonprofit to the prospect of having to pay back money or the value of benefits previously paid out or provided by your nonprofit plus very hefty taxes, interest, and penalties.

Limitation on Political Activities - A 501(c)3 corporation is prohibited from participating in any political campaigns for or against any candidate for public office.  Participation in or contributions to political campaigns can result in the revocation of 501(c)3 tax-exempt status and the assessment of special excise taxes against the organization and its managers. (See Internal Revenue Code §§ 4955, 6852, and 7409.) Voter Education Activities Section 501(c)3 groups can conduct certain voter education activities if they are done in a nonpartisan manner (see IRS Revenue Ruling 78-248). If you want to engage in this type of political activity, we recommend you consult an attorney. Your organization can request an IRS letter ruling on its voter education activities by writing to the address listed in IRS Publication 557. For information on restrictions on political candidate campaign activity by 501(c)3 organizations, see Election Year Issues. It contains information about other laws and restrictions applicable to political campaign nonprofits non- 501(c)3 groups organized primarily to support or oppose political candidates, under Internal Revenue Code§ 527.

Influencing Legislation - Section 501(c)3 organizations are prohibited from acting to influence legislation, "except to an insubstantial degree." In the past, courts have found that spending more than 5% of an organization's budget, time, or effort on political activity was substantial. More recently, courts have tended to look at the individual facts of each case. Generally, if a nonprofit corporation contacts, or urges the public to contact, members of a legislative body, or if it advocates the adoption or rejection of legislation, the IRS considers it to be acting to influence legislation.  Lobbying to influence legislation also includes: • any attempt to affect the opinions of the general public or a segment of the public, and • communication with any member or employee of a legislative body, or with any government official or employee who might participate in the formulation of legislation. However, lobbying to influence legislation does not include: • making available the results of nonpartisan analysis, study, or research • providing technical advice or assistance to a government body, or to its committee or other subdivision, in response to a written request from it, where such advice would otherwise constitute the influencing of legislation • appearing before, or communicating with, any legislative body with respect to a possible decision that might affect the organization's existence, powers, tax-exempt status, or the deductibility of contributions to it, or • communicating with a government official or employee, other than for the purpose of influencing legislation. Also excluded from the definition of lobbying efforts are communications between an organization and its members about legislation (or proposed legislation) of direct interest to the organization and the members, unless these communications directly encourage members to influence legislation.

Political Expenditures Test - Under the political expenditures test in IRC § 501(h), limitations are imposed on two types of political activities: lobbying expenditures and grassroots expenditures. Lobbying expenditures are those made for the purpose of influencing legislation, while grassroots expenditures are those made to influence public opinion.  For examples of these two types of activities, see IRS Publication 557, the "Lobbying Expenditures" section. The monetary limits are different for each of the categories, and the formulas for computing them are somewhat complicated. If your 501(c)3 nonprofit elects the political expenditures test, you must file IRS Form 5768, Election-Revocation of Election by an Eligible Section 501(c)(3) Organization To Make Expenditures To Influence Legislation, within the tax year in which you wish the election to be effective. This election is also available under similar rules at the state level. In determining whether a group's legislative activities are substantial in scope, the IRS looks at the amount of time, money, or effort the group spends on legislative lobbying. If they are substantial in relation to other activities, 501(c)3 tax status might be revoked and, again, special excise taxes can be levied against the organization and its managers. See IRC § 4912.

The Alternative Political Expenditures Test - Since it is impossible to know ahead of time how the IRS will assess the substantiality of a group's legislative activity, the IRC allows 501(c)3 public charities (most 501(c)3 groups will qualify as public charities) to elect an alternative expenditures test to measure permissible legislative activity. Under this test, a group may spend up to 20% of the first $500,000 of its annual expenditures on lobbying, 15% of the next $500,000, 10% of the next $500,000, and 5% of its expenditures beyond that, up to a total limit of $1 million each year.  Caution - Some groups can't use the political expenditures test. This expenditures test and its provisions for lobbying and grassroots expenditures are not available to churches, an integrated auxiliary of a church, a member of an affiliated group of organizations that includes a church, or to private foundations. If your nonprofit corporation plans to do considerable lobbying activity, mostly by unpaid volunteers, then electing the expenditures test might be a good idea. Why? Because the minimal outlay of money to engage in these activities will probably keep you under the applicable expenditure limits. If you didn't make this election, your 50l(c)3 tax exemption might be placed in jeopardy if the IRS considers your political activities to be a substantial part of your overall purposes and program.  If you plan to engage in more than a minimum amount of political lobbying or legislative efforts, you need to decide whether it is to your advantage to elect the expenditures test based on the facts of your situation. If you find that these alternative political expenditures rules are still too restrictive, you might consider forming a social welfare organization or civic league under Section 501 (c)(4) of the Internal Revenue Code, an exemption that requires a different federal exemption application, IRS Form 1024, and does not carry with it all the attractive benefits of 501 (c)(3) status (access to grant funds, tax deductible contributions, and so on). See "Is Your Group a Nonprofit That Can Use This Book?" in Chapter 1 and IRS Publication 557 for further information on 501(c)4 organizations.

Additional limitations for certain groups - Federally funded groups may be subject to even more stringent political expenditure tests than those discussed here (for example, political activity and expenditure restrictions imposed by the federal Office of Management and Budget). For a thorough discussion of the rules that apply to lobbying activities by 501(c)3 organizations and detailed information on the Section 501 (h) political expenditures test election, see Lobbying Issues by Charities and Nonprofit Organizations, IRS Publication 4302.

Are You Selling Services or Information That the Federal Government Offers for Free? - If your nonprofit plans to sell services or information, check to see if the same service or information is readily available free (or for a nominal fee) from the federal government. If so, you may need to tell potential clients and customers of this alternate source. This rule applies to all tax-exempt nonprofits (including any 501(c)3 organization, whether classified as a public charity or private foundation). (IRC § 6711.) Failure to comply with this disclosure requirement can result in a substantial fine. For further information on these disclosure requirements, see IRS Publication 557.

The 1% or $5,000 Limit for Exempt-Purpose Income - There is one major limitation on the amount of income from exempt-purpose activities that can be included in the one-third qualified public support figure. In any tax year, receipts from individuals or government units from the performance of exempt-purpose services that exceed $5,000 or 1 % of the organization's total support for the year, whichever is greater, must be excluded from the organization's qualified public support figure. This limitation applies only to exempt-purpose receipts and not to gifts, grants, contributions, or membership fees received by the organization.  For example, Van-Go is a visual arts group that makes art available to people around the nation by toting it around in specially marked vans. In 2012, Van-Go derives $30,000 total support from the sale of paintings. The funds are receipts related to the performance of the group's exempt purposes. Any amount over $5,000 paid by any one individual cannot be included in computing Van-Go's qualified public support for the year, although the full amount is included in total support. Of course, if Van-Go's total support for any year is more than $500,000, then the limitation on individual contributions will be 1 % of the year's total support, since this figure exceeds $5,000.

Some Gifts Are Gross Receipts - When someone gives money or property without getting anything of value in return, we think of it as a gift or contribution. But when people give a nonprofit money or property in return for admissions, merchandise, services performed, or facilities furnished to the contributor, these aren't gifts. They are considered gross receipts from exempt-purpose activities and are subject to the $5,000 or 1 % limitation.  For example, at its annual fundraising drive, the National Cormorant Preservation League rewards $100 contributors with a book containing color prints of cormorants. The book normally retails for $25. Only $75 of each contribution is considered a gift; the remaining $25 payments are classified as gross receipts from the performance of the group's exempt purposes and are subject to the $5,000 or 1 % limitation.

Some Grants Are Gross Receipts - It is sometimes hard to distinguish money received as a grant from exempt-purpose gross receipts. The IRS rule is that when the granting agency gets some economic or physical benefit in return for its grant, such as a service, facility, or product, the grant is classified as gross receipts related to the exempt activities of the nonprofit organization. This means that the funds will be subject to the 1 % or $5,000 limitation that applies to exempt-purpose receipts. Money contributed to benefit the public will be treated as bona fide grants by the IRS, not as exempt-purpose receipts. This type of bona fide grant is not subject to the 1 % or $5,000 limitation.  For example, A pharmaceutical company, Amalgamated Mortar & Pestle, provides a research grant to a nonprofit scientific and medical research organization, Safer Sciences, Inc. The company specifies that the nonprofit must use the grant to develop a more reliable childproof cap for prescription drug containers (the results of the nonprofit research will be shared with the commercial company). The money is treated as receipts received by Safer Sciences in carrying out its exempt purposes and is subject to the $5,000 or 1 % limitation. Safer Sciences gets a grant from the federal Centers for Disease Control and Prevention to build a better petri dish for epidemiological research. Since the money is used to benefit the public, the full amount will be included in the nonprofit organization's qualified public support figure.

Unusual Grants Drop Out of the Support Computation - To be included as qualified support (in the numerator of the support fraction), the support must be from permitted sources. Disqualified persons include founders, directors, or executive officers of the nonprofit. A large grant from one of these sources could undermine the ability of the nonprofit to qualify under this public charity test.  To avoid this result for nonprofits that would otherwise qualify under the exempt activities support test, unusual grants are ignored-that is, they drop out of both the numerator and denominator of the support calculation. (There is a similar exclusion for unusual grants under the public support test, discussed above.) A grant will be classified as unusual if the source of the grant is not regularly relied on or actively sought out by the nonprofit as part of its support outreach program and if certain other conditions are met. If you want to learn more about these unusual grant requirements for groups that qualify as a public charity under the exempt-activities support test, see IRS Publication 557.

Rents Related to Exempt Purposes Are Not Gross Investment Income - Rents received from people or groups whose activities in the rented premises are related to the group's exempt purpose are generally not considered gross investment income. This is a good thing. Why? Remember: Under this public charity test, the organization must normally not receive more than one-third of its total support from unrelated trades or businesses or from gross investment income.

FORMS AND RESOURCES

• Incorporation Checklist

• Application for Reservation of Corporate Name

• Articles of Incorporation

• Articles Filing Letter Bylaws (including Membership Provisions and Adoption of Bylaws)

• Form 1023: Application for Recognition of Exemption (with Notice 1382)

• Instructions for Form 1023

• Form SS-4: Application for Employer Identification Number

• Instructions for Form SS-4

• Form 5768 Election/Revocation To Make Expenditures To Influence Legislation

• Publication 557 Tax-Exempt Status for Your Organization

• Publication 4220: Applying for 501(c)3 Tax-Exempt Status

• Publication 4221-PC: Compliance Guide for 501(c)3 Public Charities

• Publication 4221-PF: Compliance Guide for 501(c)(3) Private Foundations

• Publication 1828: Tax Guide for Churches and Religious Organizations Public Charity or Private Foundation Status Issues under IRC §§ 509(a)(1)-(4), 4942(j)(3), and 507 Disclosure, FOIA and the Privacy Act Update: The Final Regulations on the Disclosure Requirements for Annual Information Returns and Applications for Exemption Education, Propaganda, and the Methodology Test Election Year Issues Lobbying Issues Private School Update UBIT: Current Developments Intermediate Sanctions (IRC 4958)

• Update IRS Revenue Ruling 2007-41 Political Campaign Prohibition Guidance Internal Revenue Bulletin (IRB 2008-18) with T.D. 9390 Final Regulation changes to Section 4958 regulations

• Waiver of Notice and Consent to Holding of First Meeting of Board of Directors

• Minutes of First Meeting of Board of Directors

• IRS Revenue Procedure 75-50

• IRC Section 4958, Taxes on Excess Benefit Transactions

• IRS Regulations Section 53.4958-0

• Final 4958 regulation changes. See Internal Revenue Bulletin No. 2008-18, T.D. 9390.

• Intermediate Sanctions (IRC Section 4958) Update Conflict of Interest Provisions Article 9 of the bylaws included in this book contains rules and procedures for approving or avoiding conflict of interest transactions, including compensation arrangements. This bylaw provision contains the conflict of interest language recommended by the IRS (included in the sample conflict of interest policy in the instructions to IRS Form 1023). It also has language for the approval of compensation arrangements that attempts to comply with the safe harbor provisions of the excess benefit rules. You will need to become familiar with Article 9 of your bylaws and refer to those provisions whenever your board, or a committee of your board, decides to set or increase salaries, enter into contracts, or approve deals with individuals or other organizations.