http://www2.guidestar.org/rxg/news/webinars/webinar-archive.aspx

1. Grantmaker Due Diligence
in the
Pension Protection Act Era:
How to identify supporting organizations and align
your grants administration process with the 21st
century tax code
15 February 2011
1
© 2011, GuideStar USA, Inc. All Rights Reserved. This information is copyrighted subject matter owned by
GuideStar USA and is protected by United States and international copyright law.

2. Today’s Facilitators
Pamela Jowdy
Senior Product Manager, GuideStar
Suzanne Ross McDowell
Partner, Steptoe & Johnson, LLP
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3. Participant Poll
#grantmakerdd 3

4. Today’s Objectives
1. Internal Revenue Code: Impacts on Grantmakers
 Why Verify: Pension Protection Act of 2006
 Supporting Organizations: Relationships and Control
 Expenditure Responsibility: Defined
 Due Diligence: Methods and Best Practices
2. GuideStar Charity Check: Anatomy of a Solution
 How it works
 What it delivers
 Why it works
3. “Automatic” Failure to File Revocations
4. Q & A 4

5. Internal Revenue Code
Impact of the Pension Protection Act of 2006 on
Grantmakers
Suzanne Ross McDowell
Partner
Steptoe & Johnson LLP
smcdowell@steptoe.com
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#grantmakerdd

6. Summary of
Pension Protection Act Provisions
Affecting Grants to
Supporting Organizations
#grantmakerdd 6

7. Changes Made by the
Pension Protection Act of 2006
 Private Foundations (PFs)
 Grants to certain supporting organizations (SOs) do
not count towards minimum distribution
• Penalty: 30% of shortfall; must make correction
 Grants to certain SOs require expenditure
responsibility
• Penalty: 20% of grant on foundation; potentially 5% on
directors and officers; must make correction
 Donor Advised Funds (DAFs)
 Grants to certain SOs require expenditure
responsibility
• Penalty: 20% of grant on sponsor of DAF
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8. What is a Supporting Organization?
 Internal Revenue Code provides--
 All 501(c)(3) organizations are either private
foundations or public charities
 Private foundations are subject to greater regulation
 Public charities include:
 Schools, hospitals, churches, government units
 Organizations that meet specific requirements for
broad public support
 SOs
 All other 501(c)(3) organizations are private
foundations
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9. What is a Supporting Organization?
(cont’d)
 SO is a 501(c)(3) organization which is--
 Classified as a public charity (not a PF)
 Because it has a specified relationship with another
public charity (the supported organization)
 Types of relationships
 Type I – Parent-subsidiary
 Type II – Brother-sister
 Type III – Operated in connection with
• Functionally Integrated
• Not Functionally Integrated
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10. Which Supporting Organizations
Require Expenditure Responsibility?
 Type III Non-Functionally Integrated SOs
 All other SOs if--
 A disqualified person of the foundation
making a grant to the SO directly or indirectly
controls the SO or a supported organization;
or
 A donor to a DAF, or a person designated by
the donor to advise with respect to
distributions, directly or indirectly controls a
supported organization
#grantmakerdd 10

11. What is Expenditure Responsibility?
 Procedures designed to ensure that PF funds
are used for exclusively charitable purposes--
 Pre-grant inquiry
 Written grant agreement with the grantee
 Grantee must keep funds separate from
noncharitable funds
 Regular reports from the grantee to PF
 PF reports to IRS on Form 990-PF that
expenditure responsibility requirements were
met
11

12. Which Grants Do Not Count Toward a
Private Foundation’s Minimum
Distribution?
Grants to--
 Type III Non-Functionally Integrated SOs
 All other SOs if--
 A disqualified person of the foundation
making a grant to the SO directly or indirectly
controls the SO or a supported organization
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13. When Does a Person Have Control?
 No IRS guidance provides clear method for
determining whether control exists.
 Control exists when one or more disqualified
persons or donors may, by aggregating their
votes or positions of authority, require the SO
or supported organization to make an
expenditure, or prevent the SO or supported
organization from making an expenditure.
See Notice 2006-109.
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14. When is a Type III Supporting
Organization Functionally Integrated?
 Proposed Regulations issued on September 24, 2009
 Until temporary or final regulations are issued, can
rely on Notice 2006-109 or Proposed Regulations
 Notice 2006-109: SO is functionally integrated
• When the activities engaged in for or on behalf
of a supported organization(s) are activities to
perform the functions of, or to carry out the
purposes of, such organization(s), and;
• But for the involvement of the SO, would
normally be engaged in by the supported
organization(s) themselves.
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15. When is a Type III Supporting
Organization Functionally Integrated?
(cont’d)
 Proposed Regulations: SO is functionally integrated
 If engages in activities substantially all of which
directly further the exempt purposes of the supported
organization(s), by performing the functions of or
carrying out the purposes of the supported
organization(s); and
 But for the involvement of the SO, would normally be
engaged in by the supported organizations
 Includes owning and managing exempt-use property
 Does not include fundraising or managing non-
exempt use property for a supported organization
 Special rules for hospitals and governmental units
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16. Conducting Due Diligence to
Avoid Excise Taxes
under the
Pension Protection Act
#grantmakerdd 16

17. Step 1: Determine if Potential
Grantee is a 501(c)(3) Organization
 Approved Methods
 IRS Determination Letter; and
 Verification of listing in IRS Pub. No. 78
• Pub. No. 78 Weekly Updates in Internal
Revenue Bulletin
 If grantee is not a 501(c)(3), no new rules
 If grantee is a 501(c)(3), must determine if it
is an SO
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18. Step 2: Determine if Potential
Grantee is a SO
 Approved Methods
 IRS Determination Letter
• Section 509(a)(1) and 509(a)(2) organization – not a
SO
• Section 509(a)(3) organization = SO
• IRS letter may be silent
 IRS Business Master File
• Direct access (Notice 2006-109)
• Access to IRS BMF data through third party such as
GuideStar (Rev. Proc. 2009-32)
 If grantee is not a SO, can make grant—no new rules
 If grantee is a SO, must determine the type
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19. Step 3: If Grantee is a SO, Determine
the Type of SO
 Method 1: IRS Determination Letter
 Most Determination Letters don’t include Type
• Prior to 2006, no need for Type
 Prior to February 22, 2007, IRS issued Determination
Letters on FI status based on an Advance Notice of
Proposed Rulemaking (ANPRM)
 ANPRM superseded by Prop. Reg. but can continue to rely
on Determination Letter issued under ANPRM until Prop.
Reg. are issued as temporary or final as long as SO meets
the requirements of ANPRM or Prop. Reg.
 IRS now issuing Determination Letters that a Type III is
Functionally Integrated under Prop. Reg. definition
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20. Step 3: If Grantee is a SO, Determine
the Type of SO (cont’d)
 Method 2:
 Reasoned written opinion of counsel of PF or
DAF
20

21. Step 3: If Grantee is a SO, Determine
the Type of SO (cont’d)
 Method 3:
 Good Faith Reliance on Written Representation
by Grantee
• Representation by officer, director or trustee
• Describes how officers, directors and trustees
of grantee are selected
• For Type I or II, references governing
document provisions establishing relationship
with supported organization
• For Type III-- identifies supported
organizations
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22. Step 3: If Grantee is a SO, Determine
the Type of SO (cont’d)
Method 3 (cont’d)
 Review by PF or DAF
• Governing documents of SO and supported organization
• For Type III, representation from supported
organizations
o Re types of activities
o That, but for SO, supported organization would conduct
activities of SO
Note: cannot rely on Form 990 to determine Type
22

23. Step 3: If Grantee is a SO, Determine
the Type of SO (cont’d)
 If grantee is a Non-Functionally Integrated
Type III SO, then PF or DAF must exercise
expenditure responsibility and grant does not
count toward non-operating foundation’s
minimum distribution
 If grantee is a Type I, Type II or Functionally
Integrated Type III SO, must determine if a
disqualified person of a PF or donor or
donor’s designee of a DAF has control
23

24. Step 4: Determine if Disqualified Person
or Donor has Control over SO or
Supported Organization
 No IRS approved procedure; use definition in Notice
2006-109
 Obtain list of supported organization(s)
 Identify disqualified persons for a PF and donors and
their designees for a DAF
 Determine if disqualified persons exercise control
over SO or supported organization
 Determine if donors/designees control supported
organization
 Direct or indirect control
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25. Step 4: Determine Control (cont’d)
 If disqualified person or donor (or donor’s
designee) has control, then must exercise
expenditure responsibility and grant does not
count toward a non-operating foundation’s
minimum distribution
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26. Summary
 Type III which is Not Functionally Integrated
 Grant does not count toward non-operating
foundation’s minimum distribution
 PFs and DAFs must exercise expenditure
responsibility
 Type I, II or Functionally Integrated Type III with
disqualified person or donor control
 Grant does not count toward non-operating
foundation’s minimum distribution
 PFs and DAFs must exercise expenditure
responsibility
#grantmakerdd 26

27. GuideStar Charity Check
Anatomy of a Solution
Pamela Jowdy
Senior Product Manager
#grantmakerdd 27

28. Why Verify?
The Challenge: Recap
Two Unique Due Diligence To-Do’s:
To-Do: Data Source:
Verify Current Publication 78
Charitable Status and
Internal Revenue Bulletin
Identify Supporting
Organizations with IRS Business Master File
509(a)(3) status
#grantmakerdd 28

29. Why Verify: IRS Data Sources
Pub 78 and Internal Revenue Bulletin
Establish Tax Deductibility and Verify Current Charitable Status
 IRS Publication 78:
 Also known as Cumulative List of Organizations
 Includes all organizations to which charitable contributions are tax deductible
 Current tax-exempt status, percentage of contributions that are tax deductible
 Deductibility limitations
 Published quarterly
 IRS Internal Revenue Bulletin:
 Also known as the „IRB‟
 Lists organizations whose charitable status has been changed or revoked
 Updated weekly
Rev. Proc. 82-39, 1982-1 C.B. 759 Sec.3.01 and Sec.3.02 states that grantors “may rely on
the classification of an organization listed in or covered by Publication No. 78.”
#grantmakerdd 29

30. Why Verify: IRS Data Sources
IRS Business Master File
Determine 509(a) Status
 IRS Business Master File:
 Lists all tax-exempt organizations registered with the IRS
 Published monthly
 Includes reason for non-private foundation status, aka “public charity classification”
 Reason for non-private foundation status = 509(a) status
 509(a)(1) and 509(a)(2):
 A public charity that receives a substantial amount of public support to fund its operations
 509(a)(3): Supporting Organization
 A public charity that provides support to one or more publicly supported organizations
 Must demonstrate that is has a particular type of relationship with the organization it
supports
#grantmakerdd 30

31. Why Verify: Pension Protection Act
Supporting Organizations Snapshot
IRS Business Master File
509(a) Universe
IRS Business Master File
 32,191 509(a)(3) Supporting
Organizations: 509(a)(3)
4%
 21,505 have filed a form 990
509(a)(2)
 4% of all 509(a) orgs 28%
 12,305 of the 32,000 largest
foundations, or 38%, made a grant
to any supporting organization
between 2000 and 2004 509(a)(1)
68%
While the supporting organization universe is fairly discrete, failure to identify these
organizations creates an exponentially greater fiscal and operational risk for private
foundations and sponsors of donor-advised funds.
#grantmakerdd 31

32. Internal Revenue Code Charity Check v1.5
100% compliant with
Grants Administration Milestones IRS FAQ and
Revenue Procedure
2009-32
1969 August December March June
2006 2006 2007 2009
Internal Revenue Code
Tax Reform Act Pension Protection Interim Guidance IRS FAQ on IRS Revenue
Act Regarding Business Master File Procedure 2009-32
The legal framework Supporting Orgs Reliance
for the regulation of New requirements on and Donor-Advised Formalizes March
private foundations grants to certain Funds Allows grantors to use 2007 FAQ
and public charities supporting third party resources
is established organizations Grantor may rely on to obtain required IRS Precedential
[509(a)(3)] IRS BMF or Letter of BMF information instrument upon
Determination for about a potential which compliance
Definition of Type III identifying supporting grantee‟s charity and grantmaking
supporting organization 509(a) classification under teams can rely
organizations status section 509(a)(1), (2)
or (3)
Definition of Type III
functionally integrated
supporting
organizations 32

33. Why Verify: Pension Protection Act
IRS Revenue Procedure 2009-32
June 2009
Source: http://www.irs.gov/pub/irs-drop/rp-09-32.pdf
#grantmakerdd 33

34. GuideStar Charity Check
An Integrated, One-Stop Verification Solution
How it Works
 Incorporates Weekly Internal Revenue Bulletin
 Marries Publication 78 data with IRS Business Master File data
 Married, but never modified
 OFAC verification included (organization level)
 10 year track record of consuming and managing IRS data
#grantmakerdd 34

35. GuideStar Charity Check
An Integrated, One-Stop Verification Solution
What it Delivers
Date and time stamp
Electronic or hard copy
documentation
Verify Current
Charitable Status
Latest Quarterly Pub 78
Weekly Bulletin Date
EIN Identify
IRS BMF Date Supporting
Organizations
Reason for Non-Private with 509(a)(3)
Foundation Status status
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36. GuideStar Charity Check
An Integrated, One-Stop Verification Solution
Why it Works
Fully compliant with recently issued guidance
from IRS concerning reliance on third-party
resources for IRS BMF data:
The grantees‟ name, EIN and public charity classification
(aka “reason for non-private foundation status”) under
section 509(a)(1), (2) or (3) is presented in the report
A statement that the information in the report is from the
most currently available IRS monthly update to the BMF,
along with the IRS BMF revision date
The date and time of the grantor‟s search is included on the
report
The third party IRS BMF data and report must be in a form
which the grantor can store in hard copy or
electronically.
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37. Recap
#grantmakerdd 37

38. Charity Check User Experience
Two Clicks to Compliance
Pamela Jowdy
Senior Product Manager
GuideStar
#grantmakerdd 38

39. Common Participant Questions
1. IRS Data Sources: Manual Verification Options
 Publication 78
 Internal Revenue Bulletin
 Business Master File
2. The Letter of Determination: isn’t this good enough?
#grantmakerdd 39

40. IRS Publication 78
Grantmaker Verification Options
IRS Publication 78 Online
 IRS website provides search functionality for Pub 78
 Does not include IRB weekly updates; must search separately for changes and / or revocations
 Cannot search by EIN
 No date or time stamp
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Source: http://apps.irs.gov/app/pub78

41. IRS Internal Revenue Bulletin
Grantmaker Verification Options
IRS IRB
 Includes status changes and revocations
 Published weekly in pdf and html format
 Does not include EIN
 Not searchable
Source: http://www.irs.gov/irb 41

42. IRS Business Master File
Grantmaker Verification Options
IRS Downloadable Business Master File
Draft of manual solution for
509(a)verification directly from
IRS BMF
#grantmakerdd 42

43. The Letter of Determination
Isn’t this good enough?
What it is
 Static, historic snapshot
 Only accurate at time of issuance
 Confirms 501c3 status
What it is NOT
 Does not account for changes in
charitable status since date of
original issuance
 Some letters include SO Type
(2006)
 IRS suspended letters for Type III
functionally integrated SOs 2.22.07
 Does not reflect automatic
revocations starting in 2011
43

44. Automatic Revocations
Failure to file annual return for 3 consecutive years
 Pension Protection Act of 2006 provision
 Forms 990-N, 990-EZ, 990 or 990-PF
 Religious organizations are still exempt from filing requirement
 GuideStar estimates 350,000 NPOs may be at risk
 Many NPOs with annual gross revenues < $25K previously not required to file; now must file 990-N
 First deadline: 5.17.10 for NPOs with FYE date of 12.31.09
 IRS granted “temporary relief” extension until 10.15.10
 “At Risk” Organizations: www.irs.gov/thelist
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45. Automatic Revocations
Failure to file annual return for 3 consecutive years
 IRS to publish list early 2011
 Publication will be ongoing and updated monthly
 GuideStar working closely with IRS to understand timing, data structure and distribution model into BMF
 GuideStar Charity Check will include a flag for these “failure to file” organizations
 GuideStar Premium will include a flag for these “failure to file” organizations
45

46. Questions Already Submitted
1. International Grantmaking
2. Supporting Organization Type and Charity Check
3. Advance Ruling Process and Charity Check
4. OFAC: Definition and options
5. XML Delivery Options
#grantmakerdd 46

47. International Grantmaking
Considerations
 Does the foreign charity already have a Letter of Determination?
 Exercise expenditure responsibility
 Equivalency Determination
 International Repository Project:
 www.USIG.org [COF-sponsored website]
 www.ngosource.org [international repository project website]
 Become familiar with the USA Patriot Act
#grantmakerdd 47

48. Supporting Organization Types
Options and Approaches
 Supporting Organization Guidesheets published by IRS
 GuideStar Charity Check policy and long term product vision
 http://www.irs.gov/charities/article/0,,id=174956,00.html
 Consult your legal counsel!
48

49. Advance Ruling Process
Temporary IRS Regulations
 Issued September 9, 2008
 Eliminated the advance ruling process for 501(c)(3) organizations reasonably expected to be publically
supported
 IRS automatically classifies new 501(c)(3)s as public charities for first 5 years if can reasonably be expected to
be publically supported
 Includes public charities whose advance ruling period has not yet expired or expired after June 9, 2008
 Charity Check still publishes the Advance Ruling date in the body of the report, where applicable
 Footer messaging and link to IRS resource persists
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http://www.irs.gov/charities/charitable/article/0,,id=185568,00.html

50. OFAC and SDN
Definition and Options
Office of Foreign Assets Control / Specially Designated Nationals
 http://www.ustreas.gov/offices/enforcement/ofac/
Source: Technology Affinity Group and Council on Foundations‟ 2007 Grantmakers Information Technology Report, September 2007
#grantmakerdd 50

51. Charity Check Web Service
XML* Data and PDF Report Delivery
*Extensible Markup Language =
easy way to share structured data
via ether
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52. 52

53. Contact Information
webinars@guidestar.org
Suzanne Ross McDowell
Partner, Steptoe & Johnson, LLP
smcdowell@steptoe.com
#grantmakerdd 53

54. Appendix
54

55. GuideStar Charity Check
Access Points: Results
#grantmakerdd 55

56. GuideStar Charity Check
Access Points: Report
56

57. GuideStar Charity Check
509(a)(3) Supporting Organization
57

58. GuideStar Charity Check
Not Verified in Publication 78
58

59. GuideStar Charity Check
Not Listed in IRS Business Master File
59

60. GuideStar Charity Check
OFAC Organization: Results
60

61. GuideStar Charity Check
OFAC Organization: Report
61

62. Grantmaker Due Diligence
in the
Pension Protection Act Era:
How to identify supporting organizations and
align your grants administration process with
the 21st century tax code
© 2011, GuideStar USA, Inc. All Rights Reserved. This information is copyrighted subject matter owned by
GuideStar USA and is protected by United States and international copyright law.
62