The Internal Revenue Service recently issued guidance (see IRB 2015-39 dated September 28, 2015) that allows private foundations greater flexibility in making investments of foundation capital while avoiding excise taxes on jeopardizing investments. The Notice addresses questions surrounding whether a private foundation investment whose purpose is the production of income or the appreciation of property (i.e., investments other than program-related investments) would be taxable under Internal Revenue Code section 4944. The Notice explains that foundation managers may consider the relationship between a particular investment and the foundation’s charitable purposes in deciding whether to make an investment, and offers the following example: “a private foundation will not be subject to tax under section 4944 if foundation managers who have exercised ordinary business care and prudence make an investment that furthers the foundation’s charitable purposes at an expected rate of return that is less than what the foundation might obtain from an investment that is unrelated to its charitable purposes.” This investment standard is now more consistent with the Uniform Prudent Management of Institutional Funds Act (UPMIFA), adopted by most states.
Members of the Stanford law school, business school, and other departments, local attorneys and legal professionals, social entrepreneurs and investors attended the May 27, 2015 presentation on “Starting & Scaling Social Enterprises: A Crash Course on Social Enterprise”.
The presenters included attorneys Zoe Hunton, Neetal Parekh (lawyer, entrepreneur, cofounder of Thinktomi, and blogger at Innov8Social), and Natalia Thurston (Director of Legal Services, Social Venture Law in Oakland). Monica Lienke, start-up attorney at Springmeyer Law and Stanford Law School Alumni Class of 2014, moderated the discussion, and Kaleisha Stuart, Stanford Law School Class of 2015, organized the event.
The presenters offered an overview of the following topics:
- defining social enterprise
- development of legal infrastructure to support social enterprise
- nonprofit and philanthropic sector issues
- structure and funding considerations in starting and scaling a social enterprise
- case study of Etsy’s recent IPO illustrating the unique challenges that arise from the growth and scaling of a B-Corp
- integrating social enterprise into a legal career
Section 501(c)(3) public charities are allowed to establish scholarship programs to grant funds to individuals, subject to the following rules:
- The scholarship program must further charitable and educational purposes within the meaning of Section 501(c)(3), as stated in the charity’s organizing document. For example, providing school tuition scholarships to individuals based on financial need and merit furthers charitable and educational purposes.
- Scholarships must be offered to a large enough group to constitute a charitable class. Scholarships cannot be limited to designated individuals or members of a narrowly defined group. A sufficiently broad and open-ended charitable class would include, for example, low income students or female students.
- Selection of scholarship recipients must be made in a nondiscriminatory fashion in terms of racial preference, and in an objective manner based on need and/or merit. No grants may be awarded to an officer or director of the charity, nor to a member of the scholarship selection committee, nor to a substantial contributor to the charity. Family members of these individuals are also not eligible to receive scholarships.
- The charity must keep adequate records and case histories to demonstrate that grants to individuals further charitable and educational purposes and that grant funds are not misused.
- The charity is not required to obtain advance approval from the IRS in order to make scholarship grants to individuals, however it must comply with the above rules. If the charity is applying for 501(c)(3) status and plans to conduct a scholarship program, it should describe its scholarship grant procedures on Schedule H of Form 1023. Note that private foundations are required to seek approval from the IRS prior to distributing scholarship grants.
Impact Law Forum kicked off its 2015 event series with a well-attended presentation on how cooperative businesses are shaping the landscape of the new economy and what legal practitioners need to know to support the growth of these revolutionary business models for social impact.
The presentation was led by Sushil Jacob, Director of the Green-Collar Communities Clinic (GC3) and Staff Attorney at the East Bay Community Law Center (EBCLC), and Ricardo Nunez, Director of Legal Services and Cooperatives Program Director at the Sustainable Economies Law Center (SELC). Attendees included practicing attorneys, staff at legal organizations, clinics, and firms, law students and individuals interested in becoming lawyers.
Ricardo and Sushil’s presentation slides can be accessed here: http://www.slideshare.net/RicardoNuez8/how-cooperatives-are-changing-the-landscape-of-the.
For substantive legal information on cooperative models, including legal guides and resources for practical use, visit SELC’s website.
Be sure to check the event listings for GC3, EBCLC, and SELC, where you can learn about upcoming workshops and legal cafes covering community enterprise, justice, and advocacy issues.