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I think I stumbled onto a solution to CS problem of having a non-profit structure that is a rather tough fit for 501c3 designation.
A new corporate organization is cropping up which is defined under state laws: an entity known as an L3C or "low profit limited liability company". This is a for-profit organization which is dedicated for charitable or educational purposes, rather than the accumulation of wealth for stockholders. It sounds like a perfect vehicle for CS!
With an L3C set up, the managers would be able to apply for grants from foundations (not government grants, but oh well) and would be subject to no federal income tax.
There are 3 requirements for an L3c:
-to have a dedicated charitable or educational purpose,
-to not accumulate wealth or property,
-no political lobbying
It has not been set up for California or New Hampshire yet, and the IRS is still ironing out details for how to monitor it, but L3C is getting attention...and hopefully coming to a state near you:)
I'll write the CS managers today and alert them to this...hope y'all are having a nice week:)
The IRS denial letter - Blog post by Casey
By Casey Fenton:
A couple of weeks ago I wrote about how CouchSurfing had been denied 501c3 status by the IRS; the status that the State of New Hampshire required us to get in order to keep operating as a non-profit. Despite our best efforts we weren’t able to achieve it and had to find an alternative, which is ultimately how we ended up transitioning into a B Corp.
As you know I’ve received a lot of emails from our members; lots positive, lots of questions and some with definite concerns about our future. A common one is “Why didn’t you just try harder to get 501c3? I think it’s something you could have achieved.”
Some members have asked to know more about why we were rejected, so I’ve posted the full denial letter and Narrative Description (PDFs) of CS’s activities below to help make sense of it all. I asked our non-profit attorney, Cherie Evans, to provide her interpretation as well.
Letter from, Cherie Evans, CouchSurfing’s non-profit attorney who filed the final 501c3 application:
“The primary reason for the denial of CouchSurfing’s application for tax-exempt status was that the IRS disagreed with CouchSurfing as to whether its activities were charitable and educational. This was the subject of many of the questions and discussions with the IRS leading up to the denial. In addition to the Revenue Rulings regarding homestay mentioned by the IRS in the denial letter, CouchSurfing found support for its qualification under Internal Revenue Code Section 501(c)(3) based on Private Letter Rulings by the IRS and based on similar organizations that had been granted Section 501(c)(3) status. Private Letter Rulings and previous determinations by the IRS do not have precedential value, and the IRS is not required to follow them; however, they are a good indication of the IRS’s thinking on the matter. Importantly, there is only so much precedent on activities that qualify under Section 501(c)(3), and there are many Section 501(c)(3) organizations that have fact patterns different from these IRS rulings. Because there was not a Revenue Ruling or other precedent that dealt with an organization identical to CouchSurfing, i.e., an organization that used a website to facilitate homestay, there was an element of discretion in the IRS’s decision. Instead of looking at CouchSurfing’s approach as innovative and cost saving, the IRS looked negatively on the fact that there was not an intermediary personally arranging the homestays. The IRS also seemed to fear that other websites that were social networks might see this as an opening to tax exemption.
To bolster its denial of tax exemption, the IRS threw every possible negative factor into the denial letter. Some of these issues had never been raised. Throughout the process, CouchSurfing bent over backwards to make any changes requested by the IRS and to produce any requested documents. CouchSurfing produced hundreds of pages of documents, including receipts and financial records. Even though the IRS tried to find many reasons for denial, the IRS did not note any inappropriate use of funds by directors or officers.
One new issue the IRS raised in the denial letter to demonstrate that CouchSurfing was not organized for charitable purposes was that CouchSurfing’s Articles of Agreement allowed for the repayment of capital contributions on dissolution. CouchSurfing’s Articles were prepared by BizFilings, an online incorporation service, which mistakenly added this phrase. During the three years that CouchSurfing pursued tax exemption and after multiple conferences with and multiple questions from IRS agents, this phrase in the Articles was never raised as a basis for denial. If it had been, CouchSurfing would have amended its Articles. In addition, since CouchSurfing was planning to transfer its assets to the California nonprofit corporation and dissolve (because it was operating out of California rather than New Hampshire), it did not seem necessary to revise the New Hampshire corporation’s Articles. There were no capital contributions to CouchSurfing so this phrase was meaningless. In contrast to the IRS, the New Hampshire Attorney General’s Office considers CouchSurfing to be organized for charitable purposes based on its Articles and views the asset dedication language as requiring Attorney General oversight and restricting CouchSurfing’s assets to charitable purposes.
Although CouchSurfing articulated in detail why its activities were charitable and educational, the IRS disagreed. CouchSurfing had the option to appeal the IRS denial. However, this is an expensive and time consuming process, and the result is not certain.”
Internal Revenue Service – Denial Letter
Narrative Description of CouchSurfing Activities
Discussion topic #3: Financial reporting and integrity
Time for our third installment of discussion topics: financial reporting and integrity in governance...and it's a big one:)
As a start for this discussion, I'll refer you guys to these terrific free publications, both of which emphasize a general culture of accountability, and a fierce Board of Directors, as the keys to financial and organizational integrity in managing non-profits:
Now, the general rules: CS is required to post its finances annually, the form of which changes depending upon how much money it collects. If CS collects from $500,000 to $1,000,000 in a year, it must post a financial report that complies with general accounting practices. It has done this for all years up to 2008 and is indeed in complete compliance with all state and federal laws regarding financial disclosure: http://www.couchsurfing.org/organization_finances_2008.html
(I personally can't understand this document because the categories are too broad to be meaningful, but CS has fulfilled its legal obligation).
If CS collects more than $1 million USD, as it surely will in 2009, it is required by law to post an independently audited financial report, so the form should change this year and the document will be necessarily more understandable and transparent.
CS is required by both state and federal law to be operating under the supervision of a 5-person Board of Directors, the members of which may not be employees, family, or have any other financial interest in the charity. http://www.gencourt.state.nh.us/RSA/html/XXVII/292/292-6-a.htm
They are required to have available updated by-laws and a conflict of interest policy: http://www.nhbca.com/Non-Profit_Guide.pdf (page 9; #2)
This area is where CS needs to be in better compliance: CS apparently has a nominal board of directors but evidently they exist only as ink on paper...and do not really meet, and are not independently engaged in providing oversight to the organization. The FAQ formerly listed the members of the Board of Directors but now does not mention it; organizational details are vague: http://www.couchsurfing.org/help.html#runs
If you're thinking, "who cares about this boring stuff? It's not fun and I hate this shit"...I can't really blame you since it's picky and uninteresting...but is required by the NH Department of Justice and the IRS for public charities to be legally compliant. CS, as a charitable organization, will never become a 501c3 org without making these changes in how it is governed...it needs an independent Board of Directors....it currently does not have one, and must then rely upon committed members to keep the leadership in check.
I checked out the US Servas site today; this org is fully compliant, have their 501c3, and are a great role model for CS' future governance:
You may click on this page and access a pdf of their by-laws anytime.
CS has always been an organization run on charismatic leadership with great ideas, energy and fun...which is perfect for a start-up org. Everyone knew each other, trusted each other, and relied on good-faith and love to keep CS running in the early days.
Now that we are past the million-member mark, CS cannot expect pleas of good faith, love and trust to motivate volunteers or donors to give time and money to this organization, especially with a non-standard operating structure. We need to make a shift from charisma-driven leadership to policy-driven leadership...with the good governance and oversight that this transformation will provide.
Your comments are always very welcome:)
I have no idea why I received this to my personal email, but possibly it is about transparency...maybe?
OK, I have added a few things, like links to profiles and CS titles, but besides gadget's wife and Matt who we know nothing about,I have NOT embellished anything..
Mattthew Brauer – CouchSurfing:
Thanks for a great meeting, everyone. One of my all time favorite meetings!
Your suggestions for more fun at the home/office:
* More excursions!
* Give each other more massages
* Staff pillow fights
* Staff kickball and/or dodgeball team
* CS version of "spirit week" (http://en.wikipedia.org/wiki/Homecoming)
* Intercom system for finding the fun
What's already fun about the home/office:
The common theme was that you most enjoy discovering new things and having
diverse experiences. Specifically you said:
* so many people are always doing something crazy/fun
* so much random weirdness happens
* we're exposed to so many new things
* we get to create new solutions, not just follow instructions
How you keep the fun in what you do:
This is a summary of what you all said was fun about the projects you're
working on. The are all gems. Especially your suggestions for how you have
fun even when you're not having fun. Could you fit even more of these
things into your day?
I think we all experience these simple things often, but sometimes we don't
give them enough space and attention because we're rushing to do the next
thing. Maybe instead of trying to fit more of these into your day, the way
to have more fun is to take more time to relish these moments as they occur:
* feeling appreciated
* feeling accomplishment
* feeling energy of teammates
* feeling of value to teammates
* appreciating the efforts of other teammates
* appreciating self-accomplishments
* observing that progress has been made
* observing ideas becoming reality
* observing results due to efforts
* joy of the new
* joy of experimenting
* joy of exercising creativity
* joy of organizing things
* joy of collaboration with other teammates
* improving your role itself
* finding moments of hope when not having fun
* finding satisfaction in doing what's needed when not having fun
* finding small moments of humor when not having fun
Your primary projects, and why it's fun for you:
* Gadget: http://www.couchsurfing.org/people/gadget/ Ambassador Management or whatever
: Destruction of bad processes within the Ambassador support team
: Doing what is needed even though not very fun.
(Nothing from wife, Shirley) http://www.couchsurfing.org/profile.html?id=8T2WEFA
* Jim: COO Jim Stone http://www.couchsurfing.org/people/redcouchguy/
: Reorganizing my role
: Doing less things better instead of more things worse
* Jackie: http://www.couchsurfing.org/profile.html?id=2GDI7E5
: Home improvement
: Getting to see physical results. Learning how to delegate. Being visually creative.
* Jesse: http://www.couchsurfing.org/people/jessieness/
: Mural in the Bathroom
: Using my creativity. Fitting lots lots of people in a small space.
* Travis: Travis Raymond http://www.couchsurfing.org/people/tray_4tay/
: Helping TTT with his secret plan to create CS babies (TTT: I deny everything)
: It's a secret
* Matt: (No idea who this guy is as he has no links to any of these others) Possibly the gardener, but wait... No garden.
: Home improvement
: feeling appreciated
* Casey: CEO Casey Fenton, http://www.couchsurfing.org/people/casey/
: Finding moments of hope and payoff from efforts in a project that's not very fun
* Casey-Ann: CFO: CaseyAnn Schultz, http://www.couchsurfing.org/profile.html?id=55SOK
: Revamping the bookkeeping system.
: Feeling of accomplishment
* Mandy: Administrative Coordinator, Mandy Hixson, http://www.couchsurfing.org/people/mandy/
: Helping the Casey's figure out CS finances
: Finding humorous moments in project that's not very fun
* Erin: Erin Saunders Administrative assistant to CEO http://www.couchsurfing.org/profile.html?id=30T3X9P
: Describing everything I do for next admin
: Getting better insight into all the things I do. Getting to organize my brain.
* Cyril: Tech team, http://www.couchsurfing.org/people/cyrilg/
: Search backend
: Getting to create something totally new for CS
: Starting new job: helping staff translate their ideas into requirements documents
: Getting to do more stuff. Seems like more energy and synergy in the house.
* Hector: System Admin http://www.couchsurfing.org/profile.html?id=1CXPK7K
: Changes to database, new framework for developers
: Making things better for my teammates. Doing something that's used by my teammates
* Otto: System Admin: Andrew Otto http://www.couchsurfing.org/people/otto/
: Server changes
: Freeing up servers and then getting to play with them. Getting to plan new stuff
* Farley: Sys Admin: Andrew Farley http://www.couchsurfing.org/people/farley/
: (TTT: sorry, I can't understand my own notes. I wrote down "following new policy for better development")
* Cameron: Project Manager: Cameron Mills http://www.couchsurfing.org/people/camtastic/
: Project Tool (Matrix)
: "Taking shit in my mind and making it so I can touch it (virtually)"
* Alex: CS Tech Team, Alex Wilemsma, www.couchsurfing.com/ALX4GOD
: Project Tool (matrix)
: Coding something new entirely from scratch. Getting to use the new coding framework. Making a tool that looks nice.
* Ben: User Design and Interface: Ben Hanna http://www.couchsurfing.org/people/bhanna/
: Track couch request acceptance tool
: Organizing my brain in new ways. Making flow charts.
* Rachel: MDST Coordinator: Rachel DiCerbo http://www.couchsurfing.org/profile.html?id=7A60GP
: Complaint tracking tool
: Seeing progress being made. Seeing an idea become reality
* Mars: Events Coordinator: Marcelle Santos, http://www.couchsurfing.org/marcelle
: Overhauling the events section
: collaborating with teammates feels more creative and creates better ideas
* Jeff: Jeff Frame http://www.couchsurfing.org/people/jframe31210/
: Revamping the donation pages
: Collaborating with lots of other team members
* TTT: General Manager Mattthew Brauer, http://www.couchsurfing.org/people/mattthew/
: Finding knobs to twiddle (note: twiddling is not the same as fondling)
: Seeing how making a small twiddle can make a big difference
Discussion topic #2: 501c3 status
hey all...here's our next discussion topic: the IRS US Federal tax-exemption, known as the 501c3 designation and how it relates to CS....whew. It's big and it's boring...so look out:)
1. The 501(c)(3) is part of the US Federal tax code defined the Internal Revenue Service, or the IRS. This section of the tax code exempts organizations characterized as "charitable" from paying federal income tax, sales tax, and allows individual donations to be claimed as deductions on the individual's federal tax return. http://www.irs.gov/charities/charitable/article/0,,id=136459,00.html
2. A 501c3 is important to charities because they can save money by not paying the taxes listed above, and because they can more easily encourage donations to the organization by offering a deduction to donors: the donation is made with tax-free dollars...which encourages people to give. The 501c3 also imparts the charitable organization with the IRS' defacto stamp-of-approval: it can be viewed as a safe, upstanding, genuine charity because the federal government has scrutinized its finances and governance policies, and finds them authentically "charitable", and worthy of being tax-exempt.
Many organizations have taken the first step to becoming "charities" by simply registering with their state's department of justice as either a public charity or a private foundation. This requires a form to be filled out and a $25 filing fee paid to the state...and obligates the organization to *some* limits on their governance and financial disclosure....but includes much fewer restrictions and scrutiny than the federally-designated 501c3. CS currently is a public charity (not a 501c3) registered in the state of New Hampshire (every state has its own rules for charities, but they are similar...for information on the New Hampshire rules, please see this link: http://www.sos.nh.gov/corporate/PDF/Nonprofit.pdf
to see CS' original filing for registering as a public charity, please see this link: https://www.sos.nh.gov/corporate/soskb/Filings.asp?473515#
3. CS is a public charity registered with the state of New Hampshire. In order to take the next step, and become a 501c3 tax-exempt charity, CS must fill out an application, undergo scrutiny by the IRS, and receive their approval and tax-exempt number. An application was filed with the IRS in 2007 but was returned with questions about the organization. This is the status of CS today: neither rejected nor accepted as a 501c3, but pending. I am not sure if the questions were answered and resubmitted...and do not know who knows the status right now other than CEO Casey Fenton.
To see the process required by any public charity to become a 501c3, please click this link, and go to "Life Cycle of a Public Charity": http://www.irs.gov/charities/charitable/article/0,,id=136459,00.html
Please reply to this post with your comments or questions:)