[volunteers] (forw) updated LUG HOWTO, esp. on tax/corp. craziness

[Heather Stern]

On Fri, Mar 16, 2007 at 10:01:01PM -0700, Rick Moen wrote:
> May be of interest in light of SVLUG's brush with these issues -- and 
> my sense that misconceptions still abound.

Some points added below, and potential misconcpetions your wording provokes
dutifully pointed out.   Some text squished for your reading sanity, but 
since my additions are almost as wordy, ah well... read on, MacDuff.
 
> ----- Forwarded message from Rick Moen <rick at linuxmafia.com> -----
> 
>  Date: Fri, 16 Mar 2007 17:34:25 -0700
>  To: conspire at linuxmafia.com
>  From: Rick Moen <rick at linuxmafia.com>
>  Subject: [conspire] Installfest tomorrow;
> 	updated LUG HOWTO, esp. on tax/corp. craziness
> 
> [snip]
> 
> for three years after that.  So, it's spring cleaning time -- and I've
> been tightening up and updating it, again, catching up on events:
 
Kudos to cleanups.  It's a bit wordy and risks large paragraphs lying
unread.  It also has the weakness of only telling people what they shouldn't
do, not offering things that they could, that might meet the needs they've
imagined.

> [...]
> 
> "7. Legal and political issues; 7.1 Organisational legal issues" got a 
. . .
> 
>    Common Misconceptions Debunked:
> 
>    * Incorporation and tax-exempt status are separate issues. You don't
>    have to be incorporated to get recognition of tax-exempt status. You
>    don't have to be tax-exempt to be incorporated. (Odds are, you honestly
>    won't want either. You just probably assume you do.)
 
True dat.

>    * The "liability shield" one can get from incorporating 

...is mostly a social hack on the random litigous soul, to convince them 
that what was originally a merely rude idea is also a bad idea or infeasible.

Unofortunately this is the US and anyone can sue for a lot of stupid reasons.
If you're in another country, your kilometerage may vary.

The main effect one gets from incorporating is the ability to have
your LUG treated as an Entity which can sign contracts.  If it has no
contracts it is interested in being involved in, then the sweat to do
so is better spent elsewhere.

Owning property in the name of an org could be a reason to do so.
Promising a formal service to some other entity could be.  Buying and
selling stuff could be.  If your volunteers are already indulging in
bits of paperwork to do things you are doing as a group, than becoming
a group that can sign such things once and get it over with might have
value, at the cost of the initial setup paperwork for being a Dot Inc.

Having a bank account in the name of the org for fundraising is the usual
reason offered, but that can be done without Entity status, by means of a
business alias in your county ("doing business as _your_LUG_name_here_").
Fundraising is also its own problem; if your people aren't spending money
for things already on behalf of the group, who would fundraising benefit?

>    * Umbrella insurance coverage against tort liability (i.e., 

...if affordable (unlikely) is part II of the same social hack.  Although
if something happens that it covers, and you had it, at least it actually
has a visible return.  Problem: if the risk is sufficiently real that you
probably need it, it's also sufficiently real that your local insurance
carrier probably has valid reason to consider you a high risk.  Problem Two:
if the risk you have is not one that's shared by a lot of other people, the
insurance companies don't have a large pool of entities or people who are their
customers to spread the costs around to.   Expect to be held over a barrel.

>    * IRS recognition as a tax-exempt group doesn't mean donations to
>    your group necessarily become tax-deductible: Automatic
>    deductibility is reserved to _charities only_, IRS category 501(c)(3),

The class of charitable status you speak of is only one of the flavors 
of 501(c)3 status... and is not restricted to churchlike orgs.  

Other notes towards deductability:  people who are doing something that's
within their *own* business' needs can usually deduct it within the scope of 
that, regardless of the status (pro, amateur/ad hoc, gov approved or whatnot)
of the groups they hang out with.

For instance, I deduct my BayLISA dues via my consulting business tax
paperwork because it's a membership group in my scope;  if the fed or state
stripped "memberships" from the tax regs I could do the business-member or
sponsorship status and deduct it as promotional.  Varius linuxy things that
cost money are things I can deduct because they relate to me retaining my
professional skills.  

The correct answer to "can I deduct this?" is of course, "ask your
accountant or tax preparer, not me."

>    which must obey extremely stifling restrictions on group activities
>    (e.g., it would then become illegal to host anti-DMCA events or 
>    support any other political activity),

Not illegal, just extremely limited; it requires filing even more paperwork,
and treading carefully regarding your Exempt Purpose.  You would be better
to create an interlocking 501(c)4 which is meant for your political purpose.

501c3 who are naughty and screw this up not only lose, but go to the
penalty box - they get smacked hard, and aren't allowed to retroactively 
create the 501c4 they should have in the first place to wriggle off the hook 
for later activities of the same sort.  Documented.

>  and must meet exacting 
>    paperwork and auditing standards. 

This is an accurate way of putting it, concise, but is true when you become
an org of formal sort whether you attempt tax-exempt status or not.

> It's difficult to envision 
>    501(c)(3) charity status actually making functional sense for 
. . .
>    for recognition as a "social and recreation club", category 501(c)(7) [1].

This should be a seperate paragraph. Paragraph 1's main point is "such
status isn't necessarily a magic wand for taxfreedom" and this one's main
point is "You're probably considering the wrong flavor of gov paperwork
to dive into if you really insist."

Actually it isn't a magic wand for taxfreedom on the org's end either;  if 
you use money for things not within your Exempt Purpose you have to track
whether there's enough of that to be taxed, and of course, it's on a
seperate form.  

...or a c6, trade organization.   There may be different classifications at 
the state level, read your state's paperwork carefully. 

>    * In any event, unless one wishes to become a registered charity to
>    render incoming donations tax-deductible, there is _literally no point_ 
>    in applying for IRS recognition of your small, informal Linux group 
>    under any of the Internal Revenue Code section 501(c) tax-exempt 
>    statuses, because IRS simply doesn't care about groups with annual 
>    gross revenues less than $25,000, and doesn't want to hear from them. [2]
 
Once there's a bank account someone does care... but, it is usually subsumed
under other things, e.g. the normal taxes of whoever put their precious SSN
on the bank's paperwork.

>    * The Federal Volunteer Protection Act of 1997 [3] does not [4], in 
>    fact, shield volunteers of Internal Revenue Code section 501(c)(3) 
>    charities from tort lawsuits. At most, it furnishes some legal 
>    defences that can be raised during (expensive) civil litigation, with 
. . . 

This can be introduced with a *LOT* shorter text and increase vastly the
chance that anyone will ever bother to read this bullet.  

It's the clear definition of the role that has any value, not the
membership status of the volunteer. Alas, since the value only exists
after you get dragged into court, the Federal Volunteer Protection Act
has limited kevlar to offer you.  

(If you want to describe what kevlar it *does* offer that might be useful.)

Similarly, insurance only exists to defend your pocketbook after the fact,
regarding a carefully defined list of Bad Things That Could Happen. This
seems of value until you realize: (a) it only applies to bad things
you think of first, (b) insurance companies love to put in riders letting
them off the hook, (c) it's really a lot of work to get any, possibly
costing more - in volunteer sweat as well as that pocketbook your LUG
actually bothered to get - to sign up for the kevlar than the kevlar 
would be worth even should it actually apply.  If whatever you're insuring
against is a real danger, with a finite chance of *ahem* paying off, it
might have value.  Otherwise it's a very expensive lotto ticket. 

(supporting concepts toward signing up for defense mechanisms:) 
People buy fire, flood or quake insurance for their homes because they
will be personally devastated if it had to pay off.  People buy motorcycle
helmets because the traffic cops make them;  it *might* pay off in them
not getting killed if they hit earth, but the real defense it buys is
against a thick wad of non-representative tax collection by the local PD,
which really could get quite expensive otherwise.

(counterpoint)
It's rare for LUGs to have such destructible resources.  Usually their only
resource is people who show up with good cheer and useful hands, eyes, ears,
amd Linux knowledge.   Good cheer is destructible, alas.   However, the kinds
of things that can devastate a LUG are rarely insurable.

	/me pauses to sigh at lost good cheer...

Why anyone would think their illegal activities would be defended by federal
noisemakers is about as stunning as Babbage's experience:

  "On two occasions I have been asked [by members of Parliament!], 
   'Pray, Mr.  Babbage, if you put into the machine wrong figures, 
   will the right answers come out?'  I am not able rightly to 
   apprehend the kind of confusion of ideas that could provoke such 
   a question."
                -- Charles Babbage

Abusing a license that you've been given by your state or the feds has
its own bad side effects and I wouldn't expect a federal act to defend
you from those, either.

>    As may be apparent from the above, a number of groups have, in the
>    past, talked themselves into unjustifiable levels of bureaucratic
>    strait-jacketing with no real benefit and serious ongoing
>    disadvantages to their groups, because of misconceptions, careless
>    errors, and tragically bad advice in the above areas.

Break the paragraph here.  #include <vivid-opinion.h>

> In general, you
>    should be slow to heed the counsel of amateur financial and tax
>    advisors. (This HOWTO's maintainer had past experience during his
>    first career as a _professional_ finance and tax advisor, but, if you
>    need competent advice tailored to your situation, please have a
>    consultation with someone currently working in that field.)

I'd suggest not claiming your past experience, as people seeing the world
through rose colored glasses may stop reading at the middle of the sentence. 
However, it's your doc, so your call.

> The Linux Documentation project hasn't yet posted the update on its main
> site and mirrors -- should happen RSN -- but my local copy can always be
> read here: http://linuxmafia.com/lug/  (Note that the LinuxDoc SGML is
> always available, and that this is a freely licensed document under
> Creative Commons BY-SA 3.0.

They have a long history of being slow about updating their mirror of
updated documents.  When I was at Tuxtops I swept the set and about a
quarter of them were not only "dusty" but some by a long time.  I suspect
if the maintainer updates without telling them so, and users of the doc
itself never chased it up enough to spot the main one and say so, they'd 
never notice.

  . | .    Heather Stern          |     (408) 374-7623 land
--->*<---  star at starshine.org   - * -   (408) 761-4912 cell
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