DOCUMENT RESUME

ED 342 177 EC 300 936

AUTHOR De Witt, John C.; Mendelsohn, StevenTITLE Establishing Nonprofit Foundations To Pay for

Assistive Technology. RESNA Technical AssistanceProject.

INSTITUTION RESNA: Association for the Advancement ofRehabilitation Technology, Washington, DC.

SPONS AGENCY National Inst. on Disability and RehabilitationResearch (ED/OSERS), Washington, DC.

PUB DATE Sep 90NOTE 17p.PUB TYPE Guides - Non-Classroom Use (055)

EDRS PRICE MF01/PC01 Plus Postage.DESCRIPTORS *Assistive Devices (for Disabled); Compliance

(Legal); *Disabilities; Federal Legislation; FundRaising; *Philanthropic Foundations; *PrivateFinancial Support; Program Development; StatewidePlanning; *Technology

IDENTIFIERS *Technology Related Assistance Individ Disabil Act

ABSTRACT -

This guide examines the incorporation ofnongovernmental funding streams into state-wide programs oftechnology-related assistance under Title I of the Technology-RelatedAssistance for Individuals with Disabilities Act of 19BB. It examinesunderlying philosophical, structural, and legal issues involved inthe formation and effective use of a foundation or other nonprofitorganizational framework to facilitate the provision of assistivetechnology deviTas and ziervices. The paper begins by defining afoundation and explaining governmental restrictions on its financing.It then outlines what a foundation can do, focusing on itsflexibility in responding to needs, its aim to augment rather thenreplace public sector resources, deciding whether to charge fees torecipients of the foundation's support, speed of operation, andability to broaden assistive technology's constituency. Proceduresfor setting up the organization are discussed, covering such items asgoverning board makeup and necessary documentation. Tasks involved inmaintaining the foundation on an ongoing basis are also spelled out.(12 references) (JDD)

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ASSISTWE TECHNOLOGY

SEPTEMBER 1990

1101 CONNECTICUT AVENUE, N.W.SUITE 700

WASHINGTON, D.C. 200362021857-1140

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ESTABLISHING NONPROFIT FOUNDATIONSTO PAY FOR

ASSISTIVE TECHNOLOGY

This paper was developed by John C. De Witt andSteven Mendelsohn of De Witt, Mendelsohn andAssociate&

SEPTEMBER 1990

The RESNA TA Project is a federally funded project of the National Instituteon Disability and Rehabilitation Research (NIDRR), Office of Special Edwationand Rehabilitative Services (OSERS), US. Department of Educati-- (ED).This paper does not necessarily reflect the position or policy of NIDRIVED andno offidal endorsement of the material should be inferred. For 'briber informatimcontact: RONA TA Project, 1101 Comeliest Avenue, N.W. Suite 700,Washington, D.C. 20036, 20211157-1140.

3

RESNA Technical Assistance Reject

ESTABLISHING A NONPROFIT FOUNDATIONTO PAY FOR ASSISTIVE TECHNOLOGY

INTRODUCTION

Assistive technology devices and services represent an increasingly impcoant source ofoppertunity fce persons with disabilities in such spheres as employment, education andiinlependent living. Accordingly, recent Federal legislation, including most notably theTechnology-Related Assistance for Individuals with Disabilities Act of 1988 (Tech Act) hasenhanced the flow of Federal funds to the assistive technology field.' 2 It is too early toassess the effect upon the provision of a.ssistive technology which will result from theAmericans With Disabilities Act of 1990.2

This legislation, along with amendnwnts to other categorical and state grant programs, hasraised the profile and increased the level of support for assistive technology. It is likelythat the need and demaid fix funding in this area will cmitinue to outstrip available publicsector resources for the foreseeable fume.

Faced with the disparity between exponential growth in recognition of the need forassistive technology, on the one hand, and the relative inelasticity of governmentalresources, on the other, many service-providers and policy makers have begun to exploredm potential for utilizing tu exempt nongovernmntal organizations for attracting additionalfinancial resources into the field.

Certainly, governmental sources have not been exhausted or even fully explored. What thisdoes suggest, is that every avenue should be explored in order to =et the increasingconsumer demand for assistive technology.

States ok.-iating with grants under Title I of the "Tech Act" have authority to engage in"partnerships and cooperative initiatives." "Program Authority" is given to engage in:

"...support of the establishment or continuation of partnerships or cooperativeinitiatives between the public sector and the private sector to facilitatedevelopnwnt and implementation of a state-wide program of technology-related assistance to individuals with disabilities."

Several state programs currently funded under Title I of the Tech Act have expressed aninterest in establishing a "foundation." Therefore, RESNA's Technical Assistance Projectcommissioned De Win, Mendelsohn & Associates to develop this policy paper.

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Establishing a Nonprofit Foundatim 1

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crganization is structured in accordance with we or mint' 0' the permissible forms, andwhetlwr it is iveradng in a manner consistent with its exempt purposes, numerous otherprovisimrs of the tax cock must also be consulted.' Regardless of the organizational form,state law also plays an essential tole.

"Foundation" no specific meaning Whether as donors, service-providers cr fundrecipients, most people have had some expos= to the nonprofit seam. "Foundation" isthe term we most teen use to describe organizations of this kind. It may, therefcre, comeas a surprise to many that the term "foundation" has no specific fx technical meaningunder the Internal Revenue Co&

"Foundaticar," within philanthropic circles, is generally unierstood to mean an organizatimwhich distrilmates funds. Additionally, it may ;amide goods or services of scone nature toother tax exanpt organizations or to people who fall within its purview.

This understanding of what a foundatim is prot-ibly characterizes public perception aswell. Additirmally, the term also connotes manizatims which raise money from thecommunity through appeals for "public supptut."

"Private" foundation Becalm the attraction of dm foundation fonnat is its potential forWinging private funds into the assistive technology field, it is imp:runt to note a point ofnonraclature that can, if not clarified, give rise to considerable confusion. The concept ofthe "private foundatice does have a specific definition in the tax law.7 These foundationsare subject to a number el restrictions and to a number of penalty taxes that do not applyto other tax exempt organizations. Their administration is far more difficult and complex.Privaft foundatitun geatrally do not raise funds from the community, but instead rely onendowments art proceeds from investnents fir their operating funds.

It is extremely unlikely that any state Tech Act progam wishing to establish a tax exemptvehicle would wish to opt fcr the "private foundatice" fcemat. Yet, raising "private funds"represents tlw distinct object of the enterprise.

Defining terms The words "public" and "private" are used differently depending uponcontext. "Public sector" implies a governmental entity; "private sector" implies anongovernmental entity. A foundation, other than one legally defined by IRS as "private"(see above), raises a significant portion of its revenues fmm what IRS refers to as "publicsupport." In this context, "public" implies support generated from private individuals andorganizations. The latter will usually be corporations, other businesses, nonprofit groups or,on occasion, governmental entities awarding grants or contracts.

"Community" fbundation The concept of the "community foundation" representsanother mganizational variant that has received a great deal of attention. Again, whileladdng a pzecise tkfinition, the term generally refers to those foundations which poolresources from a numba of cktnors cr from sevrral smalkr trusts to addiess the needs of agiven community. Time may or may not utilize programmatic priorities in allocating their

Establishing a Nonprofit Foundation

6

3

RESNA Technical Asa Isaacs PROM

funds. Most often, they endeavor to resporx1 broadly to the evolving needs of the city,regice ce state which they have been established to serve.

A foundation concerned mlely with tin assistive technology needs of the disabledcommunity within a particular locale would probably have a narrower focus than thetypical martmunity foumlation. It is trix that tin concans of persons with disabilities areincreasingly mule/stood to be coterminous with those te society as a whole. However, useof "community foundation" terminology in this =text would pmbably require thatperceptions concerning the nature of a cmnmunity foundatkm be modified to son= degree.

Qwporations and trusts under state law As indicated above, tire choice of whatorganizational form to adopt is, in the end, dependent as much upon state as upon Ferknallaw. While the variation amtmg state laws is far too great to allow for &tailed analysishere, it appears to be the case that "tmsts" and "cmporations" =present the two mostwidely applicable legal forms of foundations. The mist is frequenCy used by wealthyindividuals or mganizatims wishing to use their own resources few philanthropic purposes.They do not, as a rule, solicit funds frail the public.

Public perception appears to be that a mot has substantial financial reserves. Partly, thismay be due to the ward appearing in the name of many large financial institutions. Purelyfrom a public relations perspective, the trust structure might be one to avoid whenestablishing a nonprofit organization wishing to obtain financial support from the public.

"Nonprofit" or "not.for-profit" Between trusts and anporations, the corporate fonn, assuggested by the familiarity of the term "nonprofit" or "not-for-profit" corporation, is themodel which today enjoys an undisputed ascendancy larticularly when broad-based publicparticipation in the organization's support is contemplbted. Though potentiallyimpermissible under the law of some states, it should usually be possible to use the term"foundation" in the organization's title, should that be thought desirable.'

Other nomenclature Several other issues of nomenclattut can also cause unnecessaryconfusim Such terms as "public charity," and "charitable foundation" are used loosely inconmxm parlance. No great legal significance, at least so far as tax law is concerned,attaches to the choices between these or among several other similar phrases.

WHAT CAN A FOUNDATION DO?

Flexibility Under the Tech Act, states are accorded a significant degree of flexibility inidentifying the needs and defining tkir responses to these =eds. This flexibility isreflected in the variety of priorities and approaches embodied in the plans of the states thathave thus far received grants under the new law.

Most activities amtemplated under the Tech Act requite appropriate financing for effectiveimplementation. Categories such as proOsion of assistive technology devices and services,

Estabik;hing a Nonprofit Foundation 4

RONA Tait tied Aseistanes Pitied

connnunity mureach, and information dissonination could benefit from an alternativefunding saute stkt as a foumiatim This is consistent with contemporary public-sectorphilosophy which recognizes the valuable role played by public-Fivate partnerships inprogram devekTment.

Nevertheless, the kind of parmrship that a given mganization or cmtsortium may wish toestabEsh, and tlw !Incise sort of entity they will choose to create, must depend, mme thananything else, on exactly what k is they intend to accomplish.

Setting up and gyrating a foundatkm is not umluly complicated cc difficult. Designingone that best meets tly needs and most fidly serves the purposes for which it is createdrepresents a far me challenging problem.

Raids shtmld augment, not reOace Whatever else may be inten&d, the first goal of anassistive technology foundation is to raise money. Yet, even this truism harbms potentialdangers. If the foundation is not carefully structured, there is real risk that the funds itraises will be used to replace rather than augment public sector resources.

Though mandated under tly Education of the Handicapped Act, Rehabilitaticm Act andother legislation, assistive technology remains all too discretionary on the part of manystate educatms, vocatimal rehabilitation agencies and others. Absent its routineinstitutionalization within such programs, assistive technology can too easily be remitted tothe resources of dm nonprofit sector.

Fox this reason, the- foundation's design must ensure that private funds are additive to thesystem. It must likewise ensure that, so far as matching fund requirenynts, interagencycooperation and similar issues are concerned, public and private funds are deployed so asto leverage one another to the maximum possible degree.

What this means in practice is deciding clearly who dm foundation will serve and whatservices will be provided. For example:

if individuals are to be served directly, it may be desirable to crafteliObility criteria ensuring that these will be persons who madnot have been, m would not have been, served by existing agencies; or

&terminations of what direct services or devices are to be providedmust be made with full knowledge of what is currently available andcould enhance the valm of existing resources.

Tratkoffs to amsider The foundation must frame its fund raising appeals differentlydepending upon its service objectives. The basic issue to be resolved is whether therecipient of a foundation for assistive technology services and/or devices will themselvespay for any portion of those services m &vices. For example, if devices, would they be:

Establishing a Nonpolk Foundation 5

Fovided on permanan loan with title retained by the fourtation;&mated outright to the individual with a disability;partially donated and prtially purchased by the individual;funded by a loan to the individual with the loan guaranteed by the foundatim; orsome oder mechanism?

Some members of the general public may not be as willing to contribute to an organizationwhich in any way charges for its service to recipients. In this context, they might bewilling to support a pogram which donates devices, but not one which loans funds withde expectation of repayment by the recipient

Varieties of technology-related assistance which could fall into these categories are:

device loan financing mechanisms;direct device provision;assessment;evaluation;training;information dissemination;training to assistive technology professionals; orcm-going maintenance a devices.

Less red tape An advantage that a foundation generally offers is that of speed andflexibility. Beyond resowce limitations, public bodies are frequently constrained in theservices they can provide by the terms of the categaical service programs =ler whichthey operate. Often too, they face limitations and delays in the selection art purchase ofassistive devices, dut to the procurement procedures, bidding requirements and contractingregulations of their state governments.

Generally, foundations do not operate under comparable strictures. Nevertheless, there aresignificant decisions which need to be made about how and when it wants to be cast in therole of meeting emergency or urgent needs, as opposed to carrying on a program that aimsat longer term goals. The foundation must decide to what extent it wishes to be proactiveor is prepared to be reactive.

Broadening assistive technology's constituency Another advantage of a foundation is itsability to broaden assistive technology's constituency in the community. This may be donein at le ast three ways:

by irmasing the number of people who can benefit from assistive technology;by increasing public awareness of the reed through its community outreach andfund raising efforts; andby providing opportunities for those who have been exposed to assistivetechnokogy's potential, to make tax deductible contributions to the cause.

Establishkg a Nonprofit Foundation 6

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E A Technics. Aiskiiince Pitied

Selecting the organizational form The next step is selection of an organizational formthat will wait best under the law of the particular state. A lawyer is not iequired to makethis choice or to do the paperwak. Optimally, the process will be enhanced by usinglegal comet skilled in this area, unless the people creating the organizatian parse=meaningful experience of their own.

Factors A number of factors will influence the choice of organizational form under thestate's law such as the:

relative powers of capotathms, trusts, associations, etc.;duties of officers and directors undder various forms;

a filing requirements and filing fees applicable to eiw.h fomi;nature of state oversight once tin organization has been established;extent to which one cr another ft= will facilitate or inhibitdevelopment ci its goals and objectives.

Corporate form As noted earlier, the cospaate form, specifically the nonprofitcorporation, is likely to be the choice in the majority of cases. It usually offers all the taxadvantages that could be forthcoming with any other form, as well as these major ones:

flexibility to modify the prop= without court approval;insulation of directors and officers flan personal liability; and=salable scope for delegation of responsibility to staff.

Paperwork The second step involves the completion and filing of the documentationnecessary for the establishamt and official recognition of the forthcoming foundation.'Once again, the documents in question will vary from state to state. Filing for aCertificate of Imorporation is usually the starting point. As part of the process, these stepswill probably foliow:

preparing articles of incarnation (the constitution of the foundation as it were);developing by-laws (its statutes);holding an organizational meeting which will produce a set of minutes, in whichadoption of articles and by-laws, naming of officers, creation of a governingbort and passage of necessary resolutions will be summarized; andpreparing a charitable registration if requhed by other state agencies such as theSecretary of State or Attorney General indicating intention to raise funds fromthe general public.

Articles of Incatrnation The Articles of Incorporation will set forth the purposes of theorganization. This should be done with reasonable specificity, bin not as to &Five thefoundaticm oppatunities to fine-tune its programs as experience and changing conditionsdictate. If moiled or permitted under state law, projected sources ig im:ome should alsobe indicate& If done, cite all expected sources of incane such as contributions from the

Establishing a Nonprofit Foundation

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REINA Technical kosisfairce Project

public, fees for service, sale cr lease of devicesor a combination of these sources. Thisbecomes important at the federal level, as discussed later.

Governing board makeup is critical Beyond legal acquirements, board makeup is oneof the most profound philosophical ikcisicals a foundation makes. In the case of assistivetechnology, key elements imlude the:

level of consumer representation on the board including family members;active role of community leaders, especially in fund-raising;participatim of governmental units in program managenzntinvolvement of existing service providers including assistive technologyspecialistsgeographical distribution of board membership in the event the ceganizationwill have a state-wide focus;clearly defmed duties of members, especially in fund-raising and fiscalmanagement; andmeans by which board vacancies will be filled, and related matters.

In cyder to further "consumeriesponsive" program development, it is essential that asubstantial number of governing board members be consumers re their family members.Such representation will help the board to be both consumer-responsive and consumer-directed.

Equally vital for a foundation is the inclusim of community leaders, especially from thefor-profit business seam Fund-raising, public relations and community outreach leadershipwill flow frail these individuals.

Asset distributim Eitlacr the articles or by-laws will probably also need to address assetdistribution in the event of dissolution of the corporation. Subject to assuring that theassets would not fall into Ovate hands or "inure" to the benefit of private parties, thisdetermination should ordinarily be within the discretion of the foundation to make, just asis the ownership of property that it bur".

Until such time as the appropriate state agency cm agencies give formal approval forcreation of the foundation, no entity capable of receiving a grant of tax exemption yetexists. One could file a request for tax exempt status while still awaiting fmal stateapproval, but, where time permits, it makes more sense to address these two levelssequentially.

Application fot Federal tax exempt status Request for Federal tax exemption is madeon 1R3 Form 1023 "Application for Recognition of Exemption under Section 501(cX3)."Prnsuant to IRS Form 8718, which in most cases must be submitted with Form 1023, afiling fee of $150 to $300 may be requind. As with the state filings, the need for legalcounsel depends upon the sophistication of those preparing the exempdon request.

Establishing a Nonprofit Foundation 9

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Unrelated bushman taxable Warne Two issapts, which may or may not already havecome up at an eadkr point, do warrant special attention at this stage. The firu of theserelates to "umelated business taxable Wane.' So far as possble, infmmation aboutorganizaticoal purposes and projected sources of hmome shoukl be premed in such afashion as to minimize pmential exposure to this tax. If the foundation inands to deriveany revenues frmit the fees for its services cif faint the sale, lease or other distribution ofassistive technology devices, it is vital that these intentions be integrated into its IRS filingin such a way as to preclude, to the maximum degree possible, any erroneouscharacterization of these subsequent revenues as unrelated business income.

Little known code twovisitm Tim seccmd issue relates to a little-known pmvisiGn of theInternal Revenue Code which can have substantial implications for benefiting assistivetechnology programs." Generally, donations of inventmy equipment by businesses tocharitable organizations yield a tax deductim for dm donor equal to the equipnwat'sproducticm cost, not its wholesale or retail value. Secticm 170 (c) (3) allows certain=potations to take a larger deduction when they contribute such equipment to exemptorganizations for "care of the ill, the needy or infants."

This unfortunate nomenclature notwithstanding, the bottom line of this extremely intricateprovision is that for eligible and qualifying donations, the value of the deducticm comescloser to what the inventory equipnwat could have been sold for by its manufacturer.Where available, this enriched deduction can heighten the attractiveness of contributing to afoundation.

If the foundation intends to accept donations of equipment, the opportunity to dietpotential donors this sweetened deduction should be borne in mind in the preparation of itsorganizational docunwnts.

Caution On the other hand, this provision carries with it a number of strict limitations.The recipient foundation is limited in its ability to dispose of the propeny, m to sell orotherwise charge individuals for it. IRS approval of the exemption request will beevidenced by a determination letter from the appropriate district office. It is not unusualfir them to seek additional information in the course of mviewing the request.

MAINTAINING THE FOUNDATION

Once the foumlation has been established and received tax exempt status, there are stilltasks for the botud and officers on an ongoing basis to preserve it. In addition towhatever periodic state filings may be demamled, tax exempt organizations are generallyobliged to file an annual information return Fmm 990 with the IRS. If there is unrelatedbusiness income, additional fmms may be needed.

Establishing a Nonproln Foundation 10

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REINA Ts:WM Aseistenoo Project

Support test The faandatim must always be concealed with the maintenance of its taxcum* status. Among other things, it must meet a two-pan suppott test. In essence, thistest involves the ability of the foundation to:

obtain at least one-third of its support from the public revenuesources specified in its filing, and

avoid deriving mot than one-third fro= investments or otherother am-public souices.'

The foundation should raise adequate funds from the comunity and have no need todivert its resources flan its exempt purposes into accumulatim of endownzat or otherMans. As convoluted and intimidating as these Fovisions may appear, they are unlikelyto pose ruble= for an assistive technology foundation that can bout any measure ofcommunity support. Even should a foundation fail under the one-third test in a particularyear, there are several fall-back criteria that would operate to protect its tax exempt status.

Because of the dynamic and rapidly changing nature of the assistive technology field, it isdifficult to anticipate all the permutadons of potential private funding progiam models. Forthis reason, no amount of advance planning will guarantee avoidance of situations withunclear tax implication for the foundation. In such situations seeking a Private LetterRuling from the IRS may be available if IRS deems it an appropriate question of law to beraised. Such a niling, obtained prospectively, can often provide authoritative guidancenecessary for making the most infcnned decisions. This may be done without peatdifficulty and at moderate expense.

CONCLUSION

As indicated in the "INTRODUCTION", operational issues such as staffing, fund raisingor public relations are outside the scope of a short policy paper. Nevertheless, they arevital to the foundation's success and must be addressed at the apprivriate time. Insummary, let us restate some of the majcr issues discussed in this paper.

What the organization is to do, and on what scale it is to operate is key to establishing afoundation. For this, and many other issues, an imaginative and active governing brord isessential. Involvement from a broad spectnim of the community is vital, includingconsumers, community leaders, especially the for profit sector; and, apprwriate serviceproviden.

Each of the issues delineated in this paper, as well as many others that could be named,have correlations in oiganizational form and structure. How funds are raised, how

Establishing a Nonprofit Foundation 1 1

14

resources are allocated and what priorities are set tepresent the central issues in thearticulation of a missim and in the organization's day-to-day work.

States wending =ler Title I grants wishing to raise additional funding kr technology-related assistance might:

cite Secdon 211 (b) (8) of the Tech Act far "support of the establishment orcIntinuation of partnerships or cooperative initiatives between the public sectorand the private sector to facilitate development and implementation of a state-wide program of technology-related assistance to individuals with disabilities."organize as s nonprofit corporation under state law;use the term "foundation" in the amporate name if deenvd appropriate;file for tax gumption under Internal Revenue Code Section 501(cX3) and otherapplicable provisions;file for tax exempticm under applicable state law(s); andderive at least one-third of its revenues from public support (private individualsand coganizations or, in some cases, government).

Whether the specific choices are these, or others, the range of philosophical, structural andlegal issues to be considered pose a unique challenge for the establishment of a foundationto pay for the funding of assistive technology for people with disabilities. It is anendeavor peculiar to this decade and Anwrica's increasing awareness of the role of peoplewith disabilities in society, strongly supported, we suggest, by the expanded provision ofassistive technology.

REFERENCES

REINA Technical Aids lance Project

1. Technology-Rehurd Assistance for Individuals with Disabilities Act of 1988 (PublicLaw 100-407), codified at 29 U.S.C. Section 2201 et seq.

2. Except where clarity will be improved, the term "assistive technology" is usedthroughout this paper. It is inclusive of "technology-mimed assistance," "assistivetechnology services and devices", or in the context of technology, "individuals withdisabilities" or 'consumers and family members".

3. The American with Disabilities Act (Public Law 101-336).

4. 29 U.S.C. Section 2211(bX8).

5. Internal Revenue Code, Section 501.

6. See especially Internal Revenue Code, Section 170(e)(3), Section 509 and Section 512.

7. Internal Revenue Code, Section 509.

8. Except where clarity dictates, the term "foundation" is used throughout the remainingpages. It connotes a non-governmental tax exempt organization authorized to raise fundsfrom the general public.

9. The wcwd "foundation" is assumed to be part of the nonprofit corporation's name, e.g.,The XYZ Foundation.

10. Internal Revenue Code, Section 512.

11. Internal Revenue Code, Section 170(e)(3).

12. Internal Revenue Code, Section 509(a).

Establishing a Nonprofit Foundation 13

BIBLIOGRAPHY

RESNA MOM= I Assistance Project

Anoitike IL O., How To Form Your Own Profit/Non-profit Corporation Without A Lawyer(New Ycet: Do-It-Yourself Legal Publications, 2nd edition, 1986)

Conners, Tracy D., The Nonprofit Orgnization Hpdbook (New York: McGraw-Hill, 2ndeditim, 1988)

Edie, John A., First Steps In Starting A Foundfition (Washington: Council On Foundations,1987)

Hopkins, Bruce M., The Law Qf Tax-Exempt Organization (Sommerset, NJ: RonaldPress/Wiley, 5th edition, 1987)

Tarnacki, Duane L., Establishing A Charitable Foundation In Michigan (Grand Haven:Council Of Michigan Foundations, 1986)

Treusch, Paul E., Tax-Exempt Charitable Organizations (Philadelphia: American LawInstitute-American Bar Association Committee On Continuing Professional Education, 3rdedition, 1988)

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