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Payday Payback: Collecting Earned Wages from Deadbeat Employers

In Contracts, Employment, Legal, Texas Law on September 29, 2011 at 8:24 AM

It is unacceptable for an employer to not pay earned wages. Accordingly, the Texas legislature has provided avenues by which jilted employees can make life very difficult for recalcitrant employer-debtors.

Because wage disputes are usually small—one study shows the average dispute amount to be $420.00—the cost of pursuing redress through litigation usually greatly exceeds the value of the remedy sought. Texas therefore provides a cost-free administrative remedy to unpaid workers by empowering the Texas Workforce Commission (TWC) to investigate, rule on, and then enforce wage claims. Engaging this process requires little effort and education. One need only follow the instructions and complete the form found at http://www.twc.state.tx.us/ui/lablaw/ll1.pdf. These instructions include filling out the form completely and accurately, notarizing it, and then returning it to the address thereon indicated. The claim must be filed within 180 days of the date payment was originally due. (If 180 days have already lapsed, a claimant should NOT file with the TWC, as doing so may endanger a claimant’s ability to seek redress through the courts. See Igal v. Brightstar Information Group Tech. Inc., 250 S.W.3d 78 (Tex. 2007).)

The TWC then conducts an investigation, requesting information from the claimant and the employer as needed.  The investigation timelines can vary, and the TWC informs claimants of the estimated length of investigation. Upon completion of the investigation, the TWC issues a Preliminary Wage Determination Order (PWDO). If the TWC feels the employer engaged in a bad-faith failure to pay, it may assess an administrative penalty against the employer of up to $1,000.00.

After the PWDO is issued, the claimant and the employer have 21 days from the issue date to make an appeal. If neither the claimant nor the employer appeal, and if the employer fails to pay the amount determined by the TWC to be due (if any) then the PWDO becomes a final order 30 days after its issuance. The TWC’s Collections Unit then seeks recovery through a variety of avenues, such as bank account freezes and real property liens. Those employers who: (1) intend to withhold wages at the time the employee is hired; and (2) do not pay wages after a demand is made, can be subject to criminal penalties, including a two-to-ten-year prison sentence and a fine of up to $10,000.00. 

Sometimes—such as when there is a larger amount in controversy or when the TWC’s claims process has born no fruit in the past with a particular employer—an employee may instead decide to enforce a wage claim dispute through the courts. Enforcing a wage claim through the courts is the same as any other lawsuit, however, Texas legislators have likewise made efforts to facilitate this recovery process for jilted workers. The most daunting aspect of filing a civil suit is hiring and paying an attorney, yet under Texas law, the dead-beat employer can be made to pay attorneys’ fees. The Texas Civil Practices and Remedies Code §38.001 allows the plaintiff to recover attorneys’ fees if the claim is for performed labor or an oral or written contract. To recover the attorneys’ fees, the claimant must simply: (1) be represented by an attorney; (2) present the claim to the opposing party; and (3) give the opposing party thirty days to meet the demand.

Because the dead-beat employer-debtor will be footing the bill in a litigation proceeding, because of the administrative penalties the TWC may impose in an administrative proceeding, and because of the potential for criminal liability, Texas legislators have provided attention-getting incentives for employers to timely pay up; otherwise, they expose themselves to painful payback.

A Will’s Bare Necessities

In Legal, Texas Law, Uncategorized, Wills on August 30, 2011 at 10:14 AM

The normal goal for a person to have when writing a will is to ensure that all of his property and money are given to the right people after he dies. On the other hand, perhaps the central focus for an attorney drafting a will is to ensure that the will is written in such a way that it would be very difficult to contest. Both of these goals can be reached by following the statutory guidelines for will requirements and by applying common sense and skill to the drafting process.

In Texas, the Probate Code governs the probate process, including the requirements for a valid will. Section 57 describes who may execute a will, and section 59 details the requirements of the will. In order to execute a will, a person must have “legal capacity.” This means that either the testator (person leaving the will) is eighteen years or older, has been married, or is a member of the armed forces. The statute further requires that the testator has “testamentary capacity.” Testamentary capacity is more amorphous than legal capacity. The only language the statute offers to explain testamentary capacity is that the testator must be of “sound mind.” This term has been further defined by Texas case law with the pinnacle case being Stephen v. Coleman, 533 S.W.2d 444 (Tex. Civ. App.—Fort Worth 1976, writ ref’d n.r.e.). Essentially, testamentary capacity boils down to whether the testator has the ability to understand everything that he is doing in relation to leaving a will and the impact that act will have. A testator must also have “testamentary intent,” which simply requires that the testator intends for the document to be his will.

Other formal requirements are mandated by the statute. The will must be signed by the testator. If the will is attested, as opposed to holographic (entirely hand written by the testator), it must be signed by two witnesses who are older than fourteen. The witnesses must sign at the bottom of the will (subscribe) and must sign the will in the presence of the testator. These requirements seem very simple, yet they only provide the bare minimum of what a will must contain. A will that is valid, and therefore follows all of the statutory guidelines, is not necessarily uncontestable. Great care and skill are often required in drafting a contest–safe will. For further reading, see the Texas Probate Code (especially Chapter IV), accessible at http://law.justia.com/codes/texas/2005/pb.html.

Response Review: Was the Rick Perry Prayer Rally Unconstitutional?

In Constitutional Law, First Amendment, Legal on August 8, 2011 at 3:45 PM

Governor Perry’s August 6th prayer rally garnered lots of media attention this past weekend. With 30,000 people in attendance, the sheer size of “The Response” was newsworthy—it was reportedly larger than any rally so far this election cycle by any other Republican presidential hopeful. Relatedly, many pundits saw the event as Governor Perry’s proverbial gauntlet throw-down, a flexing of admittedly large social conservative political muscles that have the potential to make him a top contender should he enter the presidential race. There has also been questioning as to whether Governor Perry’s key role in the event was a violation of the Establishment Clause. According to the Southern District of Texas, the short answer to this question is, it doesn’t matter. In Freedom From Religion Foundation, INC. v. Perry, Judge Gray Miller found that even if Governor Perry’s actions had been unconstitutional, plaintiff FFRF–quite possibly along with all other potential plaintiffs–had no standing to sue.

The analysis that leads to this answer follows a long and tangled path, beginning with the text of the Constitution itself, proceeding on to subsequent constitutional amendments, traversing some two hundred years of interpretive jurisprudence, and ending with Judge Miller’s decision in FFRF v. Perry. The First Amendment reads, in relevant part, “Congress shall make no law respecting an establishment of religion or prohibiting the free exercise thereof.” In 1947, the Supreme Court held this portion of the Bill of Rights to be enforceable against state as well as federal governments through 14th-Amendment incorporation. Governor Perry’s actions in his capacity of state governor, therefore, must conform to the mandates of the First Amendment.

Whether they do, however, is a moot question according to Judge Miller, as FFRF had no standing to sue. The three requirements for standing in such a case are: “(1) an ‘injury in fact’ that is (a) concrete and particularized and (b) actual or imminent; (2) a causal connection between the injury and the conduct complained of; and (3) the likelihood that a favorable decision will redress the injury.” The court, referring heavily to a recent Seventh Circuit opinion on whether President Obama could constitutionally declare a National Day of Prayer, found that plaintiffs failed to meet the first requirement by showing there had been an “injury in fact.”

In arriving at this conclusion, the court emphasized that attendance at the rally was voluntary and that Governor Perry merely invited prayers from those not in attendance: “Governor Perry’s statements are requests, not commands, and no injury flows from a mere request.” The court explicitly held, again referring to the Seventh Circuit opinion, that nonparticipants’ resulting feelings of exclusion are not sufficient to constitute an injury because they only reflect value judgments of the excluded bystanders. Finally, the court acknowledged that its ruling might well have the effect of making it so that nobody would have standing in a case such as the one before it. Judge Miller gave this concern short shrift by simply referring back to the above-mentioned requirements for standing. “[A]bstract injury. . . is not injury in fact,” he stated.

What about the merits of the case? In other words, if FFRF did have standing, how would the court have ruled? Judge Miller gave a strong hint when he stated: “plaintiffs…seek two types of specific injunctive relief that have never been granted by a federal court: (1) an injunction barring a state governor from issuing a proclamation inviting people to pray; and (2) an injunction limiting the manner in which a state governor may participate in a religious function” (emphasis added). If the injunction in question is the type never to have been granted in federal court, it is likely that most courts would decline to extend the Establishment Clause so far as to prohibit activity of the kind in which Governor Perry engaged. It is also likely the Supreme Court would so forbear.

Water Law Fatwas: Recent and Possible Next Steps Toward Preserving the Ogallala

In Agriculture, Landowners, Legal, Texas Law, Water Law on July 19, 2011 at 8:12 AM

In June 2011, the Texas Legislature passed and Governor Perry signed into law S.B. 332, amending the Texas Water Code. While praised in various news media outlets as a victory for land owners’ property rights, the bill also contains text that may have the potential to further limit the Rule of Capture.

Under the unmodified Rule of Capture, the roots of which go back to the English common law, there is no limit to the amount of water people may withdraw from sources directly beneath their land—as much water as the landowner can “capture” becomes personal property. Though this rule would theoretically lead to optimal water use where a single person owns an entire aquifer, it leads to a tragedy of the commons if more than one person draws from the same aquifer. That is, where single ownership adheres, the landowner is incentivized to deplete the aquifer optimally because only the landowner will suffer the consequences of too rapid a depletion. Where there are multiple owners, however, each landowner is incentivized to take as much water as possible without regard to reasonable use and preservation because other landowners may use up the limited resource first. Critics of the Rule of Capture often describe this dynamic as a “race to the bottom.” Texas has a permitting and rulemaking system, recently modified by S.B. 332, that helps limit this negative aspect of the Rule.

Though explicitly preserving “defenses to liability under the Rule of Capture” (but leaving intact civil penalties imposed by the state), S.B. 332 contains some text that has the potential to further limit the Rule’s breadth by requiring Ground Water Conservation Districts (GWCD), the administrative units charged by Texas law with regulating groundwater usage, to consider an aquifer’s recharge in its rulemaking. Such a requirement could be an important development. Both S.B. 332 and its predecessor explicitly allow a GWCD to “provide for . . . recharging of the groundwater or of a groundwater reservoir or its subdivisions in order to control subsidence, prevent degradation of water quality, or prevent waste of groundwater.” Only S.B. 332, however, contains text that requires consideration of recharge: “In adopting a rule under this chapter, a district shall: consider the public interest in. . . recharging. . . of groundwater, and of groundwater reservoirs or their subdivisions.”  This fact, combined with the fact that the new text arguably provides authority to GWCDs to consider recharge issues for the mere sake of sustainability—instead of solely for the prevention of land “subsidence,” water “degradation,” and “waste”—suggests that Texas lawmakers continue to worry about the lifespan of Lone Star aquifers, particularly that of the great but diminishing Ogallala.

Such concern is understandable, as fresh water is becoming increasingly precious in a world whose population has more than doubled in the last half century. Furthermore, and because (in the prominently displayed words of the High Plains GWCD home page) “there is no substitute for water,” many international affairs experts predict that the world’s water supplies will be at the center of the next resource-incited war.

Because Texas is not the only state to draw from the Ogallala, however, the tragedy of the commons poses an ongoing and significant threat to the aquifer at an intergovernmental level. In other words, why should Texas lawmakers be shy about depleting the Ogallala unless they have an assurance from Colorado, Kansas, Nebraska, New Mexico, Oklahoma, South Dakota, and Wyoming (the other states lying atop the Ogallala) that they too will be responsible stewards of this natural resource. Such mutual assurance is the only way to make sure the Ogallala is used wisely.

An interstate groundwater compact (a congressionally approved treaty between states) would make such an assurance binding. While numerous interstate surface water compacts exist, there are currently no interstate groundwater compacts. This is a curious juxtaposition—probably a result of a later developed understanding of the nature of groundwater—as groundwater is more vulnerable to the tragedy of the commons than surface water, due in part to the fact that groundwater is less easily renewed. Until a groundwater compact (or some other law that is binding on the states) is ratified and approved, state lawmakers will understandably allow depletion of the Ogallala at a greater than optimal rate.

The Immigration Maze

In Federal Law, Immigration, Legal on June 13, 2011 at 9:59 AM

Very few things are more complicated and personal than immigration. In order to understand some of your immigration options, it is  important to know some of the most basic immigration terms. First, you need to know if you are allowed to legally be in the United States.

There are four immigration statuses that you can have under the U.S. Immigration System:

  • You can be an undocumented immigrant, with no legal right to be in the U.S.
  • You can seek to obtain a non-immigrant visa that allows you to spend a limited amount of time in the U.S., usually for a specific purpose.
  • You can seek to become a Legal Permanent Resident (Green Card holder), which allows you to live in the U.S. indefinitely, with most of the rights of a U.S. Citizen.
  • You can be a U.S. Citizen.

If you are an undocumented immigrant, you will need to get a visa or other legal status as soon as possible, otherwise you are subject to removal (deportation) from the U.S. If you qualify, however, the U.S. does offer several ways to become a Legal Permanent Resident. A Legal Permanent Resident is someone who has been granted authorization to live and work in the U.S. on a permanent basis. As proof of that status, a person is granted a Legal Permanent Resident card, commonly known as a “Green Card.” A Green Card enables a person to live and work in the U.S. for the rest of their lives, so long as they do not abandon their residence by staying outside the U.S. for too long, or by engaging in conduct which renders them subject to removal (deportation).  Legal Permanent Residents can qualify for U.S. citizenship five years after obtaining status, or they can choose to renew their Green Card every ten years.

There are several different ways to become a Legal Permanent Resident. Most individuals are sponsored by a family member or U.S. employer. U.S. citizens can petition for their spouses, children, parents, and siblings, while Legal Permanent Residents can only sponsor their spouses and children. The fastest method (usually under one year) is when a U.S. citizen files for immediate relatives such as a spouse, parent, or minor child. The longest method is when a U.S. citizen petitions for a sibling. In some instances this can take up to fifteen years.

Can I Become a Legal Permanent Resident Even if I Have Overstayed My Visa?

One of the most frequent immigrations questions we hear is: “Can I still become a Legal Permanent Resident even if I have overstayed my visa?” The answer is yes, if your last entry into the United States was lawful, and you are married to a U.S. Citizen. Lawful Admission  means an entry into the U.S. after inspection and authorization by an immigration officer. This is the case regardless of how long you have overstayed your visit to the U.S. However, if you are not married to a U.S. Citizen, and you have overstayed your visa, the best thing for you to do is to leave the U.S., sooner rather than later. This is because if you leave before you have overstayed your visa for six months, there are no penalties. However, if you overstay your visa by 180 to 365 continuous days, you can be barred from returning to the U.S. for three years. And, if you overstay for more than one year, you can be barred from the U.S. for up to ten years.

Sitting in high cotton or just high and dry?

In Agriculture, Contracts, Cotton, Landowners, Legal, Texas Law on April 18, 2011 at 9:11 AM

There is no secret that the South Plains region is the largest cotton producing region in the United States.  Cotton itself accounts for around 35% of total world fiber use. Cotton is produced by some eighty countries; however, the U.S., China, and India combined produce over two-thirds of the world’s cotton, the U.S. being the third largest cotton producing country. Cotton is at least a $25 billion industry and accounts for over 200,000 farm and textile jobs.

 During the growing season, cotton farmers execute contracts to sell their cotton.  The buyers then trade and sell this cotton to manufacturers on an open cotton market.  As of late, the cotton market has been volatile. Supply has been driving the market price to all-time highs. Raw cotton prices have risen to record levels while global cotton consumption, according to the USDA, is projected at 117.1 million bales. At the beginning of March 2011, the USDA estimated that prospective cotton plantings would be approximately 12.6 million acres. That is a 1.6 million acre or 15% increase above 2010 levels.  Globally, cotton production is anticipated to rise 13%.

 The current market price of cotton, coupled with tight supply, might lead some to believe that there is considerable interest by producers to plant cotton this coming year. This may also prompt cotton farmers to sign contracts that appear to be advantageous.  The contracting process, however, is filled with numerous potential obstacles.  Mother Nature is forever fickle and so far this year is not cooperating. Anyone who has been in the South Plains this spring can smell, and when the wind is up, taste the dry dirt in the air. In fact, this spring has been the warmest, driest and windiest spring since 1917.  With little to no subsurface moisture, there is a risk that this fall’s cotton crop may suffer.  A farmer looking at a contract needs to be aware of how the weather impacts the cotton growth and how that may impact the figures in a sales contract. 

 Since cotton contracts often involve some speculation about the overall crop, if Texas’ anticipated cotton production is lowered due to lack of moisture, which causes farmers not to plant, the high market prices are here to stay. This phenomenon, which is a potential with this year’s crop, also impacts the sale of cotton and a farmer’s contract.  In addition, factor in weather and instability around the globe and you have the makings for a perfect storm that will culminate in continued market volatility and high prices.

 The speculative cotton futures figures, which play a pivotal role in cotton sales contracts, have wreaked havoc at all levels of the industry. Cotton buyers oversold and production levels were below the estimates last year. This has caused litigation to blossom between producers and buyers. Moreover, buyers are tightening up their contracts for the coming crop year making it almost impossible for producers to contract their estimated cotton production because if they can’t plant due to a lack of rain, they still have to deliver their estimated production.  Thus, greed will drive many producers to the point of insolvency.  In light of all these factors, farmers faced with cotton sales contracts should pay particular attention to the speculative nature of crop estimation, and determine whether or not they can deliver and whether or not their buyer is in a position to live up to their end of the bargain.

Blowing a bunch of hot air or harvesting the wind? Wind Energy in West Texas

In Energy, Landowners, Legal, Texas Law, Wind Energy on April 14, 2011 at 1:22 PM

West Texas is full of incredible resources. When describing the resources of west Texas, most people would cite oil and gas reserves, the Ogallala Aquifer, our abundant agricultural land, and our copious amount of sunshine. But the natural resource we have in the most abundance, and still largely unharvested, is the wind. Most detractors of West Texas will cite the wind as a reason why this region is unattractive. But, moving into the future, the wind could be the resource that sets this region apart, puts it in the forefront of a national energy movement, and demonstrates and showcases Texas’ commitment to innovation.

The processes and the science of harvesting wind energy makes technological leaps every year and the importance of wind energy only continues to increase. As this demand increases, our local landowners, farmers and ranchers are contacted and courted by wind energy companies. The wind energy company may propose many different contract scenarios for landowners. Each of the common options have their pros and cons, and each contain many pitfalls for the landowner that could impact everything from below-surface mineral interests to hunting on the land. This blog post cannot come close to discussing all the possible situations and scenarios, so below I’ll describe some of the basics a landowner should look for when initially evaluating a wind energy company’s overtures.

(1)  The Lease Option.  Wind energy companies are careful about the placement of their turbines. There is a precise science used to determine where wind harvesting can be most profitable. As such, most of the leases wind energy companies propose will have an exploratory option period for the span of a couple of years to figure out if the meteorological factors of the land would produce good wind energy. During this time, the wind energy company gets the sole right to go on the land to install their weather data and other equipment and send out experts to survey the property, as well as other inspectors to determine other unique aspects of the land. It would seem as if the wind energy company has free reign to use the land as it sees fit. During this option period, however, there are various clauses a landowner may want to consider including in a lease option, especially those concerning the continuance of the landowners’s other revenue-generating activities, such as farming and hunting. Also, a landowner may want to include provisions in the option period agreement that require the wind energy company to act on the agreement and to study the land. Different wind energy companies propose and document this option period in different ways – some with language directly in the lease, others with a separate option agreement. In addition, some companies will give the landowner an option agreement with an attached lease term sheet. Regardless of the method of presentment, the landowner must be careful as to the provisions and stipulations put in a Lease Option.

(2) The Lease. A wind energy lease is a complicated document with many clauses that can impact the use and development of the land. The typical lease term is fifty years, so the landowner needs to think of not only current issues, but issues moving far into the future. The lease will establish the particular uses and activities in which the wind energy company can engage. The uses are extensive, especially during the construction phase. A landowner needs to pay particular attention to how the wind energy company will construct its turbines, how it plans to get around on the land, what the land owner can do during the construction phase, and what, if any, other improvements and structures will be built and kept upon the land – and whether or not the lease includes any installation fees to be paid to the landowner. In regard to payment for the use of the land, the landowner will want to scrutinize the method and calculation of payments and whether or not there is a minimum payment established in the lease. Finally, the landowner will want to scrutinize clauses that involve the on-going uses of the land by the landowner. Much of the land in West Texas is used for other revenue-producing activities such as farming, ranching and hunting. If not careful, the wind energy lease may hinder or extinguish the landowner’s right to continue such activities.

This is just a preview of the issues arising from executing wind energy leases. In fact, there are many other issues that can and do arise after the agreements are signed. Regardless of the attention to detail that is required and the careful thought and consideration needed by the landowner, the development of wind energy in our region has the potential to make us national leaders in renewable energy. It also has the potential to supplement and enhance the income of our landowners. This is a form of energy that is here to stay. The development has just begun, and West Texas is a prime place for new development. Harvesting wind energy can, and likely will, become a key part of our economy. Landowners, however, need to be careful to ensure that this project enhances our already plentiful natural resources and does not hinder their uses. While we sometimes complain about our dusty, windy days – in the not-so-distant future, we may look out our window and see the dust blowing and smile because we are hard at work harvesting the wind!

Hey now, you stole my employee!!

In Employment, Legal, Texas Law on March 15, 2011 at 1:45 PM

Texas is known as a “right to work” state, and Texas’ laws generally promote the free practice of a trade or the ability to work.  Emergent under Texas law, however, is a body of law devoted to covenants not to compete.  Businesses want to protect those things it finds critical to its success—including its employees.  Texas law is beginning to recognize the importance of human capital to business. As this law has grown, some employers have sought to put their current employees under a covenant not to compete.  Some, however, have run into a huge roadblock in enforcement of their agreement: consideration.

 Under Texas law, an existing employee who signs a covenant not to compete must be given new confidential information as consideration.  Powerhouse Productions v. Scott, 260 S.W.3d 693, 697 (Tex. App.—Dallas 2008, no pet.); see also, Alex Shesnunoff Management Services, L.P. v. Johnson, 209 S.W.3d 644, 651 (Tex. 2006).  This new confidential information serves as consideration for the agreement.  Of course, for any agreement to be binding, there needs to be consideration. This is a really tricky area. It is tough to give an existing employee—one that may be in the employ of the business for years something new and confidential.  Texas law, however, is not sympathetic.  Some new and unique information must be given.

 What is considered confidential information is not fully defined.  The Texas Supreme Court in In re Bass, 113 S.W.3d 735, 739 (Tex. 2003), however, gave us some indications of what may qualify.  The Texas Supreme Court gave six non-exclusive factors to determine if a trade secret, or confidential information, exists:

 (1) the extent to which the information is known outside of his business;

(2) the extent to which it is known by employees and others involved in his business;

 (3) the extent of the measures taken by him to guard the secrecy of the information;

 (4) the value of the information to him and to his competitors;

 (5) the amount of effort or money expended by him in developing the information; and

 (6) the ease or difficulty with which the information could be properly acquired or duplicated by others. 

In re Bass, 113 S.W.3d at 739. 

 Employers need to be careful if they want their existing employees to sign covenants not to compete. Signature alone does not mean there is a valid and enforceable contract. New confidential consideration must be given—otherwise, all you have is just a piece of paper. 

Why is it so hard to do good? The non-profit battlefield

In Federal Law, Legal, non-profits on March 10, 2011 at 8:53 PM

Non-profits play a critical role in our communities. They provide us educational, artistic, religious, and athletic enjoyment. The laws governing non-profit organizations are complex and interesting — to say they are a battlefield is an understatement. Particularly complex are the Internal Revenue Service (“IRS”) regulations and rules. Section 501(c)(3) of the tax code provides tax exemption for non-profit organizations that perform an exempt function. Section 501(c)(3) organizations include churches, schools, hospitals, arts and environmental groups, and other organizations that are considered charitable. To obtain exempt status under Section 501(c)(3), an organization must meet the following tests:

(1) Organized as a nonprofit corporation, or as a “community chest, fund, or foundation.”

(2) Organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, to foster national or international amateur sports competition, or to prevent cruelty to children or animals.

(3) No part of its “net earnings” may inure to the benefit of any private shareholder or individual.

(4) No “substantial part” of the organization’s activities may consist of certain lobbying activities.

(5) The organization may not participate or intervene in any political campaign on behalf of or in opposition to any candidate for public office.


The IRS presumes that any organization formed after October 9, 1969, is a private foundation. An organization must notify the IRS if it is not a private foundation. This “notification” process requires the completion of an intensive and complex IRS form.  Most non-profits are not private foundations. Private foundations are organizations that receive most of their income from a small group of people – usually an individual, family, or corporation. A public charity, however, receives a bulk of their money from gifts or fees. There are substantial tax consequences associated with each and any forming organization should seek legal and financial counsel before filing with the IRS.

In order to satisfy the IRS that an organization is not a private foundation, an organization must, among other things, show that it meets the requirements of Section 509(a)(1)-(4). For example, Section 509(a)(1) organizations include churches, schools, hospitals, and other organizations that receive their public support primarily from gifts, grants and contributions from a broad group of people. In addition, Section 509(a)(2) covers organizations that receive their support from a combination of gifts, grants and contributions and fees for their exempt services. Organizations that are identified or described in 509(a)(1)-(4) are considered public charities.

For the sake of example, Section 509(a)(2) organizations encompass organizations that normally receive more than 1/3 of their support from a combination of:

(1) Gifts;

(2) Grants;

(3) Contributions;

(4) Membership fees; and

(5) Gross receipts from performing exempt function activities.

In addition, a Section 509(a)(2) organization must not receive more than 1/3 of its support from investment income and/or unrelated taxable income. The major difference between this type of organization and other public charities is that a 509(a)(2) organization receives support from gross receipts from an exempt function activity – such as ticket proceeds from a museum, opera or symphony.

Non-profits really are important for our communities. The services and entertainment they provide are invaluable. People want to provide these charitable services and to also associate with them both with time and resources. But, it is a battlefield.  There are mine fields and launched grenades to watch for when filing with the IRS.  While the end result may be a very successful and beneficial non-profit, anyone contemplating forming a non-profit should be prepared for all that comes their way.