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Understanding Nonprofit and Tax Exempt Organizations is a guide for the law student or practitioner who is looking to understand the law governing the nonprofit, tax exempt sector. This text deals with the many types of tax exempt organizations; the rules, regulations and limitations imposed on tax exempt organizations by the courts, the Internal Revenue Code (IRC) and the Treasury Regulations (Regulations); the charitable contribution and fundraising issues affecting tax exempt organizations; the unrelated business income tax, excise taxes and intermediate sanctions imposed on tax exempt organizations; and the rules regarding private foundations.
In light of the Tax Cuts and Jobs Act of 2017, this new third edition includes a more detailed chapter on Churches and religious organizations, reflecting recent changes in the law overall for charitable nonprofit organizations and sets out new IRS online filing and reporting requirements put in place during the pandemic.
The third edition of Understanding Nonprofit and Tax Exempt Organizations begins with an introduction to nonprofit organizations by discussing the relevant law in general, as nonprofits are governed by state law. Next, tax exempt organizations are discussed, by first giving the reader the background on where such organizations fit in the nonprofit sector; why the organizations are given preferential tax treatment; what form these organizations take; and how such organizations are governed and dissolved. The third edition also provides detailed explanations of the various rules, regulations and tests organizations must follow in order to obtain or retain their tax exempt status as well as the consequences for failure to comply and looks at the court created commerciality and public policy doctrines.
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Table of contents
Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v
Chapter 1: INTRODUCTION TO TAX EXEMPT ORGANIZATIONS
1.01 INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . 1
1.02 CATEGORIES OF ORGANIZATIONS IN THIRD SECTOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.03 CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . 8
Chapter 2: STRUCTURING A NONPROFIT ORGANIZATION
2.01 INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . 9
2.02 RATIONALES . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.03 STRUCTURE CHOICES . . . . . . . . . . . . . . . . . . 12
2.04 TAX EXEMPT STATUS . . . . . . . . . . . . . . . . . . . 22
2.05 STATES' ROLE IN CHOICE OF STRUCTURE . . . . 22
Chapter 3: GOVERNANCE OF NONPROFIT ORGANIZATIONS
3.01 INTRODUCTION TO GOVERNANCE . . . . . . . . . . . .25
3.02 MANAGING THE NONPROFIT . . . . . . . . . . . . . . 26
3.03 FIDUCIARY DUTIES . . . . . . . . . . . . . . . . . . . . 27
3.04 ENFORCEMENT . . . . . . . . . . . . . . . . . . . . . . . 35
Chapter 4: DISSOLVING A NONPROFIT ORGANIZATION
4.01 INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . 37
4.02 DISPOSITION OF ASSETS . . . . . . . . . . . . . . . . 38
4.03 CONVERSIONS OF NONPROFIT ORGANIZATIONS . . . . . . . . . . . . . . . . . . . . . . 42
4.04 OTHER RESTRUCTURING . . . . . . . . . . . . . . . . 44
4.05 ANTITRUST AND NONPROFITS . . . . . . . . . . . . 45
Chapter 5: RATIONALES FOR TAX EXEMPTION
5.01 INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . 51
5.02 PUBLIC BENEFIT THEORY . . . . . . . . . . . . . . . 51
5.03 PLURALISM THEORY . . . . . . . . . . . . . . . . . . . 53
5.04 SUBSIDY THEORY . . . . . . . . . . . . . . . . . . . . . 54
5.05 INCOME MEASUREMENT THEORY . . . . . . . . . . 55
5.06 CAPITAL SUBSIDY THEORY . . . . . . . . . . . . . . . 56
5.07 DONATIVE THEORY . . . . . . . . . . . . . . . . . . . . 57
5.08 RATIONALES FOR TRADE ASSOCIATIONS, SOCIAL CLUBS & FRATERNAL BENEFIT
ORGANIZATIONS . . . . . . . . . . . . . . . . . . . . . . 58
5.09 ADDITIONAL THEORIES . . . . . . . . . . . . . . . . . 59
5.10 ADDITIONAL BENEFITS OF FEDERAL TAX EXEMPTION . . . . . . . . . . . . . . . . . . . . . . . . . 61
Chapter 6: IRS TESTS FOR TAX EXEMPTION
6.01 INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . 63
6.02 ORGANIZATIONAL TEST . . . . . . . . . . . . . . . . . 63
6.03 OPERATIONAL TEST . . . . . . . . . . . . . . . . . . . 66
6.04 PRIVATE INUREMENT TEST . . . . . . . . . . . . . . 70
6.05 EXCESS BENEFIT TRANSACTIONS & INTERMEDIATE SANCTIONS . . . . . . . . . . . . . . 74
6.06 POLITICAL ACTIVITIES TEST. . . . . . . . . . . . . . 76
Chapter 7: COURT IMPOSED LIMITS ON TAX EXEMPT ORGANIZATIONS
7.01 INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . 91
7.02 ILLEGALITY & PUBLIC POLICY DOCTRINES . . . . 91
7.03 THE COMMERCIALITY DOCTRINE . . . . . . . . . . 95
Chapter 8: RELIGIOUS ORGANIZATIONS & CHURCHES
8.01 INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . 105
8.02 RELIGIOUS ORGANIZATIONS . . . . . . . . . . . . . . 105
8.03 CHURCHES . . . . . . . . . . . . . . . . . . . . . . . . . 109
8.04 CONVENTIONS OR ASSOCIATIONS OF CHURCHES . . . . . . . . . . . . . . . . . . . . . . . . . 117
8.05 GROUP RULING . . . . . . . . . . . . . . . . . . . . . . 118
8.06 INTEGRATED AUXILIARIES OF CHURCHES . . . . 118
8.07 APOSTOLIC ORGANIZATIONS . . . . . . . . . . . . . . 120
8.08 CHURCHES & POLITICAL ACTIVITY . . . . . . . . . 121
8.09 CHURCH AUDIT PROCEDURES ACT . . . . . . . . . 124
8.10 SPECIAL ISSUES FOR CHURCHES . . . . . . . . . . 125
8.11 CONSTITUTIONAL CONSIDERATIONS . . . . . . . . 129
Chapter 9: EDUCATIONAL ORGANIZATIONS
9.01 INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . 133
9.02 FORMAL VS. INFORMAL EDUCATIONAL ORGANIZATIONS . . . . . . . . . . . . . . . . . . . . . . 135
9.03 FUNDING . . . . . . . . . . . . . . . . . . . . . . . . . . . 145
9.04 RIGHTS OF STUDENTS . . . . . . . . . . . . . . . . . . 147
Chapter 10: HEALTHCARE ORGANIZATIONS
10.01 INTRODUCTION TO HOSPITALS . . . . . . . . . . . . 149
10.02 MULTI-CORPORATE FORM . . . . . . . . . . . . . . . 152
10.03 INTEGRAL PART TEST . . . . . . . . . . . . . . . . . . 153
10.04 HOSPITAL CONVERSIONS & PRIVATE INUREMENT . . . . . . . . . . . . . . . . . . . . . . . . . 155
10.06 HOMES FOR THE AGED . . . . . . . . . . . . . . . . . 166
10.07 HEALTH MAINTENANCE ORGANIZATIONS . . . . . 168
10.08 MEDICAL RESEARCH ORGANIZATIONS . . . . . . . 170
Chapter 11: ARTS ORGANIZATIONS
11.01 INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . 173
11.02 SCOPE OF ARTS ORGANIZATIONS . . . . . . . . . . 170
11.03 CULTURAL ARTS DISTRICTS . . . . . . . . . . . . . . 180
Chapter 12: OTHER IRC SECTION 501(c)(3) ORGANIZATIONS
12.01 INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . 183
12.02 TAX EXEMPT CATEGORIES . . . . . . . . . . . . . . . 183
12.03 RELIEF OF POOR & DISTRESSED OR UNDERPRIVILEGED . . . . . . . . . . . . . . . . . . . . 184
12.04 LESSENING GOVERNMENT’S BURDEN . . . . . . . . 187
12.05 PROMOTION OF SOCIAL WELFARE . . . . . . . . . . 188
12.06 SCIENTIFIC ORGANIZATIONS . . . . . . . . . . . . . 189
12.07 TESTING FOR PUBLIC SAFETY . . . . . . . . . . . . 191
12.08 LITERARY ORGANIZATIONS . . . . . . . . . . . . . . . 192
12.09 NATIONAL & INTERNATIONAL AMATEUR SPORTS ORGANIZATIONS . . . . . . . . . . . . . . . . . . . . . . 192
12.10 PREVENTION OF CRUELTY TO CHILDREN & ANIMALS . . . . . . . . . . . . . . . . . . . . . . . . . . . 194
12.11 PROTECTION OF ENVIRONMENT . . . . . . . . . . . 194
12.12 ECONOMIC & COMMUNITY DEVELOPMENT & LOW INCOME HOUSING . . . . . . . . . . . . . . . . . 195
Chapter 13: IRC SECTION 501(c)(4): SOCIAL WELFARE ORGANIZATIONS
13.01 INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . 197
13.02 APPLYING TESTS FOR TAX EXEMPTION . . . . . . 198
13.03 DEFINING SOCIAL WELFARE . . . . . . . . . . . . . . 199
13.04 COMMUNITY BENEFIT . . . . . . . . . . . . . . . . . . 201
13.05 RELATIONSHIP BETWEEN SECTION 501(c)(4)
ORGANIZATIONS & SECTION 501(c)(3) ORGANIZATIONS . . . . . . . . . . . . . . . . . . . . . . 206
13.06 SECTION 501(c)(4) & FEDERAL ELECTION CAMPAIGN ACT . . . . . . . . . . . . . . . . . . . . . . . 208
13.07 LOCAL ASSOCIATIONS OF EMPLOYEES . . . . . . . 209
13.08 CREDIT COUNSELING GROUPS . . . . . . . . . . . . . . . . . .210
Chapter 14: OTHER TAX EXEMPT ORGANIZATIONS
14.01 INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . 213
14.02 RATIONALES . . . . . . . . . . . . . . . . . . . . . . . . 213
14.03 SECTION 501(c)(2) ORGANIZATIONS: TITLE HOLDING COMPANIES . . . . . . . . . . . . . . . . . . 214
14.04 SECTION 501(c)(5) ORGANIZATIONS: LABOR, AGRICULTURE & HORTICULTURE ORGANIZATIONS . . . . . . . . . . . . . . . . . . . . . . 214
14.05 SECTION 501(c)(6) ORGANIZATIONS: BUSINESS LEAGUES & TRADE ASSOCIATIONS . . . . . . . . . 220
14.06 SECTION 501(c)(7) ORGANIZATIONS: SOCIAL CLUBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 226
14.07 SECTION 501(c)(8) ORGANIZATIONS: FRATERNAL BENEFIT ASSOCIATIONS . . . . . . . . . . . . . . . . . 231
14.08 SECTION 501(c)(10) ORGANIZATIONS: DOMESTIC FRATERNAL ORGANIZATIONS . . . . . . . . . . . . . 232
14.09 SECTION 501(c)(19) ORGANIZATIONS: VETERANS ORGANIZATIONS . . . . . . . . . . . . . . . . . . . . . . 233
14.10 SECTION 501(m) ORGANIZATIONS: COMMERCIAL TYPE INSURERS . . . . . . . . . . . . . . . . . . . . . . 234
14.11 OTHER MUTUAL BENEFIT ORGANIZATIONS . . . . 234
14.12 ISSUES INVOLVING VOLUNTARY MEMBERSHIP ASSOCIATIONS . . . . . . . . . . . . . . . . . . . . . . . 235
Chapter 15: IRC SECTION 527: POLITICAL ORGANIZATIONS
15.01 INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . 241
15.02 DEFINING A POLITICAL ORGANIZATION . . . . . . 242
15.03 ORGANIZATIONAL & OPERATIONAL TESTS . . . . 242
15.04 DETERMINING TAXATION . . . . . . . . . . . . . . . . 244
15.05 NEWSLETTER FUNDS . . . . . . . . . . . . . . . . . . . 244
15.06 SEGREGATED FUNDS . . . . . . . . . . . . . . . . . . . 245
15.07 THE SECTION 527(f) TAX . . . . . . . . . . . . . . . . . 247
15.08 FILING & REPORTING REQUIREMENTS . . . . . . . 248
15.09 RECENT LITIGATION . . . . . . . . . . . . . . . . . . . . .249
Chapter 16: UNRELATED BUSINESS INCOME TAX
16.01 INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . 253
16.02 DEFINING UNRELATED BUSINESS INCOME . . . . 255
16.03 TAX IMPACT OF UNRELATED BUSINESS INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . 264
16.04 PASSIVE INCOME MODIFICATIONS . . . . . . . . . . 265
16.05 PARTNERSHIP INCOME . . . . . . . . . . . . . . . . . 271
16.06 DEBT-FINANCED INCOME . . . . . . . . . . . . . . . . 272
16.07 ADDITIONAL EXCEPTIONS . . . . . . . . . . . . . . . 277
16.08 SPECIAL SITUATION FOR SOCIAL CLUBS . . . . . 282
Chapter 17: CHARITABLE CONTRIBUTIONS
17.01 INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . 285
17.02 POLICY CONSIDERATIONS . . . . . . . . . . . . . . . 287
17.03 DEFINING CHARITABLE GIFT . . . . . . . . . . . . . 288
17.04 DEDUCTION LIMITATIONS FOR TAXPAYERS . . . . 294
17.05 FORM AND TIMING . . . . . . . . . . . . . . . . . . . . 296
17.06 SUBSTANTIATION & DISCLOSURE REQUIREMENTS . . . . . . . . . . . . . . . . . . . . . . 298
17.07 CONTRIBUTIONS OF PROPERTY . . . . . . . . . . . . 299
17.08 CHARITABLE CONTRIBUTION VEHICLES . . . . . . 304
17.09 DISASTER RELIEF & INTERNATIONAL GIVING . . . . . . . . . . . . . . . . . . . . . . . . . . . . 308
Chapter 18: FUNDRAISING
18.01 INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . 313
18.02 STATE INVOLVEMENT . . . . . . . . . . . . . . . . . . 313
18.03 CONSTITUTIONAL RESTRICTIONS . . . . . . . . . . 315
18.04 INTERNET SOLICITATION . . . . . . . . . . . . . . . . 318
18.05 PROPOSALS FOR REFORM . . . . . . . . . . . . . . . . 318
Chapter 19: PRIVATE FOUNDATIONS
19.01 INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . 319
19.02 DEFINING PRIVATE FOUNDATIONS . . . . . . . . . 320
19.03 AVOIDING PRIVATE FOUNDATION STATUS . . . . 321
19.04 RULES FOR PRIVATE FOUNDATIONS . . . . . . . . 322
19.05 FOUR CATEGORIES OF NON-PRIVATE FOUNDATIONS (PUBLIC CHARITIES) . . . . . . . . . 338
19.06 PRIVATE OPERATING FOUNDATIONS . . . . . . . . 358
19.07 TERMINATING A PRIVATE FOUNDATION . . . . . . 360
19.08 PRIVATE FOUNDATION FORMS . . . . . . . . . . . . . . 362
Chapter 20: SECURING & MAINTAINING TAX EXEMPT STATUS
20.01 INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . 363
20.02 APPLYING FOR TAX EXEMPT STATUS . . . . . . . . 363
20.03 DETERMINING EXEMPT STATUS . . . . . . . . . . . 369
20.04 MAINTAINING TAX EXEMPT STATUS . . . . . . . . 374
Appendix A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 381
Appendix B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 417
Appendix C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 419
Appendix D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 423
Appendix E . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 439
TABLE OF CASES . . . . . . . . . . . . . . . . . . . . . . . . . . TOC-1
TABLE OF STATUTES . . . . . . . . . . . . . . . . . . . . . . . TOS-1
INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-1
