Tax-Exempt Organizations in a Nutshell
Author:
Taylor, Scott A.
Edition:
1st
Copyright Date:
2011
19 chapters
have results for The Law of Tax-Exempt Organizations in a Nutshell
Preface 5 results
- Because tax-exempt organizations are such an important part of our economy and a critical element of our social fabric, law schools and business schools around the country are expanding their curricula to include this important area of the law. This Nutshell provides a valuable introduction and foundation for those students taking classes that cover tax-exempt organizations. Because of its focus on the law, this Nutshell also will be a valuable introduction to nonprofit professionals needing a concise overview of the legal problems that tax-exempt organizations routinely face. Finally, lawyers and other professional serving on nonprofit boards will find this book helpful in identifying where legal problems may arise.
- At the beginning of the second decade of the 21st century, the non-profit sector in the United States included more than 1.6 million tax-exempt organizations. More than one million of these organizations are public charities exempt from the federal income tax under § 501(c)(3) of the Internal Revenue Code (IRC) and eligible to receive tax deductible donations under IRC § 170. More than 100,000 private foundations, also exempt under IRC § 501(c)(3), comprise an important part of the sector and have an extremely complicated set of legal rules that apply to them. Roughly another half million tax-exempt organizations round out the sector and represent such diverse organizations as chambers of commerce, the American Medical Association, non-profit cemeteries, and labor unions. The annual revenues of public charities make up about 10% of the gross domestic product of the United States, and 9% of all wages come from nonprofit organizations.
- The primary law in this area is federal, but state and tribal laws also play an important role. Accordingly, I have identified those places where state and tribal laws are relevant. In terms of the federal law, I must apologize on behalf of Congress. The federal laws that Congress has passed over the years in this area of law are some of the most complicated statutes ever written. To make things worse, the relevant provisions are scattered throughout the vast Internal Revenue Code. I also apologize on behalf of the Internal Revenue Service (IRS) for its voluminous and dense Treasury Regulations that attempt to explain the statutory material that Congress has passed. To be fair, let me point out that IRS has produced many excellent publications that attempt to explain the many legal complexities that tax-exempt organizations face.
- My goal is to provide you with a coherent framework that enables you to understand the legal basics as they come out of the federal statutes and Treasury Regulations. From this framework, you can start asking the right questions based on the appropriate law. Once you understand which law or sets of law apply, further research may be necessary. Alternatively, you may find a ready answer that comes right out of the applicable statute or regulation.
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Chapter I. Historical Origins in Charitable Trust Law 25 results (showing 5 best matches)
- The role of IRS within the non-profit world explains the title of this book: The Law of Tax–Exempt Organizations in a Nutshell. Most of the law that concerns us will be federal, although state and tribal law will have an appropriate place. This federal law dealing with tax-exempt organizations exists within the broader federal tax law and comes in the form of statutes, regulations, rulings, cases, and various types of administrative materials (IRS publications, forms, instructions, and memoranda). Much of the federal law regulates tax-exempt organizations to insure that they are organized and operated in furtherance of their exempt purposes and to limit the negative effects of greed and the lust for power.
- Now in the United States most of the regulation of the philanthropic sector falls on the shoulders of the Internal Revenue Service (IRS) with various state offices concerned with regulating fundraising activities. In general, philanthropic organizations enjoy exemption from the federal income tax. In most cases, these organizations must apply to IRS in order to confirm their tax-exempt status. See IRC § 508(a). For a philanthropic organization to be exempt from the federal income tax, it must be organized and operated for one or more charitable purposes. See IRC § 501(c)(3). Most tax-exempt organizations must file annual information returns with the IRS. See IRC § 6033(a). This system within IRS—application for exempt status and filing of annual information returns—provides the rationale for saddling IRS with most of the responsibility for regulating the philanthropic sector within our country.
- Historically, charities became relevant as a matter of federal law when Congress passed a corporate income tax law in 1909 and expressly provided exemption for “corporations or associations organized and operated exclusively for religious, charitable, or educational purposes, no part of the income of which inures to the private benefit of any private stockholder or individual.” Act of August 5, 1909, ch. 6, 36 Stat. 11, 113. Congress enacted an individual income tax in 1913, but the federal tax-exempt status of philanthropic organizations became especially relevant when Congress enacted the Revenue Act of 1918 with a provision allowing individuals to deduct contributions or gifts made “to corporations organized and operated exclusively for religious, charitable, scientific, or educational purposes, or for the prevention of cruelty to children or animals…” See Revenue Act of 1918, ch. 18, § 214(a)(10), 40 Stat. 1057, 1068 (1919). In 1918 the charitable contribution deduction was born...
- Like England, America has had its share of philanthropic scandals. Sadly, some non-profit organizations in America also played a critical role in promoting scientific racism. For example, the American Economic Association, a learned society formed in 1885, published and promoted Frederick L. Hoffman’s book “Race Traits and Tendencies of the American Negro” (1896), viewed as one of the most influential works on scientific racism in America. Sectors of the American charitable community, especially some private schools, have played a disturbing role as the United States has gone about the challenge of fighting racism and promoting racial equality. See Bob Jones University v. United States, 461 U.S. 574 (1983) (revoking the federal tax-exempt status of a private university under § 501(c)(3) because of racial discrimination in treatment of students).
- From the historical origins of charitable trusts emerge the pervasive and timeless themes of generosity, greed, and power—humanity in its full flower as it struggles with good and evil. In thirteenth-century England, most charitable transfers dealt with religious matters and were under the jurisdiction of the ecclesiastical courts. Many a wealthy sinner surmised that confession and repentance coupled with a gift of land to the church might smooth the path to a heavenly afterlife. In the thirteenth century, transfers of land to religious bodies had legal effect because the religious body was a corporation under medieval law and had the legal capacity to hold and own the land through a tenure known as “frankalmoign” from the Old French meaning “free alms.” The transfer of the land insured that members of the particular religious order would say prayers and perform masses in the name of the person making the gift.
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Chapter II. Tax–Exempt Landscape 71 results (showing 5 best matches)
- The landscape of the tax-exempt sector paints a picture of many well-known organizations that control vast pools of capital, exercise influence, and engage in substantial political activity. The primary regulation of this sector comes under the federal tax law and the regulatory efforts of the IRS. This Nutshell concentrates primarily on the federal tax law and regulations that govern most of the organizations that are exempt from the federal income tax under §§ 501 and 527. If you plan on practicing in this area of law or if you are a non-profit professional trying to learn more about the federal tax law as it applies to tax-exempt organizations, then you need to read and study the statutes and regulations that apply to your situation. The purpose of this discussion is to provide you with an outline of the important statutes.
- Many of you who are reading this Nutshell are currently attending law school and need to learn something about the law of tax-exempt organizations. If you are going to a state or public law school, then your law school is most likely part of a state university system, such as the University of Michigan. These universities and their constituent law schools are governmental entities that enjoy tax-exempt status under the federal income tax, not under § 501(c)(3), but under the general exemption for state and local governmental entities.
- IRC § 501. This section is the heart of the tax-exempt statutory universe because it describes most of the organizations that we think of as making up the broad category of tax-exempt organizations. Our primary focus will be on § 501(c)(3), but we will also consider some of the other important tax-exempt organizations. Extensive regulations provide important guidance in applying this section.
- The tax-exempt landscape, defined primarily by the federal tax law, includes organizations of great variety. This chapter describes those well-known organizations to help provide you with memorable signposts and focuses on the organizations described in § 501(c)(3). You will learn later in Chapter V that under the federal income tax law “private foundation” has a special meaning designed to impose extra regulations on an organization controlled by a small number of individuals. At this stage, however, I want to draw your attention to foundations whose primary function is to hold vast amounts of wealth that produces income used to make grants to individuals and other tax-exempt organizations.
- Nonetheless, many state universities and their law schools control § 501(c)(3) tax-exempt organizations formed as fundraising tools and as legal entities that hold investments to produce income used to support the university generally or the law school specifically. For example, the University of Virginia controls the University of Virginia Foundation, which serves broad university goals with a focus on real estate, financial advising, and administrative services for other foundations formed to support academic units within the University of Virginia. In contrast, the University of Virginia Law School has its own foundation with the sole purpose of raising funds and generating investment revenue for the law school. As a result, many public universities and the law schools associated with them have formed supporting foundations that are exempt from the federal income tax under § 501(c)(3). As a practical matter, this means that the federal law governing tax-exempt organizations has...
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Chapter X. Gaining and Maintaining Tax–Exempt Status 52 results (showing 5 best matches)
- For many state tax purposes, the tax-exempt status of an organization is relevant. In almost all cases, the state law defers to the federal determination of the organization’s tax-exempt status. If IRS determines that an organization is tax-exempt under § 501(c)(3), then the relevant state or states will also treat the organization as tax-exempt for a variety of purposes. In general, then, state corporate income tax will not apply unless unrelated business income is involved. Property tax exemption varies widely from state to state. Exemption from sales tax also may be available for some § 501(c)(3) organizations.
- If a tax-exempt organization required to file an annual return under § 6033(a) fails to file a return for three consecutive years, then the tax-exempt status of the organization automatically will be revoked. See IRC § 6033(j)(1). Once an organization loses its tax-exempt status, then it must reapply and file a new Form 1023 or Form 1024. See IRC § 6033(j)(2). An organization can request retroactive reinstatement by showing reasonable cause for failure to file an annual return. See IRC § 6033(j)(3). The IRS Form 990–T is required of all tax-exempt organizations described in § 501(a) with unrelated business income for the year in excess of $1,000. See Treas. Reg. § 1.6033–2(e)
- The IRS Form 990, 990–EZ, and 990–N depend on the amount of annual gross receipts of the organization. The Form 990–N, which organizations file online, is a very brief information return for those non-private foundations exempt under § 501(c)(3) with annual gross receipts under $50,000. The Form 990–EZ is a shorter version of the Form 990 for organizations with gross receipts of less than $200,000 and with assets of less than $500,000. And the Form 990 is for use by the remaining organizations that have gross receipts in excess of $200,000 and assets of more than $500,000. Finally, private foundations use the IRS Form 990–PF without regard to the amount of gross receipts or value of assets. For our purposes, then, the major tax-exempt organizations that I have covered in this Nutshell use the IRS Form 990 series based on their level of gross receipts and the value of their assets, except for private foundations, which use the Form 990–PF based on legal status as a private foundation...
- Almost all organizations that seek tax-exempt status under § 501(c) must file an application with IRS. See IRC § 508 (specific statutory notice requirements for § 501(c)(3) organizations) and Treas. Reg. § 1.501(a)–1(a)(3) (requiring application for organizations under § 501(c)). For a comprehensive table outlining the appropriate forms to use for application of tax-exempt status, see IRS Publication 557, Tax–Exempt Status for Your Organization (Rev. October 2010). The IRS Form 1023 is used for § 501(c)(3) organizations, unless the organization is exempt from filing. The IRS Form 1024 is used for most other organizations seeking tax-exempt status.
- Under section 508, most § 501(c)(3) organizations cannot acquire tax-exempt status until they have filed the required IRS Form 1023. The statute and the applicable regulation provide a special rule that applications filed within 15 months of the date of legal formation will relate back to the date of formation. See IRC § 508(a)(2) and Treas. Reg. § 1.508–1(a)(2)(i). The primary importance of this rule is that it allows supporters to make tax deductible donations to the organization under § 170 so long as the organization ultimately receives tax-exempt status from IRS under § 501(c)(3). In accepting donations, the organizers should make sure to inform the donors that they are planning on making a timely application and that the deduction under § 170 will not be allowed if the application is withdrawn, is late, or requires substantial modifications to enable the organization to qualify for tax-exempt status. The contributions are deductible only if the organization receives tax-exempt...
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Chapter VI. Charitable Giving 143 results (showing 5 best matches)
- If a taxpayer makes a contribution and if the organization is listed in Publication 78, then the contribution is treated as having been made to an organization within the meaning of § 170(c). What if the organization is in the process of applying for tax-exempt status under § 501(c)(3)? Can it be treated as an organization within § 170(c) before it applies for tax-exempt status and be eligible to receive deductible contributions?
- If you are counseling a potential donor, especially one planning on making a substantial contribution, you should always check the current tax-exempt status of the organization through Publication 78 and the list of organizations on the revocation list. In addition, assurances of tax-exempt status from the organization will help the process along.
- After an organization receives its tax-exempt status, it should be listed in IRS Publication 78. But what happens if IRS takes action to revoke an organization’s tax-exempt status? How does this affect the deductibility of contributions? In general, contributions made to a § 501(c)(3) organization are deductible until IRS gives notice that it has revoked the organization’s tax-exempt status. IRS initially publishes these notices on a weekly basis in the Internal Revenue Bulletin. You can find the Internal Revenue Bulletin online here:
- The answer is yes and no. If the organization applies for tax-exempt status within 15 months of being legally formed (usually the date of incorporation for a nonprofit corporation as shown on the charter of incorporation issued by a state official) and ultimately receives tax-exempt status under § 501(c)(3), then any contributions are treated as made as if the organization already had its tax-exempt status. See Treas. Reg. § 1.508–1(a)(2)(i). Therefore, a taxpayer making a contribution could deduct it so long as the organization ultimately gained tax-exempt status. If a new organization, however, does not apply within 15 months of having come into legal existence, then its status as a tax-exempt organization under § 501(c)(3) arises on the date that it makes its application. See IRC § 508(d)(2)(B), Treas. Reg. §§ 1.508–1(a)(1)(i), 1.508–2, and Peek v. Commissioner, 73 T.C. 912 (1980) (denying charitable contribution deduction where organization applied more than 15 months after...
- The churches and affiliated organizations not listed in Publication 78 include those that have not filed for tax-exempt status. This category of religious organizations, even though it uses the word “church,” which would imply application only to a Christian denomination, extends to and includes virtually all faith traditions having the formality of an organized religion and a regular place of worship. Churches, their integrated auxiliaries, and conventions or associations of churches are not required to file for tax-exempt status. See IRC § 508(c)(1)(A). As a result, these organizations have automatic tax-exempt status under § 501(c)(3) once they become churches. Deductibility of contributions, however, may be something of an issue. Churches, however, are free to apply for tax-exempt status under § 501(c)(3). This extra formality and recognition by IRS may facilitate the making of charitable contributions.
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Chapter IV. Tax–Exempt Organizations Under IRC § 501(c)(3) 198 results (showing 5 best matches)
- Section 501(c)(3) is at the epicenter of the law of tax-exempt organizations because it describes the category of organizations that dominate this area of law. Tax-exempt status under § 501(c)(3) is the BIG DEAL because donations to these organizations are deductible for federal income, estate, and gift tax purposes. Section 501(c)(3) contains in its relatively compact language most of the legal requirements that must be satisfied in order to obtain tax-exempt status. The IRS, by way of regulations, and the courts, through their decisions, have grafted on to the statute refinements and additional requirements. To achieve tax-exempt status, an organization must:
- I am emphasizing “state law” here, but please remember that I am also referring to the District of Columbia. Many tax-exempt organizations have their headquarters in the District of Columbia. As a result, many of these organizations are nonprofit corporations under the law of the District. See D.C. Code Ann. §§ 29–301.01 et seq.
- Organizations with a literary purpose are relatively rare, perhaps because they likely have an educational purpose as well. The regulation provides no guidance. IRS does advise organizations with a literary purpose to indicate and explain if the purpose is accomplished through the operation of a bookstore or a publishing operation. See Tax–Exempt Status for Your Organization, IRS Pub. 557, p. 28 (Rev. October 2010). IRS is attempting to determine if the primary purpose of the literary activities are private and commercial. If so, then the organization will not qualify for tax-exempt status. But if the organization focuses on literary quality, then tax-exempt status may be appropriate. See GCM 38845 (May 4, 1982) (discussing whether an organization’s publication of a literary magazine promoted the public interest or was primarily commercial in nature).
- The state statutory provisions governing nonprofit corporations will be in the larger collection of state statutes. If you have any desire to practice in the area of tax-exempt organizations, you need to locate your state statute, read it, and consult it regularly. This is vital if you are providing any legal services in connection with the formation, operation, reorganization, or termination of a tax-exempt organization that is a nonprofit corporation under state law.
- The illegality of an organization usually manifests itself in the context of planned activities. For example, an anti-war organization planned on conducting illegal acts of civil disobedience to increase the impact of their anti-war demonstrations. The IRS ruled that such activity was illegal and precluded the granting of tax-exempt status under § 501(c)(3). See Rev. Rul. 75–384, 1975–2 C.B. 204. A much more egregious example involved an organization that promoted child sexual abuse and child pornography. See Mysteryboy, Inc. v. Commissioner, T.C.Memo 2010–13. A less obvious example involved a joint venture between a hospital and physicians in which referral fees violating federal law caused IRS to recommend denial of exempt status. See GCM 39862 (Nov. 21, 1991). Even so, examples of illegality are fairly rare in the scheme of things. Organizers of an aspiring tax-exempt organization under § 501(c)(3) are unlikely to apply for exempt status if their planned activities are illegal.
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Chapter III. Types of Non–Profit Entities 36 results (showing 5 best matches)
- It is very important to remember that a nonprofit corporation is almost always a creature of state law. Such a corporation can then serve as the legal entity that is an organization that acquires tax-exempt status under federal law. The procedures for acquiring tax-exempt status are discussed in Chapter X.
- Much of the law that governs tax-exempt organizations is federal. An organization, however, cannot qualify for tax-exempt status unless it is a legal entity. An individual, no matter how selfless and charitably minded, cannot declare herself to be a charity or foundation and then seek tax-exempt status from the Internal Revenue Service. Likewise, a group of individuals cannot declare themselves to be an organization unless they undertake to satisfy the legal formalities that enable them to become a legal entity.
- The federal government and state governments sometimes charter organizations by affirmative legislation. For purposes of federal tax-exempt status, this method of unique formation is relatively unimportant so long as the chartered organization meets the necessary requirements for exempt status. A well-known example of a specially chartered organization is the Smithsonian Institution, which Congress chartered in 1846. The various units of the Smithsonian Institution are recognized as tax-exempt as a § 501(c)(3) organization by the IRS and appear in IRS Publication 78, Cumulative List of Organizations.
- IRS has now taken the position that an LLC can qualify as a tax-exempt organization under §§ 501(c)(3) and 501(c)(4). See Richard A. McCray and Ward L. Thomas, Limited Liability Companies as Exempt Organizations—Update, IRS Continuing Professional Education Technical Instruction Program 27–33 (2001). However, the LLC is unlikely to become a workable type of legal entity for most tax-exempt organizations. An LLC, under state law, must have one or more members, and under IRS guidelines the only type of member permitted is another § 501(c)(3) organization or a governmental unit of a state or local government. Because the permissible members of a tax-exempt LLC are already tax-exempt, one must ask why they would form another tax-exempt entity as an LLC unless they had a special non-tax reason.
- In IRS Publication 78, Cumulative List of Organizations, IRS maintains a list of organizations eligible to receive tax deductible contributions. A quick look at this publication shows that most of the organizations use the non-profit corporation as the preferred legal entity. This publication does not list other types of tax-exempt organizations (those not entitled to receive tax deductible donations). But the nonprofit corporation is even more preferred among the non-§ 501(c)(3) group of tax-exempt organizations.
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Chapter VII. Regulation of Charitable Fundraising 60 results (showing 5 best matches)
- Regulation of fundraising in the United States falls primarily to the individual states. Apart from fundraising questions that might affect the deductibility of a charitable contribution under § 170 or the continuing tax-exempt status of an organization under § 501(a), the federal tax laws deal very little with the regulation of fundraising. But because IRS has such a strong presence in the regulation of tax-exempt organizations through the application process and the filing of annual information returns, states have left most of the regulatory function of the charitable sector in the hands of IRS.
- See Model Act § 2(b). If the registration is the first such registration, then the charitable organization must also include its organizational documents (e.g., articles of incorporation and bylaws). See Model Act § 2(c)(1). In addition, the charitable organization must provide “a statement setting forth the place where and the date when the organization was legally established, the form of its organization and its tax-exempt status attaching copies of federal or state tax-exemption determination letters.” Model Act § 2(c)(2). If the federal determination letter of tax-exempt status is issued after the registration, then the charitable organization must file a copy with the state regulator within 30 days of receiving the letter. See Model Act § 2(d). A registering charitable organization must also submit a financial statement that must be an audited financial statement if the gross revenue exceeds a specified amount. See Model Act § 3. Finally, the charitable organization must pay...
- The Model Act requires annual registration and reporting for all covered charitable organizations, fund raising counsel, and paid solicitors. See Model Act §§ 2, 3, 5, & 6. A “charitable organization” means an organization that is tax-exempt under § 501(c)(3). See Model Act § 1(a)(1). The term also includes various types of organizations having charitable purposes that are not necessarily tax-exempt under § 501(c)(3). See Model Act § 1(a)(2). The term “fund raising counsel” means the person who is compensated to plan and coordinate fundraising efforts but does not include paid or volunteer inhouse staff of the charitable organization or lawyers who advise clients about making contributions. See Model Act § 1(f). The term “paid solicitor” means a person (usually a corporation or LLC) that receives compensation from a charitable organization for soliciting contributions. See § Model Act § 1(g). And “solicitation” has a broad and inclusive meaning extending to most forms of fundraising...
- Most, but not all states, require registration and reporting of charitable organizations engaged in fundraising. The laws and methods of regulation vary from state to state. For professional fundraisers that operate on a national level, complying with the registration and disclosure laws may be difficult. For many organizations that undertake regular but modest fundraising, the primary difficulty is determining if registration and reporting are even necessary. If you are working on behalf of a new § 501(c)(3) organization that is considering charitable fundraising, your first task is to identify the state agency or office that is responsible. The next task is to review the law to determine if registration and reporting are necessary. Once you determine the extent to which the law applies to your organization, then you can go about the task of satisfying the requirements of the state law.
- This change in 2008 provides great assistance to states because the Schedule G for each of these organizations will now be available to the states interested in using the information in connection with their efforts to deter fraud and abuse in charitable fundraising. IRS is authorized to share federal tax information with states under § 6103(d) and has tax information sharing agreements with all 50 states. In addition, the state charity offices have online access to most filed IRS Forms 990 and 990–EZ. Many states require § 501(c)(3) organizations to file their annual IRS Forms 990 with the appropriate regulatory body. Finally, these state offices have the ability to conduct online searches of IRS Form 990 databases based on zip code. These forms are online because Congress has required most tax-exempt organizations to open their IRS Forms 990 to the public. See IRC § 6104.
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Chapter VIII. Tax–Exempt Organizations Under Provisions Other Than § 501 91 results (showing 5 best matches)
- In chapter IV, we looked at the various types of tax-exempt organizations that come within § 501(c)(3). In chapter V, you learned that all tax-exempt organizations that fall within § 501(c)(3) are classified as private foundations unless they come within at least one of the classifications contained in § 509(a). These organizations are by far the most numerous in the tax-exempt universe. The organizations we look at in this chapter are nonetheless important. Some of them, the ones we look at first, can receive tax deductible donations. The others, however, are not eligible to receive tax deductible donations. Congress has classified them as tax-exempt organizations for a variety of reasons.
- A labor organization is subject to the private inurement prohibition. See Treas. Reg. § 1.501(c)(5)–1(a)(1). In addition, the organization can not have as its primary activity the holding, management, and investment of member funds. See Treas. Reg. § 1.501(c)(5)–1(b)(1). Nonetheless, a labor organization can hold and invest member funds to be used later in connection with the organization’s tax-exempt activities. See, e.g., Rev. Rul. 75–288, 1975–2 C.B. 212 (finding that dues held and used for a legal defense fund for an organization comprised of police officers furthered tax-exempt purposes) and Rev. Rul. 67–7, 1967–1 C.B. 137 (finding a separate organization controlled by a labor organization tax-exempt under § 501(c)(5) was also tax-exempt where its purpose was to maintain a strike and lockout fund).
- The most significant professional football league that is exempt under § 501(c)(6) is the National Football League (NFL). The NFL owners have an affiliated § 501(c)(3) organization named NFL Charities that, according to the organization’s most recent IRS Form 990, supports “programs and initiatives that deliver education and youth services, designates funds to assist the foundations of current and former players working in local communities, and awards sports related medical research grants that advance the body of knowledge of sports medicine for professional and recreational athletes.” In addition, the National Football League Players Association is a tax-exempt labor organization under § 501(c)(5). This brief NFL tax-exempt story is just an aside to demonstrate that the tax-exempt world is pervasive in the United States.
- Initial classification as a § 501(c)(4) also serves a rather quirky function because aspiring § 501(c)(3) organizations that do not apply for exempt status within the required period of time measured from the date of formation (15 months with a 12–month extension) can elect to be treated as an interim § 501(c)(4) organization from the date of formation until the date of the application for tax-exempt status. See IRS Form 1023, Schedule E. Classification first under § 501(c)(4) and then under § 501(c)(3) works because the tax-exempt status under (c)(4) is effective from the date of formation whereas the tax-exempt status under (c)(3) is effective only from the date of application. See IRC § 508(a)(2). From the date of application forward the organization can be treated as tax-exempt under § 501(c)(3).
- Section 501(c)(2) provides for tax-exempt status of a wholly owned corporation (subsidiary) of an organization (parent) exempt from income tax under one of the provisions contained in § 501(c). The exemption for the subsidiary under § 501(c)(2) applies only if the sole purpose of the subsidiary is to hold title to property, collect the income it produces, and pay over the proceeds (less expenses) to the parent organization. See IRC § 501(c)(2). The subsidiary corporation cannot accumulate the income. See Treas. Reg. § 1.501(c)(2)–1(b). Congress enacted this special rule to allow organizations to create a separate legal entity to limit the parent organization’s liability. This treatment makes sense because rental income, if earned directly by a tax-exempt
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Chapter IX. Tax on Unrelated Business Income and on Income From Debt–Financed Property 63 results (showing 5 best matches)
- At the core of the federal income tax on a tax-exempt organization’s unrelated trade or business income and on income from debt-financed property is a concern for equal treatment. See Treas. Reg. § 1.513–1(b). The for-profit world was concerned about unfair competition from tax-exempt organizations. The fear was that a tax-exempt organization might run a restaurant, a steel mill, or a railroad and gain an unfair competitive advantage by avoiding the payment of the federal corporate income tax. To level the playing field, Congress enacted these two taxes so that a tax-exempt organization would have to pay the same amount of corporate income tax on income it derived from a business operation not related to the organization’s exempt function or activities. This example, in very simple form, illustrates how the tax on unrelated business income works:
- First example: A tax-exempt organization buys an apartment building for $2 million. To buy the building, the organization pays $200,000 in cash and borrows the remaining $1.8 million from a bank. The first year, the building produces $100,000 in rental income. Assuming that the tax basis in the building is its cost of $2 million and that the organization has $1.8 million of acquisition indebtedness, then 90% of the $100,000 in rental income and 90% of the deductions connected with the rental activity are treated as unrelated business income and deductions. See IRC § 514(a)(1). Before enacting the debt-financing rules in 1969, Congress believed that tax-exempt organizations had a tax advantage over taxable entities because a tax-exempt organization could pay off the balance of the loan with income that was not subject to income tax. Recall that rental income is excluded from unrelated business
- Second example: A tax-exempt organization buys a building for $2 million to be used as a small dormitory for married students. The organization is a tax-exempt college. The organization pays $200, 000 in cash and borrows $1.8 million from the bank. The dormitory generates $100,000 in rental income. None of this rental income is unrelated business income under the debt-financed property rule because the entire building is used in connection with the organization’s exempt function—providing education to its students. See IRC § 514(b)(1)(A)(i).
- Bingo games have been a traditional form of fund-raising for tax-exempt organizations for a very long time. These games are excluded from treatment as an unrelated trade or business if 1) the activity meets the definition of bingo, 2) is legal in the jurisdiction where it is played, and 3) is carried on in jurisdictions in which bingo is not regularly carried on by for-profit organizations. See IRC § 513(f). Bingo is defined as a game in which wagers are placed, the winners are determined, and prizes (money or property) are distributed in the presence of those playing the game. See IRC § 513(f)(2). If a tax-exempt organization does not qualify for the exclusion in § 513(f) because of the presence of for-profit bingo within the jurisdiction, then the organization can still come within the volunteer exclusion if substantially all the activity of the bingo operation is conducted by volunteers. See Treas. Reg. § 1.513–4(b).
- Within the tax-exempt sector, an important source of revenue comes from affinity card programs where a credit card issuer enters into an agreement with a tax-exempt organization to market credit cards displaying the organization’s name and logo. IRS, in a substantial number of litigated cases, asserted that exploitation of an organization’s name and logo was unrelated to the organization’s exempt purpose. The courts agreed with IRS but ultimately concluded that the revenue generated was royalty income under § 512(b)(2). See, e.g., Oregon State University Alumni Ass’n, Inc. v. Commissioner, 193 F.3d 1098 (9th Cir. 1999) (holding that income from licensing the name and logo in the amount of about $300,000 per year was excluded royalty income).
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Chapter V. Private Foundations—A Subspecies of the § 501(c)(3) Organization 200 results (showing 5 best matches)
- As someone who works in or hopes to work in the tax-exempt world, you may be asking yourself whether the exceptionally technical determination of whether a § 501(c)(3) organization is a non-private foundation (public charity) has any practical application. Let me assure you that this is important. Every organization that aspires to be a tax-exempt organization under § 501(c)(3) must establish that it is a non-private foundation if it does not want to be classified as a private foundation. We will soon learn that the regulatory regime for private foundations is much worse than for non-private foundations.
- The total amount of support used in the denominator of the fraction to determine the application of the one-third support test and the not-more-than-one-third support test applies only to the organization’s normal sources of support over a five-year period that includes the current year and the preceding four years. See Temp. Treas. Reg. § 1.509(a)–3(c)(1)(i). For new organizations, the IRS will grant an advance ruling for the first five years if the organization can demonstrate in its application for tax-exempt status that the organization reasonably can be expected to meet the one-third support test and the not-more-than-one third
- The relevance of non-private foundation status first arises during the process of completing the IRS Form 1023 (application for § 501(c)(3) tax-exempt status). On Part X (Public Charity Status), an organization must indicate whether it is a private foundation or a public charity. The discussion in this chapter so far should have helped you gain a better understanding of what category is likely to apply to your organization. If your organization is claiming public charity status as a church, then it will have to complete Schedule A. If the organization is a school, then Schedule B must be completed. Schedule C applies to hospitals, and Schedule D applies to supporting organizations under § 509(a)(3).
- As we look at the universe of § 501(c)(3) organizations, we need to distinguish between private foundations and non-private foundations. The term “foundation” has a common dictionary definition denoting a charitable institution supported by a permanent fund that produces income for the institution’s operations. In contrast, the term “private foundation” is specifically defined in § 509 and, in general, refers to § 501(c)(3) organizations needing a higher level of regulation to prevent abuse of their tax-exempt status.
- In terms of public support, the United Way receives support from millions of contributors every year. This broad base of public support is supposed to insure that donors will monitor the United Way’s activities. The United Way of America is the umbrella organization of the many local United Way operations, which are separate organizations with their own tax-exempt status under § 501(c)(3). The United Way of America is a public charity because of the support it receives from the public. See IRC §§ 509(a)(1) & 170(b)(1)(A)(vi).
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Title Page 4 results
Copyright Page 3 results
- Nutshell Series, In a Nutshell
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Outline 91 results (showing 5 best matches)
Index 81 results (showing 5 best matches)
Advisory Board 12 results (showing 5 best matches)
- Professor of Law, Chancellor and Dean Emeritus, University of California, Hastings College of the Law
- Professor of Law, Michael E. Moritz College of Law,The Ohio State University
- Professor of Law, University of San Diego Professor of Law Emeritus, University of Michigan
- Professor of Law, Pepperdine University Professor of Law Emeritus, University of California, Los Angeles
- Professor of Law, Washington & Lee University School of Law
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Table of Cases 17 results (showing 5 best matches)
- Riley v. National Federation of the Blind of North Carolina, Inc., 487 U.S. 781, 108 S.Ct. 2667, 101 L.Ed.2d 669 (1988), 230
- Schaumburg, Village of v. Citizens for a Better Environment, 444 U.S. 620, 100 S.Ct. 826, 63 L.Ed.2d 73 (1980), 229
- Church of Visible Intelligence That Governs The Universe v. United States, 4 Cl.Ct. 55 (Cl.Ct.1983), 129
- St. Joseph Farms of Ind. Bros. of Congregation of Holy Cross, Southwest Province, Inc. v. Commissioner, 85 T.C. No. 2, 85 T.C. 9 (U.S.Tax Ct.1985), 278
- Brown v. Board of Ed. of Topeka, Shawnee County, Kan., 347 U.S. 483, 74 S.Ct. 686, 98 L.Ed. 873 (1954), 70
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Table of Internal Revenue Code Sections 147 results (showing 5 best matches)
- 507(a)(2)(A) ---------------------------------------- 186
- 509(a)(2)(A)(ii) ---------------------------------------- 152, 153
- 509(a)(3)(A) ---------------------------------------- 155
- 4946(a)(1)(A)---------------------------------------- 169
- 6050L(a)(2)(A)---------------------------------------- 212
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- Publication Date: August 12th, 2011
- ISBN: 9780314262349
- Subject: Taxation
- Series: Nutshells
- Type: Overviews
- Description: Taylor’s Tax-Exempt Organizations in a Nutshell provides a valuable introduction and foundation for those students taking classes that deal with the law of nonprofit organizations and the tax treatment of them. Special treatment is provided on charitable giving, fundraising, unrelated business income, and private foundations. Because of its focus on the law, this is a valuable introduction for nonprofit professionals who need a concise overview of the legal problems that nonprofit organizations routinely face.
