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The Law of Tax-Exempt Organizations

by: Hopkins, Bruce R.

The Law of Tax-Exempt Organizations

by: Hopkins, Bruce R.

ISBN 13:
9781118363072
ISBN 10:
1118363078
Edition: 10th
Format: Paperback
Copyright: 04/01/2013
Publisher: Wiley

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The Law of Tax-Exempt Organizations > ISBN13: 9781118363072

Summary

Nonprofit organizations are subject to a complex set of regulations and laws. Written in plain English, this book keeps tax-exempt organizations up-to-date on all current regulations pertaining to tax-exempt organizations. It ensures professionals are well-prepared to make decisions about their organizations actions and future and is a definitive one-volume source of information on federal laws by the leading legal authority in the nonprofit sector. This guide is supplemented annually to keep the lawyers and managers of nonprofit organizations on top of the latest nonprofit legal and tax developments.

About the Online Resources xiii

About the Author xv

Preface xvii

Book Citations xix

PART ONE INTRODUCTION TO THE LAW OF TAX-EXEMPT ORGANIZATIONS 1

1 Definition of and Rationales for Tax-Exempt Organizations 3

§ 1.2 Definition of Tax-Exempt Organization 3

§ 1.7 Freedom of Association Doctrine 4

2 Overview of Nonprofit Sector and Tax-Exempt Organizations 5

§ 2.1 Profile of Nonprofit Sector 5

§ 2.2 Organization of the IRS 6

(b) Tax-Exempt and Government Entities Division 6

PART TWO FUNDAMENTALS OF THE LAW OF TAX-EXEMPT ORGANIZATIONS 7

3 Source, Advantages, and Disadvantages of Tax Exemption 9

§ 3.2 Recognition of Tax Exemption 9

§ 3.2A Recognition of Public Charity, Private Foundation Status 9

4 Organizational, Operational, and Related Tests and Doctrines 11

§ 4.3 Organizational Test 11

(a) Statement of Purposes 11

(b) Dissolution Requirements 11

§ 4.4 Primary Purpose Test 12

§ 4.5 Operational Test 12

(a) Basic Rules 12

§ 4.6 Exclusively Standard 13

§ 4.7 Commensurate Test 13

(a) Application of Commensurate Test 13

(b) Charitable Spending Initiative 14

§ 4.7A Consideration of Organizations’ Names (New) 14

§ 4.8 State Action Doctrine 15

(a) Doctrine in General 15

(b) Doctrine as Applied to Social Clubs 19

(d) Statutory Law 21

§ 4.10 Commerciality Doctrine 21

(a) Origin of Doctrine 21

(b) Contemporary Application of Doctrine 22

§ 4.11 Social Enterprise Developments (New) 23

(a) Concept of Social Enterprise 23

(b) Program-Related Investments 24

(d) B Corporations 25

(e) Benefit Corporations 25

(f) Flexible Purpose Corporations 25

5 Nonprofit Governance 27

§ 5.7 IRS and Governance 27

(b) IRS Ruling Policy 28

PART THREE TAX-EXEMPT CHARITABLE ORGANIZATIONS 31

6 Concept of Charitable 33

§ 6.2 Public Policy Doctrine 33

(a) General Principles 33

(d) Other Forms of Discrimination 33

(e) Affirmative Action Principles 34

§ 6.3 Charitable Concepts 34

(a) Requirements of Charitable Cases 34

(i) Illegal Activities 34

(j) Tax Exemption Does Not Create Contract 35

(m) Tax Exemption Does Not Create Charitable Trust 35

7 Charitable Organizations 37

§ 7.3 Credit Counseling 37

(d) Statutory Criteria for Exemption 37

§ 7.4 Provision of Housing 38

§ 7.6 Promotion of Health 38

(a) Hospitals 39

(b) Additional Statutory Requirements for Hospitals 39

(i) Fitness Centers 40

(j) Other Health Care Organizations 41

(k) Regional Health Information Organizations 41

(l) Health Insurance Exchanges (New) 41

(m) Accountable Care Organizations (New) 43

§ 7.7 Lessening Burdens of Government 48

§ 7.11 Promotion of Social Welfare 48

§ 7.15 Other Categories of Charity 48

(a) Environmental Protection 48

(d) Public Interest Law 49

(e) Local Economic Development 49

8 Educational Organizations 51

§ 8.1 Federal Tax Law Definition of Educational 51

§ 8.2 Education Contrasted with Propaganda 51

§ 8.3 Educational Institutions 51

(a) Schools, Colleges, and Universities 51

§ 8.4 Instruction of Individuals 51

9 Scientific Organizations 53

§ 9.1 Federal Tax Laws Definition of Science 53

§ 9.2 Concept of Research 53

10 Religious Organizations 55

§ 10.1 Constitutional Law Framework 55

(a) General Constitution Law Principles 55

(b) Constitutional Law and Tax Exemption 55

§ 10.3 Churches and Similar Institutions 56

(a) General Principles 56

(b) Associational Test 56

§ 10.5A Mission Societies (New) 58

§ 10.7 Apostolic Organizations 58

11 Other Charitable Organizations 59

§ 11.2 Amateur Sports Organizations 59

§ 11.7 Literary Organizations 59

§ 11.8 Donor-Advised Funds 60

(a) Donor-Advised Fund Basics 60

(b) Statutory Criteria 60

(d) Congressional Research Service Report (New) 61

12 Public Charities and Private Foundations 65

§ 12.3 Categories of Public Charities 65

PART FOUR OTHER TAX-EXEMPT ORGANIZATIONS 67

13 Social Welfare Organizations 69

§ 13.1 Concept of Social Welfare 69

(b) Benefits to Members 69

§ 13.2 Requirements of Community 69

(a) Community and Condominium Associations 69

14 Business Leagues and Like Organizations 71

§ 14.1 Concept of Business League 71

(a) General Principles 71

§ 14.2 Disqualifying Activities 72

(a) Line-of-Business Requirements 72

(b) For-Profit Business Activities 72

15 Social Clubs 75

§ 15.1 Social Clubs in General 75

(b) Club Functions 75

§ 15.6 Sale of Club Assets 75

16 Labor, Agricultural, and Horticultural Organizations 77

§ 16.1 Labor Organizations 77

18 Employee Benefit Funds 79

§ 18.3 Voluntary Employees’ Beneficiary Association 79

19 Other Tax-Exempt Organizations 81

§ 19.1 Instrumentalities of United States 81

§ 19.2 Title-Holding Corporations 81

(b) Multiple-Parent Organizations 81

§ 19.3 Local Associations of Employees 82

§ 19.4 Fraternal Organizations 82

(b) Domestic Fraternal Societies 82

§ 19.5 Benevolent or Mutual Organizations 82

(b) Mutual Organizations 82

§ 19.7 Credit Unions 82

§ 19.11 Veterans’ Organizations 83

(a) General Rules 83

§ 19.17 Railroad Retirement Investment Trust 83

§ 19.18 Qualified Health Insurance Issuers 83

§ 19.19 Qualified Tuition Programs 84

(a) State-Sponsored Programs 84

(b) Educational Institution-Sponsored Programs 84

§ 19.21 Governmental and Quasi-Governmental Entities 84

(b) Income Exclusion Rule 84

PART FIVE PRINCIPAL EXEMPT ORGANIZATION LAWS 87

20 Private Inurement and Private Benefit 89

§ 20.3 Definition of Insider 89

§ 20.4 Compensation Issues 89

(a) Meaning of Compensation 89

(b) Determining Reasonableness of Compensation 90

§ 20.5 Other Forms of Private Inurement 90

(h) Services Rendered 90

(j) Retained Interests 90

(j-l) Business Referral Operations (New) 90

(k) Embezzlement 91

§ 20.8 Private Inurement and Social Welfare Organizations 91

§ 20.9 Private Inurement and Business Leagues 91

§ 20.10 Private Inurement and Social Clubs 92

§ 20.11 Private Benefit Doctrine 92

(a) General Rules 92

(b) Incidental Private Benefit 93

(d) Perspective 93

21 Intermediate Sanctions 95

§ 21.2 Tax-Exempt Organizations Involved 95

§ 21.3 Disqualified Persons 95

§ 21.4 Transactions Involved 95

(a) General Rules 95

(f) Scholarships and Similar Grants 96

§ 21.6 Intermediaries 96

§ 21.7 For the Use of Transactions 96

§ 21.13 Indemnification and Insurance 96

22 Legislative Activities by Tax-Exempt Organizations 97

§ 22.3 Lobbying by Charitable Organizations 97

(b) Concept of Lobbying 97

(d) Expenditure Test 97

§ 22.6 Legislative Activities of Business Leagues 98

(a) Business Expense Deduction Disallowance Rules 98

§ 22.7 Legislative Activities of Other Tax-Exempt Organizations 98

§ 22.9 Constitutional Law Framework 98

23 Political Campaign Activities by Tax-Exempt Organizations 99

§ 23.2 Prohibition on Charitable Organizations 99

(b) Participation or Intervention 99

§ 23.3 Political Campaign Expenditures and Tax Sanctions 100

§ 23.5 Political Activities of Social Welfare Organizations 100

(b) Political Campaign Activities 100

§ 23.8 Political Activities by Other Exempt Organizations 100

§ 23.9 Advocacy Communications 100

24 Unrelated Business Activities 101

§ 24.2 Definition of Trade or Business 101

(a) General Principles 101

(b) Requirement of Profit Motive 102

(g) Nonbusiness Activities 102

(h) Real Estate Development Activities 102

§ 24.3 Definition of Regularly Carried On 102

(d) Preparatory Time 102

§ 24.4 Definition of Substantially Related 103

(f) Related Business Activities 103

§ 24.5 Contemporary Applications of Unrelated Business Rules 103

(a) Educational Institutions 103

(b) Health Care Providers 104

(e) Business Leagues 105

(h) Advertising 105

(i) Fundraising 106

(k) Provision of Services 107

(l) Sales of Merchandise 107

§ 24.6 Modifications 107

(g) Royalties 107

(h) Rent 107

§ 24.7 Exceptions 108

(j) Low-Cost Articles 108

(k) Mailing Lists 108

(l) Associate Member Dues 108

(m) Small Business Corporations Rules 108

§ 24.10 Special Rules 108

§ 24.12 Unrelated Debt-Financed Income 109

(b) Debt-Financed Property 109

(d) Exempt Function Borrowing (New) 110

PART SIX ACQUISITION ANDMAINTENANCE OF TAX EXEMPTION 111

25 Exemption Recognition and Notice Processes 113

§ 25.1 Recognition Application Procedure 113

(a) General Procedures 114

(b) Substantially Completed Application 115

(d) User Fees 116

(e) Application Form 116

(i) Impact of Tax Refunds 116

§ 25.2 Requirements for Charitable Organizations 117

(a) General Rules 117

§ 25.3 Nonprivate Foundation Status 117

(a) Notice Requirement 117

§ 25.5 Requirements for Certain Employee Benefit Organizations 117

§ 25.5A Requirements for Certain Prepaid Tuition Plans (New) 117

§ 25.6 Requirements for Certain Health Insurance Issuers 118

§ 25.7 Group Exemption Rules 118

§ 25.8 Suspension of Tax Exemption 120

§ 25.9 Notice Requirements for Political Organizations 120

§ 25.11 Forfeiture of Tax Exemption 120

26 Administrative and Litigation Procedures 123

§ 26.1 Administrative ProceduresWhere Recognition Denied 123

§ 26.2 Revocation of Modification of Tax-Exempt Status: Administrative Procedures 123

§ 26.3 Retroactive Revocation of Tax-Exempt Status 124

§ 26.5 Revocation of Tax-Exempt Status: Litigation Procedures 124

(a) General Rules 124

(b) Declaratory Judgment Rules 126

§ 26.6 IRS Examination Procedures and Practices 126

(a) General IRS Exempt Organizations Audit Procedures and Practices 126

§ 26.6A Compliance Checks (New) 127

§ 26.7 Fast-Track Case Settlement Program 127

§ 26.8 IRS Disclosure to State Officials 127

27 Operational Requirements 129

§ 27.1 Changes in Operations or Form 129

(a) Changes in Operations 129

§ 27.2 Annual Reporting Rules 129

(a) Overview of Annual Information Returns 129

(b) Exceptions to Reporting Requirements 130

(d) Group Returns 131

§ 27.3 Redesigned Annual Information Returns 131

(o) Schedule H 132

(x) Transition Rules 132

(y) Uncertain Tax Positions (New) 132

(z) Preparer Tax Identification Numbers (New) 134

§ 27.4 Notification Requirement 134

§ 27.5 Filing Requirements and Tax-Exempt Status 135

§ 27.5A Charitable Organizations Listing Reliance Rules (New) 136

§ 27.7 Electronic Filing Rules 138

§ 27.9 IRS Document Disclosure Rules 138

(a) Federal Tax Law Disclosure Requirements 138

§ 27.10 Document Disclosure Obligations of Exempt Organizations 138

(a) General Rules 138

(f) Harassment Campaign Exception 139

§ 27.13 Insurance Activities 139

(b) Commercial-Type Insurance Rules 139

§ 27.14 Feeder Organizations 139

§ 27.15 Tax-Exempt Entity Leasing Rules 139

(g) Partnership Arrangements 139

PART SEVEN INTERORGANIZATIONAL STRUCTURES AND OPERATIONAL FORMS 141

28 Tax-Exempt Organizations and Exempt Subsidiaries 143

§ 28.1 Subsidiaries Basics 143

§ 28.3 Tax-Exempt Subsidiaries of Charitable Organizations 144

§ 28.5 Contributions and Other Payments 144

29 Tax-Exempt Organizations and For-Profit Subsidiaries 145

§ 29.1 For-Profit Subsidiaries in General 145

(b) Choice of Form 145

§ 29.2 Potential of Attribution to Parent 145

§ 29.3 Financial Considerations 146

§ 29.7D Temporary Rule 146

§ 29.8 Liquidations 147

31 Tax-Exempt Organizations: Other Operations and Restructuring 149

§ 31.1 Organizational Considerations 149

(a) Form 149

§ 31.2 Operational Considerations 150

(a) Expenses 150

§ 31.3 Mergers 150

§ 31.3A Reorganizations (New) 150

§ 31.6 Single-Member Limited Liability Companies 151

§ 31.7 Low-Profit Limited Liability Companies 152

§ 31.8 Choice of Entity Considerations 152

(b) Federal Tax Law 152

PART EIGHT APPENDIXES 153

Appendix A Sources of Tax-Exempt Organizations Law 155

Appendix B Internal Revenue Code Sections 157

Cumulative Index 159

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