A practical guide to handling the challenges facing tax-exempt organizations, written by a leading authority
Tax Planning and Compliance for Tax-Exempt Organizations, Sixth Edition ensures that you have the practical knowledge to handle critical tax situations. This book provides guidance for the significant issues facing nonprofit organizations. It’s an essential guide to navigating the complexities of nonprofit tax rules and regulations. Packed with checklists and suggestions starting with Exhibit 1.1, Organizations Reference Chart and Exhibit 1.2, Suitability for Tax-Exempt Status, this guide helps anyone that creates, advises, or manages a nonprofit organization.
Now, you can better understand the requirements for various categories of tax-exempt organizations: public charities, private foundations, civic associations, business leagues, and social clubs, as well as title-holding companies and governmental entities. You’ll discover practical guidance on the issue of potentially owing income tax on revenue-producing enterprises. Clear explanations cover the many exceptions to taxability. Tax issues related to internet activity, advertising, publishing, services, and much more are all addressed in this tax planning guide designed specifically for nonprofit and tax-exempt nonprofit organizations.
- Use extensive quick checklists that cover tax-exempt eligibility, reporting to the IRS, and tax compliance
- Find detailed instructions for submitting a variety of exemption applications and tax forms
- See sample documents, such as organizational bylaws, letters of application, and completed IRS forms
- Refer to tools and practice aids, such as a comparison chart summarizing the differences between public and private charitable organizations
Written by one of the leading authorities in the field, the book also delves into recent tax law changes affecting nonprofits and other tax-exempt organizations. This indispensable guide can offer direction and support if you are challenged to successfully navigate the complex maze of nonprofit tax rules and regulations.
Table of Contents
List of Exhibits xiii
Preface xvii
About the Author xxiii
Acknowledgments xxv
Part I Qualifications of Tax-Exempt Organizations 1
Chapter 1 Distinguishing Characteristics of Tax-Exempt Organizations 3
1.1 Differences between Exempt and Nonexempt Organizations 10
1.2 Nomenclature 13
1.3 Ownership and Control 13
1.4 Role of the Internal Revenue Service 14
1.5 Suitability as an Exempt Organization 15
1.6 Start-Up Tax and Financial Considerations 18
1.7 Choosing the Best Form of Organization 22
Chapter 2 Qualifying Under IRC §501(c)(3) 27
2.1 Organizational Test 29
2.2 Operational Test 36
Chapter 3 Religious Organizations 59
3.1 Types of Religious Organizations 60
3.2 Churches 65
3.3 Religious Orders 72
3.4 Religious and Apostolic Associations 73
Chapter 4 Charitable Organizations 75
4.1 Relief of the Poor 77
4.2 Promotion of Social Welfare 79
4.3 Lessening the Burdens of Government 88
4.4 Advancement of Religion 91
4.5 Advancement of Education and Science 91
4.6 Promotion of Health 92
4.7 Cooperative Hospital Service Organizations 116
Chapter 5 Educational, Scientific, and Literary Purposes and Prevention of Cruelty to Children and Animals 118
5.1 Educational Purposes 119
5.2 Literary Purposes 134
5.3 Scientific Purposes 134
5.4 Testing for Public Safety 139
5.5 Fostering National or International Amateur Sports Competition (But Only If No Part of Its Activities Involves the Provision of Athletic Facilities or Equipment) 140
5.6 Prevention of Cruelty to Children or Animals 141
Chapter 6 Civic Leagues and Local Associations of Employees: §501(c)(4) 143
6.1 Comparison of (c)(3) and (c)(4) Organizations 145
6.2 Qualifying and Nonqualifying Civic Organizations 151
6.3 Local Associations of Employees 155
6.4 Neighborhood and Homeowner’s Associations 157
6.5 Disclosures of Nondeductibility 160
Chapter 7 Labor, Agricultural, and Horticultural Organizations: §501(c)(5) 169
7.1 Labor Unions 170
7.2 Agricultural Groups 175
7.3 Horticultural Groups 178
7.4 Disclosures of Nondeductibility 179
Chapter 8 Business Leagues: §501(c)(6) 180
8.1 Basic Characteristics 181
8.2 Meaning of “Common Business Interest” 181
8.3 Line of Business 183
8.4 Rendering Services for Members 186
8.5 Sources of Revenue 192
8.6 Membership Categories 193
8.7 Member Inurement 194
8.8 Chambers of Commerce and Boards of Trade 195
8.9 Comparison to §501(c)(5) 195
8.10 Recognition of Exempt Status 196
8.11 Formation of a Related Charitable Organization 197
8.12 Disclosures for Lobbying and Nondeductibility 199
Chapter 9 Social Clubs: §501(c)(7) 200
9.1 Organizational Requirements and Characteristics 202
9.2 Member Inurement Prohibited 205
9.3 Membership Requirements 207
9.4 Revenue Tests 208
9.5 Unrelated Business Income Tax 211
9.6 Filing and Disclosure Requirements 217
Chapter 10 Instrumentalities of Government and Title-Holding Corporations 218
10.1 §501(c)(1) Instrumentalities of the United States 218
10.2 Governmental Units 219
10.3 Qualifying for §501(c)(3) Status 223
10.4 §501(c)(2) Title-Holding Corporations 235
10.5 §501(c)(25) Title-Holding Corporations 239
Chapter 11 Public Charities 241
11.1 Distinctions between Public and Private Charities 242
11.2 “Inherently Public Activity” and Broad Public Support: §509(a)(1) 245
11.3 Community Foundations 259
11.4 Service-Providing Organizations: §509(a)(2) 268
11.5 Difference Between §509(a)(1) and §509(a)(2) 270
11.6 Supporting Organizations: §509(a)(3) 282
11.7 Testing for Public Safety: §509(a)(4) 296
Part II Standards For Private Foundations 297
Chapter 12 Private Foundations - General Concepts 299
12.1 Why Private Foundations Are Special 299
12.2 Special Rules Pertaining to Private Foundations 302
12.3 Application of Taxes to Certain Nonexempt Trusts 310
12.4 Termination of Private Foundation Status 311
Appendix 12-1: Brief Description of Tax Sanctions Applicable to Private Foundations 335
Excise Tax on Investment Income - §4940 Tax 335
Chapter 13 Excise Tax Based on Investment Income: IRC §4940 339
13.1 Formula for Taxable Income 341
13.2 Capital Gains 348
13.3 Ponzi Scheme Losses 354
13.4 Deductions from Gross Investment Income 356
13.5 Tax-Planning Ideas 361
13.6 Foreign Foundations 365
13.7 Timely Payment of Excise Tax 367
13.8 Tax on Private Colleges and Universities 368
13.9 Exempt Operating Foundations 369
Chapter 14 Self-Dealing: IRC §4941 370
14.1 Definition of Self-Dealing 371
14.2 Sale, Exchange, or Lease of Property 374
14.3 Loans 384
14.4 Compensation 387
14.5 Transactions that Benefit Disqualified Persons 399
14.6 Payments to Government Officials 406
14.7 Sharing Space, People, and Expenses 407
14.8 Indirect Deals 410
14.9 Property Held by Fiduciaries 412
14.10 Issues Once Self-Dealing Occurs 415
Chapter 15 Minimum Distribution Requirements: IRC §4942 420
15.1 Assets Used to Calculate Minimum Investment Return 422
15.2 Measuring Fair Market Value 428
15.3 Distributable Amount 435
15.4 Qualifying Distributions 438
15.5 Private Operating Foundations 455
15.6 Satisfying the Distribution Test 464
Chapter 16 Excess Business Holdings and Jeopardizing Investments: IRC §§4943 and 4944 471
16.1 Excess Business Holdings 471
16.2 Jeopardizing Investments 480
16.3 Program-Related Investments 487
16.4 Penalty Taxes 492
Chapter 17 Taxable Expenditures: IRC §4945 498
17.1 Lobbying 500
17.2 Voter Registration Drives 506
17.3 Grants to Individuals 506
17.4 Grants to Public Charities 519
17.5 Grants to Foreign Organizations 530
17.6 Expenditure Responsibility Grants 532
17.7 Noncharitable Expenditures 546
17.8 Excise Taxes Payable 547
Appendix 17-1: Examples of Emergency, Hardship Grant Application, Church and Foreign Equivalency Grants 549
Part III Obtaining and Maintaining Tax-Exempt Status 583
Chapter 18 IRS Filings, Procedures, and Policies 585
18.1 IRS Determination Process 586
18.2 Annual Filing of Forms 990 595
18.3 Reporting Organizational Changes to the IRS 607
18.4 Weathering an IRS Examination 613
18.5 When an Organization Loses Its Tax-Exempt Status 618
Chapter 19 Maintaining Exempt Status 620
19.1 Checklists 620
Chapter 20 Private Inurement and Intermediate Sanctions 643
20.1 Defining Inurement 646
20.2 Salaries and Other Compensation 648
20.3 Setting Salary 650
20.4 Housing and Meals 652
20.5 Purchase, Lease, or Sale of Property or Services 653
20.6 Loans and Guarantees 654
20.7 For-Profit to Nonprofit and Vice Versa 655
20.8 Services Rendered for Individuals 656
20.9 Joint Ventures 658
20.10 Intermediate Sanctions 659
Chapter 21 Unrelated Business Income 671
21.1 IRS Scrutiny of Unrelated Business Income 673
21.2 History of the Unrelated Business Income Tax 674
21.3 Consequences of Receiving UBI 675
21.4 Definition of Trade or Business 677
21.5 What is Unrelated Business Income? 680
21.6 “Regularly Carried On” 681
21.7 “Substantially Related” 683
21.8 Unrelated Activities 688
21.9 The Exceptions 710
21.10 Income Modifications 717
21.11 Calculating and Minimizing Taxable Income 727
21.12 Debt-Financed Property 736
21.13 Museums 743
21.14 Travel Tours 745
21.15 Publishing 746
Chapter 22 Relationships with Other Organizations and Businesses 750
22.1 Creation of (c)(3) by (c)(4), (5), or (6) 751
22.2 Alliances with Investors 755
22.3 Creation of a For-Profit Corporate Subsidiary 759
22.4 Active Business Relationships 762
Chapter 23 Electioneering and Lobbying 765
23.1 Election Campaign Involvement 766
23.2 Voter Education versus Candidate Promotion 772
23.3 Tax on Political Expenditures 777
23.4 Lobbying Activity of §501(c)(3) Organizations 786
23.5 Permissible Amounts of Lobbying 793
23.6 Lobbying Limits for §501(c)(4), (5), (6), and Other Exempt Organizations 796
23.7 Advocacy and Nonpartisan Analysis 797
Chapter 24 Deductibility and Disclosures 799
24.1 Overview of Deductibility 800
24.2 The Substantiation and Quid Pro Quo Rules 812
24.3 Valuing Donor Benefits 820
24.4 Unrelated Business Income Aspects of Fund-Raising 824
24.5 State and Local Regulations 825
Chapter 25 Employment Taxes 826
25.1 Distinctions Between Employees and Independent Contractors 828
25.2 Ministers 835
25.3 Reporting Requirements 839
Chapter 26 Mergers, Bankruptcies, and Terminations 844
26.1 Mergers and Other Combinations 844
26.2 Bankruptcy 849
26.3 Terminations 852
Table of Cases 855
Table of IRS Revenue Rulings 867
Table of IRS Procedures 873
Index 875
