Table of Contents
About the Author xv
Preface xvii
About the Online Resources xix
Book Citations xxi
Part One: Introduction to the Law of Tax-Exempt Organizations
1 Definition of and Rationales for Tax-Exempt Organizations 3
§ 1.1 Definition of Nonprofit Organization 3
(a) Nonprofit Organization Defined 3
2 Overview of Nonprofit Sector and Tax-Exempt Organizations 5
§ 2.1 Profile of Nonprofit Sector 5
§ 2.2 Organization of IRS 7
(a) IRS in General 7
(b) Tax Exempt and Government Entities Division 8
Part Two: Fundamentals of the Law Of Tax-Exempt Organizations
3 Tax Exemption: Source and Recognition 11
§ 3.2 Recognition of Tax Exemption 11
(a) General Rules 11
§ 3.3 Recognition of Public Charity, Private Foundation Status 11
4 Organizational, Operational, and Related Tests and Doctrines 13
§ 4.1 Forms of Tax-Exempt Organizations 13
(a) General Rules 13
§ 4.7 Commensurate Test 13
§ 4.9 Commerciality Doctrine 13
(e) Other Applications of Doctrine 13
(f) Elements of Commerciality 14
(g) IRS Ruling Policy 14
5 Nonprofit Governance 17
§ 5.3 Board Duties and Responsibilities 17
(a) Duty of Care 17
(b) Duty of Loyalty 18
(c) Duty of Obedience 18
§ 5.7 IRS and Governance 18
(c) IRS Ruling Policy 18
Part Three: Tax-Exempt Charitable Organizations
6 Concept of Charitable 21
§ 6.2 Public Policy Doctrine 21
(b) Race-Based Discrimination 21
§ 6.3 Collateral Concepts 21
(a) Requirement of Charitable Class 21
(i) Illegal Activities 22
7 Charitable Organizations 23
§ 7.2 Relief of Distressed 23
(b) Disaster Relief Programs 23
§ 7.4 Provision of Housing 28
§ 7.6 Promotion of Health 28
(a) Hospital Law in General 28
(b) Additional Statutory Requirements for Hospitals 28
§ 7.8 Advancement of Education 28
§ 7.14 Fundraising Organizations 29
(c) Other Exemption Issues 29
§ 7.15 Instrumentalities of Government 29
§ 7.17 Qualified Opportunity Zones 30
8 Educational Organizations 33
§ 8.1 Federal Tax Law Definition of Educational 33
§ 8.3 Educational Institutions 33
(a) Schools, Colleges, and Universities 33
§ 8.4 Instruction of Individuals 34
§ 8.5 Instruction of Public 34
9 Scientific Organizations 35
§ 9.2 Concept of Research 35
10 Religious Organizations 37
§ 10.1 Constitutional Law Framework 37
(a) General Constitutional Law Principles 37
(c) Internal Revenue Code Provisions 38
§ 10.2 Federal Tax Law Definition of Religion 38
(c) Abuse of Tax Exemption 38
§ 10.3 Churches and Similar Institutions 38
(c) Principle of Respect for Autonomy 38
§ 10.5 Integrated Auxiliaries of Churches 38
§ 10.7 Religious Orders 38
11 Other Types of Charitable Organizations 41
§ 11.2 Amateur Sports Organizations 41
§ 11.8 Donor-Advised Funds 41
(c) Portrait of Donor-Advised Fund Universe 41
§ 11.9 Endowment Funds 43
(b) College and University Endowment Tax 43
12 Public Charities and Private Foundations 47
§ 12.1 Federal Tax Law Definition of Private Foundation 47
(a) Private Foundation Defined 47
§ 12.3 Categories of Public Charities 47
(b) Publicly Supported Charities 47
(c) Supporting Organizations 48
§ 12.4 Private Foundation Rules 48
(f) Other Provisions 48
Part Four: Other Tax-Exempt Organizations
13 Social Welfare Organizations 51
§ 13.1 Concept of Social Welfare 51
(b) Benefits to Members 51
§ 13.3 Conduct of Business 51
14 Business Leagues and Similar Organizations 53
§ 14.1 Concept of Business League 53
(a) General Principles 53
(g) Certification Programs 53
§ 14.2 Disqualifying Activities 54
(a) Line-of-Business Requirement 54
(c) Performance of Particular Services 54
(d) Private Inurement 55
(d-1) Private Benefit 55
15 Social Clubs 57
§ 15.1 Social Clubs in General 57
(b) Club Functions 57
§ 15.4 Exceptions to Limitations 57
§ 15.5 Taxation of Social Clubs 57
16 Labor, Agricultural, and Horticultural Organizations 59
§ 16.2 Agricultural Organizations 59
17 Political Organizations 61
§ 17.4 Public Policy Advocacy Activities 61
18 Employee Benefit Funds 63
§ 18.3 Voluntary Employees’ Beneficiary Associations 63
19 Other Categories of Tax-Exempt Organizations 65
§ 19.12 Farmers’ Cooperatives 65
§ 19.18 Qualified Health Insurance Issuers 65
§ 19.20 ABLE Programs 65
§ 19.22 Governmental and Quasi-Governmental Entities 66
(a) Intergovernmental Immunity 66
(b) Income Exclusion Rule 66
(c) Integral Parts of States 67
Part Five: Principal Exempt Organization Laws
20 Private Inurement and Private Benefit Doctrines 71
§ 20.4 Compensation Issues 71
(b) Determining Reasonableness of Compensation 71
§ 20.5 Executive Compensation Tax 71
(a) Statutory Law 71
(b) Perspectives 72
(c) Proposed Regulations 72
(d) TIGTA Examination 76
§ 20.6 Other Forms of Private Inurement 77
(a) Rental Arrangements 77
(b) Lending Arrangements 77
(e) Equity Distributions 78
(h) Tax Avoidance Schemes 78
(i) Services Rendered 78
(j) Business Referral Operations 78
(m-1) Successors to For-Profit Companies 79
§ 20.12 Private Inurement and Other Categories of Exempt Organizations 79
§ 20.13 Private Benefit Doctrine 80
(a) General Rules 80
(c) Joint Venture Law 81
(d) Perspective 81
21 Intermediate Sanctions 83
§ 21.4 Transactions Involved 83
(c) Automatic Excess Benefit Transactions in General 83
§ 21.16 Interrelationship with Private Inurement Doctrine 83
22 Legislative Activities by Tax-Exempt Organizations 85
§ 22.3 Lobbying by Charitable Organizations 85
(b) Concept of Lobbying 85
(c) Substantial Part Test 85
23 Political Campaign Activities by Tax-Exempt Organizations 87
§ 23.2 Prohibition on Charitable Organizations 87
(b) Participation or Intervention 87
§ 23.3 Political Campaign Expenditures and Tax Sanctions 87
§ 23.6 Political Activities of Social Welfare Organizations 87
(a) Allowable Campaign Activity 88
24 Unrelated Business: Basic Rules 89
§ 24.2 Definition of Trade or Business 89
(j) Concept of Investment Plus 89
§ 24.3 Definition of Regularly Carried On 89
(a) General Principles 89
(b) Determining Regularity 89
§ 24.4A Deemed Unrelated Business Income 90
§ 24.5 Contemporary Applications of Unrelated Business Rules 90
(q) Other Organizations’ Exempt Functions 90
§ 24.9 Unrelated Debt-Financed Income 90
(c) Acquisition Indebtedness 90
(d) Exempt Function Borrowing 91
(e) Administrative Needs Borrowing 92
25 Unrelated Business: Modifications, Exceptions, Special Rules, and Taxation 93
§ 25.1 Modifications 93
(g) Royalties 93
(h) Rent 93
(l-1) Income from Subsidiaries 94
(n-1) Global Intangible Low-Taxed Income 94
§ 25.2 Exceptions 95
(a) Volunteer-Conducted Businesses 95
(b) Convenience Businesses 95
(c) Sales of Gift Items 95
(h) Gambling 96
§ 25.3 Special Rules 96
§ 25.4 Fringe Benefit Rules 97
§ 25.5 “Bucketing” Rule 97
(a) Statutory Law 97
(b) Final Regulations 97
(c) Medical Marijuana Dispensary Cases 101
§ 25.7 Deduction Rules 102
(a) General Rules 102
(b) Charitable Deduction 103
(c) Specific Deduction 103
(d) Net Operating Losses 103
Part Six: Acquisition and Maintenance of Tax Exemption
26 Exemption Recognition and Notice Processes 107
§ 26.1 Recognition Application Procedure 107
(a) Introduction 107
(b) General Procedures 108
(c) Completed Application 109
(d) User Fees 110
(e) Penalties for Perjury 110
(g) Streamlined Application 110
(h) Reliance on Determination Letters 110
(i) Post-Determination Review 111
§ 26.3 Nonprivate Foundation Status 111
(a) Notice Requirement 111
§ 26.4 Requirements for Social Welfare Organizations 111
§ 26.10 Rules for Other Categories of Organizations 111
§ 26.10A Determination Letter Requests on Form 8940 112
(a) General Rules 112
(b) Changes in Public Charity/Private Foundation Status 112
§ 26.10B Withdrawal of Request for Determination Letter 113
§ 26.11 Group Exemption Rules 114
(a) General Rules 114
(b) Advantages and Disadvantages of Group Exemption 114
(c) Proposed Revised Procedures 114
§ 26.12 Suspension of Tax Exemption 118
§ 26.13 Notice Requirements for Social Welfare Organizations 119
§ 26.14 Notice Requirements for Political Organizations 119
§ 26.16 Forfeiture of Tax Exemption 119
§ 26.17 Constitutional Law Aspects of Process 119
27 Administrative and Litigation Procedures 121
§ 27.1 Administrative Procedures Where Recognition Denied 121
(a) Requests Receiving Appeals Office Consideration 121
(b) Matters Not Receiving Appeals Office Consideration 122
§ 27.3 Retroactive Revocation of Tax-Exempt Status 122
§ 27.5 Revocation of Tax-Exempt Status: Litigation Procedures 123
(a) General Rules 123
(b) Declaratory Judgment Rules 123
§ 27.6 IRS Examination Procedures and Practices 124
(b) IRS Exempt Organizations Examination Guidelines 124
(c) Church Audits 126
§ 27.9 IRS Disclosure to State Officials 126
28 Operational Requirements 127
§ 28.1 Changes in Operations or Form 127
(a) Changes in Operations 127
§ 28.2 Annual Reporting Rules 127
(a) Overview of Annual Information Returns 128
(b) Content of Annual Information Returns 128
(c) Exceptions to Reporting Requirements 131
(e) Group Returns 132
§ 28.5 Filing Requirements and Tax-Exempt Status 132
§ 28.5A Pre-Revocation Notice by IRS 132
§ 28.8 Electronic Filing Rules 133
(d) Law Revision in 2020 133
§ 28.9 Unrelated Business Income Tax Returns 133
§ 28.10 IRS Document Disclosure Rules 134
(a) Federal Tax Law Disclosure Requirements 134
§ 28.11 Document Disclosure Obligations of Exempt Organizations 134
(a) General Rules 134
(d) Failure to Comply 134
(i) Donor Information Disclosure 134
§ 28.14 Insurance Activities 139
(b) Commercial-Type Insurance Rules 139
§ 28.17 Tax-Exempt Organizations and Tax Shelters 139
§ 28.17 International Grantmaking Requirements 140
(a) Charitable Organizations Generally 140
(b) Private Foundations 140
(c) Anti-Terrorist Financing Guidelines 141
§ 28.18 Recordkeeping Requirements 141
28A Tax-Exempt Organizations and Tax Shelters 143
§ 28A.1 Concept of Tax Shelter 144
§ 28A.2 Judicial Doctrines 145
(a) Sham Transaction Doctrine 145
(b) Economic Substance Doctrine 146
(c) Business Purpose Doctrine 146
(d) Substance-over-Form Doctrine 146
(e) Step Transaction Doctrine 147
(f) Countervailing Case Law 148
§ 28A.3 Tax Shelter Law in General 149
(a) IRS’s Office of Tax Shelter Analysis 149
(b) Other IRS Initiatives 149
(c) Reportable Transactions 150
(d) Participation in Reportable Transactions 151
(e) Participant Disclosure Requirements 151
(f) Material Advisor Disclosures 152
(g) Material Advisors Lists Requirements 153
(h) Abusive Tax Shelter Promotion Penalty 153
(i) Other Tax Shelter Penalties 154
§ 28A.4 Exempt Organizations and Tax Shelter Penalties 155
§ 28A.5 Exempt Organizations’ Involvement in Shelters 156
(a) Transfers of Incidence of Taxation 156
(b) Abuse of Corporations Sole 158
(c) A Disputed Tax Shelter 159
(d) Overvaluation Is Often Key Issue 161
(e) “Charitable Giving” Plan Failed 161
(f) Syndicated Conservation Easements 163
(g) Donor-Advised Funds 164
(h) Patient Assistance Programs 164
(i) Other Tax Shelters in Exempt Organizations Context 165
§ 28A.6 GAO Findings and Recommendations 166
§ 28A.7 “Dirty Dozen” Listings 167
Part Seven: Interorganizational Structures and Operational Forms
29 Tax-Exempt Organizations and Exempt Subsidiaries 171
§ 29.3 Tax-Exempt Subsidiaries of Charitable Organizations 171
§ 29.7 Revenue from Tax-Exempt Subsidiary 171
30 Tax-Exempt Organizations and For-Profit Subsidiaries 173
§ 30.2 Potential of Attribution to Parent 173
32 Tax-Exempt Organizations: Other Operations and Restructuring 175
§ 32.1 Mergers 175
§ 32.7 Conversions from Nonexempt to Exempt Status 175
(b) Federal Tax Law 175
Table of Cases 177
Cumulative Table of IRS Revenue Rulings 207
Cumulative Table of IRS Revenue Procedures 217
Cumulative Table of IRS Private Determinations Cited in Text: IRS
Private Letter Rulings, Technical Advice Memoranda, General
Counsel Memoranda, and Chief Counsel Advice Memoranda 219
IRS Private Letter Rulings 219
Technical Advice Memoranda 229
General Counsel Memoranda 230
Chief Counsel Advice Memoranda 231
Table of IRS Private Letter Rulings, Technical Advice Memoranda, and Counsel Memoranda 233
Cumulative Table of Cases Discussed in Bruce R. Hopkins’ Nonprofit Counsel 263
Cumulative Table of IRS Private Determinations Discussed in Bruce R. Hopkins’ Nonprofit Counsel 279
Index 303
