Ensure compliance with the latest tax-exempt legal developments
The 13th edition of The Law of Tax-Exempt Organizations compiles all of the latest pertinent statutes, regulations, rulings, and court opinions into a single authoritative resource. Written by renowned authors and legal experts Bruce R. Hopkins and Shane Hamilton, this book uses accessible language and extensive tabular information to allow for easy navigation and quick reference.
A companion website provides seven additional online resources, including Cumulative Tables of IRS Private Letter Rulings, Technical Advice Memoranda, and Counsel Memoranda. Sample topics featured in this book include:
- Nonprofit governance, including board duties and responsibilities in duty of care, loyalty, and obedience
- Charitable organizations focusing on relief of distressed, provision of housing, and promotion of health and social welfare
- General constitutional law principles and internal revenue code provisions for religious organizations
- Public charities, private foundations, and other types of charitable organizations, such as amateur sports leagues, business leagues, and social clubs
Tax laws are continuously evolving and the statutes and regulations for tax-exempt organizations change more quickly than most. The thirteenth edition of The Law of Tax-Exempt Organizations is an essential reference for all non-profit organizations to ensure compliance in all directives and activities.
Table of Contents
A Letter to the Reader xxvii
About the Authors xxix
Preface xxxi
About the Online Resources xxxiii
Book Citations xxxv
1 Definition of and Rationales for Tax- Exempt Organizations 1
§ 1.1 Definition of Nonprofit Organization 1
(a) Nonprofit Organization Defined 2
(b) Nonprofit Sector 3
§ 1.2 Definition of Tax- Exempt Organization 4
§ 1.3 Tax- Exempt Organizations Law Philosophy 6
§ 1.4 Political Philosophy Rationale 8
§ 1.5 Inherent Tax Rationale 15
§ 1.6 Other Rationales and Reasons for Exempt Organizations 16
§ 1.7 Freedom of Association Doctrine 18
2 Overview of Nonprofit Sector and Tax- Exempt Organizations 21
§ 2.1 Profile of Nonprofit Sector 22
§ 2.2 Organization of IRS 25
(a) IRS in General 26
(b) Tax Exempt and Government Entities Division 27
(c) Restructuring of IRS 28
3 Tax Exemption: Source and Recognition 31
§ 3.1 Source of Tax Exemption 31
§ 3.2 Recognition of Tax Exemption 33
(a) General Rules 34
(b) Concept of Recognition 35
§ 3.3 Recognition of Public Charity, Private Foundation Status 36
§ 3.4 Alternatives to Tax- Exempt Status 37
4 Organizational, Operational, and Related Tests and Doctrines 39
§ 4.1 Forms of Tax- Exempt Organizations 40
(a) General Rules 40
(b) Check- the- Box Regulations 42
(i) Basic Rules 42
(ii) Exempt Organization Rules 43
§ 4.2 Governing Instruments 44
§ 4.3 Organizational Test 45
(a) Statement of Purposes 45
(b) Dissolution Requirements 48
(c) Mission Statements 51
(d) Board Composition 51
(e) Rules for Limited Liability Companies 51
§ 4.4 Primary Purpose Test 52
§ 4.5 Operational Test 57
(a) Basic Rules 57
(b) Activities Tests 61
(c) Quantification of Activities 61
(d) Action Organizations 62
(e) Aggregate Principle 64
§ 4.6 Exclusively Standard 64
§ 4.7 Commensurate Test 67
§ 4.8 State Action Doctrine 68
(a) Doctrine in General 68
(b) Doctrine as Applied to Social Clubs 70
(c) Doctrine and Other Exempt Organizations 71
(d) Statutory Law 73
§ 4.9 Commerciality Doctrine 73
(a) Summary of Doctrine 74
(b) Assumption Underlying Doctrine 74
(c) Origin of Doctrine 74
(d) Focus on Publishing 75
(e) Other Applications of Doctrine 76
(f) Elements of Commerciality 77
(g) IRS Ruling Policy 78
(h) Contemporary Perspective on Doctrine 80
§ 4.10 Social Enterprise Developments 83
(a) Concept of Social Enterprise 83
(b) Program- Related Investments 84
(c) Low- Profit Limited Liability Companies 85
(d) B Corporations 85
(e) Benefit Corporations 85
(f) Flexible Purpose Corporations 85
5 Nonprofit Governance 87
§ 5.1 Boards of Directors Basics 87
§ 5.2 Board Composition and Tax Law 88
§ 5.3 Board Duties and Responsibilities 89
(a) Duty of Care 90
(b) Duty of Loyalty 90
(c) Duty of Obedience 90
§ 5.4 Board Member Liability 91
§ 5.5 Sarbanes- Oxley Act 91
§ 5.6 Nonprofit Governance Principles 92
(a) Governance Philosophy in General 92
(b) Inventory of Sets of Principles 92
(i) Legal Compliance and Public Disclosure 93
(ii) Effective Governance 94
(iii) Financial Oversight 95
(iv) Responsible Fundraising 96
(c) Form 990 Approach to Governance 96
(d) Boards of Credit Counseling Organizations 97
§ 5.7 IRS and Governance 97
(a) Matter of Agency Jurisdiction 97
(b) IRS Officials’ Speeches 99
(c) IRS Ruling Policy 101
(d) IRS Training Materials 104
(e) IRS Governance Check Sheet 105
6 Concept of Charitable 107
§ 6.1 Federal Tax Law Definition of Charitable 108
(a) Popular and Ordinary Definition 108
(b) Common Law Definition 108
(c) Federal Tax Law Definition 110
§ 6.2 Public Policy Doctrine 114
(a) General Principles 114
(b) Race- Based Discrimination 115
(i) Supreme Court Pronouncement 116
(ii) IRS Policy 116
(iii) Broader Policy Impact 118
(c) Gender- Based Discrimination 119
(d) Other Forms of Discrimination 120
(e) Affirmative Action Principles 121
§ 6.3 Collateral Concepts 124
(a) Requirement of Charitable Class 124
(b) Means- to- End/Instrumentality Rule 127
(c) Charity as Evolving Concept 129
(d) Motive 129
(e) Private Use 130
(f) Cy Pres Doctrine 131
(g) Fluid Recovery Principles 132
(h) Charging of Fees 134
(i) Illegal Activities 134
§ 6.4 What Tax Exemption Does Not Create 136
7 Charitable Organizations 139
§ 7.1 Relief of Poor 140
§ 7.2 Relief of Distressed 142
(a) General Principles 142
(b) Disaster Relief Programs 142
(i) General Guidance 144
(ii) Public Charities 146
(iii) Donor- Advised Funds 146
(iv) Private Foundations 147
(v) Private Letter Rulings 148
§ 7.3 Credit Counseling 148
(a) Initial Evolution of Exemption Law 149
(b) Statutory Criteria for Exemption 150
§ 7.4 Provision of Housing 151
§ 7.5 Down Payment Assistance 153
§ 7.6 Promotion of Health 154
(a) Hospital Law in General 155
(b) Additional Statutory Requirements for Hospitals 157
(i) Hospitals Subject to Requirements 157
(ii) Community Health Needs Assessments 158
(iii) Financial Assistance Policy 158
(iv) Emergency Medical Care Policy 159
(v) Limitation on Charges 159
(vi) Billing and Collection 159
(vii) Mandatory IRS Review of Tax Exemption 159
(viii) Effective Dates 160
(c) Hospital Clinical Departments and Funds 160
(d) Medical Research Organizations 161
(e) Homes for Aged 161
(f) Health Maintenance Organizations 162
(g) Integrated Delivery Systems 164
(h) Peer Review Organizations 165
(i) Fitness Centers 167
(j) Other Health Care Organizations 168
(k) Regional Health Information Organizations 170
(l) Health Insurance Exchanges 171
(m) Accountable Care Organizations 173
(i) ACOs in General 173
(ii) Tax- Exempt Organizations Issues 174
7.7 Lessening Burdens of Government 176
§ 7.8 Advancement of Education 180
(a) General Principles 180
(b) Scholarship Grants 184
§ 7.9 Advancement of Science 185
§ 7.10 Advancement of Religion 185
§ 7.11 Promotion of Social Welfare 187
§ 7.12 Promotion of Arts 190
§ 7.13 Consortia 192
(a) General Principles 192
(b) Adjunct Theory 194
(c) Cooperative Arrangements 195
§ 7.14 Fundraising Organizations 197
(a) General Principles 197
(b) Application of Commensurate Test 199
(c) Other Exemption Issues 200
§ 7.15 Government Entities as Charitable Counterparts 202
§ 7.16 Other Categories of Charity 206
(a) Environmental Protection 206
(b) Promotion of Patriotism 207
(c) Promotion of Sports 208
(d) Public Interest Law 208
(e) Local Economic Development 210
(f) Other Charitable Organizations 212
§ 7.17 Qualified Opportunity Zones 213
§ 7.18 Charitable Grants to Individuals 214
8 Educational Organizations 215
§ 8.1 Federal Tax Law Definition of Educational 215
§ 8.2 Education Contrasted with Propaganda 216
§ 8.3 Educational Institutions 219
(a) Schools, Colleges, and Universities 220
(b) Museums and Similar Organizations 223
(c) Other Educational Organizations 225
§ 8.4 Instruction of Individuals 225
§ 8.5 Instruction of Public 229
§ 8.6 Educational Activity as Commercial Business 233
§ 8.7 Educational Activity as Private Benefit Function 237
§ 8.8 Child Care Organizations 237
9 Scientific Organizations 239
§ 9.1 Federal Tax Law Definition of Science 239
§ 9.2 Concept of Research 240
§ 9.3 Requirement of Public Interest 243
§ 9.4 Scientific as Charitable or Educational 244
§ 9.5 Technology Transfer 244
10 Religious Organizations 247
§ 10.1 Constitutional Law Framework 248
(a) General Constitutional Law Principles 248
(i) Free Exercise Clause 248
(ii) Establishment Clause 250
(iii) Religious Freedom Restoration Act 253
(iv) Free Speech Considerations 253
(b) Constitutional Law and Tax Exemption 254
(c) Internal Revenue Code Provisions 256
§ 10.2 Federal Tax Law Definition of Religion 258
(a) Religion Defined 258
(b) Bases for Denial of Tax Exemption 262
(c) Abuse of Tax Exemption 263
§ 10.3 Churches and Similar Institutions 265
(a) General Principles 265
(b) Associational Test 269
(c) Principle of Respect for Autonomy 272
§ 10.4 Conventions or Associations of Churches 273
§ 10.5 Integrated Auxiliaries of Churches 273
§ 10.6 Mission Societies 275
§ 10.7 Religious Orders 276
§ 10.8 Apostolic Organizations 277
§ 10.9 Communal Groups 279
§ 10.10 Retreat Facilities 280
11 Other Types of Charitable Organizations 281
§ 11.1 Cruelty Prevention Organizations 281
§ 11.2 Amateur Sports Organizations 281
§ 11.3 Public Safety Testing Organizations 283
§ 11.4 Cooperative Hospital Service Organizations 284
§ 11.5 Cooperative Educational Service Organizations 286
§ 11.6 Charitable Risk Pools 287
§ 11.7 Literary Organizations 288
12 Public Charities and Private Foundations 289
§ 12.1 Federal Tax Law Definition of Private Foundation 290
(a) Private Foundation Defined 290
(b) Private Operating Foundations 290
(c) Exempt Operating Foundations 292
(d) Conduit Foundations 293
(e) Common Fund Foundations 294
(f) Other Types of Foundations 294
(g) Organizational Test 295
§ 12.2 Disqualified Persons 296
(a) Substantial Contributors 297
(b) Foundation Managers 298
(c) Twenty Percent Owners 298
(d) Family Members 300
(e) Corporations 300
(f) Partnerships 300
(g) Trusts or Estates 300
(h) Private Foundations 300
(i) Governmental Officials 301
§ 12.3 Categories of Public Charities 301
(a) Institutions 301
(b) Publicly Supported Charities 302
(i) Donative Publicly Supported Charities in General 302
(ii) Facts- and- Circumstances Test 305
(iii) Community Foundations 305
(iv) Service Provider Publicly Supported Organizations 306
(v) Public Colleges and Universities Support Foundations 308
(c) Supporting Organizations 309
(d) Public Safety Testing Organizations 315
§ 12.4 Private Foundation Rules 316
(a) Self- Dealing 316
(b) Mandatory Distributions 319
(c) Excess Business Holdings 320
(d) Jeopardizing Investments 322
(e) Taxable Expenditures 324
(f) Other Provisions 327
§ 12.5 Donor- Advised Funds 328
§ 12.6 Endowment Funds 331
(a) Definition of Endowment Fund 331
(b) College and University Endowment Tax 331
(c) Form 990 Reporting 334
13 Social Welfare Organizations 335
§ 13.1 Concept of Social Welfare 335
(a) General Rules 335
(b) Benefits to Members 339
§ 13.2 Requirement of Community 342
(a) Homeowners’ Associations 342
(b) Broader Requirement of Community 346
§ 13.3 Conduct of Business 347
§ 13.4 Advocacy Organizations 347
(a) Legislative Activities 348
(b) Political Campaign Activities 348
14 Business Leagues and Similar Organizations 349
§ 14.1 Concept of Business League 349
(a) General Principles 350
(i) Tax Law Characteristics 350
(ii) Members 351
(iii) Dues 352
(b) Meaning of Business 352
(c) Line- of- Business Requirement 353
(i) Concept of Line of Business 353
(ii) Supreme Court Pronouncement 353
(iii) Other Developments 355
(d) Membership Services 356
(e) Professional Organizations 358
(f) Varieties of Business Leagues 360
(g) Certification Programs 361
§ 14.2 Disqualifying Activities 362
(a) Line- of- Business Requirement 362
(b) For- Profit Business Activities 363
(i) General Rule 363
(ii) Incidental Business Activity 364
(c) Performance of Particular Services 364
(i) Particular Services 365
(ii) General Rule 365
(iii) Particular Services for Nonmembers 370
(iv) Unrelated Business Activities 371
(d) Private Inurement and Private Benefit 372
(e) Commerciality 372
§ 14.3 Chambers of Commerce 373
§ 14.4 Boards of Trade 374
§ 14.5 Real Estate Boards 375
15 Social Clubs 377
§ 15.1 Social Clubs in General 377
(a) Rationale for Tax Exemption 377
(b) Club Functions 378
(c) Other Tax Law Matters 381
§ 15.2 Public Use and Investment Income Limitations 381
§ 15.3 Exceptions to Limitations 385
§ 15.4 Taxation of Social Clubs 387
§ 15.5 Sale of Club Assets 392
16 Labor, Agricultural, and Horticultural Organizations 395
§ 16.1 Labor Organizations 395
§ 16.2 Agricultural Organizations 400
§ 16.3 Horticultural Organizations 405
17 Political Organizations 407
§ 17.1 Political Organizations in General 408
(a) Political Organizations Defined 409
(b) Newsletter Funds 411
§ 17.2 Organizational Test 411
§ 17.3 Operational Test 412
§ 17.4 Public Policy Advocacy Activities 412
§ 17.5 Taxation of Political Organizations 413
§ 17.6 Taxation of Other Exempt Organizations 416
§ 17.7 Avoiding Political Organizations Tax 417
§ 17.8 Independent Political Action Committees 419
18 Employee Benefit Funds 421
§ 18.1 Overview 421
§ 18.2 Special Rules for Welfare Benefit Funds 422
(a) Nondiscrimination Requirements 422
(b) Tax- Exempt Status 423
§ 18.3 Voluntary Employees’ Beneficiary Associations 423
§ 18.4 Supplemental Unemployment Benefit Trusts 428
§ 18.5 Black Lung Benefits Trusts 429
§ 18.6 Retirement Plan Trust Funds 431
§ 18.7 Other Benefit Funds 432
19 Other Categories of Tax- Exempt Organizations 433
§ 19.1 Instrumentalities of the United States 434
§ 19.2 Title- Holding Corporations 435
(a) Single- Parent Organizations 435
(b) Multiple- Parent Organizations 439
§ 19.3 Local Associations of Employees 440
§ 19.4 Fraternal Organizations 442
(a) Fraternal Beneficiary Societies 442
(b) Domestic Fraternal Societies 444
§ 19.5 Benevolent or Mutual Organizations 446
(a) Local Life Insurance Associations 446
(b) Mutual Organizations 447
§ 19.6 Cemetery Companies 451
§ 19.7 Credit Unions 454
§ 19.8 Mutual Reserve Funds 455
§ 19.9 Insurance Companies and Associations 456
§ 19.10 Crop Operations Finance Corporations 457
§ 19.11 Veterans’ Organizations 458
(a) General Rules 458
(b) Pre- 1880 Organizations 459
§ 19.12 Farmers’ Cooperatives 460
§ 19.13 Shipowners’ Protection and Indemnity Associations 466
§ 19.14 Homeowners’ Associations 467
§ 19.15 High- Risk Individuals’ Health Care Coverage Organizations 469
§ 19.16 Workers’ Compensation Reinsurance Organizations 469
(a) State- Sponsored Organizations 470
(b) Certain Insurance Companies 470
§ 19.17 National Railroad Retirement Investment Trust 470
§ 19.18 Qualified Health Insurance Issuers 470
§ 19.19 Qualified Tuition Programs 472
(a) State- Sponsored Programs 472
(b) Educational Institution- Sponsored Programs 473
(c) Other Rules 473
§ 19.20 ABLE Programs 475
§ 19.21 Professional Sports Leagues 476
§ 19.22 Governmental and Quasi- Governmental Entities 476
(a) Intergovernmental Immunity 477
(b) Income Exclusion Rule 477
(c) Integral Parts of States 480
(d) State Instrumentalities 482
(e) Related Considerations 483
§ 19.23 Native American Tribes 483
§ 19.24 Other Categories of Tax- Exempt Organizations 484
§ 19.25 Nonexempt Membership Organizations 485
20 Private Inurement and Private Benefit Doctrines 489
§ 20.1 Concept of Private Inurement 491
§ 20.2 Definition of Net Earnings 493
§ 20.3 Definition of Insider 494
§ 20.4 Compensation Issues 497
(a) Meaning of Compensation 498
(b) Determining Reasonableness of Compensation 499
(c) Percentage- Based Compensation 503
(d) Multiple Payors 504
(e) Role of Board 504
(f) Board Member Compensation 504
(g) Actuality of Services Rendered 505
(h) Illegal Payments 505
§ 20.5 Excess Executive Compensation Tax 505
(a) Overview 505
(b) Definition of Applicable Tax- Exempt Organization 506
(c) Definition of Covered Employee 506
(d) Definition of Remuneration 507
(e) Definition of Related Organization 507
(f) Parachute Payments 508
(g) For- Profit Executives as Volunteers 508
(h) Additional Law 510
§ 20.6 Other Forms of Private Inurement 510
(a) Rental Arrangements 511
(b) Lending Arrangements 511
(c) Sales of Assets 512
(d) Capital Improvements 513
(e) Equity Distributions 513
(f) Assumptions of Liability 514
(g) Employee Benefits 514
(h) Tax Avoidance Schemes 516
(i) Services Rendered 516
(j) Business Referral and Networking Operations 520
(k) Provision of Goods or Refreshments 521
(l) Retained Interests 521
(m) Embezzlements 521
(n) Successors to For- Profit Companies 522
(o) Other Forms of Inurement 522
§ 20.7 Per Se Private Inurement 523
§ 20.8 Incidental Private Inurement 524
§ 20.9 Private Inurement and Social Welfare Organizations 526
§ 20.10 Private Inurement and Business Leagues 527
§ 20.11 Private Inurement and Social Clubs 529
§ 20.12 Private Inurement and Other Categories of Exempt Organizations 531
§ 20.13 Private Benefit Doctrine 532
(a) General Rules 532
(b) Incidental Private Benefit 534
(c) Joint Venture Law 538
(d) Perspective 542
21 Intermediate Sanctions 547
§ 21.1 Concept of Intermediate Sanctions 548
§ 21.2 Tax- Exempt Organizations Involved 548
§ 21.3 Disqualified Persons 549
§ 21.4 Excess Benefit Transactions 552
(a) General Rules 552
(b) Revenue- Sharing Arrangements 554
(c) Automatic Excess Benefit Transactions in General 554
(d) Automatic Excess Benefit Transactions and Supporting (e) Organizations 555
Automatic Excess Benefit Transactions and Donor- Advised Funds 556
§ 21.5 Controlled Entities 556
§ 21.6 Intermediaries 557
§ 21.7 For the Use of Transactions 557
§ 21.8 Initial Contract Exception 560
§ 21.9 Rebuttable Presumption of Reasonableness 561
(a) Independent Body 561
(b) Appropriate Data 561
(c) Adequate Documentation 562
§ 21.10 Excise Tax Regime 563
§ 21.11 Correction Requirement 564
§ 21.12 Definitions 567
(a) Participation 567
(b) Knowing 567
(c) Reliance on Professional Advice 567
(d) Willful and Reasonable Cause 568
(e) Occurrence 568
§ 21.13 Indemnification and Insurance 569
§ 21.14 Return for Payment of Excise Taxes 569
§ 21.15 Statute of Limitations 570
§ 21.16 Interrelationship with Private Inurement Doctrine 571
22 Legislative Activities by Tax- Exempt Organizations 575
§ 22.1 Legislative Activities Law for Exempt Organizations - Introduction 576
§ 22.2 Meaning of Legislation 576
(a) Substantial Part Test 576
(b) Expenditure Test 576
(c) Associations’ Dues Deductibility Test 577
§ 22.3 Lobbying by Charitable Organizations 577
(a) Legislative History 577
(b) Concept of Lobbying 578
(c) Substantial Part Test 578
(i) Action Organizations 578
(ii) Allowable Lobbying 579
(iii) Exceptions 580
(iv) Reporting Rules 581
(d) Expenditure Test 581
(i) Influencing Legislation 582
(ii) Allocation Rules 584
(iii) Allowable Lobbying 584
(iv) Nonearmarked Grants 586
(v) Exceptions 587
(vi) Election of Test 588
(vii) Evaluating Election 588
(viii) Affiliated Organizations 589
(ix) Record- Keeping Requirements 590
(x) Reporting Rules 590
§ 22.4 Lobbying Expenditures and Tax Sanctions 591
§ 22.5 Legislative Activities of Social Welfare Organizations 591
§ 22.6 Legislative Activities of Business Leagues 592
(a) Business Expense Deduction Disallowance Rules 592
(b) Flow- Through Rules 595
(c) Proxy Tax Rules 596
§ 22.7 Legislative Activities of Other Tax- Exempt Organizations 598
§ 22.8 Internet Communications 598
§ 22.9 Constitutional Law Framework 599
23 Political Campaign Activities by Tax- Exempt Organizations 603
§ 23.1 Political Campaign Activities by Charitable Organizations - Introduction 604
§ 23.2 Prohibition on Charitable Organizations 604
(a) Scope of the Proscription 604
(b) Participation or Intervention 605
(i) Terminology 605
(ii) Political Campaign Intervention 605
(iii) Ascertaining Intervention 606
(iv) Summary of Law 607
(v) Candidate Appearances 610
(vi) Individual Participation 610
(c) Voter Education Activities 610
(d) Requirement of Candidate 612
(e) Requirement of Campaign 613
(f) Requirement of Public Office 613
(g) Activist Organizations 613
§ 23.3 Political Campaign Expenditures and Tax Sanctions 616
§ 23.4 Taxation of Political Expenditures 618
§ 23.5 “Religious Liberty” Executive Order 619
§ 23.6 Political Activities of Social Welfare Organizations 619
(a) Allowable Campaign Activity 620
(b) Political Campaign Activities 620
(c) Political Activities 621
§ 23.7 Political Activities by Labor Organizations 622
§ 23.8 Political Activities by Business Leagues 622
§ 23.9 Political Activities by Other Categories of Exempt Organizations 623
§ 23.10 Advocacy Communications 623
§ 23.11 Internet Communications 624
24 Unrelated Business: Basic Rules 627
§ 24.1 Introduction to Unrelated Business Rules 628
§ 24.2 Definition of Trade or Business 631
(a) General Principles 631
(b) Requirement of Profit Motive 632
(c) Competition 634
(d) Commerciality 635
(e) Charging of Fees 635
(f) Fragmentation Rule 637
(g) Nonbusiness Activities 638
(h) Real Estate Development Activities 640
(i) Occasional Sales 642
(j) Concept of Investment Plus 642
§ 24.3 Definition of Regularly Carried On 643
(a) General Principles 643
(b) Determining Regularity 644
(c) Preparatory Time 646
§ 24.4 Definition of Substantially Related 646
(a) General Principles 647
(b) Size and Extent Test 649
(c) Same State Rule 650
(d) Dual Use Rule 650
(e) Exploitation Rule 652
(f) Related Business Activities 652
(g) Unrelated Business Activities 654
§ 24.5 Contemporary Applications of Unrelated Business Rules 656
(a) Educational Institutions 656
(b) Health Care Organizations 659
(i) Various Related Businesses 659
(ii) Sales of Pharmaceuticals 660
(iii) Testing Services 660
(iv) Fitness Centers 661
(v) Physical Rehabilitation Programs 662
(vi) Administrative Services 663
(vii) Other Health Care Activities 663
(c) Museums 664
(d) Social Welfare Organizations 666
(e) Business Leagues 666
(i) Services to Members 666
(ii) Insurance Programs 668
(iii) Associate Member Dues 669
(iv) Other Association Business Activities 670
(f) Labor and Agricultural Organizations 671
(g) Credit Unions 672
(h) Advertising 672
(i) Concept of Advertising 672
(ii) General Rules 673
(iii) Concept of Related Advertising 675
(i) Fundraising 676
(i) Fundraising as Unrelated Business 676
(ii) Affinity Card Programs 677
(iii) Sales of Mailing Lists 678
(iv) Application of Exceptions 678
(v) Tax Planning Consulting 679
(j) Travel Tour Activities 680
(k) Provision of Services 681
(l) Sales of Merchandise 683
(m) Share- Crop Leasing 684
(n) Retirement Plan Reversions 685
(o) Internet Communications 686
(p) Debt Management Plan Services 687
(q) Other Organizations’ Exempt Functions 688
§ 24.6 Corporate Sponsorships 688
§ 24.7 Deemed Unrelated Business Income 691
§ 24.8 Partnership Rules 692
§ 24.9 Commercial- Type Insurance 692
§ 24.10 Unrelated Debt- Financed Income 693
(a) General Principles 693
(b) Debt- Financed Property 693
(c) Acquisition Indebtedness 695
(d) Exempt Function Borrowing 699
(e) Administrative Needs Borrowing 700
25 Unrelated Business: Modifications, Exceptions, Special Rules, and Taxation 701
§ 25.1 Modifications 702
(a) Passive Income in General 702
(b) Dividends 702
(c) Interest 703
(d) Securities Lending Income 703
(e) Loan Commitment Fees 704
(f) Annuities 704
(g) Royalties 704
(h) Rent 706
(i) General Rules 706
(ii) Related Rental Activities 707
(i) Other Investment Income 708
(j) Capital Gains 709
(k) Income from Controlled Entities 709
(l) Research Income 710
(m) Electric Companies’ Member Income 710
(n) Foreign Source Income 710
(i) General Rules 710
(ii) Global Intangible Low- Taxed Income 712
(o) Brownfield Sites Gain 712
(p) Religious Order Rule 712
§ 25.2 Exceptions 713
(a) Volunteer- Conducted Businesses 713
(b) Convenience Businesses 715
(c) Sales of Gift Items 716
(d) Businesses of Employees’ Associations 717
(e) Entertainment Activities 717
(f) Trade Shows 718
(g) Hospital Services 720
(h) Bingo Game Income 721
(i) Pole Rentals 721
(j) Low- Cost Articles 721
(k) Mailing Lists 722
(l) Associate Member Dues 722
§ 25.3 Small Business Corporation Rules 723
§ 25.4 Special Rules 723
(a) Foreign Organizations 723
(b) Veterans’ Organizations 723
(c) Social Clubs, VEBAs, and SUB Trusts 724
(d) Title- Holding Companies 725
§ 25.5 “Bucketing” Rule 726
(a) Statutory Law 726
(b) Regulations 727
(i) Separate Unrelated Businesses in General 727
(ii) Investment Activities 727
(iii) Qualifying Partnership Interests 728
(iv) Qualifying S Corporation Interests 730
(v) Controlled Entities 730
(vi) Total UBTI 730
(c) Medical Marijuana Dispensary Cases 731
§ 25.6 Tax Structure 732
§ 25.7 Deduction Rules 732
(a) General Rules 733
(b) Charitable Deduction 734
(c) Specific Deduction 735
(d) Net Operating Losses 735
26 Exemption Recognition and Notice Processes 737
§ 26.1 Recognition Application Procedure 738
(a) Introduction 739
(b) General Procedures 741
(i) Required Information 742
(ii) Other Procedural Elements 744
(iii) Preparation of Application 746
(c) Completed Application 746
(d) User Fees 747
(e) Penalties for Perjury 748
(f) Streamlined Application 748
(g) Withdrawal of Request 750
(h) Reliance on Determination Letters 750
(i) Post- Determination Review 751
§ 26.2 Requirements for Charitable Organizations 751
(a) General Rules 751
(b) Exceptions 753
(c) Limited Liability Companies 754
§ 26.3 Nonprivate Foundation Status 754
(a) Notice Requirement 754
(b) Rules for New Publicly Supported Charities 755
§ 26.4 Requirements for Social Welfare Organizations 756
§ 26.5 Requirements for Certain Credit Counseling Organizations 756
§ 26.6 Requirements for Certain Employee Benefit Organizations 756
§ 26.7 Requirements for Certain Prepaid Tuition Plans 757
§ 26.8 Requirements for Certain Health Insurance Issuers 757
§ 26.9 Requirement for ABLE Programs 758
§ 26.10 Rules for Other Categories of Organizations 758
§ 26.11 Group Exemption Rules 758
(a) Existing Procedures 759
(b) Advantages and Disadvantages of Group Exemption 762
(c) Proposed Revised Procedures 762
(i) General Rules 763
(ii) Subordinate Organizations 764
(iii) Requesting Group Exemption Letter 765
(iv) Maintenance of Group Exemption 765
(v) Preexisting Arrangements 766
(vi) Other Rules 767
§ 26.12 Terrorism- Related Suspension of Tax Exemption 767
§ 26.13 Notice Requirements for Social Welfare Organizations 768
§ 26.14 Notice Requirements for Political Organizations 769
§ 26.15 Integral Part Doctrine 770
(a) Affiliated Organizations 771
(b) Divisions 773
§ 26.16 Forfeiture of Tax Exemption 774
§ 26.17 Constitutional Law Aspects of Process 776
27 Administrative and Litigation Procedures 779
§ 27.1 Administrative Procedures Where Recognition Denied 780
(a) Requests Receiving IRS Appeals Consideration 780
(b) Matters Not Receiving IRS Appeals Consideration 782
§ 27.2 Revocation or Modification of Tax- Exempt Status: Administrative Procedures 782
§ 27.3 Retroactive Revocation of Tax- Exempt Status 784
(a) Administrative Procedures 784
(b) Consequences of Retroactive Revocation of Exempt Status 787
(i) Tax Treatment: Corporations 788
(ii) Tax Treatment: Individuals 791
§ 27.4 Statute of Limitations Matters 792
§ 27.5 Denial or Revocation of Tax- Exempt Status: Litigation Procedures 793
(a) Anti- Injunction Act 794
(b) Tax Deficiency and Refund Actions 798
(c) Declaratory Judgment Rules 798
(i) General Requirements 799
(ii) Exhaustion of Administrative Remedies 802
(iii) Deductibility of Contributions 803
(iv) Administrative Record 803
(d) Other Approaches 805
§ 27.6 IRS Examination Procedures and Practices 806
(a) General IRS Exempt Organizations Audit Procedures and Practices 806
(i) Case Preparation System 807
(ii) General Procedures 807
(iii) Types of Examinations 809
(b) IRS Exempt Organizations Examination Management 811
(c) Church Audits 813
§ 27.7 Compliance Checks 814
§ 27.8 Fast- Track Case Settlement Program 815
§ 27.9 IRS Disclosure to State Officials 816
28 Operational Requirements 819
§ 28.1 Changes in Operations or Form 820
(a) Changes in Operations 820
(b) Changes in Form 821
(c) Changes in Foundation or Public Charity Status 823
(d) Form 8940 Determination Letter Requests 824
§ 28.2 Annual Reporting Rules 825
(a) Overview of Annual Information Returns 826
(i) Form 990 826
(ii) Form 990- EZ 827
(iii) Form 990- PF 827
(iv) Filing Dates 827
(v) Penalties 828
(vi) Assessments 829
(vii) Change in Tax Year 830
(b) Content of Annual Information Returns 830
(i) Financial Information 830
(ii) Contributions and Grants 830
(iii) Compensation 831
(iv) Excise Taxes 831
(v) Hospitals 832
(vi) Private Foundations 832
(vii) Political Organizations 832
(viii) Controlling Organizations 832
(ix) Sponsoring Organizations 833
(x) Supporting Organizations 833
(c) Exceptions to Reporting Requirements 833
(i) Churches and Other Religious Organizations 833
(ii) Small Organizations 834
(iii) Other Organizations 835
(d) Limited Liability Companies 835
(e) Group Returns 836
(f) Able Program Reports 837
§ 28.3 Annual Notice Requirement (Form 990- N) for Small Organizations 837
§ 28.4 Automatic Revocation for Failure to File 838
§ 28.5 Charitable Organizations Listing Reliance Rules 839
(a) IRS’s Searchable Databases 840
(b) Charitable Status Reliance Rules 840
(c) Safe Harbor Rules as to Public Charity Status 841
§ 28.6 Reporting by Political Organizations 842
(a) General Rules 843
(b) Filing Dates 843
§ 28.7 Electronic Filing Rules 844
§ 28.8 Unrelated Business Income Tax Returns 845
(a) Filing and Reporting Requirements 845
(b) Additions to Tax and Penalties 846
§ 28.9 Document Disclosure Obligations of IRS 847
(a) Federal Tax Law Disclosure Requirements 848
(i) General Rules 848
(ii) Exempt Organizations Documents 849
(b) Freedom of Information Act 851
§ 28.10 Document Disclosure Obligations of Exempt Organizations 852
(a) General Rules 852
(b) Rules as to Inspection 854
(c) Rules as to Copies 854
(d) Failure to Comply 855
(e) Widely Available Exception 855
(f) Harassment Campaign Exception 856
(g) Penalties 856
(h) Political Organizations 857
(i) Donor Information Disclosure 857
§ 28.11 Information or Services Disclosure 858
§ 28.12 Fundraising Disclosure 859
§ 28.13 Insurance Activities 861
(a) General Rules 861
(b) Commercial- Type Insurance Rules 861
(c) Charitable Split- Dollar Insurance Plans 864
§ 28.14 Feeder Organizations 864
§ 28.15 Tax- Exempt Entity Leasing Rules 867
§ 28.16 Tax- Exempt Organizations and Tax Shelters 867
§ 28.17 Record-Keeping Requirements 869
§ 28.18 International Grantmaking Requirements 870
(a) Charitable Organizations 870
(b) Private Foundations 871
(c) Anti- Terrorist Financing Guidelines 871
29 Tax- Exempt Organizations and Exempt Subsidiaries 873
§ 29.1 Subsidiaries Basics 873
§ 29.2 Charitable Organizations as Subsidiaries 874
(a) Introduction 874
(b) Subsidiaries of Domestic Charitable Organizations 875
(c) Subsidiaries of Foreign Charitable Organizations 876
§ 29.3 Tax- Exempt Subsidiaries of Charitable Organizations 879
§ 29.4 Other Combinations of Tax- Exempt Organizations 880
§ 29.5 Potential of Attribution 881
§ 29.6 Contributions and Other Payments 882
§ 29.7 Revenue from Tax- Exempt Subsidiary 884
30 Tax- Exempt Organizations and For- Profit Subsidiaries 885
§ 30.1 For- Profit Subsidiaries in General 886
(a) Establishing For- Profit Subsidiaries 886
(b) Choice of Form 887
(c) Control Element 888
§ 30.2 Potential of Attribution to Parent 888
§ 30.3 Financial Considerations 891
(a) Capitalization 891
(b) Compensation 892
(c) Sharing of Resources 893
§ 30.4 Asset Accumulations 893
§ 30.5 Subsidiaries in Partnerships 893
§ 30.6 Revenue from For- Profit Subsidiary 894
(a) Income Flows to Parent 894
(b) Tax Treatment of Income from Subsidiary 895
(c) Special Rule 897
§ 30.7 Liquidations 898
31 Tax- Exempt Organizations and Joint Ventures 901
§ 31.1 Partnerships and Joint Ventures Basics 901
(a) Partnerships 901
(b) Joint Ventures 904
(c) Law- Imposed Joint Ventures 906
§ 31.2 Public Charities as General Partners 907
§ 31.3 Whole- Entity Joint Ventures 909
(a) Overview of Law 909
(b) IRS Guidance 910
§ 31.4 Ancillary Joint Ventures 911
§ 31.5 Low- Income Housing Ventures 912
§ 31.6 Information Reporting 913
32 Tax- Exempt Organizations: Other Operations and Restructuring 915
§ 32.1 Mergers 915
§ 32.2 Reorganizations 917
§ 32.3 Multiple- Member Limited Liability Companies 919
§ 32.4 Single- Member Limited Liability Companies 920
§ 32.5 Choice of Entity Considerations 921
§ 32.6 Conversion from Exempt to Nonexempt Status 922
(a) State Law 922
(b) Federal Tax Law 923
§ 32.7 Conversion from Nonexempt to Exempt Status 924
(a) State Law 924
(b) Federal Tax Law 925
(c) Gain or Loss Recognition 927
§ 32.8 Conversion from One Exempt Status to Another 929
Index 931
