Introduction: An Indispensable Roadmap for the Complex Maze of Tax-Exempt Rules and Regulations xiii
Chapter 1 Distinguishing Characteristics of Tax-Exempt Organizations 1
1.1 Differences between Exempt and Nonexempt Organizations 8
1.2 Nomenclature 10
1.3 Control 11
1.4 Role of the Internal Revenue Service 12
1.5 Suitability as an Exempt Organization 12
1.6 Start-Up Costs, Governance, Tax, and Financial Considerations 15
1.7 Choosing a Form for the New Exempt Organization 18
Chapter 2 Qualifying Under IRC 501(c)(3) 23
2.1 Organizational Test 25
2.2 Operational Test 31
Chapter 3 Public Charities 57
3.1 Distinctions Between Public and Private Charities 58
3.2 "Inherently Public Activity" and Broad Public Support: 509(a)(1) 59
3.3 Community Foundations 72
3.4 Service-Providing Organizations: 509(a)(2) 81
3.5 Difference Between 509(a)(1) and 509(a)(2) 83
3.6 Supporting Organizations: 509(a)(3) 91
3.7 Testing for Public Safety: 509(a)(4) 106
Chapter 4 Religious Organizations 107
4.1 Characteristics of Religious Organizations 108
4.2 Churches 112
4.3 Religious Orders 125
4.4 Religious and Apostolic Associations 126
Chapter 5 Charitable Organizations 129
5.1 Relief of the Poor 131
5.2 Promotion of Social Welfare 136
5.3 Lessening the Burdens of Government 146
5.4 Advancement of Religion 149
5.5 Advancement of Education and Science 149
5.6 Promotion of Health 150
5.7 Cooperative Hospital Service Organizations 170
Chapter 6 Other Charitable Organizations Qualifying Under IRC 501(c)(3) Charitable Purposes 171
6.1 Educational Purposes 172
6.2 Literary Purposes 186
6.3 Scientific Purposes 187
6.4 Testing for Public Safety 191
6.5 Fostering National or International Amateur Sports Competition (But Only If No Part of Its Activities Involves the Provision of Athletic Facilities or Equipment) 192
6.6 Prevention of Cruelty to Children or Animals 194
Chapter 7 Civic Leagues, Other Nonprofits, and Social Welfare Organizations Exempt Under IRC 501(c)(4) 195
7.1 Comparison of (c)(3) and (c)(4) Organizations 197
7.2 Qualifying and Nonqualifying Civic Organizations 204
7.3 Local Associations of Employees 211
7.4 Neighborhood and Homeowner's Associations 212
7.5 Disclosures of Nondeductibility 216
Chapter 8 Governmental Units, Component-Created Entities, and Title-Holding Corporations 225
8.1 Governmental Units 225
8.2 Political Subdivisions 228
8.3 Integral Parts 229
8.4 Eligibility for Obtaining and Benefits/Detriments of Holding IRC 501(c)(3) Tax-Exempt Status 231
8.5 Instrumentalities 233
8.6 Affiliates 237
8.7 IRC 501(c)(2) Title-Holding Corporations 238
8.8 IRC 501(c)(25) Title-Holding Corporations 243
Chapter 9 Private Inurement and Intermediate Sanctions 245
9.1 Defining Inurement 248
9.2 Salaries and Other Compensation 250
9.3 Setting Salary 253
9.4 Housing and Meals 255
9.5 Purchase, Lease, or Sale of Property or Services 256
9.6 Loans and Guarantees 258
9.7 For-Profit to Nonprofit and Vice Versa 258
9.8 Services Rendered for Individuals 259
9.9 Joint Ventures 261
9.10 Intermediate Sanctions 262
Chapter 10 Private Foundations-General Concepts 277
10.1 Why Private Foundations Are Special 277
10.2 Special Rules Pertaining to Private Foundations 279
10.3 Application of Taxes to Certain Nonexempt Trusts 291
10.4 Termination of Private Foundation Status 293
Chapter 11 Excise Tax Based on Investment Income: IRC 4940 317
11.1 Formula for Taxable Income 318
11.2 Net Capital Gains 327
11.3 Deductions from Gross Investment Income 333
11.4 Tax-Planning Considerations 338
11.5 Foreign Foundations 341
11.6 Timely Payment of Excise Tax 343
11.7 Tax on Private Colleges and Universities 344
11.8 Exempt Operating Foundations 345
Chapter 12 Self-Dealing: IRC 4941 347
12.1 Definition of Self-Dealing 348
12.2 Sale, Exchange, or Lease of Property 352
12.3 Loans 362
12.4 Compensation 365
12.5 Transactions That Benefit Disqualified Persons 372
12.6 Payments to Government Officials 380
12.7 Sharing Space, People, and Expenses 381
12.8 Indirect Self-Dealing 384
12.9 Property Held by Fiduciaries 385
12.10 Issues Once Self-Dealing Occurs 389
Chapter 13 Minimum Distribution Requirements: IRC 4942 395
13.1 Assets Used to Calculate Minimum Investment Return 397
13.2 Measuring Fair Market Value 404
13.3 Distributable Amount 410
13.4 Qualifying Distributions 412
13.5 Private Operating Foundations 433
13.6 Satisfying the Distribution Test 443
Chapter 14 Excess Business Holdings and Jeopardizing Investments: IRC 4943 and 4944 451
14.1 Excess Business Holdings 451
14.2 Jeopardizing Investments 462
14.3 Program-Related Investments 467
14.4 Penalty Taxes 473
Chapter 15 Taxable Expenditures: IRC 4945 479
15.1 Lobbying 481
15.2 Voter Registration Drives 486
15.3 Grants to Individuals 486
15.4 Grants to Public Charities 498
15.5 Grants to Foreign Organizations 509
15.6 Expenditure Responsibility Grants 512
15.7 Noncharitable Expenditures 525
15.8 Excise Taxes Payable 526
Chapter 16 IRS Filings, Procedures, and Policies 529
16.1 IRS Tax Exempt and Government Entities Division 530
16.2 IRS Determination Process 534
16.3 Annual Filing of Forms 990 545
16.4 Reporting Organizational Changes to the IRS 555
16.5 Weathering an IRS Examination 559
16.6 When an Organization Loses Its Tax-Exempt Status 566
Chapter 17 Unrelated Business Income 567
17.1 IRS Scrutiny of Unrelated Business Income 572
17.2 History of the Unrelated Business Income Tax 572
17.3 Consequences of Receiving UBI 573
17.4 Definition of Trade or Business 575
17.5 What Is Unrelated Business Income? 579
17.6 "Regularly Carried On" 580
17.7 "Substantially Related" 582
17.8 Unrelated Activities 587
17.9 The Exceptions 609
17.10 Income Modifications 616
17.11 Calculating and Minimizing Taxable Income 627
17.12 Debt-Financed Property 635
17.13 Museums 642
17.14 Travel Tours 644
17.15 Publishing 645
Chapter 18 Relationships with Other Organizations and Businesses 649
18.1 Creation of a (c)(3) by a (c)(4), (5), or (6) 650
18.2 Alliances with Investors 655
18.3 Corporate Subsidiary 660
18.4 Active Business Relationships 665
Chapter 19 Electioneering and Lobbying 669
19.1 Election Campaign Involvement 670
19.2 Voter Education vs. Candidate Promotion 676
19.3 Tax on Political Expenditures 681
19.4 Lobbying Activity of 501(c)(3) Organizations 691
19.5 Permissible Amounts of Lobbying 697
19.6 Lobbying Limits for 501(c)(4), (5), (6), and Other Exempt Organizations 701
19.7 Advocacy and Nonpartisan Analysis 702
Chapter 20 Mergers, Reorganizations, and Terminations 705
20.1 Mergers and Other Combinations 705
20.2 Reorganizations 711
20.3 Terminations 714
Chapter 21 Deductibility and Disclosures 717
21.1 Overview of Deductibility 718
21.2 The Substantiation and Quid Pro Quo Rules 731
21.3 Valuing Donor Benefits 742
21.4 Unrelated Business Income Aspects of Fund-Raising 746
Appendix 1: Labor, Agricultural, and Horticultural Organizations: 501(c)(5) 749
Appendix 2: Business Leagues: 501(c)(6) 761
Appendix 3: Social Clubs: 501(c)(7) 781
Appendix 4: Guides for Maintaining Exempt Status 799
Appendix 5: Brief Description of Tax Sanctions Applicable to Private Foundations 833
List of Exhibits 837
About the Authors 839
Index 841
