Law of Tax-Exempt Organizations

SHANE T. HAMILTON is one of the country’s leading practitioners in the field of nonprofit and tax-exempt organizations. He has extensive experience in advising tax-exempt clients in connection with their complex nonprofit and tax matters and representing them before the IRS. The late BRUCE R. HOPKINS was a practicing lawyer for 50 years in the tax-exempt organizations field, a prolific author or coauthor of more than 40 books on nonprofit law, and a law professor. He spoke extensively at nonprofit and tax-exempt organizations conferences nationally and internationally and was widely considered to be the “Dean of Nonprofit Law.”

• A Letter to the Reader xxviiAbout the Authors xxixPreface xxxiAbout the Online Resources xxxiiiBook Citations xxxv1 Definition of and Rationales for Tax- Exempt Organizations 1§ 1.1 Definition of Nonprofit Organization 1§ 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 182 Overview of Nonprofit Sector and Tax- Exempt Organizations 21§ 2.1 Profile of Nonprofit Sector 22§ 2.2 Organization of IRS 253 Tax Exemption: Source and Recognition 31§ 3.1 Source of Tax Exemption 31§ 3.2 Recognition of Tax Exemption 33§ 3.3 Recognition of Public Charity, Private Foundation Status 36§ 3.4 Alternatives to Tax- Exempt Status 374 Organizational, Operational, and Related Tests and Doctrines 39§ 4.1 Forms of Tax- Exempt Organizations 40§ 4.2 Governing Instruments 44§ 4.3 Organizational Test 45§ 4.4 Primary Purpose Test 52§ 4.5 Operational Test 57§ 4.6 Exclusively Standard 64§ 4.7 Commensurate Test 67§ 4.8 State Action Doctrine 68§ 4.9 Commerciality Doctrine 73§ 4.10 Social Enterprise Developments 835 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§ 5.4 Board Member Liability 91§ 5.5 Sarbanes- Oxley Act 91§ 5.6 Nonprofit Governance Principles 92§ 5.7 IRS and Governance 976 Concept of Charitable 107§ 6.1 Federal Tax Law Definition of Charitable 108§ 6.2 Public Policy Doctrine 114§ 6.3 Collateral Concepts 124§ 6.4 What Tax Exemption Does Not Create 1367 Charitable Organizations 139§ 7.1 Relief of Poor 140§ 7.2 Relief of Distressed 142§ 7.3 Credit Counseling 148§ 7.4 Provision of Housing 151§ 7.5 Down Payment Assistance 153§ 7.6 Promotion of Health 1547.7 Lessening Burdens of Government 176§ 7.8 Advancement of Education 180§ 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§ 7.14 Fundraising Organizations 197§ 7.15 Government Entities as Charitable Counterparts 202§ 7.16 Other Categories of Charity 206§ 7.17 Qualified Opportunity Zones 213§ 7.18 Charitable Grants to Individuals 2148 Educational Organizations 215§ 8.1 Federal Tax Law Definition of Educational 215§ 8.2 Education Contrasted with Propaganda 216§ 8.3 Educational Institutions 219§ 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 2379 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 24410 Religious Organizations 247§ 10.1 Constitutional Law Framework 248§ 10.2 Federal Tax Law Definition of Religion 258§ 10.3 Churches and Similar Institutions 265§ 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 28011 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 28812 Public Charities and Private Foundations 289§ 12.1 Federal Tax Law Definition of Private Foundation 290§ 12.2 Disqualified Persons 296§ 12.3 Categories of Public Charities 301§ 12.4 Private Foundation Rules 316§ 12.5 Donor- Advised Funds 328§ 12.6 Endowment Funds 33113 Social Welfare Organizations 335§ 13.1 Concept of Social Welfare 335§ 13.2 Requirement of Community 342§ 13.3 Conduct of Business 347§ 13.4 Advocacy Organizations 34714 Business Leagues and Similar Organizations 349§ 14.1 Concept of Business League 349§ 14.2 Disqualifying Activities 362§ 14.3 Chambers of Commerce 373§ 14.4 Boards of Trade 374§ 14.5 Real Estate Boards 37515 Social Clubs 377§ 15.1 Social Clubs in General 377§ 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 39216 Labor, Agricultural, and Horticultural Organizations 395§ 16.1 Labor Organizations 395§ 16.2 Agricultural Organizations 400§ 16.3 Horticultural Organizations 40517 Political Organizations 407§ 17.1 Political Organizations in General 408§ 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 41918 Employee Benefit Funds 421§ 18.1 Overview 421§ 18.2 Special Rules for Welfare Benefit Funds 422§ 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 43219 Other Categories of Tax- Exempt Organizations 433§ 19.1 Instrumentalities of the United States 434§ 19.2 Title- Holding Corporations 435§ 19.3 Local Associations of Employees 440§ 19.4 Fraternal Organizations 442§ 19.5 Benevolent or Mutual Organizations 446§ 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§ 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§ 19.17 National Railroad Retirement Investment Trust 470§ 19.18 Qualified Health Insurance Issuers 470§ 19.19 Qualified Tuition Programs 472§ 19.20 ABLE Programs 475§ 19.21 Professional Sports Leagues 476§ 19.22 Governmental and Quasi- Governmental Entities 476§ 19.23 Native American Tribes 483§ 19.24 Other Categories of Tax- Exempt Organizations 484§ 19.25 Nonexempt Membership Organizations 48520 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§ 20.5 Excess Executive Compensation Tax 505§ 20.6 Other Forms of Private Inurement 510§ 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 53221 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§ 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§ 21.10 Excise Tax Regime 563§ 21.11 Correction Requirement 564§ 21.12 Definitions 567§ 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 57122 Legislative Activities by Tax- Exempt Organizations 575§ 22.1 Legislative Activities Law for Exempt Organizations— Introduction 576§ 22.2 Meaning of Legislation 576§ 22.3 Lobbying by Charitable Organizations 577§ 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§ 22.7 Legislative Activities of Other Tax- Exempt Organizations 598§ 22.8 Internet Communications 598§ 22.9 Constitutional Law Framework 59923 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§ 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§ 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 62424 Unrelated Business: Basic Rules 627§ 24.1 Introduction to Unrelated Business Rules 628§ 24.2 Definition of Trade or Business 631§ 24.3 Definition of Regularly Carried On 643§ 24.4 Definition of Substantially Related 646§ 24.5 Contemporary Applications of Unrelated Business Rules 656§ 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 69325 Unrelated Business: Modifications, Exceptions, Special Rules, and Taxation 701§ 25.1 Modifications 702§ 25.2 Exceptions 713§ 25.3 Small Business Corporation Rules 723§ 25.4 Special Rules 723§ 25.5 "Bucketing" Rule 726§ 25.6 Tax Structure 732§ 25.7 Deduction Rules 73226 Exemption Recognition and Notice Processes 737§ 26.1 Recognition Application Procedure 738§ 26.2 Requirements for Charitable Organizations 751§ 26.3 Nonprivate Foundation Status 754§ 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§ 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§ 26.16 Forfeiture of Tax Exemption 774§ 26.17 Constitutional Law Aspects of Process 77627 Administrative and Litigation Procedures 779§ 27.1 Administrative Procedures Where Recognition Denied 780§ 27.2 Revocation or Modification of Tax- Exempt Status: Administrative Procedures 782§ 27.3 Retroactive Revocation of Tax- Exempt Status 784§ 27.4 Statute of Limitations Matters 792§ 27.5 Denial or Revocation of Tax- Exempt Status: Litigation Procedures 793§ 27.6 IRS Examination Procedures and Practices 806§ 27.7 Compliance Checks 814§ 27.8 Fast- Track Case Settlement Program 815§ 27.9 IRS Disclosure to State Officials 81628 Operational Requirements 819§ 28.1 Changes in Operations or Form 820§ 28.2 Annual Reporting Rules 825§ 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§ 28.6 Reporting by Political Organizations 842§ 28.7 Electronic Filing Rules 844§ 28.8 Unrelated Business Income Tax Returns 845§ 28.9 Document Disclosure Obligations of IRS 847§ 28.10 Document Disclosure Obligations of Exempt Organizations 852§ 28.11 Information or Services Disclosure 858§ 28.12 Fundraising Disclosure 859§ 28.13 Insurance Activities 861§ 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 87029 Tax- Exempt Organizations and Exempt Subsidiaries 873§ 29.1 Subsidiaries Basics 873§ 29.2 Charitable Organizations as Subsidiaries 874§ 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 88430 Tax- Exempt Organizations and For- Profit Subsidiaries 885§ 30.1 For- Profit Subsidiaries in General 886§ 30.2 Potential of Attribution to Parent 888§ 30.3 Financial Considerations 891§ 30.4 Asset Accumulations 893§ 30.5 Subsidiaries in Partnerships 893§ 30.6 Revenue from For- Profit Subsidiary 894§ 30.7 Liquidations 89831 Tax- Exempt Organizations and Joint Ventures 901§ 31.1 Partnerships and Joint Ventures Basics 901§ 31.2 Public Charities as General Partners 907§ 31.3 Whole- Entity Joint Ventures 909§ 31.4 Ancillary Joint Ventures 911§ 31.5 Low- Income Housing Ventures 912§ 31.6 Information Reporting 91332 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§ 32.7 Conversion from Nonexempt to Exempt Status 924§ 32.8 Conversion from One Exempt Status to Another 929Index 931