JODY BLAZEK was a founder and partner in Blazek & Vetterling, a Houston-based CPA firm focused on tax, auditing, and financial planning for exempt organizations and the people who create, fund, and work with them. She is the author of six books in the Wiley Nonprofit Series, including Financial Planning for Nonprofit Organizations Made Easy and The Tax Law of Private Foundations, Sixth Edition. She is a frequent speaker at nonprofit symposia. JANE M. SEARING is a managing director in Deloitte Tax’s Private Wealth practice, and the Global Center for Excellence in Philanthropy. She specializes in tax-exempt organizations, specifically private foundations, and philanthropic planning, and focuses on helping family offices and ultra–high–net-worth individuals execute their philanthropic vision. Searing is a frequent speaker and writer, a certified public accountant in Washington, Hawaii, and Colorado, and a member of the American Institute of Certified Public Accountants.

• Introduction: An Indispensable Roadmap for the Complex Maze of Tax-Exempt Rules and Regulations xiiiChapter 1 Distinguishing Characteristics of Tax-Exempt Organizations 11.1 Differences between Exempt and Nonexempt Organizations 81.2 Nomenclature 101.3 Control 111.4 Role of the Internal Revenue Service 121.5 Suitability as an Exempt Organization 121.6 Start-Up Costs, Governance, Tax, and Financial Considerations 151.7 Choosing a Form for the New Exempt Organization 18Chapter 2 Qualifying Under IRC §501(c)(3) 232.1 Organizational Test 252.2 Operational Test 31Chapter 3 Public Charities 573.1 Distinctions Between Public and Private Charities 583.2 “Inherently Public Activity” and Broad Public Support: §509(a)(1) 593.3 Community Foundations 723.4 Service-Providing Organizations: §509(a)(2) 813.5 Difference Between §509(a)(1) and §509(a)(2) 833.6 Supporting Organizations: §509(a)(3) 913.7 Testing for Public Safety: §509(a)(4) 106Chapter 4 Religious Organizations 1074.1 Characteristics of Religious Organizations 1084.2 Churches 1124.3 Religious Orders 1254.4 Religious and Apostolic Associations 126Chapter 5 Charitable Organizations 1295.1 Relief of the Poor 1315.2 Promotion of Social Welfare 1365.3 Lessening the Burdens of Government 1465.4 Advancement of Religion 1495.5 Advancement of Education and Science 1495.6 Promotion of Health 1505.7 Cooperative Hospital Service Organizations 170Chapter 6 Other Charitable Organizations Qualifying Under IRC §501(c)(3) Charitable Purposes 1716.1 Educational Purposes 1726.2 Literary Purposes 1866.3 Scientific Purposes 1876.4 Testing for Public Safety 1916.5 Fostering National or International Amateur Sports Competition (But Only If No Part of Its Activities Involves the Provision of Athletic Facilities or Equipment) 1926.6 Prevention of Cruelty to Children or Animals 194Chapter 7 Civic Leagues, Other Nonprofits, and Social Welfare Organizations Exempt Under IRC §501(c)(4) 1957.1 Comparison of (c)(3) and (c)(4) Organizations 1977.2 Qualifying and Nonqualifying Civic Organizations 2047.3 Local Associations of Employees 2117.4 Neighborhood and Homeowner’s Associations 2127.5 Disclosures of Nondeductibility 216Chapter 8 Governmental Units, Component-Created Entities, and Title-Holding Corporations 2258.1 Governmental Units 2258.2 Political Subdivisions 2288.3 Integral Parts 2298.4 Eligibility for Obtaining and Benefits/Detriments of Holding IRC §501(c)(3) Tax-Exempt Status 2318.5 Instrumentalities 2338.6 Affiliates 2378.7 IRC §501(c)(2) Title-Holding Corporations 2388.8 IRC §501(c)(25) Title-Holding Corporations 243Chapter 9 Private Inurement and Intermediate Sanctions 2459.1 Defining Inurement 2489.2 Salaries and Other Compensation 2509.3 Setting Salary 2539.4 Housing and Meals 2559.5 Purchase, Lease, or Sale of Property or Services 2569.6 Loans and Guarantees 2589.7 For-Profit to Nonprofit and Vice Versa 2589.8 Services Rendered for Individuals 2599.9 Joint Ventures 2619.10 Intermediate Sanctions 262Chapter 10 Private Foundations—General Concepts 27710.1 Why Private Foundations Are Special 27710.2 Special Rules Pertaining to Private Foundations 27910.3 Application of Taxes to Certain Nonexempt Trusts 29110.4 Termination of Private Foundation Status 293Chapter 11 Excise Tax Based on Investment Income: IRC §4940 31711.1 Formula for Taxable Income 31811.2 Net Capital Gains 32711.3 Deductions from Gross Investment Income 33311.4 Tax-Planning Considerations 33811.5 Foreign Foundations 34111.6 Timely Payment of Excise Tax 34311.7 Tax on Private Colleges and Universities 34411.8 Exempt Operating Foundations 345Chapter 12 Self-Dealing: IRC §4941 34712.1 Definition of Self-Dealing 34812.2 Sale, Exchange, or Lease of Property 35212.3 Loans 36212.4 Compensation 36512.5 Transactions That Benefit Disqualified Persons 37212.6 Payments to Government Officials 38012.7 Sharing Space, People, and Expenses 38112.8 Indirect Self-Dealing 38412.9 Property Held by Fiduciaries 38512.10 Issues Once Self-Dealing Occurs 389Chapter 13 Minimum Distribution Requirements: IRC §4942 39513.1 Assets Used to Calculate Minimum Investment Return 39713.2 Measuring Fair Market Value 40413.3 Distributable Amount 41013.4 Qualifying Distributions 41213.5 Private Operating Foundations 43313.6 Satisfying the Distribution Test 443Chapter 14 Excess Business Holdings and Jeopardizing Investments: IRC §§4943 and 4944 45114.1 Excess Business Holdings 45114.2 Jeopardizing Investments 46214.3 Program-Related Investments 46714.4 Penalty Taxes 473Chapter 15 Taxable Expenditures: IRC §4945 47915.1 Lobbying 48115.2 Voter Registration Drives 48615.3 Grants to Individuals 48615.4 Grants to Public Charities 49815.5 Grants to Foreign Organizations 50915.6 Expenditure Responsibility Grants 51215.7 Noncharitable Expenditures 52515.8 Excise Taxes Payable 526Chapter 16 IRS Filings, Procedures, and Policies 52916.1 IRS Tax Exempt and Government Entities Division 53016.2 IRS Determination Process 53416.3 Annual Filing of Forms 990 54516.4 Reporting Organizational Changes to the IRS 55516.5 Weathering an IRS Examination 55916.6 When an Organization Loses Its Tax-Exempt Status 566Chapter 17 Unrelated Business Income 56717.1 IRS Scrutiny of Unrelated Business Income 57217.2 History of the Unrelated Business Income Tax 57217.3 Consequences of Receiving UBI 57317.4 Definition of Trade or Business 57517.5 What Is Unrelated Business Income? 57917.6 “Regularly Carried On” 58017.7 “Substantially Related” 58217.8 Unrelated Activities 58717.9 The Exceptions 60917.10 Income Modifications 61617.11 Calculating and Minimizing Taxable Income 62717.12 Debt-Financed Property 63517.13 Museums 64217.14 Travel Tours 64417.15 Publishing 645Chapter 18 Relationships with Other Organizations and Businesses 64918.1 Creation of a (c)(3) by a (c)(4), (5), or (6) 65018.2 Alliances with Investors 65518.3 Corporate Subsidiary 66018.4 Active Business Relationships 665Chapter 19 Electioneering and Lobbying 66919.1 Election Campaign Involvement 67019.2 Voter Education vs. Candidate Promotion 67619.3 Tax on Political Expenditures 68119.4 Lobbying Activity of §501(c)(3) Organizations 69119.5 Permissible Amounts of Lobbying 69719.6 Lobbying Limits for §501(c)(4), (5), (6), and Other Exempt Organizations 70119.7 Advocacy and Nonpartisan Analysis 702Chapter 20 Mergers, Reorganizations, and Terminations 70520.1 Mergers and Other Combinations 70520.2 Reorganizations 71120.3 Terminations 714Chapter 21 Deductibility and Disclosures 71721.1 Overview of Deductibility 71821.2 The Substantiation and Quid Pro Quo Rules 73121.3 Valuing Donor Benefits 74221.4 Unrelated Business Income Aspects of Fund-Raising 746Appendix 1: Labor, Agricultural, and Horticultural Organizations: §501(c)(5) 749Appendix 2: Business Leagues: §501(c)(6) 761Appendix 3: Social Clubs: §501(c)(7) 781Appendix 4: Guides for Maintaining Exempt Status 799Appendix 5: Brief Description of Tax Sanctions Applicable to Private Foundations 833List of Exhibits 837About the Authors 839Index 841

JODY BLAZEK was a founder and partner in Blazek & Vetterling, a Houston-based CPA firm focused on tax, auditing, and financial planning for exempt organizations and the people who create, fund, and work with them. She is the author of six books in the Wiley Nonprofit Series, including Financial Planning for Nonprofit Organizations Made Easy and The Tax Law of Private Foundations, Sixth Edition. She is a frequent speaker at nonprofit symposia. JANE M. SEARING is a managing director in Deloitte Tax’s Private Wealth practice, and the Global Center for Excellence in Philanthropy. She specializes in tax-exempt organizations, specifically private foundations, and philanthropic planning, and focuses on helping family offices and ultra–high–net-worth individuals execute their philanthropic vision. Searing is a frequent speaker and writer, a certified public accountant in Washington, Hawaii, and Colorado, and a member of the American Institute of Certified Public Accountants.

• Introduction: An Indispensable Roadmap for the Complex Maze of Tax-Exempt Rules and Regulations xiiiChapter 1 Distinguishing Characteristics of Tax-Exempt Organizations 11.1 Differences between Exempt and Nonexempt Organizations 81.2 Nomenclature 101.3 Control 111.4 Role of the Internal Revenue Service 121.5 Suitability as an Exempt Organization 121.6 Start-Up Costs, Governance, Tax, and Financial Considerations 151.7 Choosing a Form for the New Exempt Organization 18Chapter 2 Qualifying Under IRC §501(c)(3) 232.1 Organizational Test 252.2 Operational Test 31Chapter 3 Public Charities 573.1 Distinctions Between Public and Private Charities 583.2 “Inherently Public Activity” and Broad Public Support: §509(a)(1) 593.3 Community Foundations 723.4 Service-Providing Organizations: §509(a)(2) 813.5 Difference Between §509(a)(1) and §509(a)(2) 833.6 Supporting Organizations: §509(a)(3) 913.7 Testing for Public Safety: §509(a)(4) 106Chapter 4 Religious Organizations 1074.1 Characteristics of Religious Organizations 1084.2 Churches 1124.3 Religious Orders 1254.4 Religious and Apostolic Associations 126Chapter 5 Charitable Organizations 1295.1 Relief of the Poor 1315.2 Promotion of Social Welfare 1365.3 Lessening the Burdens of Government 1465.4 Advancement of Religion 1495.5 Advancement of Education and Science 1495.6 Promotion of Health 1505.7 Cooperative Hospital Service Organizations 170Chapter 6 Other Charitable Organizations Qualifying Under IRC §501(c)(3) Charitable Purposes 1716.1 Educational Purposes 1726.2 Literary Purposes 1866.3 Scientific Purposes 1876.4 Testing for Public Safety 1916.5 Fostering National or International Amateur Sports Competition (But Only If No Part of Its Activities Involves the Provision of Athletic Facilities or Equipment) 1926.6 Prevention of Cruelty to Children or Animals 194Chapter 7 Civic Leagues, Other Nonprofits, and Social Welfare Organizations Exempt Under IRC §501(c)(4) 1957.1 Comparison of (c)(3) and (c)(4) Organizations 1977.2 Qualifying and Nonqualifying Civic Organizations 2047.3 Local Associations of Employees 2117.4 Neighborhood and Homeowner’s Associations 2127.5 Disclosures of Nondeductibility 216Chapter 8 Governmental Units, Component-Created Entities, and Title-Holding Corporations 2258.1 Governmental Units 2258.2 Political Subdivisions 2288.3 Integral Parts 2298.4 Eligibility for Obtaining and Benefits/Detriments of Holding IRC §501(c)(3) Tax-Exempt Status 2318.5 Instrumentalities 2338.6 Affiliates 2378.7 IRC §501(c)(2) Title-Holding Corporations 2388.8 IRC §501(c)(25) Title-Holding Corporations 243Chapter 9 Private Inurement and Intermediate Sanctions 2459.1 Defining Inurement 2489.2 Salaries and Other Compensation 2509.3 Setting Salary 2539.4 Housing and Meals 2559.5 Purchase, Lease, or Sale of Property or Services 2569.6 Loans and Guarantees 2589.7 For-Profit to Nonprofit and Vice Versa 2589.8 Services Rendered for Individuals 2599.9 Joint Ventures 2619.10 Intermediate Sanctions 262Chapter 10 Private Foundations—General Concepts 27710.1 Why Private Foundations Are Special 27710.2 Special Rules Pertaining to Private Foundations 27910.3 Application of Taxes to Certain Nonexempt Trusts 29110.4 Termination of Private Foundation Status 293Chapter 11 Excise Tax Based on Investment Income: IRC §4940 31711.1 Formula for Taxable Income 31811.2 Net Capital Gains 32711.3 Deductions from Gross Investment Income 33311.4 Tax-Planning Considerations 33811.5 Foreign Foundations 34111.6 Timely Payment of Excise Tax 34311.7 Tax on Private Colleges and Universities 34411.8 Exempt Operating Foundations 345Chapter 12 Self-Dealing: IRC §4941 34712.1 Definition of Self-Dealing 34812.2 Sale, Exchange, or Lease of Property 35212.3 Loans 36212.4 Compensation 36512.5 Transactions That Benefit Disqualified Persons 37212.6 Payments to Government Officials 38012.7 Sharing Space, People, and Expenses 38112.8 Indirect Self-Dealing 38412.9 Property Held by Fiduciaries 38512.10 Issues Once Self-Dealing Occurs 389Chapter 13 Minimum Distribution Requirements: IRC §4942 39513.1 Assets Used to Calculate Minimum Investment Return 39713.2 Measuring Fair Market Value 40413.3 Distributable Amount 41013.4 Qualifying Distributions 41213.5 Private Operating Foundations 43313.6 Satisfying the Distribution Test 443Chapter 14 Excess Business Holdings and Jeopardizing Investments: IRC §§4943 and 4944 45114.1 Excess Business Holdings 45114.2 Jeopardizing Investments 46214.3 Program-Related Investments 46714.4 Penalty Taxes 473Chapter 15 Taxable Expenditures: IRC §4945 47915.1 Lobbying 48115.2 Voter Registration Drives 48615.3 Grants to Individuals 48615.4 Grants to Public Charities 49815.5 Grants to Foreign Organizations 50915.6 Expenditure Responsibility Grants 51215.7 Noncharitable Expenditures 52515.8 Excise Taxes Payable 526Chapter 16 IRS Filings, Procedures, and Policies 52916.1 IRS Tax Exempt and Government Entities Division 53016.2 IRS Determination Process 53416.3 Annual Filing of Forms 990 54516.4 Reporting Organizational Changes to the IRS 55516.5 Weathering an IRS Examination 55916.6 When an Organization Loses Its Tax-Exempt Status 566Chapter 17 Unrelated Business Income 56717.1 IRS Scrutiny of Unrelated Business Income 57217.2 History of the Unrelated Business Income Tax 57217.3 Consequences of Receiving UBI 57317.4 Definition of Trade or Business 57517.5 What Is Unrelated Business Income? 57917.6 “Regularly Carried On” 58017.7 “Substantially Related” 58217.8 Unrelated Activities 58717.9 The Exceptions 60917.10 Income Modifications 61617.11 Calculating and Minimizing Taxable Income 62717.12 Debt-Financed Property 63517.13 Museums 64217.14 Travel Tours 64417.15 Publishing 645Chapter 18 Relationships with Other Organizations and Businesses 64918.1 Creation of a (c)(3) by a (c)(4), (5), or (6) 65018.2 Alliances with Investors 65518.3 Corporate Subsidiary 66018.4 Active Business Relationships 665Chapter 19 Electioneering and Lobbying 66919.1 Election Campaign Involvement 67019.2 Voter Education vs. Candidate Promotion 67619.3 Tax on Political Expenditures 68119.4 Lobbying Activity of §501(c)(3) Organizations 69119.5 Permissible Amounts of Lobbying 69719.6 Lobbying Limits for §501(c)(4), (5), (6), and Other Exempt Organizations 70119.7 Advocacy and Nonpartisan Analysis 702Chapter 20 Mergers, Reorganizations, and Terminations 70520.1 Mergers and Other Combinations 70520.2 Reorganizations 71120.3 Terminations 714Chapter 21 Deductibility and Disclosures 71721.1 Overview of Deductibility 71821.2 The Substantiation and Quid Pro Quo Rules 73121.3 Valuing Donor Benefits 74221.4 Unrelated Business Income Aspects of Fund-Raising 746Appendix 1: Labor, Agricultural, and Horticultural Organizations: §501(c)(5) 749Appendix 2: Business Leagues: §501(c)(6) 761Appendix 3: Social Clubs: §501(c)(7) 781Appendix 4: Guides for Maintaining Exempt Status 799Appendix 5: Brief Description of Tax Sanctions Applicable to Private Foundations 833List of Exhibits 837About the Authors 839Index 841