Hopkins' Nonprofit Law Dictionary E-Book

Bruce R. Hopkins

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Nonprofit Law, Finance, and Management Series
• Sprache: Englisch

Seitenzahl: 1086

Veröffentlichungsjahr: 2015

Beschreibung

A focused, invaluable guide to nonprofit legal terminology and definitions The Bruce R. Hopkins Nonprofit Law Dictionary is a thorough professional reference for the terminology and definitions surrounding the law of tax-exempt organizations. Author Bruce R. Hopkins, the country's leading expert in nonprofit law, draws upon 45 years of practice to deliver a true dictionary reference for attorneys specializing in nonprofit law and tax law. The book's terminology and definitions are derived from constantly changing statutes, government agency regulations and rulings, court opinions, and government forms and instructions, with citations provided where appropriate. Modeled after a conventional dictionary, this book offers quick navigation to the information of interest, and points you toward the other Hopkins guides that provide more in-depth information should you require it. The devil is in the details, and nowhere is that statement truer than in the legal profession. Incorrect interpretation of a single phrase can cause consequences for both client and attorney, and verbiage may be intentionally vague with unexpectedly broad or narrow definitions. This guide gives you the most commonly accepted interpretations of terminology related specifically to nonprofit law, so you can feel confident in the quality of service you provide to your clients. * Stay up to date on the latest in nonprofit law * Confirm the accepted definitions of legal terms and phrases * Learn where to turn for deeper guidance on specific topics * Gain expert insight into obscure and complex definitions Stop spending time wading through textbooks and case law, only to wonder whether or not the information you eventually found applies to nonprofit law in the same way. Focused specifically on the law as it applies to the nonprofit sector, the Bruce R. Hopkins Nonprofit Law Dictionary is an indispensable reference that gives you the information you need quickly and easily.

Leseprobe

BRUCE R. HOPKINS’ NONPROFIT LAW DICTIONARY

BRUCE R. HOPKINS

Cover design: Wiley

Copyright © 2015 by Bruce R. Hopkins. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Hopkins, Bruce R., author. Bruce R. Hopkins' nonprofit law dictionary / Bruce R. Hopkins. – 1 pages cm. – (Wiley nonprofit law, finance and management series) ISBN 978-1-118-99608-9 (hardback) ISBN 9781119057079 (ePDF) ISBN 9781119057116 (ePub) 1. Nonprofit organizations–Law and legislation–United States–Dictionaries. 2. Nonprofit organizations–Taxation–Law and legislation–United States–Dictionaries. 3. Law–United States–Dictionaries. I. Title. II. Title: Nonprofit law dictionary. KF1388.A68H665 2015 346.73′06403–dc23 2015005233

This Dictionary is dedicated to my youngest granddaughter, Sadie Marie Ash, who will be nearly twelve years of age when it is published. The book is dedicated to her because she is a logophile. (When she first learned of this project, she offered to help me write the Dictionary but was chagrined to learn it would contain only law words and phrases, which, she ruefully admits, she is not quite (or yet) ready to absorb.) When I realized Sadie was interested in words, beginning around four or five, I set about to teach her some polysyllabic doozies. I succeeded in some instances, although I still cannot determine what approach leads to success. Some words she retains and sometime uses; some drift away. She reports her favorite word at this time is incognito but cannot explain why. Another is sommelier, which is a byproduct of my efforts to get her to say “Opus One” when a restaurant waitperson would ask her what she wanted to drink. Other words that have managed to stick are ambiguous, imperative, loquacious, metaphor, micturate, and palindrome. The Dictionary will give her much more to work on. I must close this dedication now and return to my current task, which is to insert zeitgeist into Sadie’s young brain.

Contents

Preface

How to Use This Dictionary

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About the Author

EULA

Guide

Cover

Table of Contents

Preface

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PREFACE

Anyone familiar with the Wiley series of publications on law, accounting, management, and fundraising for nonprofit organizations knows that your author has a passion for writing about the federal and state laws applicable to charitable and other types of nonprofit organizations. One of the reasons for this compulsion is the challenge of capturing—and then keeping up with—this vast body of complex and intricate rules, particularly in the federal tax area. Thanks to Congress and the state legislatures, the Internal Revenue Service, and other government agencies, there is always a wide range and deep flow of topics to write about.

There is another challenge underlying the zeal for this type of writing. It is what I call the “interpretive” function. That is, it is not enough to simply write summaries of the law and keep those summaries current—the challenge is to write in a way that the nontechnical reader (as well as many lawyers and accountants who do not often dwell on the subjects) can understand. This observation is not meant to be denigrating to someone who is not a tax lawyer or an accountant; it is simply recognition of the fact that the law is so convoluted and mangled, and so filled with cross-references and unintelligible phraseology, that the average person needs an interpreter to wade through it. To state the matter less delicately, some of these laws are not readily understandable at first reading.

Some quotations from the Internal Revenue Code illustrate the point. Here is the language Congress selected when it amended the income expenditure requirements for private operating foundations:

Notwithstanding the provisions of subparagraph (A), if the qualifying distributions (within the meaning of paragraph (1) or (2) of subsection (g)) of an organization for the taxable year exceed the minimum investment return for the taxable year, clause (ii) of subparagraph (A) shall not apply unless substantially all of such qualifying distributions are made directly for the active conduct of the activities constituting the purpose or function for which it is organized and operated.

This is the last sentence of IRC § 4942(j)(3).

Next is Congress' description of the criteria that a private foundation must meet to pay a 1 percent excise tax (rather than the general 2 percent) based on investment income:

A private foundation meets the requirements of this paragraph for any taxable year if (A) the amount of the qualifying distributions made by the private foundation during such taxable year equals or exceeds the sum of (i) an amount equal to the assets of such foundation for such taxable year multiplied by the average percentage payout for the base period, plus (ii) 1 percent of the net investment income of such foundation for such taxable year, and (B) such private foundation was not liable for tax under section 4942 with respect to any year in the base period.

This is section 4940(e)(2) of the Internal Revenue Code.

Here is my favorite example of the point, and I will even provide a clue in advance, which is that this passage “describes” a qualification that a charitable organization must meet if it wishes to be classified as a supporting organization with respect to a social welfare organization, a labor organization, or a trade or professional organization:

For purposes of paragraph (3), an organization described in paragraph (2) shall be deemed to include an organization described in section 501(c)(4), (5), or (6) which would be described in paragraph (2) if it were an organization described in section 501(c)(3).

This sentence (which is the last one in section 509(a)(3) of the Internal Revenue Code) and other words and phrases are explained more clearly in this book. These items cover corporate and tax terms (and many others) that apply specifically in the realm of tax-exempt and other nonprofit organizations.

The purpose of these books and the monthly newsletter is to meet these three challenges: to capture all of the pertinent law, write summaries of it in a meaningful, understandable way, and to keep with all changes to the law. It is chiefly an educational purpose.

There are many ways to provide education in a written form. The approach of the other Wiley books that I have written has been to describe the law by subject matter (tax-exempt organizations, charitable giving, fundraising, and so forth). But there are many concepts that apply to more than one of these fields.

I have been struggling to find a way to bring all of these fields into one publication, where the subject matter can still be addressed at a technical level. One way to do this is a dictionary of the terms comprising the law of nonprofit organizations. This is a tool designed to aid the reader of other books or periodicals when he or she comes across a word or phrase that is not understandable.

I am not out to join the ranks of Noah Webster or Henry Campbell Black (the latter being the author of Black's Law Dictionary); rather, the purpose of this volume is to supplement the educational and interpretative functions of other books in the Wiley series. Indeed, in addition to the definition of a word or phrase, a cross-reference leads to one or more of the other Wiley books where the reader can find more detailed information on the subject.

The exercise of preparing this book has changed me. I find that I have become somewhat of an amateur lexicologist or even a philologist. Sometimes, while working on this volume late at night, numbed by mental fatigue, I became concerned with abecedarianism. Even in the darkest hour, however, I remained convinced that this book is an afflatus.

As I indicated earlier, I see myself in this process as a dragoman. I was forced to turn in the manuscript of this book when I did, lest the editors accuse me of barmecide. I wanted to call these brief remarks the “Prolegomena,” but they made me stay with “Preface.” This process, to my colleagues' dismay, has caused me to become a word-grubber.

It is best that I cause an aposiopesis and say that, for those of you in the nonprofit world who are straining with the burden of government regulation and enforcement, I hope the Nonprofit Law Dictionary helps bring more understanding to the process and to pathways for relief.

Bruce R. Hopkins May 2015

HOW TO USE THIS DICTIONARY

The purpose of this book is to provide useful definitions of all of the terms in the law pertaining to nonprofit organizations.

The definitions in this book are written so as to explain the legal terms to those who are not schooled in the law, as well as to lawyers. Each term used in a definition that is defined elsewhere in the Dictionary is boldface. Where a definition involves a section of the Internal Revenue Code, that section of the code is referenced.

Nearly every definition is coded to one or more books by the author (in some instances, as co-author), all published by John Wiley & Sons. This information is provided so that the reader desiring more information about a body of law represented by a particular term or phrase is guided to the book or books where the subject is discussed in greater detail.

The codes for these books are as follows:

Code

Title

LI

Bruce R. Hopkins' Nonprofit Law Library

AU

IRS Audits of Tax-Exempt Organizations

FR

The Law of Fundraising, Fifth Edition

HC

The Law of Tax-Exempt Healthcare Organizations, Fourth Edition

EO

The Law of Tax-Exempt Organizations, Eleventh Edition

AR

The New Form 990: Law, Policy, and Preparation

GV

Nonprofit Governance: Law, Practices & Trends

CU

Nonprofit Law for Colleges and Universities: Essential Questions and Answers for Officers, Directors and Advisors

RE

Nonprofit Law for Religious Organizations: Essential Questions and Answers

PF

Private Foundations: Tax Law and Compliance, Fourth Edition

PG

Planning Guide for the Law of Tax-Exempt Organizations: Strategies and Commentaries

SM

Starting and Managing a Nonprofit Organization: A Legal Guide, Sixth Edition

AS

The Tax Law of Associations

CG

The Tax Law of Charitable Giving, Fifth Edition

UB

The Tax Law of Unrelated Business for Nonprofit Organizations

CL

Tax-Exempt Organizations and Constitutional Law: Nonprofit Law as Shaped by the U.S. Supreme Court

A

Abatement

In general, the word “abatement” means an alleviation, lessening, mitigation, or reduction of something. More technically, the IRS has the authority to “abate” all of the first-tier taxes underlying the private foundation rules, other than those concerning self-dealing; the penalties underlying the political expenditures rules; the penalties underlying the intermediate sanctions rules; the penalties underlying the rules concerning hospitals' failures; and the penalties underlying the donor-advised funds rules. These abatable taxes are known as qualified first tier taxes. Additional rules apply in connection with the potential for abatement of second-tier taxes when there is a correction (IRC §§ 4961, 4962). [EO §§ 12.4, 21.10; PF §§ 1.10, 5.15(f), 6.7(d), 9.10(b), 13.1, 13.7].

Absolute percentage limitation

The phrase “absolute percentage limitation” refers to a provision of a state charitable solicitation act (or local law equivalent) containing a percentage, which, when applied to the total expenses of a charitable organization, results in an amount of money that is less than the organization's fundraising costs. The organization's fundraising costs are consequently deemed, by operation of law, to be deemed unreasonable, thus preventing the organization form soliciting charitable contributions in the jurisdiction. The use of this type of percentage limitation was struck down by the U.S. Supreme Court as a violation of the free speech rights of the soliciting charitable organizations. [FR § 4.3; SM p. 152].

Abuse of discretion

The phrase “abuse of discretion” arises in the context of court review of a decision by an administrative agency or an appellate court review of a decision by a lower court. Both government agencies and lower courts generally have broad discretion in formulating their decisions. When these fact-finders and decision-makers, however, arrive at a conclusion of law that is inconsistent with the facts and circumstances that were before the agency or lower court, the reviewing court can find an abuse of discretion and overrule that decision.

Abusive tax shelter

The phrase “abusive tax shelter” means a partnership or other entity, an investment plan or arrangement, or any other plan or arrangement, in connection with which a statement is made by a person with respect to the allowability of a tax deduction or a tax credit, the excludability of any income, or the securing of any other tax benefit by reason of holding an interest in the entity or participating in the plan or arrangement which the person knows or has reason to know is false or fraudulent as to any material matter. Abusive tax shelter also refers to instances in which there is a gross valuation overstatement as to any material matter (IRC § 6700(a)). [EO § 28.17(a)] (also Tax shelter).

Accountable care organization

The Department of Health and Human Services has established a Medicare Shared Savings Program that promotes accountability for care of Medic are beneficiaries, improves the coordination of Medicare fee-for-service items and services, and encourages investment in infrastructure and redesigned care processes for high-quality and efficient health care service delivery. Groups of health care service providers, including tax-exempt organizations, and suppliers that have established a mechanism for shared governance and that meet criteria specified by the HHS are eligible to participate as “accountable care organizations,” which essentially are networks designed to reduce health care costs, under the MSSP. [HC § 13.5; EO § 7.6(m); SM pp. 5, 230].

Accountable plan

An “accountable plan” is a reimbursement or other expense allowance arrangement that satisfies the requirements of the federal tax law by including the elements of business connection, substantiation, and return of amounts that are in excess of substantiated expenses (IRC § 62(c)). Reimbursements that are not pursuant to an accountable plan are forms of gross income and likely are automatic excess benefit transactions. [GV § 6.3(r); CU Q 7.28; SM pp. 279–280; LI Q 6.28].

Accountant

The word “accountant” is used to describe an individual whose profession is the preparation, inspection, and auditing of the books and records of other individuals and organizations. Most nonprofit organizations use the services of an accountant, both in the preparation of their books and records, including preparation of the appropriate annual information return, and in the audit phase. [AR § 7.2(d)(2); SM pp. 26, 27, 81, 241] (also Certified public accountant; Generally accepted accounting principles; Public accountant).

Accounting method

The term “accounting method” is used to describe one of the methods by which a for-profit organization or a nonprofit organization keeps its books and records. It is by this method that the organization determines its revenue and expenses (both deductible and nondeductible) and thus its net income, as well as its assets, liabilities, and fund balance. One of the principal differences among accounting methods is the timing of recognition of an item of income and expense (IRC § 446). [AR § 7.2(d)(1); PF §§ 2.7(b), 6.5, 12.3(e), 15.4(a), 15.5, 15.6(a); CG §§ 2.10, 6.14; CU Q 17.54; UB § 11.5(a); SM p. 155] (also Accrual method of accounting; Cash basis method of accounting).

Accounting period

An organization's “accounting period” is the period of time comprising twelve months, such as the calendar year or a fiscal year, that corresponds to its tax year. [CG § 2.9; UB § 11.5(b)] (also Annual accounting period).

Accounting period, change of

A tax-exempt organization may decide to change its accounting period. This is done by a timely filing of its annual information return with the appropriate IRS Center for the short period (occasioned by the change in the period) for which the return is required, indicating on the return that a change of accounting period is being made. Generally, if an organization is not required to file an annual information return or a tax return reflecting unrelated business income, it is not necessary to otherwise notify the IRS that a change of accounting period is being made. If, however, an organization has previously changed its annual accounting period at any time within the ten calendar years ending with the calendar year that includes the beginning of the short period resulting from the change of an accounting period, and if the organization had a filing requirement at any time during the ten-year period, it must file an application for a change in accounting period (Form 1128) with the appropriate IRS Center. [PF § 10.4(c); CU Q 17.57; RE Q 12.1].

Accounting standards

See Generally accepted accounting principles.

Accreditation

The term “accreditation” refers to a form of credentialing, by which an organization reviews the programs and other activities of other organizations for a particular purpose and approves (or disapproves) the organization by using a set of criteria known to all of the organizations being reviewed. For example, an accrediting organization will periodically review colleges to determine whether they should continue to be accredited as educational organizations or to initially accredit such an institution. An organization may also accredit programs of other organizations. Most accrediting organizations are tax-exempt organizations and will be classified as charitable organizations where the organizations being accredited are charitable organizations, or where the programs being accredited are operated by organizations that are charitable organizations. [CU Q 5.45] (cf. Certification).

Accrual, of income

See Accrue.

Accrual method of accounting

The “accrual method of accounting” is a method of accounting by which items of income and expense are recognized at the time a right to receive income and/or an obligation for an expense arises (IRC § 446(c) (2)).

A corporation that reports its taxable income using the accrual method of accounting may, at its election, deduct charitable contributions paid within two and a half months after the close of its tax year, as long as the board of directors of the corporation authorized the making of the charitable contribution during the tax year and the charitable contribution is made after the close of the tax year of the corporation and within the two-and-a-half-month period (IRC § 170(a)(2)). [CG § 2.10] (also Cash basis method of accounting).

Accrue

The word “accrue” generally means either to come into existence or to accumulate something. The term is used as part of the federal tax law that excludes from gross income forms of income accrued by a state or a political subdivision of a state, or the District of Columbia, where the income is derived from any public utility or the exercise of any essential governmental function, or forms of income that accrued to the government of any possession of the United States or any political subdivision of such a possession (IRC § 115). [EO § 19.21(b)].

Accuracy-related penalty

The federal tax law contains several “accuracy-related penalties,” many of them having direct applicability to tax-exempt organizations and charitable giving to them. These penalties apply to acts of negligence in the tax context (IRC § 6662(b)(1)), disregard of tax rules and regulations(id), a substantial understatement of income tax (IRC § 6662(b)(2)), a substantial valuation misstatement in the income tax setting (IRC § 6662(b)(3)), a substantial estate tax valuation understatement (IRC § 6662(b)(5)), and a substantial gift tax valuation understatement(id). The penalty is 20 percent of the portion of an underpayment of tax required to be shown on a tax return (IRC § 6662(a)). [CG § 10.14].

Achievement award

A private foundation grant to an individual made in recognition of an achievement generally does not require prior approval of the IRS. The selection criteria must be fair and serve one or more charitable purposes. These grants do not require that the monetary award be expended for a particular purpose or that the recipient perform a specific action. [PF § 9.3(b)].

Acknowledgement

For purposes of the corporate sponsorship rules, an “acknowledgment” may include exclusive sponsorship arrangements; logos and slogans that do not contain qualitative or comparative descriptions of a company's products, services, or facilities; a list of the company's locations, telephone numbers, or Internet address; value-neutral descriptions, including displays or visual depictions, of a company's product line or services; and a company's brand or trade names and product or services listings. (also Contemporaneous written acknowledgement).

Acquisition indebtedness

The term “acquisition indebtedness” is used in the context of the rules pertaining to the computation of unrelated debt-financed income. Acquisition indebtedness, with respect to debt-financed property, means the unpaid amount of (1) the indebtedness incurred by an organization in acquiring or improving the property, (2) the indebtedness incurred before any acquisition or improvement of the property if the indebtedness would not have been incurred but for the acquisition or improvement, and (3) the indebtedness incurred after the acquisition or improvement of the property if the indebtedness would not have been incurred but for the acquisition or improvement and the incurring of the indebtedness was reasonably foreseeable at the time of the acquisition or improvement (IRC § 514(c)(1)).

There are some exceptions to these rules. One is that the phrase acquisition indebtedness does not include indebtedness that was necessarily incurred in the performance or exercise of an organization's tax-exempt purpose or function (IRC § 514(c)(4)). Another is that the term does not include an obligation to pay an annuity that (1) is the sole consideration issued in exchange for property if, at the time of the exchange, the value of the annuity is less than 90 percent of the value of the property received in the exchange, (2) is payable over the life of one individual who is living at the time the annuity is issued, or over the lives of two individuals living at that time, and (3) is payable under a contract that does not guarantee a minimum amount of payments or specify a maximum amount of payments and does not provide for any adjustment of the amount of the annuity payments by reference to the income received from the transferred property or any other property (IRC § 514(c)(5)). Further, the term generally does not include indebtedness incurred by a qualified organization in acquiring or improving any real property (IRC § 514(c)(9)). [UB § 5.4(a); EO § 24.9(c); HC § 24.21(b); PF §§ 6.2(f), 11.4(a)–(c); CG § 14.6; SM p. 175].

Act

An “act” is the product of a bill or resolution passed by a legislature. It is statutory law. [EO § 22.2].

Act of God

The phrase “act of God” is used to describe an incident involving natural forces that cannot be prevented by human beings, such as flooding, hurricanes, and tornadoes. Most contracts, including insurance policies, contain a provision relieving one or more parties from liability where damages are due to an act of God, rather than a direct act (or failure to act) on the part of a party to the agreement.

Action

The word “action” is a technical term for a lawsuit. It is, thus, a proceeding in a court where one person has instituted litigation against another person for something done or not done, or to protect a right. The word is used in the sense of one person bringing an “action” against another. This term can also be used in connection with an administrative proceeding.

The word is also used in connection with the expenditure test. In defining the word “legislation,” the test uses the word “action.” That use defines the term “action” as being limited to the introduction, amendment, enactment, defeat, or repeal of acts, bills, resolutions, or similar items (IRC § 4911(c)(3)). [EO § 22.2(b)] (also Actionable; Cause of action).

Action on Decision

An “Action on Decision” is a document prepared by the IRS that contains an analysis of a court opinion and the decision by the Office of Chief Counsel as to the future steps the IRS should take with respect to it, such as opting to appeal the decision.

Action organization

An organization is an “action organization” if a substantial part of its activities involves attempting to influence legislation by propaganda or otherwise. Also, an organization is an action organization if it participates or intervenes, directly or indirectly, in any political campaign on behalf of or in opposition to any candidate for public office. Further, an organization is an action organization if it has these characteristics: (1) its main or primary objective or objectives (as distinguished from its incidental or secondary objectives) may be attained only by legislation or a defeat of proposed legislation, and (2) it advocates or campaigns for the attainment of these primary objectives as distinguished from engaging in nonpartisan analysis, study, or research and making the results of those nonpartisan activities available to the public. In determining whether an organization has these characteristics, ail of the surrounding facts and circumstances, including the articles of organization and all activities of the organization, are considered. [EO §§ 4.5(b), 22.3(c)(i), 23.1; HC §§ 7.1(b), 7.4(b), (f); AR § 1.6(d); CU Q 8.5, Q 9.4; SM pp. 186, 198; LI Q 7.5, Q 8.4].

Actionable

A matter is “actionable” when it involves one or more legitimate bases for a lawsuit (an action).

Active conduct

The term “active conduct” is used to describe a situation in which a tax-exempt organization is engaged in the operation of a program, as contrasted with the funding of a program that is operated by another organization. An illustration of this is the “active conduct” requirement that is part of the income test that a private operating foundation must meet. Under that test, funds must be expended by the private operating foundation itself (the active conduct), rather than by or through one or more grantee organizations. The rules concerning medical research organizations contain a requirement that these entities be directly engaged in the continuous active conduct of medical research in conjunction with a hospital. [EO § 7.6(d); HC § 5.1(b); PF § 3.1(d)] (also Significant involvement).

Activist organization

The term “activist organization” is used to describe an organization that engages in advocacy activities, such as demonstrations, boycotts, strikes, picketing, and litigation, and is not an action organization. [EO § 23.2(f)].

Activities, bundle of

In many ways, a nonprofit organization can be regarded as a bundle of activities. Some of these activities are program, some are administration or management, and some are fundraising. Other activities may be lobbying or political campaign activities (which may be program), or unrelated business activities.

Essentially, when the IRS audits a tax-exempt organization, it is reviewing each of the activities in this bundle. The law in this regard is particularly developed in the unrelated business income context. Thus, the law states that an activity does not lose identity as a trade or business merely because it is carried on within a larger aggregate of similar activities or within a larger complex of other endeavors that may, or may not, be related to the exempt purposes of the organization (IRC § 513(c)). This is known as the fragmentation rule.

With the authority of this rule, the IRS is empowered to fragment a tax-exempt organization's operation, administered as an integrated whole, into its component parts in search of an unrelated trade or business or other disqualifying activity. [EO § 24.2(f); UB § 2.3; SM p. 172] (also Functional accounting).

Activities conducted outside the United States

The phrase “activities conducted outside the United States,” for purposes of Form 990, Schedule F, include grantmaking, other program services, fundraising, the conduct of unrelated trade or business, program-related investments, other investments, or maintaining offices, employees, or agents in particular regions outside the U.S. [AR Chap. 13].

Activities, measurement of

As a consequence of the controversy concerning the permissible extent of political campaign activities that may be undertaken by tax-exempt social welfare organizations, there is interest in the methodology (or methodologies) to be used in measuring the activities of these organizations. This quantification needs to be developed because, in addition to defining permissible (and impermissible) political campaign activity, the federal tax law must stipulate how much of this activity is allowable. This matter goes beyond the confines of political campaign activity and the activities of exempt social welfare organizations, however, and will encompass all activities of all tax-exempt organizations.

The current approach of the IRS in this regard is to allocate expenditures to an exempt organization's various functions, thereby assigning a percentage of these expenditures to each function. Sometimes, the agency also ascribes percentages on the basis of time expended by an organization's directors, trustees, officers, employees, volunteers, and agents. A third approach used by the IRS is to analyze the way in which the organization describes itself in its dealings with the public. (also Primary purpose text).

Activities test

Increasingly, the IRS is applying an “activities test” to determine whether a nonprofit organization qualifies for tax exemption in accordance with the federal tax law. This test is usually applied in a noncharitable context. As the test's name implies, it is used to ascertain whether an organization is sufficiently performing activities in conformity with the prescription of the particular exemption. (also Operational test; Primary purpose test).

Actual controversy

One of the requirements for bringing an action in accordance with the declaratory judgment rules (concerning the tax status of charitable organizations and farmers' cooperatives) is that the case must involve an “actual controversy” (IRC § 7428). This means that there must be a bona fide issue of law between the organization and the IRS and that the organization is in existence and prepared to litigate the issue or issues between the parties. [EO § 27.6(b)(i)].

Actuarial tables

The U.S. Department of the Treasury prepares “actuarial tables” for a variety of uses, including the determination of the value of income interests and remainder interests for purposes of computing charitable contribution deductions. (IRC § 7520(a)(1)) These tables must be prepared using the most recent mortality experience available (IRC § 7520(c)(3)). The tables must be revised at least once every ten years to take into account the most recent mortality experience available as of the time of the revision (id.). In this setting, these tables are often termed “valuation tables.” They reflect the use of certain interest rates and adjusted payout rates. [CG §§ 11.3, 11.4].

Actuary

An “actuary” is an individual who computes elements, such as risks and rates, according to probabilities on the basis of certain facts. Actuaries prepare actuarial tables (sometimes termed “experience tables”) to determine statistical items such as insurance rates, pension rates, and premiums. In the context of planned giving, actuaries prepare tables of factors, used to determine the charitable contribution deduction; these tables are prepared by actuaries in the U.S. Department of the Treasury (IRC § 7520(a)(1)). [CG §§ 11.3, 11.4].

Ad hoc

“Ad hoc” is a Latin term meaning “for a particular purpose.” It is generally used in reference to an ad hoc committee.

Ad hoc committee

The term “ad hoc committee” is used to describe a committee, such as one established by a nonprofit organization, formed to function only for a specific purpose and often only for a specific time (as opposed to a standing committee).

Addition to tax

Some penalties in the federal tax law that are particularly relevant to tax-exempt organizations and charitable giving to them are framed as “additions to tax.” Thus, there is an addition to tax for a failure to timely file a tax return (for example, a Form 990-T) (IRC § 6651(a)(1)). This addition to tax is 5 percent of the amount of the tax due if the failure is for not more than one month, with an additional 5 percent for each additional month or fraction of a month during which the failure continues, not exceeding 25 percent in the aggregate.

There is an addition to tax for a failure to timely pay a tax shown due on a tax return (IRC § 6651(a)(2)). This addition to tax is 0.5 percent of the amount of the tax due if the failure is for not more than one month, with an additional 0.5 percent for each additional month or fraction of a month during which the failure continues, not exceeding 25 percent in the aggregate.

There also is an addition to tax for a failure to timely pay any amount in respect of any tax required to be shown on a tax return that is not shown (IRC § 6651(a)(3)). This addition to tax is 0.5 percent of the amount of the tax due if the failure is for not more than one month, with an additional 0.5 percent for each additional month or fraction of a month during which the failure continues, not exceeding 25 percent in the aggregate.

These additions to tax of 0.5 percent may be increased to 1 percent where the failure continues after notice and demand for payment is given by the IRS (IRC § 6651(d)). They are not to be applied, however, in instances where the failure is due to reasonable cause and not due to willful neglect.

There are explicit penalties imposed on tax-exempt organizations and/or their managers that are enumerated in the Internal Revenue Code in the portion referencing additions to tax. These are the penalties for failure to file an annual information return (IRC §§ 6652(c)(1)(A) and (B)), for failure to provide public access to an annual information return (IRC § 6652(c)(1)(C)), failure to provide public access to an application for recognition of exemption (IRC § 6652(c)(1)(D)), failure by certain trusts to file an information return (IRC §§ 6652(c)(2)(A) and (B)), failure to file an information return reflecting a liquidation, dissolution, termination, or substantial contraction of a tax-exempt organization (id.), failure by an estate or trust to pay estimated income taxes (IRC § 6654(1)), failure by a tax-exempt organization to pay estimated unrelated business income taxes (IRC § 6655(g)(3)), and failure by a private foundation to pay estimated net investment income taxes (id.).

Additional hospital exemption requirements

Congress, as part of enactment of the Pension Protection and Affordable Care Act, enacted an array of additional requirements for eligibility for tax-exempt status, as charitable entities, for hospital organizations. These requirements pertain to community health needs assessments, financial assistance policies, limitations on charges, and billings and collections (IRC § 501(r)). [HC § 26.10; EO § 7.6(b)].

Additional tax

The term “additional tax” is synonymous with the term “second-tier tax,” as these taxes are applied in the private foundation, black lung benefits trust, intermediate sanctions, and political expenditures settings (IRC §§ 4941(b), 4942(b), 4943(b), 4944(b), 4945(b), 4951, 4952, 4955(b), 4958(b)). [EO §§ 12.4, 18.5, 21.10, 23.3; PF §§ 5.15(d), 6.7(c), 7.6, 8.5, 9.10(c); HC § 4.9(a)(vi); SM pp. 90–91].

Adjunct theory

The term “adjunct theory” means, in essence, that an organization that is an adjunct of another organization takes on the tax law characteristics of the other entity. Under this theory, an organization can be tax-exempt because it bears a close and intimate relationship to another organization that is tax-exempt. This doctrine, however, does not have broad application, in that it cannot be used to sidestep the prerequisites for tax exemption that an organization must meet under the statutory rules. [EO § 7.13(b)].

Adjusted basis

The phrase “adjusted basis” is used to define a basis in a property that has been adjusted to reflect true economic gain or loss in the disposition of the property. (IRC § 1011) Generally, basis is adjusted for expenditures, receipts, losses, or other items properly chargeable to a capital account (other than for certain taxes (IRC § 266) or other carrying charges and circulation expenditures (IRC § 173)) (IRC § 1016). Basis is also adjusted for the following items, to the extent the allowable items resulted in a reduction of tax: exhaustion, wear and tear, obsolescence, amortization, and depletion. [CG § 2.14(b)].

Adjusted gross income

The term “adjusted gross income” means gross income less certain expenses, such as alimony payments, certain moving expenses, and certain business expenses (IRC § 62(a)). Thus, adjusted gross income is gross income that is adjusted to take into account certain costs of acquiring or transferring income. The reason for the concept of adjusted gross income is to provide a fair basis for the allowance of noneconomic personal expense deductions. Thus, adjusted gross income is gross income after adjusting for the economic costs of generating revenue to the taxpayer. [CG § 2.4] (also Contribution base).

Adjusted net income

For purposes of the rules concerning mandatory payout by private foundations, the term “adjusted net income” means the excess (if any) of (1) the private foundation's gross income for the tax year (determined using certain income modifications) over (2) the sum of the deductions (determined using certain deduction modifications) that would be allowed to a taxable corporation for the tax year (IRC §§ 4942(f)(1), 4942(j)(3)(A)(i)). This term is also used in connection with the income test with respect to private operating foundations and the payout requirement for Type III non-functionally integrated supporting organizations. [PF §§ 3.1(d), 12.1(b), 15.7(g)].

Adjusted payout rate

The term “adjusted payout rate” is used in the context of charitable remainder trusts to mean adjustments in the factors used to calculate the charitable contribution deduction where there is a variation in the payout sequence other than an income interest payment at the end of each tax year or, in the case of a charitable remainder unitrust, where there is a valuation of trust assets on a day other than the day at the end of the year. [CG § 12.12].

Administration, power of

See Power of administration.

Administrative

The term “administrative” is derived from the words “administer” and “administration.” The term is used in government parlance to describe the function of an entity that has the task of implementing (administering) a body of statutory law. A U.S. Supreme Court justice wrote that, “[a]lthough modern administrative agencies fit most comfortably within the Executive Branch, as a practical matter they exercise legislative power, by promulgating regulations with the force of law; executive power, by policing compliance with those regulations; and judicial power, by adjudicating enforcement actions and imposing sanctions on those found to have violated their rules.” (also Administrative agency).

Administrative agency

An “administrative agency” is a unit of government that has some form of regulatory and/or rule-making authority. For example, the IRS is an administrative agency, as are the Federal Election Commission and the U.S. Postal Service. A U.S. Supreme Court justice wrote that, “[a]lthough modern administrative agencies fit most comfortably within the Executive Branch, as a practical matter they exercise legislative power, by promulgating regulations with the force of law; executive power, by policing compliance with those regulations; and judicial power, by adjudicating enforcement actions and imposing sanctions on those found to have violated their rules.” [FR §§ 3.1(k), 4.6].

Administrative allowance

The term “administrative allowance” is used to define the amount of money a tax-exempt organization is to receive from an insurance company or broker for its efforts in assisting with the marketing and sale of insurance products to its members. This type of payment is likely to constitute unrelated business income, unless it can be structured as a royalty. [UB § 9.4(b); EO §§ 24.5(e)(ii), 25.1(g)].

Administrative hearing

An “administrative hearing” is a type of administrative proceeding, in which facts are adduced, such as by the testimony of witnesses, usually in the context of development of a rule or regulation.

Administrative law

The body of law known as “administrative law” is law created by an administrative agency as the result of the promulgation of regulations, rules, forms, and the instructions to forms, and the issuance of decisions. For example, the IRS creates administrative law when it promulgates regulations, revenue rulings, revenue procedures, and the like.

Administrative proceeding

An “administrative proceeding” is a proceeding conducted by an administrative agency. In the proceeding, the agency must comport with its own rules and regulations, as well as applicable statutory law and constitutional law. For example, when the IRS conducts a hearing on a proposed regulation or rule, or in connection with a specific issue, the hearing is an administrative proceeding.

Administrative record

In a declaratory judgment case, concerning the tax status of a charitable organization or a farmers' cooperative, the court involved generally will confine its review of the case to the scope of facts contained in the “administrative record.” That is, the court usually will not conduct a trial at which new evidence may be presented. This limitation is not followed, however, where the matter concerns the revocation of the tax-exempt status of an organization. The administrative record is that body of evidence consisting of facts submitted by the organization involved and developed by the IRS; third parties may not submit material for the administrative record. [EO § 27.6(b)(iv)].

Administrative remedy

The concept of “administrative remedies” is the range of forms of relief (remedies) available to a person when that person is involved in a proceeding before an administrative agency. Before taking the particular matter into court, the person must exhaust his, her, or its administrative remedies. [EO § 27.6(b)(ii)].

Administrative remedies, exhaustion of

See Exhaustion of remedies.

Administrator

An “administrator” is an individual appointed by a court to resolve the affairs of another individual who died intestate.

Advance

The federal tax law uses the word “advance” as a synonym for the word “promote” (as in promotion of health and promotion of social welfare), principally to describe categories of charitable organizations. The term thus means “to move forward” or “to progress.” [EO §§ 7.6, 7.8-7.11; SM p. 34].

Advance approval of grants

The federal tax law requires a private foundation, when it is planning a program of grants to individuals for travel, study, or similar purposes, to obtain from the IRS advance approval of its grant-making procedures (IRC § 4945(g)). To secure this approval, a private foundation must demonstrate, to the satisfaction of the IRS, that (1) its grant procedure includes an objective and nondiscriminatory selection process, (2) the procedure is reasonably calculated to result in performance by the grantees of the activities that the grants are intended to finance, and (3) the private foundation plans to obtain reports to determine whether the grantees have performed the activities that the grants are intended to finance. No single procedure or set of procedures is required. Procedures may vary, depending upon factors such as the size of the private foundation, the amount and purpose of the grants, and whether one or more recipients are involved. Generally, a private foundation that has filed its procedures with the IRS can implement them within forty-five days, unless the IRS has acted adversely in the interim. [PF § 9.3(a)].

Advance ruling

When a private foundation seeks to terminate its private foundation status on the ground that it will be operating as a publicly supported charity, the organization must receive an advance ruling and meet the requirements of the publicly supported charity rules for an advance ruling period of sixty months. [PF § 13.4].

Advancement organizations

Organizations that are tax-exempt because they are charitable entities include those that advance education, advance science, and advance religion. [EO §§ 7.8-7.10; SM p. 34].

Advantages of tax exemption

See Tax exemption, advantages of.

Adverse

The IRS issues determination letters and rulings. When these pronouncements provide the person requesting them with a response that the person did not want, the pronouncements are said to be “adverse.” (also Favorable).

Adverse determination

A nonprofit organization may make application to the IRS for recognition of its tax-exempt status. If the IRS concludes that the organization qualifies for tax exemption, it will issue a favorable determination letter or ruling. If, however, the IRS decides to the contrary, it will issue an “adverse determination,” perhaps triggering the process of administrative appeals and litigation. [EO § 27.1].

Adverse party

For purposes of the grantor trust rules, an “adverse party” is a person having a substantial beneficial interest in a trust that would be adversely affected by the exercise or nonexercise of the power which he, she, or it possesses with respect to the trust (IRC § 672(a)). [CG § 3.8].

Adverse possession

The term “adverse possession” means a method of acquisition of title to an item of property by possession of it for a period of time, set by statute, and under certain other conditions. (also Usucaption).

Advertising

As to law in the nonprofit organization context, the most comprehensive definition as to what constitutes “advertising” is found in the corporate sponsorship rules. There, the term means any message or other programming material that is broadcast or otherwise transmitted, published, displayed, or distributed, and that promotes or markets a trade or business, or any service, facility, or product. Advertising includes messages containing qualitative or comparative language, price information, or other indications of savings or value, an endorsement, or an inducement to purchase, sell, or use any company, service, facility, or product. Also, any communication that is a business listing is likely to be regarded as “advertising.” The net income from advertising by a tax-exempt organization is generally subject to tax as unrelated business income. Some forms of “advertising” are acts of fundraising. [UB §§ 6.5(a), 6.5(b); EO §§ 24.5(h), 24.6; HC § 24.17; AS § 5.8; CG § 3.1(g); SM pp. 172, 286] (also Acknowledgment).

Advertising income

Net income derived by a tax-exempt organization from the sale of advertising is, almost always, taxable as a form of unrelated business income (IRC § 513(c)). The federal income tax regulations contain detailed rules for calculation and reporting of this type of income. It is the view of the IRS that all forms of advertising income are taxable; that is, this view holds that it is not possible for a tax-exempt organization to have related income from advertising. [EO § 24.5(h); UB § 6.5].

Advice of counsel

The term “advice of counsel” means advice provided by a lawyer, usually in writing, preceded by a full disclosure of the factual situation. (also Reasoned written legal opinion).

Advisory committee

An “advisory committee” is a group of individuals who provide policy or technical input in connection with the programs of a tax-exempt organization. This committee is, however, separate from the organization's governing body and thus does not have a formal role in the organization's governance. [SM p. 18].

Advisory letter

The IRS has the authority to, when concluding its examination of a tax-exempt organization, issue an “advisory letter” concerning one or more aspects of the organization's operations where there may be endangerment of exempt status or other compliance issues. [AU §§ 5.32(a), 5.33(b)].

Advisory opinion

An “advisory opinion” is an interpretation of the federal election laws issued by the Federal Election Commission.

Advocacy

“Advocacy” is active espousal of a position, a point of view, or a course of action. It can include lobbying, political campaign activity, demonstrations, boycotts, litigation, and various forms of programmatic advocacy. [EO Chaps. 22, 23; UB § 9.7(d); PG Chap. 5, p. 342; FR § 4.3(e)].

Advocacy communications or research materials

The expenditure test contains rules concerning situations where expenses for what are initially nonlobbying communications can subsequently be characterized as grass-roots lobbying expenditures where the materials or other communications are later used in a lobbying effort. For this result to occur, the materials must be “advocacy communications or research materials.” These materials are any communications or materials that both refer to and reflect a view on specific legislation but that do not, in their initial format, contain a direct encouragement for recipients to take action with respect to legislation. Where these communications or materials are subsequently accompanied by a direct encouragement for recipients to take action with respect to legislation, the communications or materials themselves are treated as grass-roots lobbying communications unless the primary purpose of the organization in undertaking or preparing the communications or materials was not for use in lobbying. In the absence of this primary purpose, all expenses of preparing and distributing the communications or materials will be treated as grass-roots expenditures; in the case of subsequent distribution of the materials by another organization, however, the characterization of expenditures as grass-roots lobbying expenditures under this rule applies only to expenditures paid less than six months before the first use of the communications or materials with a direct encouragement to action. [EO § 23.9; SM p. 203].

Advocacy organizations

An “advocacy organization” is an entity that has advocacy as its primary purpose. An organization can be an advocacy organization without being an action organization. [EO Chaps. 17, 22, 23, § 13.3].

Affiant

An “affiant” is an individual who makes and executes an affidavit.

Affidavit

The term “affidavit” means a written legal document that contains a statement of an individual, executed under oath and attested to by a notary public or some other authorized individual. An affidavit may be used in litigation or in an administrative proceeding in lieu of testimony.

Affiliate

The word “affiliate” means a close connection or close association; it basically is synonymous with “associate” or “auxiliary.” The term is often used to describe a class of members of an organization that are not “voting members” (or otherwise not “regular” members), but nonetheless have some interest in the purposes and programs of the organization. The term is also used to describe a relationship between two or more organizations; an affiliation usually is a looser arrangement than that evidenced by a parent and subsidiary relationship or that of organizations in a joint venture. [HC § 34.3(e)] (also Affiliated group; Affiliated organization).

Affiliated group

The term “affiliated group” is used in conjunction with the expenditure test. Generally, under this test, two organizations are deemed “affiliated” where one organization is bound by decisions of the other on legislative issues pursuant to its governing instrument, or where the governing board of one organization includes enough representatives of the other to cause or prevent action on legislative issues by the first organization (IRC § 4911(1)(2)). Where a number of organizations are affiliated, even in chain fashion, all of them are treated as one group of affiliated organizations. If, however, a group of autonomous organizations controls an organization, but no one organization in the controlling group alone can control that organization, the organizations are not considered an affiliated group by reason of the second of these definitions (IRC § 4911(f)(1)). [AR §§ 9.1(e), 9.2(b); EO § 22.3(d)(viii); HC § 7.1(f)] (also Interlocking directorate).

Affiliated organization

An organization is “affiliated” with another organization if the two entities are related in some manner. The concept of affiliation is broader than that of control, although controlled organizations are obviously affiliated. The law of tax-exempt organizations contains several instances of situations involving affiliated entities, including organizations that are part of a group for purposes of tax exemption, supporting organizations in relation to one or more supported organizations, related organizations such as a trade association and a related foundation, a national organization with affiliated organizations that all participate as beneficiaries of a pooled income fund, and organizations that are members of an affiliated group, as that term is used as part of the expenditure test rules. [AR §§ 7.2(a)(1), 7.2(b)(19), 15.2(c), (i)(7); EO § 22.2(d)(vii), Chaps. 28–30; CU Q 1.42, Q 1.43, Q 2.66, Q 4.6; SM pp. 190–191 (also Association-related foundation; Group exemption).

Affiliated organization, policy as to

The IRS, on the Form 990, suggests that the filing organization, if it has one or more affiliated organizations, have a policy as to standardization of activities and practices, given the entities' common mission and goals, and the public perception that the organizations are all part of one entity. [GV §§ 4.1(i), 6.3(h); AR §§ 5.1(i)(4), 5.2(a)(8)].

Affinity

The word “affinity” means an inherent likeness or agreement between things; when individuals are involved, it refers to a group with common interests or objectives (affinity groups). Many clubs, such as those of individuals interested in a particular hobby, are affinity groups. Organizations of individuals with a common heritage, base of employment, or some other common experience (such as alumni associations) are affinity groups.

Affinity card

An “affinity card” is a credit or debit card issued only to members of an affinity group; the card bears the organization's name, logo, and/or some other unifying symbol. Many nonprofit organizations use these cards as fundraising opportunities; the for-profit organization that is receiving a profit from the use of the card by the consumers who are members of the affinity group agrees to pay a percentage of its profit to the nonprofit organization. If this arrangement is properly structured, these payments constitute royalties, so that the income the nonprofit organization receives from its affinity card program is not taxable as unrelated business income. If, however, the organization is significantly involved in promotion of the program, the consequence may be taxation of the revenue. [EO § 25.1(g); FR §§ 5.7(b)(vi), 5.18(d); SM p. 178].

Affinity group

See Affinity.

Affirmative action

The concept of “affirmative action” is the taking of positive (“affirmative”) steps and measures to eradicate the results of previous forms of discrimination; it is the basis for programs that benefit individuals in a particular class (defined using factors such as race or gender) because of past discrimination against other individuals in the same class. Affirmative action is based on the constitutional law principle of equal protection