Nonprofit Law for Colleges and Universities E-Book

Bruce R. Hopkins

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Nonprofit Authority
• Sprache: Englisch
• Veröffentlichungsjahr: 2011

Seitenzahl: 1107

Beschreibung

A hands-on guide to the most pertinent and critical legal issues facing those who lead and manage tax-exempt colleges and universities Nonprofit Law for Colleges and Universities is a practical, accessible guide to nonprofit law as it is specifically applicable to exempt colleges and universities, and their related entities, such as fundraising foundations, endowment funds, supporting organizations, for-profit subsidiaries, and limited liability companies. * Topics discussed will include governance, endowment funds management, the annual reporting requirements, and the unrelated business rules * Written by the country's leading authorities on tax-exempt organizations * Features essential, practical legal information in easy-to-understand English * Presented in question-and-answer format, divided according to major topic areas that are of interest to those who lead and manage tax-exempt colleges and universities Designed for the management and leadership of colleges and universities, as well as others working in the higher education field, such as lawyers, accountants, and fundraising/development personnel, Nonprofit Law for Colleges and Universities allows readers to easily search for and find answers to questions, putting all the information they need right at their fingertips.

Leseprobe

Contents

Preface

About the Authors

Chapter 1: Nonprofit Organizations Law Generally

Nonprofit Law Basics

Federal Tax Law Basics

Notes

Chapter 2: Nonprofit Educational Organizations

Education Law Basics

School Law Basics

Demographics

Nonprofit Law Basics

Notes

Chapter 3: Acquiring and Maintaining Tax-Exempt Status

Nonprofit and Tax-Exempt Entities

Exemption Application Basics

General Procedures

Application Form 1023

Form 1023, Schedule B

Group Exemption

Notes

Chapter 4: Acquiring and Maintaining Public Charity Status

Public Charity Law in General

Supporting Organizations in General

Type III Supporting Organizations

General Supporting Organization Questions

Donor-Advised Funds

Notes

Chapter 5: Governance

Notes

Chapter 6: Private Inurement, Private Benefit, and Excess Benefit Transactions

Introduction

Private Inurement

Private Benefit

Intermediate Sanctions

Notes

Chapter 7: Executive Compensation

Concept of the Executive

Payment of Reasonable Compensation

Reporting of Compensation, Excess Benefit Transactions, and Correction of Excess Compensation

Executive Compensation and the Governing Board

Notes

Chapter 8: Legislative Activities

Basic Federal Tax Rules

Expenditure Test

Social Welfare Organizations

Trade, Business, and Professional Associations

Reporting Requirements

Notes

Chapter 9: Political Campaign Activities

Basic Federal Tax Law Rules

IRS Enforcement Efforts

Federal Election Laws

Reporting Requirements

Notes

Chapter 10: Endowment Funds

Endowment Fund Basics

Demographics

Endowment Fund Management

Endowment Fund Investments

Endowment Fund Distributions

Endowment Fund Criticisms

Notes

Chapter 11: Scholarships, Fellowships, and Other Student Assistance

Scholarship and Fellowship Law

Other Student Assistance Programs

Notes

Chapter 12: Charitable Giving Rules

Charitable Giving Rules Basics

Percentage Limitations

Conditional, Unrestricted, and Restricted Gifts

Unique Forms of Donors

Special Gift Situations

Charity Auctions

Planned Giving

Charitable Remainder Trusts

Pooled Income Funds

Charitable Gift Annuities

Charitable Lead Trusts

Other Gifts of Remainder Interests

Notes

Chapter 13: Fundraising Regulation

Federal Law Requirements

State Law Requirements

Notes

Chapter 14: Unrelated Business Activities in General

General Unrelated Business Rules

Basic Rules

Debt-Financed Property Rules

Other Unrelated Business Rules

Notes

Chapter 15: Contemporary Application of the Unrelated Business Income Rules

Notes

Chapter 16: Entity Planning

Choice of Entity Basics

Joint Venture Basics

Partnerships and Limited Liability Companies

Tax-Exempt Organizations and Joint Ventures

Tax-Exempt Organizations, Partnerships, and Limited Liability Companies

Information Reporting

Notes

Chapter 17: Annual Information and Other Returns

General Requirements

Return Contents

Unrelated Business Income Tax Returns

Accounting Methods and Financial Statements

Changes in General Operations

Public Inspection and Record-keeping Requirements

Sanctions

Notes

Chapter 18: Disclosure and Distribution Rules

Annual Information Returns

Exemption Applications

Disclosure and Distribution Sanctions

Provision of Goods and Services

Fundraising Disclosure

Other Documents and Requirements

Notes

Index

Copyright © 2011 by Bruce R. Hopkins, Virginia C. Gross, and Thomas J. Schenkelberg. 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.

Nonprofit law for colleges and universities : essential questions and answers for officers, directors, and advisors / Bruce R. Hopkins, Virginia C. Gross, Thomas J. Schenkelberg.

p. cm.—(Wiley nonprofit authority series; 10)

Includes bibliographical references and index.

ISBN 978-0-470-91343-7 (pbk.); ISBN 978-1-118-08855-5 (ebk); ISBN 978-1-118-08856-2; ISBN 978-1-118-08857-9 (ebk)

1. Universities and colleges—Finance—Law and legislation—United States—Miscellanea. I. Gross, Virginia C. II. Schenkelberg, Thomas J. III. Title.

KF4234.H67 2011

346.73’064—dc22

To the trustees and officers of, and advisors to, the nation’s nonprofit colleges and universities, who must function in an increasingly complex, challenging, and sometimes mysterious law environment.

Preface

If we may say so, this book is timely.

Tax-exempt colleges and universities are currently under the federal tax law’s policy spotlight, manifesting an intensity not seen since the development of the unrelated business rules in 1950.

During most of the ensuing six decades, exempt colleges and universities were nearly ignored by Congress, the Department of the Treasury, and the Internal Revenue Service. The focus was on other categories of exempt organizations, such as hospitals, private foundations, credit counseling agencies, and down payment assistance organizations. To be sure, there have been the occasional reports about the propriety of collegiate athletics and higher education indirect tax arbitrage, but these controversies have been short-lived.

A few years ago, the interest at the IRS in the unrelated business expense allocation rules resumed, particularly with respect to the matter of adherence to the rule that only expenses that are directly related to the conduct of the unrelated business are properly deductible versus the approach (apparently the more common practice) that the expenses need be merely reasonably allocated between related and unrelated activities. The IRS became curious as to why relatively large sums of gross unrelated business income were giving rise to such little taxable income. Colleges and universities were among the organizations suspected of being overly generous in allocating expenses to unrelated activities.

As the IRS was musing about this and other aspects of the unrelated business rules, some members of Congress were becoming vocal about the rising cost of higher education. Questioning of the uses of college and university endowments followed, with critics asserting that too little is being spent by these funds for student assistance.

More forces within nonprofit law came into play, none particularly focused on colleges and universities at the outset. Prime among these areas of interest were nonprofit governance and executive compensation. Unfortunately for exempt colleges and universities, all of these forces in the law intertwined and focused on these institutions.

Consequently, when the IRS began to design what became the college and university compliance questionnaire, what could have been a few questions confined to the unrelated business context ballooned into the now-infamous (and impressive) Form 14018, which we refer to throughout the book as the College Compliance Questionnaire.

Over the last two decades or so, the health care field has had the dubious distinction of having, among the nation’s nonprofit subsectors, the most federal tax law issues. Because of the recent intense focus on colleges and universities by the IRS and Congress, the higher education community may be vying for that unenviable first-place position. Certainly that may be the case in the unrelated business context.

Higher education tax law has a pattern of spawning law that is applicable not only to it but also to the larger exempt organizations field. Illustrations of this are the rules pertaining to corporate sponsorships and travel tours. Today the focus on higher education executive compensation practices may lead to new rules for all in determining when compensation is reasonable and to changes in the excess benefit transactions law. Colleges and universities could be responsible for alterations in the law concerning endowment spending and unrelated business cost allocations and deduction rules.

In this book, we have addressed more topics than those covered by the IRS questionnaire. Indeed, we have discussed all nonprofit law topics we think are relevant in the higher education setting. Yet the IRS questionnaire was never far from our collective consciousness; we have endeavored to address every point of law the IRS has referenced there.

Preliminarily, the data the IRS has from the responses to the questionnaires has been summarized in an interim report prepared by the IRS and issued in mid-2010. We frequently refer to this report, which is referenced throughout as the Compliance Project Interim Report.

It is not clear, at this writing, where this IRS initiative is heading. Some are of the view that the most that will come of it is a few IRS examinations (which, in fact, are under way). Others note the parallel in the exempt hospital setting and wonder whether someday there will be, for exempt colleges and universities, the equivalent of Form 990, Schedule H, and Internal Revenue Code section 501(r) (the former bringing new reporting requirements for hospitals and the latter bringing additional exemption criteria for them). If we have to guess between these two outcomes, we will go with the latter.

We hope that this book helps college and university trustees, officers, and advisors to better understand the law environment in which they are functioning and thus to better cope with the rules. Lawyers and accountants are invited to peruse these pages as well; the book is, we hope, a valuable resource to them as they counsel and advise colleges and universities. Also, we hope that the question-and-answer format used for this book helps the reader quickly find the needed answer to a pressing question.

All of the questions answered by the book are listed at the beginning, for ease of answer search. Within many of the answers are numbers in parentheses, which are cross-references to other answers containing related material.

We wish to thank our friends at John Wiley & Sons for their support for this project, particularly our senior production editor, Natasha Andrews-Noel, our development editor, Jennifer MacDonald, and senior editor, Susan McDermott. Thanks also goes to an associate in our firm, John Crawford, who has provided valuable assistance in the book’s preparation.

Bruce R. Hopkins

Virginia C. Gross

Thomas J. Schenkelberg

July 2011

About the Authors

BRUCE R. HOPKINS is a senior partner in the law firm of Polsinelli Shughart PC, practicing in the firm’s Kansas City, Missouri, and Washington, D.C., offices. He specializes in the representation of colleges, universities, associations of institutions of higher education, and other tax-exempt organizations. His practice ranges over the entirety of law matters involving exempt organizations, with emphasis on the formation of nonprofit organizations, acquisition of recognition of tax-exempt status for them, governance and the law, the private inurement and private benefit doctrines, the intermediate sanctions rules, legislative and political campaign activities issues, public charity and private foundation rules, unrelated business planning, use of exempt and for-profit subsidiaries, joint venture planning, tax shelter involvement, review of annual information returns, Internet communications developments, the law of charitable giving (including planned giving), and fundraising law issues.

Mr. Hopkins served as chair of the Committee on Exempt Organizations, Tax Section, American Bar Association; chair, Section of Taxation, National Association of College and University Attorneys; and president, Planned Giving Study Group of Greater Washington, D.C.

Mr. Hopkins is the series editor of Wiley’s Nonprofit Law, Finance, and Management Series. In addition to coauthoring Nonprofit Law for Colleges and Universities: Essential Questions and Answers for Trustees, Officers, and Advisors, he is the author of The Law of Tax-Exempt Organizations, Tenth Edition; Planning Guide for the Law of Tax-Exempt Organizations: Strategies and Commentaries; IRS Audits of Tax-Exempt Organizations: Policies, Practices, and Procedures; The Tax Law of Charitable Giving, Fourth Edition; The Law of Fundraising, Fourth Edition; The Tax Law of Associations; The Tax Law of Unrelated Business for Nonprofit Organizations; The Nonprofits’ Guide to Internet Communications Law; The Law of Intermediate Sanctions: A Guide for Nonprofits; Starting and Managing a Nonprofit Organization: A Legal Guide, Fifth Edition; Nonprofit Law Made Easy; Charitable Giving Law Made Easy; Private Foundation Law Made Easy; Fundraising Law Made Easy; 650 Essential Nonprofit Law Questions Answered; The First Legal Answer Book for Fund-Raisers; The Second Legal Answer Book for Fund-Raisers; The Legal Answer Book for Nonprofit Organizations; The Second Legal Answer Book for Nonprofit Organizations; and The Nonprofit Law Dictionary; and is the coauthor, with Jody Blazek, of Private Foundations: Tax Law and Compliance, Third Edition; also with Ms. Blazek, of The Legal Answer Book for Private Foundations; with David O. Middlebrook, of Nonprofit Law for Religious Organizations: Essential Questions and Answers; with Thomas K. Hyatt, of The Law of Tax-Exempt Healthcare Organizations, Third Edition; with Douglas K. Anning, Virginia C. Gross, and Thomas J. Schenkelberg, of The New Form 990: Law, Policy, and Preparation; and with Ms. Gross, of Nonprofit Governance: Law, Practices & Trends. He also writes Bruce R. Hopkins’ Nonprofit Counsel, a monthly newsletter, published by John Wiley & Sons.

Mr. Hopkins maintains a Web site providing information about the law of tax-exempt organizations, at www.nonprofitlawcenter.com. Material posted on this site includes current developments outlines concerning this aspect of the law, summaries of court opinions, discussions of his books, various indexes for his newsletter, and a “What’s New” listing of recent developments in exempt organizations law.

Mr. Hopkins is a member of the adjunct faculty of the University of Kansas School of Law where he teaches the course on nonprofit, tax-exempt organizations. He received the 2007 Outstanding Nonprofit Lawyer Award (Vanguard Lifetime Achievement Award) from the American Bar Association, Section of Business Law, Committee on Nonprofit Corporations. He is listed in The Best Lawyers in America, Nonprofit Organizations/Charities Law, 2007 to 2011, and was named Kansas City’s nonprofit lawyer of the year for 2011.

Mr. Hopkins earned his J.D. and LL.M. degrees at The George Washington University Law School and his B.A. at the University of Michigan. He is a member of the bars of the District of Columbia and the state of Missouri. For a list of all Wiley books by Bruce Hopkins, please visit www.wiley.com/go/hopkins.

VIRGINIA C. GROSS is a shareholder with Polsinelli Shughart PC concentrating her practice on nonprofit and tax-exempt organizations law. Ms. Gross counsels varied nonprofit organizations on all aspects of tax-exempt organizations law, such as the formation, qualification, merger, and activities of nonprofit organizations. She advises nonprofit clients on issues regarding their operations, fundraising practices, unrelated business income planning, joint venturing and partnering, grant-making, and the use of supporting organizations and for-profit subsidiaries. Nonprofit clients include charitable and educational organizations, private foundations, associations, supporting organizations, health care organizations, social welfare organizations, and social clubs. Ms. Gross has worked with numerous nonprofit boards of directors and trustees regarding governance and best practices matters. Ms. Gross is a frequent writer and speaker on nonprofit law topics. Her publications include Nonprofit Governance: Law, Practices & Trends and The New Form 990: Law, Policy and Preparation. Ms. Gross earned her J.D. from the University of Texas and her B.S. from Texas A&M University and is listed in Best Lawyers in America for Nonprofit Organizations/Charities Law for 2008 to 2011.

THOMAS J. SCHENKELBERG is chair of the Polsinelli Shughart Nonprofit Organizations Practice Group. Drawing on his experience as both an attorney and a certified public accountant, Mr. Schenkelberg’s practice specializes in the areas of tax, nonprofit, and health care law. Clients include national hospital systems, research organizations, private foundations, colleges, universities, associations, social welfare organizations, political action committees, and governmental entities. Clients turn to Mr. Schenkelberg for structuring mergers and acquisitions, guiding corporate reorganizations, qualification for tax exemption, joint ventures of nonprofit and for-profit entities, nonprofit governance issues, compliance with private foundation rules, unrelated business income planning, fundraising programs, for-profit subsidiary planning, public charity qualification, and use of supporting organizations. His practice also involves planning for integrated delivery systems, whole-hospital joint ventures, medical service organizations, and avoidance of private inurement/intermediate sanctions. He has served as the vice-chair of the American Health Lawyers Association Tax and Finance Committee and is a frequent writer and speaker on nonprofit law topics. His many publications include coauthoring of the Tax Management Portfolio, “Private Foundations’ Distributions (Sec. 4942)” published by the Bureau of National Affairs, and The New Form 990: Law, Policy & Preparation. Mr. Schenkelberg is listed in the Best Lawyers in America for Nonprofit Organizations/Charities Law.

CHAPTER 1

Nonprofit Organizations Law Generally

A lawyer representing nonprofit colleges, universities, and other nonprofit organizations faces, on a daily basis, a barrage of questions about the rules governing the organizations’ formation, administration, operation, management, and compliance with federal and state laws, including the tax laws. More frequently than nonlawyers might suspect, there is little or no law on a particular point.

These questions may require answers from an accountant, a fundraiser, an appraiser, or a management consultant rather than a lawyer. For example, a lawyer is not professionally competent to answer questions such as: “How much can I be paid?” or “How much is this gift property worth?” Even regarding matters that are within the lawyer’s province, however—legal standards—the law is often vague. Much of the applicable nonprofit law is at the state level, so there can be varied answers to questions. Yet federal law on the subject of nonprofit law is building, and not just in the tax law arena; the best case in point is governance (Chapter 5).

Here are the questions most frequently asked about general operations of a nonprofit organization, including private colleges and universities—and the answers to them.

NONPROFIT LAW BASICS

1.1 What is a nonprofit organization?

The term nonprofit organization is somewhat misleading; regrettably, the English language lacks a better one. It does not mean an organization that cannot earn a profit. Many nonprofit organizations are realizing profits, in the sense of revenues exceeding expenses. Colleges and universities exemplify this point. Using data for institutions’ tax years ending in 2006, the average amount of net revenue received by small colleges and universities (2.34) was $11 million, by medium-size institutions (2.35) was $33 million, and by large institutions (2.36) was $87 million (2.50). An entity of any type cannot long exist without revenues that at least equal expenses.

The easiest way to define a nonprofit organization is to first define its counterpart, the for-profit organization. A for-profit organization exists to operate a business and to generate profits (revenue in excess of costs) from that business for those who own the enterprise. As an example, the owners of a for-profit corporation are stockholders, who take their profits in the form of dividends. Thus, when the term for-profit is used, it refers to profits acquired by the owners of the business, not by the business itself. The law, therefore, differentiates between profits at the entity level and profits at the ownership level.

Both for-profit and nonprofit organizations are allowed by the law to earn profits at the entity level. But only for-profit organizations are permitted profits at the ownership level. Nonprofit organizations rarely have owners; these organizations are not permitted to pass along profits (net earnings) to those who control them.

Profits permitted to for-profit entities but not nonprofit entities are forms of private inurement (see Chapter 6). That is, private inurement refers to ways of transferring an organization’s net earnings to persons in their private capacity. The purpose of a for-profit organization is to engage in private inurement. By contrast, nonprofit organizations are forbidden to engage in acts of private inurement. (Economists call this fundamental standard the nondistribution constraint.) Nonprofit organizations are required to use their profits for their program activities. In the case of tax-exempt nonprofit organizations, these activities are termed their exempt functions. For colleges and universities, the principal exempt function is the education of students; collateral functions include sports programs, research, and community service activities.

Consequently, the doctrine of private inurement is the essential dividing line, in the law, between nonprofit and for-profit organizations.

1.2 Sometimes the term not-for-profit organization is used instead of nonprofit organization. Are the terms synonymous?

As a matter of law, the terms not-for-profit and nonprofit do not mean the same. The two terms are often used interchangeably, but the proper legal term in this context is nonprofit organization (1.1).

The law employs the term not-for-profit to apply to an activity rather than to an entity. For example, the federal tax law denies business expense deductions for expenditures that are for a not-for-profit activity.1 Basically, this type of activity is not engaged in with a business or commercial motive; a not-for-profit activity is essentially a hobby.

The term not-for-profit often is applied in the nonprofit context by those who do not understand or appreciate the difference between profit at the entity level and profit at the ownership level (1.1).

1.3 What are the types of nonprofit organizations?

The principal type of nonprofit organization is the nonprofit corporation. Private colleges and universities, and organizations related to them (such as a development foundation (2.68)), usually are organized as nonprofit corporations; some may be chartered directly by a state. The other types of nonprofit organizations are trusts, unincorporated associations, and limited liability companies.