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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Serie: Wiley Nonprofit Authority
- Sprache: Englisch
- Veröffentlichungsjahr: 2019
Tax-exempt law explained, for lawyers and nonlawyers alike The Law of Tax-Exempt Organizations has, for decades, been the definitive single-volume source of legal information for nonprofit lawyers and managers alike. Author Bruce R. Hopkins is widely recognized as the leading authority on the subject; in this thoroughly revised Twelfth Edition, he provides all the updates you need to stay current on the latest changes to tax code, regulatory, and case law developments. Annual supplements available with the book will ensure that you don't miss any important updates. Making solid decisions about the future of any tax-exempt organization requires a firm and up-to-date understanding of the relevant tax and other law. This reference provides guidance on the latest developments in eligibility for tax exemption, the private inurement and private benefit doctrines, nonprofit governance, lobbying, political campaign activity, public charities, private foundations, donor-advised funds, unrelated business activities, reporting, disclosure requirements, and more. * Understand the tax code, regulations, and case law pertaining to all categories of tax-exempt organizations * Access the nonprofit law standard reference guide, written by the leading legal expert on tax-exempt organizations * Prepare yourself to make well-founded strategic decisions about the current and future actions of your organization * Review annual supplements that provide plain-English information on changes for each tax year Written in a practical format that's accessible to lawyers and non-lawyers alike, The Law of Tax-Exempt Organizations, Twelfth Edition, is a trustworthy resource for anyone involved in advising or managing charitable organizations, social welfare entities, associations, clubs, or any other type of tax-exempt entity.
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Table of Contents
Cover
About the Author
Preface
NOTE
About the Online Resources
Book Citations
PART ONE: Introduction to the Law of Tax-Exempt Organizations
CHAPTER ONE: Definition of and Rationales for Tax-Exempt Organizations
§ 1.1 DEFINITION OF
NONPROFIT ORGANIZATION
§ 1.2 DEFINITION OF
TAX-EXEMPT
ORGANIZATION
§ 1.3 TAX-EXEMPT ORGANIZATIONS LAW PHILOSOPHY
§ 1.4 POLITICAL PHILOSOPHY RATIONALE
§ 1.5 INHERENT TAX RATIONALE
§ 1.6 OTHER RATIONALES AND REASONS FOR EXEMPT ORGANIZATIONS
§ 1.7 FREEDOM OF ASSOCIATION DOCTRINE
NOTES
CHAPTER TWO: Overview of Nonprofit Sector and Tax-Exempt Organizations
§ 2.1 PROFILE OF NONPROFIT SECTOR
§ 2.2 ORGANIZATION OF IRS
§ 2.3 EO DIVISION'S REPORTS AND WORK PLANS
NOTES
PART TWO: Fundamentals of the Law of Tax-Exempt Organizations
CHAPTER THREE: Tax Exemption: Source and Recognition
§ 3.1 SOURCE OF TAX EXEMPTION
§ 3.2
RECOGNITION
OF TAX EXEMPTION
§ 3.3 RECOGNITION OF PUBLIC CHARITY, PRIVATE FOUNDATION STATUS
NOTES
CHAPTER FOUR: Organizational, Operational, and Related Tests and Doctrines
§ 4.1 FORMS OF TAX-EXEMPT ORGANIZATIONS
§ 4.2 GOVERNING INSTRUMENTS
§ 4.3 ORGANIZATIONAL TEST
§ 4.4 PRIMARY PURPOSE TEST
§ 4.5 OPERATIONAL TEST
§ 4.6 EXCLUSIVELY STANDARD
§ 4.7 COMMENSURATE TEST
§ 4.8 STATE ACTION DOCTRINE
§ 4.9 COMMERCIALITY DOCTRINE
§ 4.10 SOCIAL ENTERPRISE DEVELOPMENTS
NOTES
CHAPTER FIVE: Nonprofit Governance
§ 5.1 BOARDS OF DIRECTORS BASICS
§ 5.2 BOARD COMPOSITION AND TAX LAW
§ 5.3 BOARD DUTIES AND RESPONSIBILITIES
§ 5.4 BOARD MEMBER LIABILITY
§ 5.5 SARBANES-OXLEY ACT
§ 5.6 NONPROFIT GOVERNANCE PRINCIPLES
§ 5.7 IRS AND GOVERNANCE
NOTES
PART THREE: Tax-Exempt Charitable Organizations
CHAPTER SIX: Concept of
Charitable
§ 6.1 FEDERAL TAX LAW DEFINITION OF
CHARITABLE
§ 6.2 PUBLIC POLICY DOCTRINE
§ 6.3 COLLATERAL CONCEPTS
§ 6.4 WHAT TAX EXEMPTION DOES NOT CREATE
NOTES
CHAPTER SEVEN: Charitable Organizations
§ 7.1 RELIEF OF POOR
§ 7.2 RELIEF OF DISTRESSED
§ 7.3 CREDIT COUNSELING
§ 7.4 PROVISION OF HOUSING
§ 7.5 DOWN PAYMENT ASSISTANCE
§ 7.6 PROMOTION OF HEALTH
§ 7.7 LESSENING BURDENS OF GOVERNMENT
§ 7.8 ADVANCEMENT OF EDUCATION
§ 7.9 ADVANCEMENT OF SCIENCE
§ 7.10 ADVANCEMENT OF RELIGION
§ 7.11 PROMOTION OF SOCIAL WELFARE
§ 7.12 PROMOTION OF ARTS
§ 7.13 CONSORTIA
§ 7.14 FUNDRAISING ORGANIZATIONS
§ 7.15 INSTRUMENTALITIES OF GOVERNMENT
§ 7.16 OTHER CATEGORIES OF CHARITY
NOTES
CHAPTER EIGHT: Educational Organizations
§ 8.1 FEDERAL TAX LAW DEFINITION OF
EDUCATIONAL
§ 8.2
EDUCATION
CONTRASTED WITH
PROPAGANDA
§ 8.3 EDUCATIONAL INSTITUTIONS
§ 8.4 INSTRUCTION OF INDIVIDUALS
§ 8.5 INSTRUCTION OF PUBLIC
§ 8.6 EDUCATIONAL ACTIVITY AS COMMERCIAL BUSINESS
§ 8.7 EDUCATIONAL ACTIVITY AS PRIVATE BENEFIT FUNCTION
§ 8.8 CHILD CARE ORGANIZATIONS
NOTES
CHAPTER NINE: Scientific Organizations
§ 9.1 FEDERAL TAX LAW DEFINITION OF
SCIENCE
§ 9.2 CONCEPT OF
RESEARCH
§ 9.3 REQUIREMENT OF
PUBLIC INTEREST
§ 9.4
SCIENTIFIC
AS
CHARITABLE
OR
EDUCATIONAL
§ 9.5 TECHNOLOGY TRANSFER
NOTES
CHAPTER TEN: Religious Organizations
§ 10.1 CONSTITUTIONAL LAW FRAMEWORK
§ 10.2 FEDERAL TAX LAW DEFINITION OF
RELIGION
§ 10.3 CHURCHES AND SIMILAR INSTITUTIONS
§ 10.4 CONVENTIONS OR ASSOCIATIONS OF CHURCHES
§ 10.5 INTEGRATED AUXILIARIES OF CHURCHES
§ 10.6 MISSION SOCIETIES
§ 10.7 RELIGIOUS ORDERS
§ 10.8 APOSTOLIC ORGANIZATIONS
§ 10.9 COMMUNAL GROUPS
§ 10.10 RETREAT FACILITIES
NOTES
CHAPTER ELEVEN: Other Types of Charitable Organizations
§ 11.1 CRUELTY PREVENTION ORGANIZATIONS
§ 11.2 AMATEUR SPORTS ORGANIZATIONS
§ 11.3 PUBLIC SAFETY TESTING ORGANIZATIONS
§ 11.4 COOPERATIVE HOSPITAL SERVICE ORGANIZATIONS
§ 11.5 COOPERATIVE EDUCATIONAL SERVICE ORGANIZATIONS
§ 11.6 CHARITABLE RISK POOLS
§ 11.7 LITERARY ORGANIZATIONS
§ 11.8 DONOR-ADVISED FUNDS
§ 11.9 ENDOWMENT FUNDS
NOTES
CHAPTER TWELVE: Public Charities and Private Foundations
§ 12.1 FEDERAL TAX LAW DEFINITION OF
PRIVATE FOUNDATION
§ 12.2 DISQUALIFIED PERSONS
§ 12.3 CATEGORIES OF PUBLIC CHARITIES
§ 12.4 PRIVATE FOUNDATION RULES
NOTES
PART FOUR: Other Tax-Exempt Organizations
CHAPTER THIRTEEN: Social Welfare Organizations
§ 13.1 CONCEPT OF
SOCIAL WELFARE
§ 13.2 REQUIREMENT OF
COMMUNITY
§ 13.3 CONDUCT OF BUSINESS
§ 13.4 ADVOCACY ORGANIZATIONS
NOTES
CHAPTER FOURTEEN: Business Leagues and Similar Organizations
§ 14.1 CONCEPT OF
BUSINESS LEAGUE
§ 14.2 DISQUALIFYING ACTIVITIES
§ 14.3 CHAMBERS OF COMMERCE
§ 14.4 BOARDS OF TRADE
§ 14.5 REAL ESTATE BOARDS
NOTES
CHAPTER FIFTEEN: Social Clubs
§ 15.1 SOCIAL CLUBS IN GENERAL
§ 15.2 PUBLIC USE LIMITATION
§ 15.3 INVESTMENT INCOME LIMITATION
§ 15.4 EXCEPTIONS TO LIMITATIONS
§ 15.5 TAXATION OF SOCIAL CLUBS
§ 15.6 SALE OF CLUB ASSETS
NOTES
CHAPTER SIXTEEN: Labor, Agricultural, and Horticultural Organizations
§ 16.1 LABOR ORGANIZATIONS
§ 16.2 AGRICULTURAL ORGANIZATIONS
§ 16.3 HORTICULTURAL ORGANIZATIONS
NOTES
CHAPTER SEVENTEEN: Political Organizations
§ 17.1 POLITICAL ORGANIZATIONS IN GENERAL
§ 17.2 ORGANIZATIONAL TEST
§ 17.3 OPERATIONAL TEST
§ 17.4 PUBLIC POLICY ADVOCACY ACTIVITIES
§ 17.5 TAXATION OF POLITICAL ORGANIZATIONS
§ 17.6 TAXATION OF OTHER EXEMPT ORGANIZATIONS
§ 17.7 AVOIDING POLITICAL ORGANIZATIONS TAX
§ 17.8 INDEPENDENT POLITICAL ACTION COMMITTEES
NOTES
CHAPTER EIGHTEEN: Employee Benefit Funds
§ 18.1 OVERVIEW
§ 18.2 SPECIAL RULES FOR WELFARE BENEFIT FUNDS
§ 18.3 VOLUNTARY EMPLOYEES' BENEFICIARY ASSOCIATIONS
§ 18.4 SUPPLEMENTAL UNEMPLOYMENT BENEFIT TRUSTS
§ 18.5 BLACK LUNG BENEFITS TRUSTS
§ 18.6 RETIREMENT PLAN TRUST FUNDS
§ 18.7 OTHER BENEFIT FUNDS
NOTES
CHAPTER NINETEEN: Other Categories of Tax-Exempt Organizations
§ 19.1 INSTRUMENTALITIES OF THE UNITED STATES
§ 19.2 TITLE-HOLDING CORPORATIONS
§ 19.3 LOCAL ASSOCIATIONS OF EMPLOYEES
§ 19.4 FRATERNAL ORGANIZATIONS
§ 19.5 BENEVOLENT OR MUTUAL ORGANIZATIONS
§ 19.6 CEMETERY COMPANIES
§ 19.7 CREDIT UNIONS
§ 19.8 MUTUAL RESERVE FUNDS
§ 19.9 INSURANCE COMPANIES AND ASSOCIATIONS
§ 19.10 CROP OPERATIONS FINANCE CORPORATIONS
§ 19.11 VETERANS' ORGANIZATIONS
§ 19.12 FARMERS' COOPERATIVES
§ 19.13 SHIPOWNERS' PROTECTION AND INDEMNITY ASSOCIATIONS
§ 19.14 HOMEOWNERS' ASSOCIATIONS
§ 19.15 HIGH-RISK INDIVIDUALS' HEALTH CARE COVERAGE ORGANIZATIONS
§ 19.16 WORKERS' COMPENSATION REINSURANCE ORGANIZATIONS
§ 19.17 NATIONAL RAILROAD RETIREMENT INVESTMENT TRUST
§ 19.18 QUALIFIED HEALTH INSURANCE ISSUERS
§ 19.19 QUALIFIED TUITION PROGRAMS
§ 19.20 ABLE PROGRAMS
§ 19.21 PROFESSIONAL SPORTS LEAGUES
§ 19.22 GOVERNMENTAL AND QUASI-GOVERNMENTAL ENTITIES
§ 19.23 NATIVE AMERICAN TRIBES
§ 19.24 OTHER CATEGORIES OF TAX-EXEMPT ORGANIZATIONS
§ 19.25 NONEXEMPT MEMBERSHIP ORGANIZATIONS
NOTES
PART FIVE: Principal Exempt Organization Laws
CHAPTER TWENTY: Private Inurement and Private Benefit Doctrines
§ 20.1 CONCEPT OF
PRIVATE INUREMENT
§ 20.2 DEFINITION OF
NET EARNINGS
§ 20.3 DEFINITION OF
INSIDER
§ 20.4 COMPENSATION ISSUES
§ 20.5 EXECUTIVE COMPENSATION TAX
§ 20.6 OTHER FORMS OF PRIVATE INUREMENT
§ 20.7
PER SE
PRIVATE INUREMENT
§ 20.8 INCIDENTAL PRIVATE INUREMENT
§ 20.9 PRIVATE INUREMENT AND SOCIAL WELFARE ORGANIZATIONS
§ 20.10 PRIVATE INUREMENT AND BUSINESS LEAGUES
§ 20.11 PRIVATE INUREMENT AND SOCIAL CLUBS
§ 20.12 PRIVATE INUREMENT AND OTHER CATEGORIES OF EXEMPT ORGANIZATIONS
§ 20.13 PRIVATE BENEFIT DOCTRINE
NOTES
CHAPTER TWENTY-ONE: Intermediate Sanctions
§ 21.1 CONCEPT OF
INTERMEDIATE SANCTIONS
§ 21.2 TAX-EXEMPT ORGANIZATIONS INVOLVED
§ 21.3 DISQUALIFIED PERSONS
§ 21.4 TRANSACTIONS INVOLVED
§ 21.5 CONTROLLED ENTITIES
§ 21.6 INTERMEDIARIES
§ 21.7
FOR THE USE OF
TRANSACTIONS
§ 21.8 INITIAL CONTRACT EXCEPTION
§ 21.9 REBUTTABLE PRESUMPTION OF REASONABLENESS
§ 21.10 EXCISE TAX REGIME
§ 21.11 CORRECTION REQUIREMENT
§ 21.12 DEFINITIONS
§ 21.13 INDEMNIFICATION AND INSURANCE
§ 21.14 RETURN FOR PAYMENT OF EXCISE TAXES
§ 21.15 STATUTE OF LIMITATIONS
§ 21.16 INTERRELATIONSHIP WITH PRIVATE INUREMENT DOCTRINE
NOTES
CHAPTER TWENTY-TWO: Legislative Activities by Tax-Exempt Organizations
§ 22.1 LEGISLATIVE ACTIVITIES LAW FOR EXEMPT ORGANIZATIONS—INTRODUCTION
§ 22.2 MEANING OF
LEGISLATION
§ 22.3 LOBBYING BY CHARITABLE ORGANIZATIONS
§ 22.4 LOBBYING EXPENDITURES AND TAX SANCTIONS
§ 22.5 LEGISLATIVE ACTIVITIES OF SOCIAL WELFARE ORGANIZATIONS
§ 22.6 LEGISLATIVE ACTIVITIES OF BUSINESS LEAGUES
§ 22.7 LEGISLATIVE ACTIVITIES OF OTHER TAX-EXEMPT ORGANIZATIONS
§ 22.8 INTERNET COMMUNICATIONS
§ 22.9 CONSTITUTIONAL LAW FRAMEWORK
NOTES
CHAPTER TWENTY-THREE: Political Campaign Activities by Tax-Exempt Organizations
§ 23.1 POLITICAL CAMPAIGN ACTIVITIES BY CHARITABLE ORGANIZATIONS—INTRODUCTION
§ 23.2 PROHIBITION ON CHARITABLE ORGANIZATIONS
§ 23.3 POLITICAL CAMPAIGN EXPENDITURES AND TAX SANCTIONS
§ 23.4 TAXATION OF POLITICAL EXPENDITURES
§ 23.5 “RELIGIOUS LIBERTY” EXECUTIVE ORDER
§ 23.6 POLITICAL ACTIVITIES OF SOCIAL WELFARE ORGANIZATIONS
§ 23.7 POLITICAL ACTIVITIES BY LABOR ORGANIZATIONS
§ 23.8 POLITICAL ACTIVITIES BY BUSINESS LEAGUES
§ 23.9 POLITICAL ACTIVITIES BY OTHER CATEGORIES OF EXEMPT ORGANIZATIONS
§ 23.10 ADVOCACY COMMUNICATIONS
§ 23.11 INTERNET COMMUNICATIONS
NOTES
CHAPTER TWENTY-FOUR: Unrelated Business: Basic Rules
§ 24.1 INTRODUCTION TO UNRELATED BUSINESS RULES
§ 24.2 DEFINITION OF
TRADE OR BUSINESS
§ 24.3 DEFINITION OF
REGULARLY CARRIED ON
§ 24.4 DEFINITION OF
SUBSTANTIALLY RELATED
§ 24.5 CONTEMPORARY APPLICATIONS OF UNRELATED BUSINESS RULES
§ 24.6 CORPORATE SPONSORSHIPS
§ 24.7 PARTNERSHIP RULES
§ 24.8 COMMERCIAL-TYPE INSURANCE
§ 24.9 UNRELATED DEBT-FINANCED INCOME
NOTES
CHAPTER TWENTY-FIVE: Unrelated Business: Modifications, Exceptions, Special Rules, and Taxation
§ 25.1 MODIFICATIONS
§ 25.2 EXCEPTIONS
§ 25.3 SPECIAL RULES
§ 25.4 FRINGE BENEFIT RULES
§ 25.5 “BUCKETING” RULE
§ 25.6 TAX STRUCTURE
§ 25.7 DEDUCTION RULES
NOTES
PART SIX: Acquisition and Maintenance of Tax Exemption
CHAPTER TWENTY-SIX: Exemption Recognition and Notice Processes
§ 26.1 RECOGNITION APPLICATION PROCEDURE
§ 26.2 REQUIREMENTS FOR CHARITABLE ORGANIZATIONS
§ 26.3 NONPRIVATE FOUNDATION STATUS
§ 26.4 REQUIREMENTS FOR SOCIAL WELFARE ORGANIZATIONS
§ 26.5 REQUIREMENTS FOR CERTAIN CREDIT COUNSELING ORGANIZATIONS
§ 26.6 REQUIREMENTS FOR CERTAIN EMPLOYEE BENEFIT ORGANIZATIONS
§ 26.7 REQUIREMENTS FOR CERTAIN PREPAID TUITION PLANS
§ 26.8 REQUIREMENTS FOR CERTAIN HEALTH INSURANCE ISSUERS
§ 26.9 REQUIREMENT FOR ABLE PROGRAMS
§ 26.10 RULES FOR OTHER CATEGORIES OF ORGANIZATIONS
§ 26.11 GROUP EXEMPTION RULES
§ 26.12 SUSPENSION OF TAX EXEMPTION
§ 26.13 NOTICE REQUIREMENTS FOR SOCIAL WELFARE ORGANIZATIONS
§ 26.14 NOTICE REQUIREMENTS FOR POLITICAL ORGANIZATIONS
§ 26.15 INTEGRAL PART DOCTRINE
§ 26.16 FORFEITURE OF TAX EXEMPTION
§ 26.17 CONSTITUTIONAL LAW ASPECTS OF PROCESS
NOTES
CHAPTER TWENTY-SEVEN: Administrative and Litigation Procedures
§ 27.1 ADMINISTRATIVE PROCEDURES WHERE RECOGNITION DENIED
§ 27.2 REVOCATION OR MODIFICATION OF TAX-EXEMPT STATUS: ADMINISTRATIVE PROCEDURES
§ 27.3 RETROACTIVE REVOCATION OF TAX-EXEMPT STATUS
§ 27.4 STATUTE OF LIMITATIONS MATTERS
§ 27.5 REVOCATION OF TAX-EXEMPT STATUS: LITIGATION PROCEDURES
§ 27.6 IRS EXAMINATION PROCEDURES AND PRACTICES
§ 27.7 COMPLIANCE CHECKS
§ 27.8 FAST-TRACK CASE SETTLEMENT PROGRAM
§ 27.9 IRS DISCLOSURE TO STATE OFFICIALS
NOTES
CHAPTER TWENTY-EIGHT: Operational Requirements
§ 28.1 CHANGES IN OPERATIONS OR FORM
§ 28.2 ANNUAL REPORTING RULES
§ 28.3 NOTIFICATION REQUIREMENT
§ 28.4 ABLE PROGRAM REPORTS
§ 28.5 FILING REQUIREMENTS AND TAX-EXEMPT STATUS
§ 28.6 CHARITABLE ORGANIZATIONS LISTING RELIANCE RULES
§ 28.7 REPORTING BY POLITICAL ORGANIZATIONS
§ 28.8 ELECTRONIC FILING RULES
§ 28.9 UNRELATED BUSINESS INCOME TAX RETURNS
§ 28.10 IRS DOCUMENT DISCLOSURE RULES
§ 28.11 DOCUMENT DISCLOSURE OBLIGATIONS OF EXEMPT ORGANIZATIONS
§ 28.12 INFORMATION OR SERVICES DISCLOSURE
§ 28.13 FUNDRAISING DISCLOSURE
§ 28.14 INSURANCE ACTIVITIES
§ 28.15 FEEDER ORGANIZATIONS
§ 28.16 TAX-EXEMPT ENTITY LEASING RULES
§ 28.17 TAX-EXEMPT ORGANIZATIONS AND TAX SHELTERS
§ 28.18 RECORDKEEPING REQUIREMENTS
NOTES
PART SEVEN: Interorganizational Structures and Operational Forms
CHAPTER TWENTY-NINE: Tax-Exempt Organizations and Exempt Subsidiaries
§ 29.1 SUBSIDIARIES BASICS
§ 29.2 CHARITABLE ORGANIZATIONS AS SUBSIDIARIES
§ 29.3 TAX-EXEMPT SUBSIDIARIES OF CHARITABLE ORGANIZATIONS
§ 29.4 OTHER COMBINATIONS OF TAX-EXEMPT ORGANIZATIONS
§ 29.5 POTENTIAL OF ATTRIBUTION
§ 29.6 CONTRIBUTIONS AND OTHER PAYMENTS
§ 29.7 REVENUE FROM TAX-EXEMPT SUBSIDIARY
NOTES
CHAPTER THIRTY: Tax-Exempt Organizations and For-Profit Subsidiaries
§ 30.1 FOR-PROFIT SUBSIDIARIES IN GENERAL
§ 30.2 POTENTIAL OF ATTRIBUTION TO PARENT
§ 30.3 FINANCIAL CONSIDERATIONS
§ 30.4 ASSET ACCUMULATIONS
§ 30.5 SUBSIDIARIES IN PARTNERSHIPS
§ 30.6 REVENUE FROM FOR-PROFIT SUBSIDIARY
§ 30.7 LIQUIDATIONS
NOTES
CHAPTER THIRTY-ONE: Tax-Exempt Organizations and Joint Ventures
§ 31.1 PARTNERSHIPS AND JOINT VENTURES BASICS
§ 31.2 PUBLIC CHARITIES AS GENERAL PARTNERS
§ 31.3 WHOLE-ENTITY JOINT VENTURES
§ 31.4 ANCILLARY JOINT VENTURES
§ 31.5 LOW-INCOME HOUSING VENTURES
§ 31.6 INFORMATION REPORTING
NOTES
CHAPTER THIRTY-TWO: Tax-Exempt Organizations: Other Operations and Restructuring
§ 32.1 MERGERS
§ 32.2 REORGANIZATIONS
§ 32.3 MULTIPLE-MEMBER LIMITED LIABILITY COMPANIES
§ 32.4 SINGLE-MEMBER LIMITED LIABILITY COMPANIES
§ 32.5 CHOICE OF ENTITY CONSIDERATIONS
§ 32.6 CONVERSION FROM EXEMPT TO NONEXEMPT STATUS
§ 32.7 CONVERSION FROM NONEXEMPT TO EXEMPT STATUS
§ 32.8 CONVERSION FROM ONE EXEMPT STATUS TO ANOTHER
NOTES
Index
End User License Agreement
Guide
Cover
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The Law of Tax-Exempt Organizations
TWELFTH EDITION
BRUCE R. HOPKINS
Copyright © 2019 by John Wiley & Sons, Inc. 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
Names: Hopkins, Bruce R., author.Title: The law of tax-exempt organizations / Bruce R. Hopkins.Description: Twelfth edition. | Hoboken, New Jersey : Wiley, [2019] | Series: Wiley nonprofit authority | Includes bibliographical references and index. | Identifiers: LCCN 2018051887 (print) | LCCN 2018055296 (ebook) | ISBN 9781119538028 (Adobe PDF) | ISBN 9781119538011 (ePub) | ISBN 9781119538042 (hardback)Subjects: LCSH: Nonprofit organizations—Taxation—Law and legislation—United States. | Charitable uses, trusts, and foundations—Taxation—United States. | BISAC: BUSINESS & ECONOMICS / Nonprofit Organizations & Charities.Classification: LCC KF6449 (ebook) | LCC KF6449 .H6 2019 (print) | DDC 343.7306/68—dc23LC record available at https://lccn.loc.gov/2018051887
Cover Design: WileyCover Image: © Christina Krivonos/Shutterstock
About the Author
BRUCE R. HOPKINS is the principal in the Bruce R. Hopkins Law Firm, LLC, Kansas City, Missouri. He concentrates in his practice on the representation of private foundations and other categories of 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, the private inurement and private benefit doctrines, governance, 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, 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 being co-author of The Tax Law of Private Foundations, Fifth Edition, he is the author of The Law of Tax-Exempt Organizations, Eleventh Edition; The Planning Guide for the Law of Tax-Exempt Organizations: Strategies and Commentaries; Bruce R. Hopkins' Nonprofit Law Library (e-book); Tax-Exempt Organizations and Constitutional Law: Nonprofit Law as Shaped by the U.S. Supreme Court; Bruce R. Hopkins' Nonprofit Law Dictionary; IRS Audits of Tax-Exempt Organizations: Policies, Practices, and Procedures; The Tax Law of Charitable Giving, Fifth 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, Sixth Edition; Nonprofit Law Made Easy; Charitable Giving Law Made Easy; Private Foundation 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; and The Second Legal Answer Book for Nonprofit Organizations. He is the co-author, with Thomas K. Hyatt, of The Law of Tax-Exempt Healthcare Organizations, Fourth Edition; with Alicia M. Beck, of The Law of Fundraising, Fifth Edition; with David O. Middlebrook, of Nonprofit Law for Religious Organizations: Essential Questions & Answers; with Douglas K. Anning, Virginia C. Gross, and Thomas J. Schenkelberg, of The New Form 990: Law, Policy and Preparation; also with Ms. Gross, of Nonprofit Governance: Law, Practices & Trends; and with Ms. Gross and Mr. Schenkelberg, of Nonprofit Law for Colleges and Universities: Essential Questions and Answers for Officers, Directors, and Advisors. He also writes Bruce R. Hopkins' Nonprofit Counsel, a monthly newsletter, published by John Wiley & Sons.
Mr. Hopkins maintains a website providing information about the law of tax-exempt organizations, at www.brucerhopkinslaw.com (click on nonprofit law center). Material posted on this site includes a current developments outline concerning this aspect of the law, discussions of his books, and various indexes for his newsletter.
Mr. Hopkins 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.
Mr. Hopkins is the Professor from Practice at the University of Kansas School of Law, where he teaches courses on the law of tax-exempt organizations.
Mr. Hopkins earned his JD and LLM degrees at the George Washington University, his SJD at the University of Kansas, and his BA at the University of Michigan. He is a member of the bars of the District of Columbia and the state of Missouri.
Preface
One of the major highlights of my life is writing books, published by John Wiley & Sons, about the tax law applicable to nonprofit organizations. I began doing this in the early 1970s and have not stopped. I authored or coauthored 40 books during these years; more await. The Law of Tax-Exempt Organizations, however, remains special, inasmuch as it is the first book I wrote. I find it extraordinary that the book is now in its twelfth edition, covering developments in the federal law of tax-exempt organizations for the period ending in the fall of 2018.
By the time this edition is available, the book will have been in print for nearly 45 years. Sometimes, I shudder, thinking of the thousands of hours that underlie this and my other writing projects. Certainly the field of tax-exempt organizations law has been dynamic, volatile at times; the fact that this book is now in its twelfth edition is testament to the complexity of the subject matter and its astonishing and steady growth. In fact, the number of books in the Wiley Nonprofit Law, Finance, and Management Series, and the wonderful range of that material, evidences the explosiveness of the nonprofit sector over recent decades.
Most of the law reflected in this book did not exist 45 years ago. Tax exemption was introduced, constitutionally, in 1913, and the unrelated business income rules arrived in 1950. A considerable portion of the statutory law of exempt organizations is the product of enactment of the Tax Reform Act of 1969. (I am asked, from time to time, how I ended up practicing law in the realm of exempt organizations. I began practicing late in 1968. I got caught up in the writing and interpreting of the law Congress passed a few months later, and have just kept on going.)
This body of statutory law has been significantly expanded by many major and minor tax acts. In recent years, the field has been enlarged by the Pension Protection Act of 2006, the Patient Protection and Affordable Care Act, the Tax Increase Prevention Act of 2014, and the Protecting Americans from Tax Hikes (PATH) Act of 2015.
The most recent significant change reflected in this twelfth edition is assimilation of the new law brought about by enactment of what is informally known as the Tax Cuts and Jobs Act. The principal elements of this new body of law in the exempt organizations context is the “bucketing” rule now in place for computation of unrelated business taxable income, inclusion as unrelated business items of the value of certain types of fringe benefits, taxation of some colleges' and universities' endowment income, and taxation of the “excess” compensation of certain exempt organizations' executives. The Department of the Treasury and the IRS are just beginning to issue guidance as to these and other additions and changes to the law.1
Another law area that is festering at this time is the matter of donor-advised funds. These funds are currently the subject of intense criticism. Treasury and the IRS are working on proposed regulations, which are anticipated to range over topics beyond the scope of the donor-advised funds statutory law provisions.
But the federal tax law affecting exempt organizations is by no means confined to statutes. Like other areas of the federal tax law, the field is heavily informed by Treasury Department regulations, Internal Revenue Service revenue rulings and revenue procedures, and opinions from various federal (and, occasionally, state) courts. The world of exempt organizations is also dramatically affected by IRS private determinations, usually in the form of private letter rulings and technical advice memoranda.
The past decade or so alone bears witness to an immense augmentation of the federal tax law of tax-exempt organizations. Developments in the health care, higher education, private foundations, and association fields, just to name a few, have been awesome to watch and challenging to chronicle. Other notable expansions of this law have occurred and are occurring in the realms of private inurement and private benefit, legislative and political campaign activities, applications for recognition of exemption and annual information returns, the use of limited liability companies and subsidiaries, supporting organizations, the commerciality doctrine, and the unrelated business rules.
Still other notable bodies of law include the intermediate sanctions rules, disclosure and document distribution requirements, exempt organizations and insurance, mergers and other reorganizations, tax shelter penalties, and fundraising regulation.
The IRS's Tax Exempt and Government Entities (TE/GE) Division has resumed issuance of annual work plans. The IRS has issued other interesting publications (summarized or referenced herein), including a memorandum from Rulings and Agreements concerning toughening of the processing time followed in connection with applications for recognition of exemption, a memorandum from the TE/GE Division regarding the use of one or more political activities referral committees, a notice pertaining to mission-related investing by private foundations, and a revenue procedure setting forth (in delightful detail) the process private foundations are to follow in securing equivalency determinations in connection with grants to foreign charities.
The streamlined application for recognition process, utilizing Form 1023-EZ, has been, I think, operating fairly well. The IRS continues to be battered by criticism of this application, much of it leveled by the National Taxpayer Advocate (noted herein). The IRS has responded to that criticism by adding to the application a required activity description and additional questions on gross receipts, assets thresholds, and public charity/private foundation classification. Thus, the streamlined application will be less streamlined. The IRS noted, perhaps dryly, in its fiscal year 2018 work plan, that “as a result of these changes, EO expects the average processing time for a Form 1023-EZ to increase.”
The IRS continues to issue dozens of private letter rulings, some reflecting its positions on application of the commerciality doctrine (some of them questionable), the private inurement and private benefit doctrines, absence of a requisite charitable class, housing organizations, the lessening-burdens-of-government principle, qualification for exemption (mostly the lack thereof) for social welfare organizations and business leagues, the conduit rules in connection with foreign grantmaking, and applications of the unrelated business rules. Rulings on matters of governance have noticeably slowed; the IRS's policies in connection with regulation of nonprofit governance continue to be, in the view from here, incorrect.
An issue has come to the fore, which is the matter of “conversion” from for-profit status to nonprofit, tax-exempt status. The IRS's ruling position seems to have evolved to the point that, once an enterprise has been formed as a for-profit entity, the commerciality and private inurement doctrines prevent it from ever being reconstituted as an exempt organization. That is certainly not the law. This issue was bizarrely highlighted when a small group of uninformed U.S. senators wrote to the IRS and the Department of Education asserting that conversions of for-profit schools to exempt schools are resulting in “sham nonprofits” and constitute fraud and tax evasion. In a surprise, this issue popped up in the 2018 work plan. It will be interesting to see how this matter will be treated.
Many notable court cases have been decided (again, all summarized herein), resulting in opinions concerning the necessary attributes of an entity qualifying as an organization, preliminary to considerations as to whether it is tax-exempt; the concept of a corporation, which generally subsumes the concept of a nonprofit corporation; the strict scrutiny test to apply in evaluating race-based affirmative action programs in the public higher education context; the lawfulness of the contraceptive mandate and its religious exceptions as applied to nonreligious tax-exempt entities; application of the strict scrutiny test in the free speech context; application of free speech principles in the realm of processing of applications for recognition of exemption; and articulation of a “historic principle of respect for the autonomy of genuine religions.”
The Tax Cuts and Jobs Act was enacted near the close of 2017 year, bringing several new and revised rules concerning the law of tax-exempt organizations, all of which are summarized in this edition.
Two recent developments affecting tax-exempt organizations are of note. One development is the new country-by-country reporting regime and its impact on tax-exempt organizations. The regulations that detail this reporting requirement were issued in final form in July 2016; the principal statutory authority for this reporting is IRC § 6038. The other development is the import for exempt organizations of the new audit regime for partnerships; this body of law was created by the Bipartisan Budget Act of 2015 and revised by the PATH Act of 2015. Regulations have been issued, effective January 1, 2018. The concern is that exempt organizations in partnerships with for-profit partners may have tax penalties allocated to them by reason of the new taxes on partnerships, giving rise to unwarranted private benefit.
Also, there is this matter of executive orders issued from the Trump White House. One order placed a regulatory freeze on departments and agencies of the federal government, including the Department of the Treasury. Another order required agencies to revoke existing rules for every new one proposed. Still another is designed to eliminate regulations that are outdated or unnecessary. A report issued by Treasury on October 2, 2017, recommended actions to eliminate or mitigate the “burdens imposed on taxpayers” by eight sets of regulations. An executive order of direct relevance in the exempt organizations setting is the one pertaining to “free speech and religious liberty” (summarized herein).
One of the great stars of this show, of course, is the revamped Form 990. Despite its size and complexity (and some overreaching), this return is a work of art. For the larger tax-exempt organizations, proper preparation of this return is a mighty feat. But that is not the stuff of law development, although the return preparation entails considerable lawyering. Form 990 is no mere government form; the issuance of the redesigned return, and its accompanying schedules and instructions, was akin to publication of a mammoth set of regulations. Much new “law” is embedded in this document. In the context of nonprofit law, there has never been anything like it. Touted by its designers as a vehicle for acquiring information and promoting transparency, the real story is the enormous impact this return has been having, and continues to have, in shaping the behavior of the leaders, managers, and representatives (including lawyers and accountants) of exempt organizations, particularly in terms of development of policies, procedures, protocols, and other forms of governance practices.
***
This book evolved out of materials developed for the course on the law of tax-exempt organizations that I taught for 19 years at the George Washington University School of Law, in Washington, D.C., beginning in 1973. It reflects hundreds of questions asked by law students and seminar and conference attendees over the years. It has been shaped further by the inquiries of clients and colleagues.
I have tried to provide a summary of the law of tax-exempt organizations, one that is sufficiently general to present the subject in all of its marvelous expanse and peculiarity, yet with enough particularity to give the reader the specifics when needed. Thus, the book has been written in as nontechnical a manner as I can muster, yet with footnotes and other sources (including the online material) that lead to more detailed information.
It is hoped that lawyers, managers, accountants, directors and officers, fundraising executives, and students of the field can use this book to learn particular aspects of the subject matter or refresh their minds about a rule.
***
I struggle to keep this book to a single volume. This book would be much thicker but for some tightening of the writing and jettisoning of various sections. For example, I removed most of the material concerning private foundations law and incorporated it into The Tax Law of Private Foundations, now in its fifth edition (2018). Further trimming occurred when four other books were published – The Tax Law of Unrelated Business for Nonprofit Organizations (2005), The Tax Law of Associations (2006), The New Form 990: Law, Policy, and Preparation (2009); and Nonprofit Governance: Law, Practices, and Trends (2009). These topics are nonetheless reflected in the book (in Chapters 12, 24, 25, 14, 28, and 5, respectively).
There have been other instances of tightening of this nature. I am the author or coauthor of books on charitable giving, fundraising regulation, intermediate sanctions, Internet communications, and health law. These efforts, too, have helped curb the girth of the book. Nonetheless, there is not enough space herein for a detailed analysis of cases, rulings, and the like. I provide such analysis, however, in my monthly newsletter, Bruce R. Hopkins' Nonprofit Counsel, which is in its 36th year. The newsletter includes references to this book for additional reading and background information. The newsletter is a stand-alone publication; at the same time, for those with the book, it also serves as a monthly update.
***
Clichés about a book such as this abound. “Labor of love” and “work in progress” are two of them. The most important one of all, however, must be said: There have been many individuals with me on this journey who have helped enormously, doing much to nurture the book over the years, especially my friends and colleagues at John Wiley & Sons. Most notable in the past have been Walter Maythem, Dick Lynch, Jeffrey Brown, Marla Bobowick, Martha Cooley, Robin Goldstein, and Susan McDermott.
My thanks go to my senior editor, Brian T. Neill, my development editor, Vicki Adang, and my production editor, Abirami Srikandan, for their assistance and support in connection with creation of this edition of the book.
Bruce R. Hopkins
2019
NOTE
1
An article summarizing the various law additions and changes wrought by this legislation is available at Hopkins, “The Tax Cuts and Jobs Act Brings New Law for Tax-Exempt Organizations,” 29
Tax'n of Exempts
(No. 5) 3 (March/April 2018).
About the Online Resources
The Law of Tax-Exempt Organizations, Twelfth Edition is complemented by a number of online resources.
For a list of all Wiley books by Bruce R. Hopkins, please visit www.wiley.com/go/hopkins.
Also, please visit www.wiley.com/go/hopkinstaxexempt to download various appendices and tables in PDF format to use alongside this Twelfth Edition.
The appendices are:
Appendix A - Sources of Tax-Exempt Organizations Law
Appendix B - Internal Revenue Code Sections
Appendix C - 76 Categories of Tax-Exempt Organizations
The tables are:
Table of Cases
Table of IRS Revenue Rulings
Table of IRS Revenue Procedures
Table of IRS Private Determinations Cited in Text
Table of IRS Private Letter Rulings, Technical Advice Memoranda, and General Counsel Memoranda
Table of Cases Discussed in
Bruce R. Hopkins' Nonprofit Counsel
Table of IRS Private Determinations Discussed in
Bruce R. Hopkins' Nonprofit Counsel
Book Citations
Throughout this book, 14 books by the author (in some instances as coauthor), all published by John Wiley & Sons, are referenced as follows:
IRS Audits of Tax-Exempt Organizations: Policies, Practices, and Procedures
(2008): cited as
IRS Audits
The Law of Fundraising,
Fifth Edition (2014): cited as
Fundraising
The Law of Intermediate Sanctions: A Guide for Nonprofits
(2003): cited as
Intermediate Sanctions
The Law of Tax-Exempt Healthcare Organizations, Fourth Edition
(2014): cited as
Healthcare Organizations
The New Form 990: Law, Policy, and Preparation
(2009): cited as
New Form 990
Nonprofit Governance: Law, Practices and Trends
(2009): cited as
Nonprofit Governance
The Nonprofits' Guide to Internet Communications Law
(2003): cited as
Internet Communications
Planning Guide for the Law of Tax-Exempt Organizations: Strategies and Commentaries
(2004): cited as
Planning Guide
Private Foundations: Tax Law and Compliance, Fourth Edition
(2014): cited as
Private Foundations
Starting and Managing a Nonprofit Organization: A Legal Guide, Sixth Edition
(2013): cited as
Starting and Managing
The Tax Law of Associations
(2006): cited as
Associations
The Tax Law of Charitable Giving, Fifth Edition
(2014): cited as
Charitable Giving
The Tax Law of Unrelated Business for Nonprofit Organizations
(2005): cited as
Unrelated Business
Tax-Exempt Organizations and Constitutional Law: Nonprofit Law as Shaped by the U.S. Supreme Court
(2012): cited as
Constitutional Law
.
The second, fourth, ninth, and twelfth of these books are annually supplemented.
Updates on all of the foregoing subjects (plus The Law of Tax-Exempt Organizations) are available in Bruce R. Hopkins' Nonprofit Counsel, the author's monthly newsletter, also published by John Wiley & Sons.
PART ONEIntroduction to the Law of Tax-Exempt Organizations
Chapter One
Definition of and Rationales for Tax-Exempt Organizations
Chapter Two
Overview of Nonprofit Sector and Tax-Exempt Organizations
CHAPTER ONEDefinition of and Rationales for Tax-Exempt Organizations
§ 1.1 Definition of
Nonprofit Organization
(a)
Nonprofit Organization
Defined
(b) Nonprofit Sector
§ 1.2 Definition of
Tax-Exempt
Organization
§ 1.3 Tax-Exempt Organizations Law Philosophy
§ 1.4 Political Philosophy Rationale
§ 1.5 Inherent Tax Rationale
§ 1.6 Other Rationales and Reasons for Exempt Organizations
§ 1.7 Freedom of Association Doctrine
Nearly all federal and state law pertains, directly or indirectly, to tax-exempt organizations; there are few areas of law that have no bearing whatsoever on these entities. The fields of federal law that directly apply to exempt organizations include tax exemption and charitable giving requirements, and the laws concerning antitrust, contracts, education, employee benefits, the environment, estate planning, health care, housing, labor, political campaigns, the postal system, securities, and fundraising for charitable and political purposes. The aspects of state law concerning exempt organizations are much the same as the federal ones, along with laws pertaining to the formation and operation of corporations and trusts, insurance, real estate, and charitable solicitation acts. Both levels of government have much constitutional and administrative law directly applicable to exempt organizations. A vast array of other civil and criminal laws likewise applies. The principal focus of this book is the federal tax law as it applies to nonprofit organizations.
§ 1.1 DEFINITION OF NONPROFIT ORGANIZATION
A tax-exempt organization is a unique entity; among its features is the fact that it is (with few exceptions) a nonprofit organization. Most of the laws that pertain to the concept and creation of a nonprofit organization originate at the state level, while most laws concerning tax exemption are generated at the federal level. Although almost every nonprofit entity is incorporated or otherwise formed under state law, a few nonprofit organizations are chartered by federal statute. The nonprofit organizations that are the chief focus from a federal tax law standpoint are corporations, trusts, and unincorporated associations. There may also, however, be use of limited liability companies in this regard.
A nonprofit organization is not necessarily a tax-exempt organization. To be exempt, a nonprofit organization must meet certain criteria. As noted, most of these criteria are established under federal law. State law, however, may embody additional criteria; those rules can differ in relation to the tax from which exemption is sought (such as taxes on income, sales of goods or services, use of property, tangible personal property, intangible personal property, or real property).1 Thus, nonprofit organizations can be taxable entities, under both federal and state law.2
(a) Nonprofit Organization Defined
The term nonprofit organization does not refer to an organization that is prohibited by law from earning a profit (that is, an excess of earnings over expenses). In fact, it is quite common for nonprofit organizations to generate profits. Rather, the definition of nonprofit organization essentially relates to requirements as to what must be done with the profits earned or otherwise received.
The legal concept of a nonprofit organization is best understood through a comparison with a for-profit organization. The essential difference between nonprofit and for-profit organizations is reflected in the private inurement doctrine.3 Nonetheless, the characteristics of the two categories of organizations are often identical, in that both mandate a legal form,4 one or more directors or trustees, and usually officers; both of these types of entities can have employees (and thus pay compensation), face essentially the same expenses, make investments, enter into contracts, sue and be sued, produce goods and/or services, and, as noted, generate profits.5
A fundamental distinction between the two entities is that the for-profit organization has owners who hold the equity in the enterprise, such as stockholders of a corporation. The for-profit organization is operated for the benefit of its owners; the profits of the business undertaking are passed through to them, such as by the payment of dividends on shares of stock. That is what is meant by the term for-profit organization: It is one that is designed to generate a profit for its owners. The transfer of the profits from the organization to its owners is the inurement of net earnings to them in their private capacity.
By contrast, a nonprofit organization generally is not permitted to distribute its profits (net earnings) to those who control it (such as directors and officers).6 (A nonprofit organization rarely has owners.7) Simply stated, a nonprofit organization is an entity that cannot lawfully engage in private inurement. Consequently, the private inurement doctrine is the substantive defining characteristic that distinguishes nonprofit organizations from for-profit organizations for purposes of the federal tax law.
In addition to the prohibition on private inurement, several state nonprofit corporation acts require the nonprofit entity to devote its profits to ends that are beneficial to society or the public, such as purposes that are classified as agricultural, arts promotion, athletic, beneficial, benevolent, cemetery, charitable, civic, cultural, debt management, educational, eleemosynary, fire control, fraternal, health promotion, horticultural, literary, musical, mutual improvement, natural resources protection, patriotic, political, professional, religious, research, scientific, and/or social.8
(b) Nonprofit Sector
Essential to an understanding of the nonprofit organization is appreciation of the concept of the nonprofit sector of society. This sector of society has been termed, among other titles, the independent sector, the third sector, the voluntary sector, and the philanthropic sector.
A tenet of political philosophy is that a democratic state—or, as it is sometimes termed, civil society—has three sectors. These sectors contain institutions and organizations that are governmental, for-profit, and nonprofit in nature. Thus, in the United States, the governmental sector includes the branches, departments, agencies, and bureaus of the federal, state, and local governments; the class of for-profit entities comprises the business, trade, professional, and commercial segment of society; and nonprofit entities constitute the balance of this society. The nonprofit sector is seen as being essential to the maintenance of freedom for individuals and a bulwark against the excesses of the other two sectors, particularly the governmental sector.
There are subsets within the nonprofit sector. Tax-exempt organizations represent a subset of nonprofit organizations. Organizations that are eligible to attract deductible charitable gifts, charitable organizations (using the broad definition9), and other types of exempt organizations are subsets of exempt organizations. Charitable organizations (in the narrow, technical sense of that term) are subsets of charitable organizations (as defined in the broader sense).10 These elements of the nonprofit sector may be portrayed as a series of concentric circles (see diagram).
§ 1.2 DEFINITION OF TAX-EXEMPT ORGANIZATION
The term tax-exempt organization is somewhat of a fabrication, in that nonprofit organizations are rarely excused from being subject to all taxes, including the federal income tax. There are, of course, other applicable federal taxes, such as excise and employment taxes; there are categories of exemptions from them. At the state level, there are exemptions associated with income, sales, use, excise, and property taxes.
The income tax that is potentially applicable to nearly all tax-exempt organizations is the tax on income derived from an unrelated trade or business.11 Exempt entities can be taxed for engaging in political activities;12 public charities are subject to tax in the case of substantial efforts to influence legislation13 or participation in political campaign activities;14 business leagues may elect to pay a proxy tax;15 donor-advised funds are subject to taxes;16 and some exempt organizations, such as social clubs and political organizations, are taxable on their investment income.17 Private foundations are caught up in a variety of excise taxes.18
This anomaly of a tax-exempt organization being an entity that is subject to various taxes is addressed in the Internal Revenue Code. There it is written that an organization that is exempt from tax19 shall nonetheless be subject to certain taxes but, notwithstanding that tax exposure, “shall be considered an organization exempt from income taxes for the purpose of any law which refers to organizations exempt from income taxes.”20 The Internal Revenue Service (IRS) advanced the argument that an organization, having paid tax on unrelated business income for some of its years, should not be considered a tax-exempt organization for a federal tax law purpose,21 but that argument was rejected by a court as being inconsistent with the purpose of the quoted statute.22
There is no entitlement in a nonprofit organization to tax exemption; there is no entity that has some inherent right to exempt status. The existence of tax exemption and the determination of entities that have it are essentially at the whim of the legislature involved. Thus, the IRS wrote that “[e]xemption from federal income taxation is not a right; it is a matter of legislative grace that is strictly construed.”23 There is no constitutional law principle mandating tax exemption.24
There are several illustrations of this point. Congress granted tax-exempt status to certain mutual organizations—albeit with the stricture that to qualify for the exemption, an organization must have been organized before September 1, 1957.25 A challenge to this law by an otherwise qualified organization formed in 1962 failed, with the U.S. Supreme Court holding that Congress did not act in an arbitrary and unconstitutional manner in declining to extend the exemption beyond the particular year.26
For years, organizations like Blue Cross and Blue Shield entities were tax-exempt;27 Congress, however, determined that these organizations had evolved to be essentially no different from commercial health insurance providers and thus generally legislated this exemption out of existence.28 (Later Congress realized that it had gone too far in this regard and restored exemption for some providers of insurance that function as charitable risk pools.29) Congress allowed the exempt status for group legal services organizations30 to expire without ceremony in 1992; it also created a category of exemption for state-sponsored workers' compensation reinsurance organizations, with the stipulation that they be established before June 1, 1996.31 Indeed, in 1982, Congress established exemption for a certain type of veterans' organization, with one of the criteria being that the entity was established before 1880.32
There is a main statutory list of tax-exempt organizations33 to or from which Congress periodically adds or deletes categories of organizations. Occasionally, Congress extends the list of organizations that are exempt as charitable entities.34 Otherwise, it may create a new provision describing the particular exemption criteria.35
§ 1.3 TAX-EXEMPT ORGANIZATIONS LAW PHILOSOPHY
The definition in the law of the term nonprofit organization and the concept of the nonprofit sector as critical to the creation and functioning of a civil society do not distinguish nonprofit organizations that are tax-exempt from those that are not. This is because the tax aspect of nonprofit organizations is not relevant to either subject. Indeed, rather than defining either the term nonprofit organization or its societal role, the federal tax law principles respecting tax exemption of these entities reflect and flow out of the essence of these subjects.
This is somewhat unusual; many provisions of the federal tax laws are based on some form of rationale that is inherent in tax policy. The law of tax-exempt organizations, however, has little to do with any underlying tax policy. Rather, this aspect of the tax law is grounded in a body of thought rather distant from tax policy: political philosophy as to the proper construct of a democratic society.
This raises, then, the matter of the rationale for the eligibility of nonprofit organizations for tax-exempt status. That is, what is the fundamental characteristic that enables a nonprofit organization to qualify as an exempt organization? In fact, there is no single qualifying feature; the most common one is, as noted, the doctrine of private inurement. This circumstance mirrors the fact that the present-day statutory exemption rules are not the product of a carefully formulated plan. Rather, they are a hodgepodge of statutory law that has evolved over more than 100 years, as various Congresses have deleted from (infrequently) and added to (frequently) the roster of exempt entities, causing it to grow substantially over the decades.
There are six basic rationales underlying qualification for tax-exempt status for nonprofit organizations. On a simplistic plane, a nonprofit entity is exempt because Congress wrote a provision in the Internal Revenue Code according exemption to it. Thus, some organizations are exempt for no more engaging reason than that Congress said so. Certainly, there is no grand philosophical construct buttressing this type of exemption.
Some of the federal income tax exemptions were enacted in the spirit of being merely declaratory of, or furthering, then-existing law. The House Committee on Ways and Means, in legislating a forerunner to the provision that exempts certain voluntary employees' beneficiary associations,36
