The Law of Tax-Exempt Organizations E-Book

Bruce R. Hopkins

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 384

Veröffentlichungsjahr: 2022

Beschreibung

Stay informed of every major development in the law of tax-exempt organizations from 2021 and 2022 In the 2022 Cumulative Supplement to the twelfth edition of The Law of Tax-Exempt Organizations, readers will find an essential update covering and explaining every relevant and impactful legislative and regulatory change, as well as major cases and decisions from 2021, that will affect the administration and operation of tax-exempt organizations in the United States. Renowned author Bruce R. Hopkins offers concise and authoritative commentary on the latest amendments and legislation of interest to the leaders and managers of tax-exempt organizations and the lawyers, accountants, and consultants who serve and advise them.

Leseprobe

Table of Contents

Cover

Title Page

Copyright

A LETTER TO THE READER

About the Author

Preface

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

CHAPTER TWO: Overview of Nonprofit Sector and Tax-Exempt Organizations

§ 2.1 PROFILE OF NONPROFIT SECTOR

§ 2.2 ORGANIZATION OF IRS

NOTES

PART TWO: Fundamentals of the Law of Tax-Exempt Organizations

CHAPTER THREE: Tax Exemption: Source and Recognition

§ 3.2 RECOGNITION OF TAX EXEMPTION

§ 3.3 RECOGNITION OF PUBLIC CHARITY, PRIVATE FOUNDATION STATUS

CHAPTER FOUR: Organizational, Operational, and Related Tests and Doctrines

§ 4.1 FORMS OF TAX-EXEMPT ORGANIZATIONS

§ 4.3 ORGANIZATIONAL TEST

§ 4.5 OPERATIONAL TEST

§ 4.7 COMMENSURATE TEST

§ 4.8 STATE ACTION DOCTRINE

§ 4.9 COMMERCIALITY DOCTRINE

NOTES

CHAPTER FIVE: Nonprofit Governance

§ 5.3 BOARD DUTIES AND RESPONSIBILITIES

§ 5.7 IRS AND GOVERNANCE

NOTES

PART THREE: Tax-Exempt Charitable Organizations

CHAPTER SIX: Concept of

Charitable

§ 6.2 PUBLIC POLICY DOCTRINE

§ 6.3 COLLATERAL CONCEPTS

NOTES

CHAPTER SEVEN: Charitable Organizations

§ 7.2 RELIEF OF DISTRESSED

§ 7.4 PROVISION OF HOUSING

§ 7.6 PROMOTION OF HEALTH

§ 7.7 LESSENING BURDENS OF GOVERNMENT

§ 7.8 ADVANCEMENT OF EDUCATION

§ 7.11 PROMOTION OF SOCIAL WELFARE

§ 7.14 FUNDRAISING ORGANIZATIONS

§ 7.15 INSTRUMENTALITIES OF GOVERNMENT

§ 7.16 OTHER CATEGORIES OF CHARITY

§ 7.17 QUALIFIED OPPORTUNITY ZONES

NOTES

CHAPTER EIGHT: Educational Organizations

§ 8.1 FEDERAL TAX LAW DEFINITION OF

EDUCATIONAL

§ 8.3 EDUCATIONAL INSTITUTIONS

§ 8.4 INSTRUCTION OF INDIVIDUALS

§ 8.5 INSTRUCTION OF PUBLIC

NOTES

CHAPTER NINE: Scientific Organizations

§ 9.2 CONCEPT OF

RESEARCH

NOTES

CHAPTER TEN: Religious Organizations

§ 10.1 CONSTITUTIONAL LAW FRAMEWORK

§ 10.2 FEDERAL TAX LAW DEFINITION OF

RELIGION

§ 10.3 CHURCHES AND SIMILAR INSTITUTIONS

§ 10.5 INTEGRATED AUXILIARIES OF CHURCHES

§ 10.7 RELIGIOUS ORDERS

NOTES

CHAPTER ELEVEN: Other Types of Charitable Organizations

§ 11.2 AMATEUR SPORTS 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

§ 12.3 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

§ 13.3 CONDUCT OF BUSINESS

NOTES

CHAPTER FOURTEEN: Business Leagues and Similar Organizations

§ 14.1 CONCEPT OF

BUSINESS LEAGUE

§ 14.2 DISQUALIFYING ACTIVITIES

NOTES

CHAPTER FIFTEEN: Social Clubs

§ 15.1 SOCIAL CLUBS IN GENERAL

§ 15.4 EXCEPTIONS TO LIMITATIONS

§ 15.5 TAXATION OF SOCIAL CLUBS

NOTES

CHAPTER SIXTEEN: Labor, Agricultural, and Horticultural Organizations

§ 16.1 LABOR ORGANIZATIONS

§ 16.2 AGRICULTURAL ORGANIZATIONS

NOTE

CHAPTER SEVENTEEN: Political Organizations

§ 17.4 PUBLIC POLICY ADVOCACY ACTIVITIES

§ 17.5 TAXATION OF POLITICAL ORGANIZATIONS

CHAPTER EIGHTEEN: Employee Benefit Funds

§ 18.3 VOLUNTARY EMPLOYEES' BENEFICIARY ASSOCIATIONS

NOTE

CHAPTER NINETEEN: Other Categories of Tax-Exempt Organizations

§ 19.4 FRATERNAL ORGANIZATIONS

§ 19.6 CEMETERY COMPANIES

§ 19.11 VETERANS' ORGANIZATIONS

§ 19.12 FARMERS' COOPERATIVES

§ 19.14 HOMEOWNERS' ASSOCIATIONS

§ 19.18 QUALIFIED HEALTH INSURANCE ISSUERS

§ 19.20 ABLE PROGRAMS

§ 19.22 GOVERNMENTAL AND QUASI-GOVERNMENTAL ENTITIES

§ 19.24 OTHER CATEGORIES OF TAX-EXEMPT ORGANIZATIONS

NOTES

PART FIVE: Principal Exempt Organization Laws

CHAPTER TWENTY: Private Inurement and Private Benefit Doctrines

§ 20.4 COMPENSATION ISSUES

§ 20.5 EXECUTIVE COMPENSATION TAX

§ 20.6 OTHER FORMS OF PRIVATE INUREMENT

§ 20.12 PRIVATE INUREMENT AND OTHER CATEGORIES OF EXEMPT ORGANIZATIONS

§ 20.13 PRIVATE BENEFIT DOCTRINE

NOTES

CHAPTER TWENTY-ONE: Intermediate Sanctions

§ 21.3 DISQUALIFIED PERSONS

§ 21.4 TRANSACTIONS INVOLVED

§ 21.16 INTERRELATIONSHIP WITH PRIVATE INUREMENT DOCTRINE

NOTES

CHAPTER TWENTY-TWO: Legislative Activities by Tax-Exempt Organizations

§ 22.3 LOBBYING BY CHARITABLE ORGANIZATIONS

§ 22.3 LEGISLATIVE ACTIVITIES OF BUSINESS LEAGUES

NOTES

CHAPTER TWENTY-THREE: Political Campaign Activities by Tax-Exempt Organizations

§ 23.2 PROHIBITION ON CHARITABLE ORGANIZATIONS

§ 23.3 POLITICAL CAMPAIGN EXPENDITURES AND TAX SANCTIONS

§ 23.6 POLITICAL ACTIVITIES OF SOCIAL WELFARE ORGANIZATIONS

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

§ 24.4A DEEMED UNRELATED BUSINESS INCOME

§ 24.5 CONTEMPORARY APPLICATIONS OF UNRELATED BUSINESS RULES

§ 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

§ 25.7 DEDUCTION RULES

NOTES

PART SIX: Acquisition and Maintenance of Tax Exemption

CHAPTER TWENTY-SIX: Exemption Recognition and Notice Processes

§ 26.1 RECOGNITION APPLICATION PROCEDURE

§ 26.3 NONPRIVATE FOUNDATION STATUS

§ 26.4 REQUIREMENTS FOR SOCIAL WELFARE ORGANIZATIONS

§ 26.10 RULES FOR OTHER CATEGORIES OF ORGANIZATIONS

§ 26.10A DETERMINATION LETTER REQUESTS ON FORM 8940

§ 26.10B WITHDRAWAL OF REQUEST FOR DETERMINATION LETTER

§ 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

§ 26.16 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

§ 27.3 RETROACTIVE REVOCATION OF TAX-EXEMPT STATUS

§ 27.5 REVOCATION OF TAX-EXEMPT STATUS: LITIGATION PROCEDURES

§ 27.6 IRS EXAMINATION PROCEDURES AND PRACTICES

§ 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

§ 28.5 FILING REQUIREMENTS AND TAX-EXEMPT STATUS

§ 28.5A PRE-REVOCATION NOTICE BY IRS

§ 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

§ 28.14 INSURANCE ACTIVITIES

§ 28.17 TAX-EXEMPT ORGANIZATIONS AND TAX SHELTERS

§ 28.17 INTERNATIONAL GRANTMAKING REQUIREMENTS

§ 28.18 RECORDKEEPING REQUIREMENTS

NOTES

CHAPTER TWENTY-EIGHT A: Tax-Exempt Organizations and Tax Shelters

§ 28A.1 CONCEPT OF

TAX SHELTER

§ 28A.2 JUDICIAL DOCTRINES

§ 28A.3 TAX SHELTER LAW IN GENERAL

§ 28A.4 EXEMPT ORGANIZATIONS AND TAX SHELTER PENALTIES

§ 28A.5 EXEMPT ORGANIZATIONS' INVOLVEMENT IN SHELTERS

§ 28A.6 GAO FINDINGS AND RECOMMENDATIONS

§ 28A.7 “DIRTY DOZEN” LISTINGS

NOTES

PART SEVEN: Interorganizational Structures and Operational Forms

CHAPTER TWENTY-NINE: Tax-Exempt Organizations and Exempt Subsidiaries

§ 29.2 CHARITABLE ORGANIZATIONS AS SUBSIDIARIES

§ 29.3 TAX-EXEMPT SUBSIDIARIES OF CHARITABLE ORGANIZATIONS

§ 29.7 REVENUE FROM TAX-EXEMPT SUBSIDIARY

NOTE

CHAPTER THIRTY: Tax-Exempt Organizations and For-Profit Subsidiaries

§ 30.2 POTENTIAL OF ATTRIBUTION TO PARENT

NOTES

CHAPTER THIRTY-ONE: Tax-Exempt Organizations and Joint Ventures

§ 31.3 WHOLE-ENTITY JOINT VENTURES

CHAPTER THIRTY-TWO: Tax-Exempt Organizations: Other Operations and Restructuring

§ 32.1 MERGERS

§ 32.7 CONVERSIONS FROM NONEXEMPT TO EXEMPT STATUS

§ 32.8 CONVERSION FROM ONE EXEMPT STATUS TO ANOTHER

NOTES

Index

End User License Agreement

Guide

Cover

Table of Contents

Title Page

Copyright

A LETTER TO THE READER

About the Author

Preface

About the Online Resources

Book Citations

Begin Reading

Index

End User License Agreement

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the law of tax-exempt organizations

Twelfth Edition

2022 Cumulative Supplement

Bruce R. Hopkins

Copyright © 2022 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 is Available:

ISBN: 9781119538042 (main edition)ISBN: 9781119873389 (paperback)ISBN: 9781119873396 (ePub)ISBN: 9781119873402 (ePDF)

Cover Design: WileyCover Image: © Christina Krivonos / Shutterstock

A LETTER TO THE READER

It is with a heavy heart that we relay the news to you that Bruce Richard Hopkins, JD, LLM, SJD passed away on October 31, 2021. Bruce's love for the law and for writing resulted in a wonderful relationship with Wiley that lasted for better than 30 years. Throughout that time, Bruce penned more than 50 books as well as writing Bruce R. Hopkins' Nonprofit Counsel (a newsletter published monthly for 40 years). Bruce's texts are practical guides about nonprofits written for both lawyers and laypeople, many of which are considered vital to law libraries across the country. The ideas just kept flowing.

Beloved by many, Bruce was often referred to as the “Dean of Nonprofit Law.” His teaching muscle was built over a period of 19 years when he was Professional Lecturer in Law at George Washington University National Law Center. As Professor from Practice at the University of Kansas, School of Law, Bruce exercised his generative spirit teaching and mentoring younger colleagues. Always the legal scholar, he could brilliantly take complicated concepts and distill them down into easily understood principles for beginners, seasoned colleagues, and those unfamiliar with the subject matter. He was a presenter and featured speaker, both nationally and internationally, at numerous conferences throughout his career, among them Representing and Managing Tax-Exempt Organizations (Georgetown University Law Center, Washington, DC) and the Private Foundations Tax Seminar (El Pomar Foundation, Colorado Springs, Colorado). He practiced law in Washington, DC and Kansas City, Missouri, for over 50 years, receiving numerous awards and forms of recognition for his efforts.

Bruce will be dearly missed, not solely for his contributions to the Wiley catalog, but because he was a wonderful person who was loved and respected both by all of us at Wiley and by all of those he encountered.

About the Author

BRUCE R. HOPKINS was the principal in the Bruce R. Hopkins Law Firm, LLC, Kansas City, Missouri. He concentrated his practice on the representation of tax-exempt organizations. His practice ranged 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, 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, DC.

Mr. Hopkins was the series editor of Wiley's Nonprofit Law, Finance, and Management Series. In addition to being the author of The Law of Tax-Exempt Organizations, Twelfth Edition, he was the author of The Tax Law of Charitable Giving, Sixth Edition; The Tax Law of Private Foundations, Fifth 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 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, Seventh 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 was the coauthor, 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 wrote Bruce R. Hopkins' Nonprofit Counsel, a monthly newsletter, published by John Wiley & Sons.

Mr. Hopkins maintained a website providing information about the law of tax-exempt organizations, at www.brucerhopkinsbooks.com. Material posted on this site includes a current developments outline concerning this aspect of the law, discussions of his books, and various indexes that accompany 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 was listed in The Best Lawyers in America, Nonprofit Organizations/Charities Law, 2007–2021.

Mr. Hopkins was the Professor from Practice at the University of Kansas School of Law, where he taught 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 was a member of the bars of the District of Columbia and the state of Missouri.

Preface

This 2022 cumulative supplement is the third supplement to accompany the twelfth edition of The Law of Tax-Exempt Organizations. The cumulative supplement covers developments in the law of exempt organizations as of the close of 2021.

Enactment of what is informally known as the Tax Cuts and Jobs Act (TCJA) at the close of 2017 has dominated the exempt organizations current developments scene in recent months. The Department of the Treasury and the IRS have been issuing guidance, primarily final regulations, in the aftermath of the TCJA, such as in the context of the bucketing (or silo) rule for computation of unrelated business taxable income, taxation of certain private colleges' and universities' endowment income, and taxation of the excess compensation paid by exempt organizations to certain of their executives. This guidance is summarized in this cumulative supplement. The law causing inclusion as unrelated business income items of the value of certain types of fringe benefits was repealed.

Another item of legislation, the Taxpayer First Act, brought more statutory law to the tax-exempt organizations setting. This statute instituted mandatory electronic filing of exempt organizations' returns, provided some relief for organizations that may otherwise have their exemptions revoked for failure to file returns, and established a statutory Independent Office of Appeals in the IRS. These new laws are also summarized in this cumulative supplement.

The Office of Audit fiscal year 2022 Annual Audit Plan, made public in the fall of 2021, reflects the Treasury Inspector General for Tax Administration's audit priorities concerning the IRS. Planned audits of the IRS in the tax-exempt organizations context by TIGTA will (1) assess the IRS's ability to identify exempt organizations potentially involved in illegal or other nonexempt activities and the processes in place when potential nonexempt activities are identified; (2) evaluate the IRS's efforts to ensure sponsoring organizations' compliance with qualification and reporting requirements; (3) evaluate the Exempt Organization's function oversight controls and procedures when issuing proposed adverse IRC § 501(c)(3) exempt status determination letters; (4) assess the efficiency of the streamlined application process for recognition of exempt status under IRC § 501(c)(3), including whether the application provides the IRS with sufficient information to approve or deny organizations recognition of exempt status and use of resources and processing time in making these determinations; (5) determine whether the Exempt Organizations function effectively monitors exempt organizations' compliance with written advisories; and (6) assess customer service operations for taxpayer inquiries related to exempt organizations.

The Department of the Treasury and the IRS released their 2021–2022 Priority Guidance Plan on September 28, 2021. Gone are the TCJA projects, although there is a new entry concerning proposed regulations regarding allocation of expenses in computing unrelated business taxable income and addressing how changes made to the net operating loss rules by the CARES Act apply for purposes of the bucketing rule.

Also on the Priority Guidance Plan listing are the proposed regulations concerning donor-advised funds. As of the date of publication of this cumulative supplement, these regulations have yet to emerge.

The IRS continues to invigorate the law of tax-exempt organizations with private letter rulings in areas such as the commerciality doctrine, the organizational and operational tests, the private inurement and private benefit doctrines, nonqualification of organizations as exempt business leagues, and the unrelated business rules. Summaries of these and other IRS rulings are interspersed throughout this cumulative supplement (not cited as precedent, of course).

Courts are also contributing their fair share of law developments. The most dramatic of the opinions are the ones finding that the California attorney general's demands for disclosure of charities' donor information (via Form 990, Schedule B) are unconstitutional. Free speech and privacy rights are implicated. (The Treasury Department has relieved most categories of exempt organizations of the burden of disclosing this type of information.) These and other court opinions are summarized herein.

An unfortunate subject is the interplay between the law of tax-exempt organizations and the law of tax shelters (or, from some perspectives, abusive tax schemes). Interest in this area continues to grow, leading to a new chapter of the book on this subject, which is included in this cumulative supplement. Indeed, the U.S. Government Accountability Office, in early October 2019, issued a report on the subject (summarized herein).

Thanks go to research assistant Greg Gietzen, for his assistance in completing footnotes. Thanks also go to the senior editor, Brian T. Neill, and production editor, Sharmila Srinivasan, for their assistance and support in connection with creation of this cumulative supplement.

Bruce R. Hopkins

October, 2021

About the Online Resources

The Law of Tax-Exempt Organizations, 12th Edition 2022 Cumulative Supplement is complemented by seven online resources. Please visit www.wiley.com/go/hopkins/lawoftaxexempt12e-2022supp to download the following tables in PDF format to use alongside the 12th edition.

Cumulative Table of Cases

Cumulative Table of IRS Revenue Rulings

Cumulative Table of IRS Revenue Procedures

Cumulative Table of IRS Private Determinations Cited in Text

Cumulative Table of IRS Private Letter Rulings, Technical Advice Memoranda, and Counsel Memoranda

Cumulative Table of Cases Discussed in Bruce R. Hopkins' Nonprofit Counsel

Cumulative 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 & 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

The Tax Law of Private Foundations,

Fifth Edition (2018): cited as

Private Foundations

Starting and Managing a Nonprofit Organization: A Legal Guide,

Seventh Edition (2017): cited as

Starting and Managing

The Tax Law of Associations

(2006): cited as

Associations

The Tax Law of Charitable Giving,

Sixth Edition (2021): 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

§ 1.2 Definition of

Tax-Exempt Organization

§ 1.1 DEFINITION OF NONPROFIT ORGANIZATION

(a) Nonprofit Organization Defined

p. 5, note 7. Insert prior to existing text:

This point is sometimes overstated, as illustrated by a state's supreme court's proclamation that “[n]on-profit corporations do not have owners,” adding that “non-profit corporations do not have shareholders or any other way for third parties (whether individuals or entities) to assert a similar ‘ownership’ role” (Farrow v. Saint Francis Medical Center, 407 S.W.3d 579, 593 (Sup. Ct. Mo. 2013)).

p. 5, note 7. Insert as second paragraph:

An individual, desiring to engage in certain activities appropriate for a nonprofit entity, formed, with advice of legal counsel, a nonprofit corporation. Matters did not go well with this entity, programmatically or financially. This individual, who was the corporation's incorporator and president, and a director, filed a retroactive election for S corporation status for the entity as of the date of incorporation. This was done in an effort to enable him to report passthrough operating losses on his personal income tax returns. To this end, he claimed that he held an ownership interest in the organization equivalent to that of a shareholder. The IRS disagreed, disallowing the passthrough losses. The U.S. Tax Court upheld the IRS's position, rejecting the argument that this individual held “exclusive beneficial ownership” of the corporation and writing that “there is no interest in a nonprofit corporation equivalent to that of a stockholder in a for-profit corporation who stands to profit from the success of the enterprise” (Deckard v. Comm'r, 155 T.C. No. 8 (2020)).

p. 5, note 8, second line. Insert following first comma:

Charleston Area Medical Center, Inc., CAMC Health Education and Research Institute, Inc. v. United States, 940 F.3d 1362 (Fed. Cir. 2019); Wichita Center for Graduate Medical Education v. United States, 917 F.3d 1221 (10th Cir. 2019);

p. 5, note 8, third line. Insert and following semi-colon.

p. 5, note 8, fourth line. Delete text following closing parenthesis and insert period.

§ 1.2 DEFINITION OF TAX-EXEMPT ORGANIZATION

p. 8, note 35. Insert following existing text:

The Department of the Treasury, on June 3, 2021, issued its report on tax expenditures for fiscal years 2021–2030; the tax expenditure associated with the income tax charitable contribution deduction in this report is the fifth largest (at $883.5 billion).

CHAPTER TWOOverview of Nonprofit Sector and Tax-Exempt Organizations

§ 2.1 Profile of Nonprofit Sector

§ 2.2 Organization of IRS

(a) IRS in General

(a-1) Prospective Restructuring of IRS

(b) Tax Exempt and Government Entities Division

§ 2.1 PROFILE OF NONPROFIT SECTOR

p. 22, last paragraph, second line. Insert and types following number.

p. 23. Delete text, including footnotes, following first complete paragraph and insert:

According to data provided by the IRS, as of the close of the federal government's fiscal year 2019, there were 1,718,233 recognized tax-exempt organizations.21 Within this group of organizations are 1,365,744 charitable (including educational, scientific, and religious) entities, 79,808 social welfare organizations, 62,700 business leagues, 49,126 social clubs, 45,888 labor and agricultural organizations, 41,756 fraternal beneficiary organizations, 28,575 veterans' organizations, 15,560 domestic fraternal beneficiary societies, 9,406 cemetery companies, 6,050 voluntary employees' beneficiary association, 5,373 benevolent life insurance associations, 4,421 title-holding corporations, 1,677 state-chartered credit unions, 671 holding companies for pensions and other entities, 668 instrumentalities of the federal government, 659 mutual insurance companies, 88 supplemental unemployment compensation trusts, and 65 other types of exempt entities. In addition, according to the IRS, there are 39,167 political organizations and 214 religious and apostolic associations.

During this period, there were 101,880 closures of applications for recognition of tax-exempt status, with 92,439 applicants approved and 66 disapproved. Entities receiving recognition of exemption included charitable organizations (86,383), social welfare organizations (1,442), business leagues (1,432), and social clubs (1,153). The IRS received 3,070 notices of intent to operate as social welfare organizations, of which 456 were rejected. The agency examined 13,433 returns during this period (including those involving retirement plans, government entities, and tax-exempt bonds), including those in the Form 990 series (1,335), other annual returns (e.g., Form 990-PF) (302), employment tax returns (4,495), Forms 990-T (427), and Forms 4720 (383).21.1

Charitable giving in the United States in 2019 is estimated to have totaled $449.64 billion.22 Giving by individuals in 2019 amounted to an estimated $309.66 billion; this level of giving constituted 69 percent of all charitable giving for the year. Grantmaking by private foundations is an estimated $75.69 billion (17 percent of total funding). Gifts in the form of charitable bequests in 2019 are estimated to be $43.21 billion (10 percent of total giving). Gifts from corporations in 2019 totaled $21.09 billion (5 percent of total giving for that year).

Contributions to religious organizations in 2019 totaled $128.17 billion (29 percent of all giving that year). Gifts to educational organizations amounted to $64.11 billion (14 percent); to human service entities, $55.99 billion (12 percent); to foundations, $53.51 billion (12 percent); to health care institutions, $41.46 billion (9 percent); to public/society benefit organizations, $37.16 billion (8 percent); to international affairs entities, $28.99 billion (6 percent); to arts, culture, and humanities entities, $21.64 billion (5 percent); and to environment and animals groups, $14.16 billion (3 percent).

Some of the most recent data for the charitable sector66.1 are for 2015.66.2 In that year, there were 1,088,447 registered public charities, of which 314,744 were sufficiently large to file Form 990.66.3 These organizations reported $3.8 trillion in total assets ($2.3 trillion in net assets) and total revenue of $2 trillion (approximately 11 percent of gross domestic product). Most of the Form 990 filers were relatively small (assets of less than $500,000) or medium-sized (assets of $500,000 up to $10 million) charities (41.2 percent and 47.2 percent, respectively). The larger organizations, those with at least $10 million in assets, were 11.6 percent of Form 990 filers; 93.1 percent of assets were held by, 87.1 percent of revenues were received by, and 71.5 percent of contributions were made to these entities. The primary source of revenue for these organizations was program service revenue (73.1 percent), with charitable contributions accounting for a much smaller amount (12.9 percent).

p. 24. Delete text, including footnotes.

p. 25. Delete carryover paragraph and following two paragraphs, including footnotes.

§ 2.2 ORGANIZATION OF IRS

(a) IRS in General

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p. 27, second complete paragraph, sixth line. Delete Large and Mid-Size Business and insert Large Business and International.

p. 27. Insert following third complete paragraph, before heading:

The IRS is in the process of a complete restructuring, as directed by Congress in 2019, in the form of directives to the Department of the Treasury and the IRS.84.1 The overall framework of the new structure and functioning of the IRS is the subject of a comprehensive report, as directed by the legislation,84.2 submitted to Congress in early 2021.

As part of this restructuring, Congress established within the IRS an Internal Revenue Service Independent Office of Appeals.84.3 This office is under the supervision of a Chief of Appeals, who reports directly to the Commissioner of Internal Revenue. The Chief of Appeals is required to have experience and expertise in administration of, and compliance with, the federal tax laws, a broad range of compliance cases, and management of large service organizations. The function of this office is to resolve federal tax controversies without litigation on a basis that is fair and impartial both to the government and to the taxpayer, promotes a consistent application and interpretation and voluntary compliance with the federal tax laws, and enhances public confidence in and efficiency of the IRS.84.4

Congress also created the position in the IRS of a Chief Information Officer, appointed by the Commissioner of Internal Revenue.84.5 This CIO is to develop, implement, and maintain information technology for the IRS. The CIO is also required to develop and implement a multiyear strategic plan for the information technology needs of the IRS.

(a-1) Prospective Restructuring of IRS

The IRS sent its Taxpayer First Act Report to Congress.84.6 The agency billed this report as a “comprehensive set of recommendations that will reimagine the taxpayer experience, enhance employee training and restructure the organization to increase collaboration and innovation.”84.7

The essence of this report is a description of a way to “transform the IRS into a modern, efficient, and taxpayer-centric centered agency.” The strategies outlined in the report are intended to “re-shape the IRS into a nimbler enterprise, readily capable of taking advantage of emerging technology.” As is emphasized throughout, the report observes that “delivering the type of experience American taxpayers expect and deserve will require funding.”

The strategies focus on customer service, training of employees, and modernization of the IRS's organizational structure. As to organizational redesign, the IRS states that “changing times call for new ways of doing business.” The IRS expects that the coming restructuring “will increase agency-wide collaboration and deconstruct operational silos, thereby improving [the IRS's] ability to provide seamless service to [its] employees and taxpayers.”

There is to be an Enterprise Change and Innovation Division, to “coordinate annual strategic planning and prioritization activities to streamline decision making and enable the agency to set and meet its short and long-term strategic goals.” A Chief Taxpayer Experience Officer “will seek to drive strategic direction for improving the taxpayer experience across the IRS—including both service and compliance interactions.” The current senior executive team will be replaced by a “smaller, taxpayer-focused” senior leadership team. Expected is a Relationships and Services Division, a Data Office and an Enterprise Digitalization and Case Management Office, and consolidation of examination operations into a new Compliance Division. An Operations Management Division is to be a “revitalized support structure that will help the agency address many of the challenges [the IRS faces] in today's current tax administration environment.” In addition to the Commissioner of Internal Revenue, there will be a deputy commissioner, five assistant commissioners, and 32 chiefs (plus chief counsel).

The report says little about how existing operations are to be integrated into this new structure. The existing four “business units,” including Tax Exempt/Government Entities, will be folded into the Compliance Division. This is to be done to ensure “more efficient operations and provid[e] consistent outcomes for resolving taxpayer compliance issues.” The roles of Chief Counsel and the National Taxpayer Advocate will remain essentially unchanged.

The IRS estimates that full implementation of the Taxpayer First Act plans, along with the Integrated Modernization Business Plan, would cost $4.1 billion over FY 2021–FY 2025. Implementation of the specific mandates outlined in the Act (other than development and implementation of strategies) is estimated to cost $550 million during that period. Development and implementation of the taxpayer experience, training, and organizational redesign plans required by the Act has an estimated price tag of $1.6 billion. The modernization plan (for updating of IRS systems, cyber security, and operations) involves an estimated $1.9 billion.

(b) Tax Exempt and Government Entities Division

p. 28, second complete paragraph, second line. Delete applications and insert letter requests.

p. 28, third complete paragraph. Delete last sentence.

p. 28, note 87. Delete 2018-5, 2018-1 I.R.B. 233 and insert 2021-5, 2021-1 I.R.B. 250.

NOTES

21

IRS 2019 Data Book (issued on June 29, 2020). This reference to tax-exempt organizations is to entities that are exempt from federal income tax pursuant to IRC § 501(a) by reason of description in IRC § 501(c) (see

Parts Three

and

Four

). The concept of

recognition

of tax exemption is the subject of § 3.2.

21.1

Likewise, Treasury Inspector General for Tax Administration, “Fiscal Year 2019 Statistical Trends Review of the Tax Exempt and Government Entities Division” (2021-10-031 (May 3, 2021)), which added that the average number of days to process determination requests fluctuates from year to year but dropped 12 percent from 192 days to 169 days from fiscal year 2015 to fiscal year 2019.

22

These data are from

Giving USA 2020

, published by the Giving USA Foundation, and researched and written by the Center on Philanthropy at Indiana University.

66.1

See

Part Three

.

66.2

The data in this paragraph are derived from Congressional Research Service, “Tax Issues Relating to Charitable Contributions and Organizations” 3, 13–14 (R45922 (Sept. 19, 2019)).

66.3

See § 28.2(a)(i).

84.1

Taxpayer First Act, 133 Stat. 981 (Pub. L. No. 116-25, 116th Cong., 1st Sess. (2019)) (for purposes of

infra

notes 84.2–84.5, Act).

84.2

Act § 1302. See § 2.2(a-1).

84.3

Act § 1001.

84.4

The Department of the Treasury and the IRS are in the process of developing regulations in connection with the Independent Office of Appeals.

84.5

Act § 2101.

84.6

Pub. 5426 (Jan. 11, 2021).

84.7

IR-2021-07.

PART TWOFundamentals of the Law of Tax-Exempt Organizations

Chapter  Three

Tax Exemption: Source and Recognition

Chapter  Four

Organizational, Operational, and Related Tests and Doctrines

Chapter  Five

Nonprofit Governance

CHAPTER THREETax Exemption: Source and Recognition

§ 3.2 Recognition of Tax Exemption

(a) General Rules

§ 3.3 Recognition of Public Charity, Private Foundation Status

§ 3.2 RECOGNITION OF TAX EXEMPTION

(a) General Rules

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§ 3.3 RECOGNITION OF PUBLIC CHARITY, PRIVATE FOUNDATION STATUS

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CHAPTER FOUROrganizational, Operational, and Related Tests and Doctrines

§ 4.1 Forms of Tax-Exempt Organizations

(a) General Rules

§ 4.3 Organizational Test

(b) Dissolution Requirements

§ 4.5 Operational Test

(a) Basic Rules

§ 4.7 Commensurate Test

§ 4.8 State Action Doctrine

(d) Statutory Law

§ 4.9 Commerciality Doctrine

(e) Other Applications of Doctrine

(f) Elements of Commerciality

(g) IRS Ruling Policy

(h) Contemporary Perspective on Doctrine

§ 4.1 FORMS OF TAX-EXEMPT ORGANIZATIONS

(a) General Rules

p. 41, note 21, first line. Insert following comma:

Lloyd v. Comm'r, T.C. Memo. 2020-92 (2020);.

p. 41, note 21. Insert as last sentence:

An example, however, of a nonentity qualifying as a tax-exempt organization (a custodial individual retirement account) is in Lakeview Devel. Corp. v. UBS Financial Servs., Inc., 614 B.R. 603 (Bank. Ct. for D. Col. 2020).

§ 4.3 ORGANIZATIONAL TEST

p. 45. Insert as fifth paragraph:

Some states' nonprofit corporation acts differentiate between public benefit corporations and mutual benefit corporations. An organization that is seeking recognition of exemption as a charitable entity57.1 must, as to one of these jurisdictions, be structured as a public benefit corporation.57.2 This is also the case for social welfare organizations.57.3 Entities such as business leagues, social clubs, and labor and similar organizations.57.4

(b) Dissolution Requirements

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In a case before the U.S. Tax Court, an organization is challenging the authority of the IRS to require use of this specific language in dissolution clauses (The Joachim Herz Stiftung v. Comm'r (Docket No. 21039-19X, filed Nov. 25, 2019)).

§ 4.5 OPERATIONAL TEST

(a) Basic Rules

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Tikar, Inc. v. Comm'r, 121 T.C.M. 1408 (2021);

§ 4.7 COMMENSURATE TEST

p. 67, note 246. Insert following existing text:

Shortly thereafter, the IRS recognized tax exemption for an organization that carried “on no operations other than to receive contributions and incidental investment income and to make distributions of income to such exempt organizations [charitable entities] at periodic intervals.” Rev. Rul. 67-149, 1967-1 C.B. 133.

§ 4.8 STATE ACTION DOCTRINE

(d) Statutory Law

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§ 4.9 COMMERCIALITY DOCTRINE

(e) Other Applications of Doctrine

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An organization that was ruled to be charitable because it produced plays in a theater had its exemption revoked because it ceased educating the public in the theater arts and began hosting tribute band concerts, which the IRS, not surprisingly, found to be a commercial undertaking.330.1

(f) Elements of Commerciality

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336.1

Charitable organizations generally derive about 73 percent of their revenue from fee-for-service activities, while charitable contributions constitute approximately 13 percent of total revenue (e.g., § 2.1, text accompanied by note 66.2).

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340.1

The IRS attempted to retroactively revoke the tax-exempt status of a charitable organization affiliated with a for-profit company with more than 2,000 bakery-café locations in the United States, principally on the ground that it provided food and drink to the public in affluent areas (Priv. Ltr. Rul. 201911010). This case was filed in the U.S. Tax Court on March 15, 2019 (Panera Bread Found., Inc. v. Comm'r, Docket No. 5198-19X). The organization operated Panera Cares Cafes in five of these locations, providing food and drink to the poor and distressed, job training to high-risk individuals and those with developmental disabilities, and information to the public regarding food insecurity. The cafes ceased operations, leading the court to, on March 24, 2020, issue a stipulated opinion enabling the organization to retain its exempt status.

(g) IRS Ruling Policy

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an organization that provides consulting and research services on a fee basis regarding climate change and green economies, connecting member entrepreneurs and companies with investment opportunities;359.1 an organization operating a farmers' market;359.2 an organization that leases modified property to disabled individuals, for the purpose of advertising for businesses;359.3 and an organization managing funds for fees, seeking highest possible returns for its clients.359.4

p. 79, carryover paragraph. Insert as penultimate sentence:

In an extraordinary application of the commerciality doctrine, a nonprofit organization formed to combat organized theft and fraud that supports opioid and heroin addiction, by utilizing innovative software in conjunction with retailers and law enforcement agencies, was denied recognition of exemption as a charitable entity, with the IRS invoking the doctrine by characterizing the organization as merely providing a “service for a fee to retail stores.”360.1 The better analysis would have been to recognize exemption as an entity promoting health360.2 and lessening the burdens of government,360.3 with services to retailers cast as a means to larger exempt ends.360.4

(h) Contemporary Perspective on Doctrine

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p. 81, note 371, sixth line. Delete nization providing and insert a provider of.

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p. 81, note 371, ninth line. Delete and an organization.

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operating a tavern (Priv. Ltr. Rul. 202016019), and operating a used car dealership (Priv. Ltr. Rul. 202031010).

p. 82, note 394. Delete 20.12 and insert 20.13.

p. 82, note 395. Insert following existing text:

In one instance, the IRS applied the commerciality doctrine, then also held that much of an organization's activities constituted unrelated business (Priv. Ltr. Rul. 201918019).

p. 82, note 396. Delete text and insert:

For example, the IRS denied recognition as an exempt charitable entity to an organization that operated a banquet center available for fees to the public, on the ground that it was operating an unrelated business (Priv. Ltr. Rul. 201803009), as was the case where the primary activity of an organization was the sale and rental of durable medical equipment (Priv. Ltr. Rul. 201925015) and where an organization provided business development and marketing and consulting services for a fee to various types of nonprofit organizations (Priv. Ltr. Rul. 201925017). In other cases, the IRS revoked exempt status because the organization was engaging in substantially nonexempt activities (Priv. Ltr. Ruls. 201929021, 201926016). In one instance, the IRS applied the commerciality doctrine, where use of the private benefit doctrine would have been more appropriate (Priv. Ltr. Rul. 201941029).

p. 82, note 397, last line. Delete and insert:

303 F. Supp. 3d 1065 (D. Colo. 2018).

NOTES

57.1

That is, an entity described in IRC § 501(c)(3). See Part Three.

57.2

E.g., Priv. Ltr. Rul. 202114023.

57.3

See

Chapter 13

.

57.4

See

Chapters 14

–

16

.

330.1