Tax-Exempt Organizations: Organizational and Operational Requirements, written by Steven D. Simpson, Esq.,  Law Offices of Steven D. Simpson, P.A., describes the organization and operation of organizations exempt from federal income taxation under the Internal Revenue Code of 1986, as amended.

This Portfolio emphasizes the discussion of organizations exempt from tax under §501(a). Because §501(c)(3) organizations dominate the tax-exempt community, this Portfolio concentrates on those organizations. The heft of this Portfolio evidences the volume of tax law applicable to tax-exempt entities. This is also indicative of the impact that such organizations have upon contemporary society. The activities of tax-exempt organizations are tightly woven into American society. Their importance to the development of American society and the American political system should not be underestimated.

Tax-Exempt Organizations: Organizational and Operational Requirements focuses on the various types of public charities and their activities, and distinguishes public charities from private foundations. It also details the restrictions on the lobbying and political activities of public charities and the unrelated business income tax.

This Portfolio analyzes the organizational and operational requirements of tax-exempt organizations. It discusses organizations exempt under §§501(a) and 501(c)(1) through (28), §521 farmers' cooperatives, §527 political organizations, §528 homeowners' associations, and §529 qualified tuition programs. Governmental entities and instrumentalities also are discussed. Charitable trusts and pooled income funds are briefly mentioned.

Specific topics discussed in this Portfolio include

• the distinction between public charities and private foundations
• the §508 notice requirements applicable to §501(c)(3) organizations
• the organizational and operational tests of §501(c)(3)
• religious organizations, charitable organizations, educational organizations, scientific organizations, and other types of §501(c)(3) organizations
• private inurement, private benefit and the intermediate sanctions remedy
• legislative and political activities of §501(c)(3) organizations
• the income-producing activities of tax-exempt organizations and the impact of the tax on income from an unrelated trade or business imposed by the Code
• unrelated debt-financed income and more

Tax-Exempt Organizations: Organizational and Operational Requirements allows you to benefit from:

• Hundreds of hours of original research on specific tax planning topics from leading practitioners in this area
• Invaluable practice documents including tables, charts and lists
• Plain-English guidance from world-class experts
• Real-world and in-depth analysis that lets you explore various options
• Time-saving access to relevant sections of tax laws, regulations, court cases, IRS documents and more
• Alternative approaches to both common and unique tax scenarios

This Portfolio is part of the Estates, Gifts and Trusts Portfolios Library, a comprehensive series containing more than 80 Portfolios, which covers critical transactions in estate, gifts and trusts planning. This highly-regarded resource library offers commentary on a wide range of estate planning topics including: Generation Skipping Tax, Family Limited Partnerships, Charitable Remainder Trusts, Estate Planning for Closely-Held Businesses, Exempt Organizations and Private Foundations, Life Insurance, Valuation, and more.

Detailed Analysis

I. General Considerations - Introduction

Introductory Material

A. Generally

B. Historical and Statutory Bases for Exemption

1. Historical Basis for Exemption

2. Statutory Basis for Exemption

C. Economic Rationale for Exemption

D. Statutory Construction of Exemption Provisions

II. Advantages to Tax Exemption

A. Exemption from Federal Income Tax

B. Exemption from State and Local Taxes

C. Eligibility for Deductible Contributions

D. Miscellaneous

III. Disadvantages to Tax Exemption

IV. Types of Tax-Exempt Organizations

Introductory Material

A. Section 501(c)(1): Instrumentalities of the United States

B. Section 501(c)(2) and (c)(25): Title-Holding Organizations

1. Section 501(c)(2)

2. Section 501(c)(25)

C. Section 501(c)(3): Charitable Organizations

D. Section 501(c)(4): Social Welfare Organizations and Local Associations of Employees

1. Social Welfare Organizations

2. Local Associations of Employees

E. Section 501(c)(5): Labor, Agricultural and Horticultural Organizations

1. Labor Organizations

2. Agricultural and Horticultural Organizations

F. Section 501(c)(6): Business Leagues

G. Section 501(c)(7): Social Clubs

H. Section 501(c)(8): Fraternal Beneficiary Societies

I. Section 501(c)(9): Voluntary Employees’ Beneficiary Associations

1. Generally

2. Application for Recognition of Exemption

3. Benefits

J. Section 501(c)(10): Fraternal Lodge Societies

K. Section 501(c)(11): Teacher's Retirement Fund Associations

L. Section 501(c)(12): Life Insurance, Irrigation, Telephone and Similar Organizations

M. Section 501(c)(13): Cemetery Companies

N. Section 501(c)(14): Credit Unions and Mutual Insurance Funds

O. Section 501(c)(15): Small Insurance Companies

P. Section 501(c)(16): Crop-Financing Corporations

Q. Section 501(c)(17): Supplemental Unemployment Benefit Trusts

R. Section 501(c)(18): Employee-Funded Pension Trusts

S. Section 501(c)(19): Organizations of Past or Present Members of the Armed Forces

T. Section 501(c)(20): Group Legal Services Organizations

U. Section 501(c)(21): Black Lung Benefit Trusts

V. Section 501(c)(22): Certain ERISA Trusts

W. Section 501(c)(23): Armed Forces Organizations

X. Section 501(c)(24): ERISA Trusts

Y. Section 501(c)(26): State-Sponsored Health Insurance Coverage Organizations

Z. Section 501(c)(27): Workers’ Compensation Insurance Pools

AA. Section 501(d): Religious and Apostolic Organizations

BB. Section 501(e): Cooperative Hospital Service Organizations

CC. Section 501(f): Cooperative Educational Investment Organizations

DD. Section 501(n): Charitable Risk Pools

EE. Section 501(o): Provider-Sponsored Organizations

FF. Farmers’ Cooperatives, Shipowners’ Protection and Indemnity Associations, and Homeowners’ Associations

1. Farmers’ Cooperatives

2. Shipowners’ Protection and Indemnity Associations

3. Homeowners’ Associations

GG. Political Organizations

HH. Section 529 Qualified Tuition Programs

II. Organizations Treated as Exempt for Certain Purposes

1. Generally

2. Charitable Remainder Trusts

3. Section 642(c)(5): Pooled Income Funds

4. Section 4947(a)(1): Nonexempt Charitable Trusts

5. Section 4947(a)(2): Split-Interest Trusts

6. Foreign Charitable Organizations

7. Section 502: Feeder Organizations

8. Communist-Controlled Organizations

V. Governmental Entities and Instrumentalities

A. Introduction

B. Governmental Entities: Definitions

1. “Governmental Unit”

2. Political Subdivisions

3. “Instrumentality”

C. Tax Treatment of Governmental Entities

1. States and Political Subdivisions

2. Exclusion Under § 115

D. Governmental Entities’ Exemption Under § 501(c)(3)

VI. Charitable Organizations - § 501(c)(3) Generally

Introductory Material

A. Statutory Development

B. Theory of Exemption Under § 501(c)(3)

C. Advantages and Disadvantages of Exemption Under § 501(c)(3)

1. Advantages

2. Disadvantages

D. Collateral Benefits of Exemption Under § 501(c)(3)

VII. Distinction Between Public Charities and Private Foundations

Introductory Material

A. Background

B. Section 509: Private Foundations and Public Charities

1. Section 170(b)(1)(A)(i)-(v) (“Public”) Organizations

a. Churches

b. Educational Organizations

c. Hospitals and Medical Research Organizations

(1) Hospitals

(2) Medical Research Organizations

d. University Endowment Funds

e. Governmental Entities

2. Sections 170(b)(1)(A)(vi) and 509(a)(2) Publicly Supported Organizations

a. Section 170(b)(1)(A)(vi) (“Donative”) Publicly Supported Organizations

(1) Definition of Support

(2) Public Support Tests

(3) Calculation of Public Support

(4) Definition of “Normally”

(5) Advance Rulings to New Organizations

b. Section 509(a)(2) (“Service Provider”) Publicly Supported Organizations

(1) Definition of Support

(2) Public Support Test

(3) Gross Investment Income Test

(4) Definition of “Normally”

(5) Advance Rulings to New Organizations

c. Advantages to Treatment Under § 170(b)(1)(A)(vi) Rather than § 509(a)(2)

3. Section 509(a)(3) Supporting Organizations

4. Section 509(a)(4)

5. Donor Advised Funds

C. Private Foundations Generally

D. Advantages to Classification as a Public Charity

VIII. Section 508 Notice Requirements

Introductory Material

A. Application for Recognition of Exemption Under § 501(c)(3): § 508(a)

1. In General

a. Time for Filing

b. Group Exemption Procedures

c. Contents of Form 1023

d. Revocation of Favorable Determination Letter

e. Suspension of Exempt Status and of Eligibility for Exempt Status

2. Exceptions to § 508(a) Notice Requirement

B. Presumption of Private Foundation Status: § 508(b)

IX. The Organizational and Operational Tests of § 501(c)(3)

Introductory Material

A. The Organizational Test

1. Types of Entities Qualifying for Exemption

2. Articles of Organization

B. The Operational Test

X. Religious Organizations

Introductory Material

A. Definitions of Religious Organization and Church

1. Characteristics of a Religious Organization

2. The Service's Standards to Define the Term “Church”

3. Compliance with Other Requirements of § 501(c)(3)

4. Inquiries into Religious Beliefs

5. Religious Social Retreats

B. Mail Order Churches and Other Organizations Furthering Private Interests

1. Mail Order Churches

2. Other Organizations Furthering Private Interests

XI. Charitable Organizations

Introductory Material

A. Background

B. Role of Fundamental Public Policies

C. Relief of the Poor or of the Underprivileged

D. Legal Assistance and Litigating Organizations

1. Legal Aid Organizations

2. Human and Civil Rights Organizations

3. Organizations Acting as Litigation Plaintiffs

4. Public Interest Law Firms

E. Public Works, Lessening the Burdens of Government and Promotion of Social Welfare

1. Organizations that Erect or Maintain Public Works

2. Organizations that Lessen the Burdens of Government

3. Organizations that Promote the Social Welfare

F. Hospitals, Health Care Providers and the Promotion of Health

1. Hospitals

a. General Requirements for Exemption

b. Congressional Hearings

c. Hospital Audit Guidelines

d. Physician Recruitment Incentives

e. Hospital/Physician Joint Ventures

f. Purchase of Physician Practices

g. Reorganizations

h. Integrated Delivery Systems

i. Whole Hospital Joint Ventures

j. Title-Holding Companies

k. State Law Concerns

l. Pennsylvania State Law Developments

2. Health Maintenance Organizations

3. Section 501(m) and the Provision of Commercial-Type Insurance

4. Peer Review Organizations

5. Faculty Group Practice Organizations

6. Home Health Agencies

XII. Educational Organizations

Introductory Material

A. Instruction or Training of the Individual

B. Education of the Public

C. College and University Examination Guidelines

XIII. Scientific Organizations

XIV. Other Organizations

Introductory Material

A. Literary

B. Testing for Public Safety

C. Prevention of Cruelty to Children or Animals

D. Amateur Athletic Organizations

E. Cooperative Hospital Service Organizations

F. Cooperative Service Organizations of Operating Educational Organizations

G. Child Care Facilities

XV. Private Inurement, Private Benefit and Intermediate Sanctions

Introductory Material

A. Private Inurement

1. Background

2. Relationship to Private Benefit and “Exclusively”

B. Common Types of Inurement or Private Benefit

1. Unreasonable Payments

a. Compensation

b. Rent

c. Loans

d. Retained Interests

2. Other Forms of Private Inurement or Private Benefit

a. Organization Formed to Reduce Founder's Tax Liability

b. Conversion of For-Profit Organization to Nonprofit Status

c. Conversion of Nonprofit Organization to For-Profit Status

C. Public v. Private Benefit

D. Intermediate Sanctions

1. Introduction

2. Excess Benefit Transactions

3. Disqualified Persons

4. Applicable Organizations

5. Liability for the Tax

6. Effective Dates

XVI. Legislative and Political Activities

Introductory Material

A. Background

B. Legislative Activities

1. Action Organizations

2. What Constitutes an Attempt to Influence Legislation

3. “Substantial Part” Test

4. Section 501(h) Election

5. Sanctions for Excessive Lobbying

6. Disallowance of Deduction for Dues Paid to Trade Associations Engaged in Lobbying

C. Political Activities

1. Prohibition on Political Activities

2. 1987 Act

D. Educational Activities

E. Constitutional Considerations

F. Lobbying and Political Campaign Activities of Other Types of Tax-Exempt Organizations

1. Social Welfare Organizations

2. Labor, Agricultural and Horticultural Organizations

3. Business Leagues or Trade Associations

4. Veterans Organizations

5. Other Considerations

G. Attribution of Political Campaign Activities to an Organization

XVII. Engaging in a Trade or Business

Introductory Material

A. Generally

B. Revenue Act of 1950 and 1969 Act

1. Background

2. Revenue Act of 1950

3. 1969 Act

4. Rate of Tax

C. Elements of an Unrelated Trade or Business

1. The Requirement of a Trade or Business

2. Regularly Carried On

3. Substantially Related

D. Exclusions from the Definition of Unrelated Trade or Business

1. Trade or Business Carried on by Volunteers

2. Convenience Exception

3. Exception for Donated Property

4. Qualified Public Entertainment Activities

5. Trade Shows

6. Hospital Services

7. Bingo and Other Games of Chance

8. Low-Cost Articles

9. Exchanges and Rentals of Mailing Lists

10. Pole Rentals

E. Examples of Related and Unrelated Trades or Businesses

1. Related Activities

2. Unrelated Activities

F. Corporate Sponsorship Payments and UBIT Liability

1. Prior Law

2. Audit Guidelines

3. 1993 Proposed Sponsorship Regulations

4. 1997 Legislation

5. Regulations

G. How Much Unrelated Income?

1. Generally

2. Commensurate Test

H. Computation of UBTI

I. Modifications to an Organization's UBTI

1. In General

a. Dividends, Interest and Payments with Regard to Securities Loans

b. Royalties

c. Rental Income

d. Other Modifications

2. Section 512(b)(13) Controlled Organizations

3. Other Rules

a. S Corporation Shareholder

b. Income From Controlled Foreign Corporation

J. Partnerships of Exempt and Non-Exempt Entities

K. Deductions

L. Periodical Income

M. Special UBIT Rules for Social Clubs

N. Other Rules

XVIII. Unrelated Debt-Financed Income

Introductory Material

A. Background

B. Computation of Unrelated Debt-Financed Income

1. Debt-Financed Property

2. Acquisition Indebtedness

3. Average Adjusted Basis

C. Exception for Qualified Organizations

XIX. Excise Tax on Accommodation Parties in Tax Shelter Transactions

Working Papers

Table of Worksheets

Additional IRS forms and publications relating to charitable organizations are listed below with cross references to the Tax Management portfolios in which they appear.

Worksheet 1 IRM Exempt Organizations Determinations Manual, Exhibit 7.25.1-1, Table of Organizations Exempt Under Section 501

Worksheet 2 Pub. 3386 - Guide-Veterans' Organizations (Excerpt)

Worksheet 3 Form 1023 - Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, and Instructions

Worksheet 4 Form 8718 - User Fee for Exempt Organization Determination Letter Request

Worksheet 5 Form 8734 - Support Schedule for Advance Ruling Period

Worksheet 6 Sample Articles of Incorporation for a Charity

Bibliography

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Statutes:

Treasury Regulations:

Public Laws:

Treasury Rulings:

Cases:

UNOFFICIAL

Books and Treatises:

Periodicals:

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