The Law of Tax-Exempt Organizations, 2016 Supplement

By Bruce R. Hopkins

The updated definitive reference for nonprofit tax law

The Law of Tax-Exempt Organizations is the classic reference for non-profit tax law, written by the most respected name in the field. Author Bruce R. Hopkins provides comprehensive and authoritative coverage of the taxation of exempt organizations to help both lawyers and managers make better-informed decisions regarding the actions and future of their organizations. This supplement includes the latest rulings, regulations, court opinions, and much more, including expanded discussion of the private benefit doctrine, integration of Treasury Department regulations, new rules for supporting organizations and donor-advised funds, and detailed guidance on nonprofit governance and nonprofit regional healthcare cooperatives. Written in plain English to facilitate quick and easy reference, this book is a vital part of any nonprofit's reference library.

The laws pertaining to nonprofit organizations are constantly evolving, and keeping up to date with the changes may mean the difference between meeting organizational objectives or incurring costly penalties. Supplemented annually to provide a one-stop collection of pertinent updates, this book is an invaluable reference for all aspects of nonprofit law.

• Get up to date on the latest IRS rulings, regulatory changes, and court opinions
• Understand the legal guidelines relevant to your organization
• Become better-equipped to make short- and long-term strategy decisions
• Stay current on laws pertaining to governance, fund raising, business activities, and more

This Eleventh Edition is an important revision and expansion to the definitive one-volume reference, and this supplement extends the utility by providing comprehensive coverage of changes and new developments. As both laws and organizations evolve, The Law of Tax-Exempt Organizations is the definitive guide to nonprofit taxation and regulation.

• Language: English
• Publisher: Wiley
• Release date: Mar 30, 2016
• ISBN: 9781119259114

Book preview

Contents

Cover

Series Page

Title Page

Copyright

Preface

1: Definition of and Rationales for Tax-Exempt Organizations

§ 1.2 Definition Of Tax-Exempt Organization

2: Overview of Nonprofit Sector and Tax-Exempt Organizations

§ 2.2 Organization of IRS

4: Organizational, Operational, and Related Tests and Doctrines

§ 4.1 Forms of Tax-Exempt Organizatons

§ 4.5 Operational Test

§ 4.11 Commerciality Doctrine

5: Nonprofit Governance

§ 5.7 IRS and Governance

6: Concept of Charitable

§ 6.2 Public Policy Doctrine

§ 6.3 Collateral Concepts

7: Charitable Organizations

§ 7.4 Provision of Housing

§ 7.6 Promotion of Health

§ 7.7 Lessening Burdens of Government

§ 7.14 Fundraising Organizations

§ 7.16 Other Categories of Charity

8: Educational Organizations

§ 8.3 Educational Institutions

10: Religious Organizations

§ 10.1 Constitutional Law Framework

§ 10.5 Conventions or Associations of Churches

11: Other Charitable Organizations

§ 11.9 Endowment Funds

12: Public Charities and Private Foundations

§ 12.3 Categories of Public Charities

§ 12.4 Private Foundation Rules

13: Social Welfare Organizations

§ 13.1 Concept of Social Welfare

14: Business Leagues and Like Organizations

§ 14.1 Concept of Business League

§ 14.2 Disqualifying Activities

15: Social Clubs

§ 15.1 Social Clubs in General

17: Political Organizations

18: Employee Benefit Funds

§ 18.3 Voluntary Employees' Beneficiary Associations

19: Other Categories of Tax-Exempt Organizations

§ 19.19 Qualified Tuition Programs

§ 19.20 ABLE Programs

§ 19.22 Governmental and Quasi-Governmental Entities

20: Private Inurement and Private Benefit

§ 20.1 Concept of Private Inurement

§ 20.5 Other Forms of Private Inurement

§ 20.12 Private Benefit Doctrine

21: Intermediate Sanctions

§ 21.10 Excise Tax Regime

22: Legislative Activities by Tax-Exempt Organizations

§ 22.6 Legislative Activities of Business Leagues

23: Political Campaign Activities by Tax-Exempt Organizations

§ 23.2 Prohibition on Charitable Organizations

24: Unrelated Business: Basic Rules

§ 24.5 Contemporary Applications of Unrelated Business Rules

25: Unrelated Business: Modifications, Exceptions, and Special Rules

§ 25.1 Modifications

§ 25.2 Exceptions

§ 25.3 Special Rules

26: Exemption Recognition and Notice Processes

§ 26.1 Recognition Application Procedure

§ 26.3A Notice Requirements for Social Welfare Organizations

§ 26.15 Constitutional Law Aspects of Process

27: Administrative and Litigation Procedures

§ 27.2 Revocation or Modification of Tax-Exempt Status: Administrative Procedures

§ 27.3 Retroactive Revocation of Tax-Exempt Status

§ 27.6 Revocation of Tax-Exempt Status: Litigation Procedures

§ 27.7 IRS Examination Procedures and Practices

28: Operational Requirements

§ 28.3 Annual Information Return

§ 28.11 IRS Document Disclosure Rules

§ 28.18 Tax-Exempt Organizations and Tax Shelters

§ 28.19 International Grantmaking Requirements

29: Tax-Exempt Organizations and Exempt Subsidiaries

§ 29.6 Revenue from Tax-Exempt Subsidiary

30: Tax-Exempt Organizations and For-Profit Subsidiaries

§ 30.2 Potential of Attribution to Parent

§ 30.7 Revenue from for-Profit Subsidiary

32: Tax-Exempt Organizations: Other Operations and Restructuring

§ 32.7 Single-Member Limited Liability Companies

§ 32.10 Conversion from Nonexempt to Exempt Status

Table of Tax-Exempt Organizations Law Tax Reform Proposals

Table of Tax-Exempt Organizations Law Tax Reform Proposals

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

Index

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The Law of Tax-Exempt Organizations

Eleventh Edition 2016 Supplement

Bruce R. Hopkins

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Copyright © 2016 by Bruce R. Hopkins. All rights reserved.

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

Published simultaneously in Canada.

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Preface

This is the first Preface in a supplement accompanying the eleventh edition of this book. This supplement essentially covers developments in the federal law of tax-exempt organizations for the multimonth period ending at the close of 2015.

The IRS's Tax Exempt and Government Entities Division, on October 1, 2015, issued its work plan for fiscal year 2016. There has not been one of these work plans since the one issued in connection with fiscal year 2013; it is good to see these plans emerge again. This plan is somewhat marred, like last year's program letter, by an overabundance of management-speak. Unlike the letter, however, this work plan addresses some forthcoming program activity. The work plan is summarized in this supplement.

The IRS has issued other interesting publications (summarized herein), including a memorandum from Rulings and Agreements concerning a toughening of the processing time lines now being followed in connection with applications for recognition of exemption, a memorandum from the Division regarding the use of one or more political activities referral committees, and a notice pertaining to mission-related investing by private foundations. The streamlined application process seems to be operating fairly well, although it continues to be battered by substantial criticism, such as that leveled by the National Taxpayer Advocate (noted herein).

The IRS continues to issue private letter rulings illustrating its positions on application of the commerciality doctrine (some of them questionable), the private inurement and private benefit doctrines, the lack of qualification for exempt status as a business league, absence of the requisite charitable class, housing organizations, the lessening-burdens-of-government principle, the conduit rules in connection with foreign grantmaking, and regulation of nonprofit governance (these continuing to be, in the view from here, incorrect).

An issue has come to the fore again in relation to the time frame covered by this supplement: the matter of conversion from nonexempt (for-profit) status to nonprofit, tax-exempt status. The IRS seems to have evolved to the position that, once an enterprise is formed as a for-profit entity, it can never be reconstituted as an exempt organization; there are two recent private letter rulings on the point. This is certainly not the law. This issue was bizarrely highlighted when a group of 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.

Since the main volume was published, some notable 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 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 (perhaps the sleeper opinion of the Supreme Court's last term); application of free speech principles in the realm of the processing of applications for recognition of exemption; and the use of a corporation sole as an abusive tax shelter.

The Senate Committee on Finance, on August 5, 2015, released its report on the Committee's bipartisan investigation of the IRS's handling of applications for recognition of tax exemption submitted by political advocacy organizations. The essence of this report is that, during 2010–2013, IRS management was delinquent in its responsibility to provide effective control, guidance, and direction over the processing of these applications.

The Government Accountability Office (GAO), in a report issued in July 2015, concluded that there are several areas where the Division's controls intended to enable it to properly select tax-exempt organizations for examination were not well designed or implemented. The GAO recommended that the Division undertake several actions to rectify these deficiencies.

The Finance Committee and GAO reports are summarized in this supplement.

The potential for tax reform looms. As a consequence, a table has been added, this of proposed and House of Representatives–enacted law revisions in the tax-exempt organizations law setting.

My thanks go to my development editor, Matthew Davis, and Lauren Freestone, production editor, for their assistance and support in connection with this supplement.

Bruce R. Hopkins

Chapter One

Definition of and Rationales for Tax-Exempt Organizations

§ 1.2 Definition of Tax-Exempt Organization

§ 1.2 Definition Of Tax-Exempt Organization

p. 9, note 33, second paragraph. Delete and substitute:

The staff of Congress's Joint Committee on Taxation, on December 7, 2015, issued its estimates of federal tax expenditures for fiscal years 2015–2019 (JCX-141-15). The income tax charitable contribution deduction is the ninth largest of these expenditures, at $260.1 billion. The charitable deduction tax expenditure is broken down into the categories of education ($35 billion), health ($26.7 billion), and other ($198.4 billion).

The largest of the tax expenditures, ahead of the charitable deduction, are the net exclusion of pension contributions and earnings ($881.5 billion); the exclusion of employer contributions for health care, health insurance premiums, and long-term care insurance premiums ($769.8 billion); the reduced rates of tax on dividends and long-term capital gain ($689.6 billion); deferral of active income of controlled foreign corporations ($563.6 billion); the deduction for mortgage interest on owner-occupied residences ($419.8 billion); the deduction of nonbusiness state and local government income taxes, sales taxes, and personal property taxes ($342.3 billion); the subsidies for insurance purchased through health benefit exchanges ($322.5 billion); and the tax credit for children ($267 billion).

Chapter Two

Overview of Nonprofit Sector and Tax-Exempt Organizations

§ 2.2 Organization of IRS

p. 32. Insert following first paragraph, before heading:

§ 2.2 Organization of IRS

(c) EO Division's FY 2016 Work Plan

The Tax Exempt and Government Entities Division, on October 1, 2015, issued its work plan for fiscal year 2016. This work plan identifies TE/GE's five key areas of focus in the coming months. The first area is continuous improvement. It is written that one of the Division's guiding principles involves sustaining a continuous improvement feedback loop so as to effectively allocate resources. TE/GE's partnership with the IRS's Lean Six Sigma Office has, according to this report, led to many improvements in the Division's procedures. One example is the trimming of the time taken to process applications for recognition of exemption. 92.1

Forthcoming projects include evaluation of the Form 1023-EZ process to determine potential improvements, development of a program to make Forms 990 available in Modernized e-File format, finding efficiencies in closing unit processes, simplifying tax forms and enhancing their digital functionality, and refining information document requests to reduce the length of examination processes.

Another of these areas is knowledge management. The Division is developing a knowledge management framework. This entails gathering information from employees and staffing the knowledge networks (what the IRS likes to refer to as K-Nets). The IRS has begun building knowledge libraries within each K-Net, containing technical resources searchable by key issue areas and resource types.

A third area is risk management. The Division is working with the IRS's Office of the Chief Risk Officer to ensure that managers and management officials receive risk awareness training. It completed risk registers where managers identified risks within their offices and ways to mitigate existing and potential risks. It also introduced the Risk Acceptance Form and Tool to senior management, which is to help the Division document business decisions in the context of its risk appetite and acceptance. Overall, the Division is implementing mitigation strategies and/or plans to lessen the likelihood of the risk manifesting or the impact should it manifest.

The fourth area is fostering a culture of data-driven decision-making. These steps have been taken: the focusing of examination plans on strategic areas or issues where the Division believes there may be greater risk of noncompliance, and development of a pilot project to analyze data from Form 1023-EZ applications to identify trends and patterns.

The last of these areas is employee engagement. This involves empowering employees and managers, maintaining an effective recognition program, and strengthening our leadership team's visibility, transparency and interaction with employees.

Note

92.1 See § 26.1(a)(iii).

Chapter Four

Organizational, Operational, and Related Tests and Doctrines

§ 4.1 Forms of Tax-Exempt Organizations

§ 4.5 Operational Test

§ 4.11 Commerciality Doctrine

§ 4.1 Forms of Tax-Exempt Organizatons

(a) General Rules

p. 61. Insert as fourth paragraph:

Perhaps the best illustration of this body of law came in connection with a court opinion finding that an organization did not exist for tax-exempt organization law purposes.23.1 The court observed that, during the years at issue, neither this individual nor those assisting him maintained financial records, kept minutes, drafted organizing documents or bylaws, requested an employer identification number, or put in place any structures that would be expected from a continuing organization. No state organizational requirement was met. Federal annual information returns were either not filed or filed late. The court also stated that there was no separation between [this individual] and his activities. He was the sole researcher, analyst, producer, service provider, and scientist (and was later defined as the only director and officer). He had control of all of the funds involved (none of which were devoted to charitable purposes), which were deemed to be gross income to him personally.

§ 4.5 Operational Test

(a) Basic Rules

p. 86, first complete paragraph. Insert as last sentence:

By contrast, a charitable organization was allowed by the IRS to maintain its exempt