Tax Planning and Compliance for Tax-Exempt Organizations

JODY BLAZEK ( Houston TX) is a partner in Blazek & Vetterling LLP, a CPA firm focusing on tax and financial planning for exempt organizations and the individuals who create, fund, and work with them. BV serves over 400 nonprofit organizations providing financial reports and tax compliance and planning services. She is the author of six books in the Wiley Nonprofit Series: Revised Form 990; Nonprofit Financial Planning Made Easy; IRS Form 1023 Preparation Guide; Tax Planning and Compliance for Tax-Exempt Organizations, 4e; Private Foundations: Tax Law and Compliance, 3e; and The Legal Answer Book for Private Foundations, the latter two volumes co-authored with Bruce R. Hopkins. Blazek serves on the Panel of the Nonprofit Sector, Transparency and Financial Accountability Work Group. She is past Chair of the Tax-Exempt Organizations Resource Panel and a member of Form 1023 and 990 Revision Task Forces for the American Institute of Certified Public Accountants.

About the Author xi Preface xiii PART I QUALIFICATIONS OF TAX-EXEMPT ORGANIZATIONS 1 CHAPTER 2 Qualifying Under IRC 501(c)(3) 3 2.1 Organizational Test 3 *(c) Inurement Clause 3 (e) Political Activities 3 2.2 Operational Test 4 (b) Amount of Charitable Expenditures 4 *(j) The Internet and Tax-Exempt Organizations 4 *(k) Governance 5 (l) Economic Substance 6 CHAPTER 3 Religious Organizations 9 3.2 Churches 9 *(a) Special Aspects of a Church 9 (b) Definition of Church 9 CHAPTER 4 Charitable Organizations 11 4.2 Promotion of Social Welfare 11 (b) Credit Counseling and Mortgage Assistance Organizations 11 4.3 Lessening Burdens of Government 11 4.6 Promotion of Health 12 (j) 501(r) Requirements for Hospitals 12 CHAPTER 5 Educational, Scientific, and Literary Purposes, and Prevention of Cruelty to Children and Animals 23 5.1 Educational Purposes 23 *(a) Schools 23 *(f) Fraternity/Sorority Educational Foundations 24 * 5.4 Testing for Public Safety 24 CHAPTER 6 Civic Leagues and Local Associations of Employees: 501(c)(4) 25 * 6.1 Comparison of (c)(3) and (c)(4) Organizations 25 6.2 Qualifying and Nonqualifying Civic Organizations 26 *(a) Limitation on Involvement with Political Candidates 26 6.5 Disclosures of Nondeductibility 27 *(f) Excepted Organizations 27 CHAPTER 7 Labor, Agricultural, and Horticultural Organizations: 501(c)(5) 29 7.2 Agricultural Groups 29 *(b) Services to Members 29 *(c) Special Exception 30 CHAPTER 8 Business Leagues: 501(c)(6) 31 8.2 Meaning of Common Business Interest 31 8.3 Line of Business 31 *(a) User Groups 32 8.4 Rendering Services for Members 32 (b) Disqualifying Services to Individual Members 32 CHAPTER 9 Social Clubs: 501(c)(7) 33 9.4 Revenue Tests 33 (a) 35/15 Test 33 (c) Gift Tax for Club Gifts 34 CHAPTER 10 Instrumentalities of Government and Title-Holding Organizations 35 10.3 Qualifying for 501(c)(3) Status 35 *(a) Disadvantages of 501(c)(3) Status 35 (d) Political Subdivisions 35 *(e) Integral Parts 36 CHAPTER 11 Public Charities 37 * 11.1 Distinction between Public and Private Charities 37 11.2 Inherently Public Activity and Broad Public Support 509(a)(1) 37 *(h) Unusual Grants 38 11.6 Supporting Organizations 509(a)(3) 39 *(i) Form 990 Schedule A Significantly Revised for 2014 47 PART II STANDARDS FOR PRIVATE FOUNDATIONS 51 CHAPTER 12 Private Foundations General Concepts 53 12.2 Special Rules Pertaining to Private Foundations 53 (a) Types of Private Foundations 53 (c) Definition of Special Terms 53 * 12.4 Termination of Private Foundation Status 54 *(e) Mergers, Split-Ups, and Transfers between Foundations 56 *(g) Notifying the IRS 56 CHAPTER 13 Excise Tax Based on Investment Income: IRC 4940 57 13.2 Capital Gains 57 CHAPTER 14 Self-Dealing: IRC 4941 59 14.1 Definition of Self-Dealing 59 (b) Statutory Exceptions 59 14.2 Sale, Exchange, or Lease of Property 60 *(c) Furnishing or Use of Property 60 *(d) Co-Owned Property 61 (e) Partnerships 62 14.3 Loans 62 (a) Donation of Indebted Property 62 * 14.4 Compensation 63 * 14.5 Transactions that Benefit Disqualified Persons 63 *(d) Charitable Pledges 64 14.7 Sharing Space, People, and Expenses 64 (a) Can the Foundation Pay for Its Share? 64 * 14.9 Property Held by Fiduciaries 64 * 14.10 Issues Once Self-Dealing Occurs 65 *(a) Undoing the Transaction 65 (c) Who Pays What Tax? 65 CHAPTER 15 Minimum Distribution Requirements: IRC 4942 67 15.1 Assets Used to Calculate Minimum Investment Return 67 (c) Exempt Function Assets 67 15.2 Measuring Fair Market Value 68 (e) Cash and Other Assets 68 15.4 Qualifying Distributions 68 *(c) Community Foundation Grants 68 *(g) Set-Asides 69 * 15.6 Satisfying the Distribution Test 75 *(a) Timing of Distributions 75 (a)(1) Changing the Order of Application of Distributions 76 (b) Planning for Excess Distributions 77 (c) Cushion against Decline in Income 78 *(e) Abatement of Penalty 78 CHAPTER 16 Excess Business Holdings and Jeopardizing Investments: IRC 4943 and 4944 79 16.1 Excess Business Holdings 79 (a) Definition of Business Enterprise 79 *(b) Corporate Holdings 80 *(c) Partnerships, Trusts, and Proprietorships 80 *(e) Disposition Periods 81 16.2 Jeopardizing Investments 81 *(c) Donated Assets 81 * 16.3 Program-Related Investments 81 16.4 Penalty Taxes 82 (a) When the Manager Knows 82 *(c) Abatement of Penalty 83 CHAPTER 17 Taxable Expenditures: IRC 4945 85 17.3 Grants to Individuals 85 *(a) Meaning of Travel, Study or Other Purposes 85 (c) Food, Shelter, and Aid for the Poor and Distressed 85 *(e) Company Scholarship Plans 87 (f) Seeking Approval 88 17.4 Grants to Public Charities 88 *(d) The Reliance Issue 90 17.5 Grants to Foreign Organizations 91 *(b) Equivalency Procedure 91 PART III OBTAINING AND MAINTAINING TAX-EXEMPT STATUS 117 CHAPTER 18 IRS Filings, Procedures, and Policies 119 * 18.1 Determination Process 119 *(a) Successfully Requesting Tax-Exempt Status 122 (b) Timely Filing Critical for (c)(3) 125 *(c) Organizations That Need Not File 125 *(d) Group Exemptions 126 (g) Exemption for State Purposes 128 18.2 Annual Filing of Forms 990 128 (b) Design of Forms 990 128 (c) Who Files What 132 18.3 Reporting Organizational Changes to the IRS 134 *(a) Fees for Reports of Changes 134 (e) Change in IRS 509(a) Class 134 18.4 Weathering an IRS Examination 134 (a) Examination Methods 134 (e) The Desired Result: No Change 135 CHAPTER 19 Maintaining Exempt Status 155 19.1 Checklists 155 CHAPTER 20 Private Inurement and Intermediate Sanctions 161 20.1 Defining Inurement 162 (a) Persons Involved 162 (d) Economic Substance 162 20.2 Salaries and Other Compensation 163 20.8 Services Rendered for Individuals 163 (b) When Private Benefit is Found 163 20.10 Intermediate Sanctions 163 *(h) Paying the 4958 Excise Tax 163 CHAPTER 21 Unrelated Business Income 165 21.1 IRS Scrutiny of Unrelated Business Income 165 21.5 What Is Unrelated Business Income? 166 (b) Commerciality Test 166 * 21.7 Substantially Related 166 21.8 Unrelated Activities 166 *(b) Services 166 *(e) Sponsorships 169 21.10 Income Modifications 169 *(a) Dividends and Interest 169 *(c) Rentals 169 * 21.11 Calculating and Minimizing Taxable Income 170 21.12 Debt-Financed Property 171 *(a) Properties Not Subject to Debt-Financed Rules 171 *(b) Other Types of Debt 172 21.13 Museums 172 *(a) Identifying Related and Unrelated Objects 172 21.15 Publishing 172 (c) Circulation Income 172 CHAPTER 23 Electioneering and Lobbying 173 23.1 Election Campaign Involvement 173 (a) Permissible Campaign Involvement 173 23.2 Voter Education versus Candidate Promotion 173 *(a) Voter Education 173 CHAPTER 24 Deductibility and Disclosures 175 * 24.1 Overview of Deductibility 175 (a) Contribution Defined 176 24.2 Substantiation and Quid Pro Quo Rules 177 (b) Substantiation Rules 177 CHAPTER 25 Employment Taxes 179 25.2 Ministers 179 (b) How Ministers Are Special 179 Index 183