The law of tax-exempt organizations

1101 Pages·2011·8.084 MB·English

by  Bruce R. Hopkins

The Law of
Tax-Exempt Organizations
TENTHEDITION
BECOME A SUBSCRIBER!
Didyoupurchasethisproductfromabookstore?
Ifyoudid,it’simportantforyoutobecomeasubscriber.JohnWiley&Sons,Inc.maypublish,
onaperiodicbasis,supplementsandneweditionstoreflectthelatestchangesinthesubject
matterthatyouneedtoknowinordertostaycompetitiveinthisever-changingindustry.By
contacting the Wiley office nearest you, you’ll receive any current update at no additional
charge.Inaddition,you’llreceivefutureupdatesandrevisedorrelatedvolumesona30-day
examinationreview.
IfyoupurchasedthisproductdirectlyfromJohnWiley&Sons,Inc.,wehavealreadyrecorded
yoursubscriptionforthisupdateservice.
Tobecomeasubscriber,pleasecall1-877-762-2974orsendyourname,companyname(if
applicable),address,andthetitleoftheproductto:
mailingaddress: SupplementDepartment
JohnWiley&Sons,Inc.
OneWileyDrive
Somerset,NJ08875
e-mail: [email protected]
fax: [phone]
online: www.wiley.com
ForcustomersoutsidetheUnitedStates,pleasecontacttheWileyofficenearestyou:
Professional&ReferenceDivision JohnWiley&Sons,Ltd.
JohnWiley&SonsCanada,Ltd. TheAtrium
22WorcesterRoad SouthernGate,Chichester
Etobicoke,OntarioM9W1L1 WestSussexPO198SQ
CANADA ENGLAND
Phone:[phone] Phone:[phone]
Phone:[phone] Fax: [phone]
Fax: [phone] Email: [email protected]
Email: [email protected]
JohnWiley&SonsAustralia,Ltd. JohnWiley&Sons(Asia)Pte.,Ltd.
33ParkRoad 2ClementiLoop#02-01
P.O.Box1226 SINGAPORE129809
Milton,Queensland4064 Phone:[phone]
AUSTRALIA Fax: [phone]
Phone:[phone] CustomerService:65-64604280
Fax: [phone] Email: [email protected]
Email: [email protected]
The Law of
Tax-Exempt Organizations
TENTHEDITION
BRUCER.HOPKINS
JohnWiley &Sons,Inc.
Copyright(cid:2)C 2011byJohnWiley&Sons,Inc.Allrightsreserved.
PublishedbyJohnWiley&Sons,Inc.,Hoboken,NewJersey.
PublishedsimultaneouslyinCanada.
Nopartofthispublicationmaybereproduced,storedinaretrievalsystem,or
transmittedinanyformorbyanymeans,electronic,mechanical,photocopying,
recording,scanning,orotherwise,exceptaspermittedunderSection107or108
ofthe1976UnitedStatesCopyrightAct,withouteitherthepriorwritten
permissionofthePublisher,orauthorizationthroughpaymentofthe
appropriateper-copyfeetotheCopyrightClearanceCenter,Inc.,222Rosewood
Drive,Danvers,MA01923,978-750-8400,fax[phone],oronthewebat
www.copyright.com.RequeststothePublisherforpermissionshouldbe
addressedtothePermissionsDepartment,JohnWiley&Sons,Inc.,111River
Street,Hoboken,NJ07030,201-748-6011,fax[phone],oronlineat
www.wiley.com/go/permissions.
LimitofLiability/DisclaimerofWarranty:Whilethepublisherandauthorhave
usedtheirbesteffortsinpreparingthisbook,theymakenorepresentationsor
warrantieswithrespecttotheaccuracyorcompletenessofthecontentsofthis
bookandspecificallydisclaimanyimpliedwarrantiesofmerchantabilityor
fitnessforaparticularpurpose.Nowarrantymaybecreatedorextendedby
salesrepresentativesorwrittensalesmaterials.Theadviceandstrategies
containedhereinmaynotbesuitableforyoursituation.Youshouldconsultwith
aprofessionalwhereappropriate.Neitherthepublishernorauthorshallbe
liableforanylossofprofitoranyothercommercialdamages,includingbutnot
limitedtospecial,incidental,consequential,orotherdamages.
Forgeneralinformationonourotherproductsandservices,ortechnical
support,pleasecontactourCustomerCareDepartmentwithintheUnitedStates
at800-762-2974,outsidetheUnitedStatesat317-572-3993orfax317-572-4002.
Wileyalsopublishesitsbooksinavarietyofelectronicformats.Somecontent
thatappearsinprintmaynotbeavailableinelectronicbooks.
FormoreinformationaboutWileyproducts,visitourWebsiteat
www.wiley.com.
LibraryofCongressCataloging-in-PublicationData:
ISBN:978-0-470-60217-1(book);978-1-118-01559-9(ebk);978-1-118-01560-5
(ebk);978-1-118-01561-2(ebk)
PrintedintheUnitedStatesofAmerica.
10 9 8 7 6 5 4 3 2 1
Tomywife,BonnieJ.Buchele,
withlove.
Contents
AbouttheAuthor xxix
Preface xxxi
AbouttheOnlineResources xxxv
BookCitations xxxvii
PARTONE: INTRODUCTIONTOTHELAWOF
TAX-EXEMPTORGANIZATIONS
1 DefinitionofandRationalesforTax-ExemptOrganizations 3
§1.1 DefinitionofNonprofitOrganization 3
(a) NonprofitOrganizationDefined 4
(b) NonprofitSector 5
§1.2 DefinitionofTax-ExemptOrganization 6
§1.3 Tax-ExemptOrganizationsLawPhilosophy 9
§1.4 PoliticalPhilosophyRationale 11
§1.5 InherentTaxRationale 17
§1.6 OtherRationalesandReasonsForExemptOrganizations 18
§1.7 FreedomofAssociationDoctrine 20
2 OverviewofNonprofitSectorandTax-ExemptOrganizations 23
§2.1 ProfileofNonprofitSector 24
§2.2 OrganizationofIRS 28
(a) IRSinGeneral 29
(b) TaxExemptandGovernmentEntitiesDivision 30
§2.3 CharitableContributionDeductionRules 32
§2.4 EvolutionofStatutoryScheme 35
PARTTWO: FUNDAMENTALSOFTHELAWOF
TAX-EXEMPTORGANIZATIONS
3 Source,Advantages,andDisadvantagesofTaxExemption 43
§3.1 SourceofTaxExemption 43
§3.2 RecognitionofTaxExemption 45
§3.3 AdvantagesofTax-ExemptStatus 47
(a) TaxExemption 47
(b) DeductibilityofContributions 48
(c) Grants 49
(d) PreferentialPostalRates 49
■ vii ■
CONTENTS
(e) EmployeeBenefits 49
(f) AntitrustLaws 50
(g) SecuritiesLaws 51
(h) OtherAdvantages 53
§3.4 DisadvantagesofTax-ExemptStatus 55
§3.5 AlternativestoTax-ExemptStatus 56
4 Organizational,Operational,andRelatedTestsandDoctrines 59
§4.1 FormsofTax-ExemptOrganizations 59
(a) GeneralRules 59
(b) Check-the-BoxRegulations 62
(i) BasicRules 62
(ii) ExemptOrganizationRules 63
§4.2 GoverningInstruments 64
§4.3 OrganizationalTest 65
(a) StatementofPurposes 66
(b) DissolutionRequirements 69
(c) MissionStatements 70
(d) RulesforLimitedLiabilityCompanies 70
§4.4 PrimaryPurposeTest 72
§4.5 OperationalTest 77
(a) BasicRules 77
(b) ActionOrganizations 81
(c) AggregatePrinciple 83
§4.6 ExclusivelyStandard 83
§4.7 CommensurateTest 86
(a) ApplicationofCommensurateTest 86
(b) CharitableSpendingInitiative 88
§4.8 StateActionDoctrine 88
(a) DoctrineinGeneral 88
(b) DoctrineasAppliedtoSocialClubs 92
§4.9 OperationsforProfit 94
§4.10 CommercialityDoctrine 99
(a) OriginofDoctrine 100
(i) NatureofDoctrine 100
(ii) InternalRevenueCode 101
(iii) TaxRegulations 102
(iv) BeginningsoftheDoctrine 103
(v) FocusonPublishing 105
(b) ContemporaryApplicationofDoctrine 110
(c) ContemporaryPerspectiveonDoctrine 113
5 NonprofitGovernance 115
§5.1 BoardsofDirectorsBasics 116
(a) Nomenclature 116
(b) Number 116
(c) Origin(s)ofPositions 117
(d) ControlFactor 118
■ viii ■
CONTENTS
(e) ScopeofAuthority 118
(f) OtherConsiderations 118
(g) RelationshiptoOfficers 119
§5.2 BoardCompositionandTaxLaw 119
§5.3 DutiesandResponsibilities 121
(a) PrinciplesofFiduciaryResponsibility 121
(b) DutiesofDirectors 122
(i) DutyofCare 123
(ii) DutyofLoyalty 123
(iii) DutyofObedience 123
§5.4 BoardMemberLiability 124
(a) Incorporation 124
(b) Indemnification 124
(c) Insurance 124
(d) Immunity 125
(e) MinimizingLegalLiability 125
(i) Form 125
(ii) Organization’sPurposesandMission 125
(iii) Organization’sActivities 125
(iv) ArticlesofOrganization 126
(v) StructureandBylaws 126
(vi) OtherDocuments 126
(vii) RelatedEntities 127
(viii) DoingBusinessRules 127
(ix) PublicCharityStatus 127
(x) Perspective 127
§5.5 Sarbanes-OxleyAct 128
§5.6 NonprofitGovernancePrinciples 129
(a) GovernancePhilosophyinGeneral 129
(b) SenateFinanceCommitteeStaffPaper 129
(c) TreasuryDepartment’sVoluntaryBestPractices 130
(d) CommitteeforPurchaseProposedBestPractices 131
(e) AmericanNationalRedCrossGovernance
ModernizationAct 132
(f) PanelonNonprofitSectorGovernancePrinciples 133
(i) LegalComplianceandPublicDisclosure 134
(ii) EffectiveGovernance 134
(iii) StrongFinancialOversight 136
(iv) ResponsibleFundraising 136
(g) RedesignedForm990 137
(h) BoardsofCreditCounselingOrganizations 139
(i) OtherDevelopments 139
§5.7 IRSandGovernance 140
(a) IRSOfficials’Speeches 140
(b) IRSRulingPolicy 142
(c) CollegeandUniversityComplianceQuestionnaire 143
(d) ExemptOrganizationsDivision2009AnnualReport 144
(e) IRSTrainingMaterials 144
■ ix ■
CONTENTS
(f) IRSGovernanceCheckSheet 145
(i) GoverningBodyandManagement 145
(ii) Compensation 145
(iii) OrganizationalControl 145
(iv) ConflictsofInterest 146
(v) FinancialOversight 146
(vi) DocumentRetention 146
PARTTHREE: TAX-EXEMPTCHARITABLEORGANIZATIONS
6 ConceptofCharitable 149
§6.1 FederalTaxLawDefinitionofCharitable 150
(a) PopularandOrdinaryDefinition 150
(b) CommonLawDefinition 150
(c) FederalTaxLawDefinition 152
§6.2 PublicPolicyDoctrine 156
(a) GeneralPrinciples 156
(b) Race-BasedDiscrimination 157
(i) SupremeCourtPronouncement 157
(ii) PriorIRSPolicy 158
(iii) BroaderPolicyImpact 161
(c) Gender-BasedDiscrimination 162
(d) OtherFormsofDiscrimination 163
(e) AffirmativeActionPrinciples 163
§6.3 CollateralConcepts 165
(a) RequirementofCharitableClass 166
(b) Means-to-End/InstrumentalityRule 168
(c) CharityasEvolutionaryConcept 170
(d) Motive 170
(e) PrivateUse 171
(f) CyPresDoctrine 172
(g) FluidRecoveryPrinciples 173
(h) ChargingofFees 175
(i) IllegalActivities 175
(j) TaxExemptionDoesNotCreateContract 176
(k) TaxExemptionDoesNotCreateThird-PartyBeneficiaries 177
(l) TaxExemptionDoesNotCreatePrivateRightofAction 178
(m) TaxExemptionDoesNotCreateCharitableTrust 178
7 CharitableOrganizations 179
§7.1 ReliefofPoor 180
§7.2 ReliefofDistressed 181
(a) GeneralPrinciples 182
(b) DisasterReliefPrograms 182
§7.3 CreditCounseling 184
(a) InitialEvolutionofExemptionLaw 185
■ x ■
CONTENTS
(b) IRSEnforcementProgram 186
(c) ContemporaryIRSPolicy 186
(d) StatutoryCriteriaforExemption 187
§7.4 ProvisionofHousing 189
§7.5 DownPaymentAssistance 190
§7.6 PromotionofHealth 191
(a) Hospitals 191
(i) GeneralLaw 191
(b) AdditionalStatutoryRequirements 194
(i) HospitalsSubjecttoRequirements 194
(ii) CommunityHealthNeedsAssessments 194
(iii) FinancialAssistancePolicy 194
(iv) EmergencyMedicalCarePolicy 195
(v) LimitationonCharges 195
(vi) BillingandCollection 195
(vii) MandatoryIRSReviewofTaxExemption 195
(viii) EffectiveDates 195
(c) HospitalClinicalDepartmentsandFunds 196
(d) MedicalResearchOrganizations 196
(e) HomesforAged 197
(f) HealthMaintenanceOrganizations 198
(g) IntegratedDeliverySystems 199
(h) PeerReviewOrganizations 200
(i) FitnessCenters 203
(j) OtherHealthCareOrganizations 204
(k) RegionalHealthInformationOrganizations 206
§7.7 LesseningBurdensofGovernment 207
§7.8 AdvancementofEducation 210
§7.9 AdvancementofScience 213
§7.10 AdvancementofReligion 213
§7.11 PromotionofSocialWelfare 215
§7.12 PromotionofArts 218
§7.13 Consortia 220
(a) GeneralPrinciples 220
(b) AdjunctTheory 222
(c) CooperativeArrangements 223
§7.14 InstrumentalitiesofGovernment 225
§7.16 OtherCategoriesofCharity 229
(a) EnvironmentalProtection 229
(b) PromotionofPatriotism 229
(c) PromotionofSports 230
(d) PublicInterestLaw 230
(e) LocalEconomicDevelopment 232
(f) OtherCharitableOrganizations 233
8 EducationalOrganizations 235
§8.1 FederalTaxLawDefinitionofEducational 235
■ xi ■