Tax Planning and Compliance for Tax-Exempt Organizations: Rules, Checklists, Procedures - 2015 Cumulative Supplement

By Jody Blazek and Amanda Adams

The essential nonprofit tax guide, updated with the latest rules and requirements

The 2015 Cumulative Supplement to Tax Planning and Compliance for Tax-Exempt Organizations is the latest addition to the indispensable guide to navigating nonprofit tax issues stemming from evolving regulations and IRS procedures. This most recent supplement is packed with checklists and examples that ease the filing process. This new supplement is updated to align with the relevant changes in IRS forms, requirements, and procedures to help you ensure full compliance with the most up-to-date regulations. Clear, concise instructions guide you through important forms and documents, and expert discussion provides insight on specific issues such as unrelated business income, private inurement, affiliations, and employment taxes. Helpful checklists highlight critical concerns, sample documents provide clarification and example, and the nonprofit-specific guidance leads you through obtaining tax exemption, reporting, compliance testing, and lobbying expenditure management.

Nonprofit organizations contend with the possibility of losing their tax-exempt status on a daily basis. Qualification, application, maintenance, and management—every aspect of that vital status requires a solidly executed strategy for ensuring compliance with federal, state, and local regulations. The 2015 Cumulative Supplement helps you put your strategy into action, with a host of valuable tools and expert guidance on the practical aspect of nonprofit tax planning.

• Follow line-by-line instructions for forms and applications
• Access easy checklists for reporting, compliance, eligibility, and more
• Examine sample bylaws, applications, and forms
• Utilize comparison charts and other visual aids for easy reference
• Review bullet lists that compare what is and what is not acceptable

Tax rules and regulations change annually, and nonprofit organizations know that staying compliant means staying up to date. Wading through tax code is less than helpful in the field where clear, practically oriented instruction provides the quick reference accountants, lawyers, and executives need. The 2015 Cumulative Supplement to Tax Planning and Compliance for Tax-Exempt Organizations is the essential, time-saving guide to the latest in nonprofit tax rules, regulations, and procedures.

• Language: English
• Publisher: Wiley
• Release date: Nov 13, 2015
• ISBN: 9781119201267

Book preview

CONTENTS

Cover

Don't Miss Out on Must-Have and Timely New Information!

Title Page

Copyright

About the Author

Preface

Part I: Qualifications of Tax-Exempt Organizations

Chapter 2: Qualifying Under IRC § 501(c)(3)

§ 2.1 Organizational Test

§ 2.2 Operational Test

Chapter 3: Religious Organizations

§ 3.2 Churches

Chapter 4: Charitable Organizations

§ 4.2 Promotion of Social Welfare

§ 4.3 Lessening Burdens of Government

§ 4.6 Promotion of Health

Chapter 5: Educational, Scientific, and Literary Purposes, and Prevention of Cruelty to Children and Animals

§ 5.1 Educational Purposes

§ 5.4 Testing for Public Safety

Chapter 6: Civic Leagues and Local Associations of Employees: § 501(c)(4)

§ 6.1 Comparison of (c)(3) and (c)(4) Organizations

§ 6.2 Qualifying and Nonqualifying Civic Organizations

§ 6.5 Disclosures of Nondeductibility

Chapter 7: Labor, Agricultural, and Horticultural Organizations: § 501(c)(5)

§ 7.2 Agricultural Groups

Chapter 8: Business Leagues: § 501(c)(6)

§ 8.2 Meaning of Common Business Interest

§ 8.3 Line of Business

§ 8.4 Rendering Services for Members

Chapter 9: Social Clubs: § 501(c)(7)

§ 9.4 Revenue Tests

Chapter 10: Instrumentalities of Government and Title-Holding Organizations

§ 10.3 Qualifying for § 501(c)(3) Status

Chapter 11: Public Charities

§ 11.1 Distinction between Public and Private Charities

§ 11.2 Inherently Public Activity and Broad Public Support § 509(a)(1)

§ 11.6 Supporting Organizations §509(a)(3)

Part II: Standards for Private Foundations

Chapter 12: Private Foundations—General Concepts

§ 12.2 Special Rules Pertaining to Private Foundations

§ 12.4 Termination of Private Foundation Status

Chapter 13: Excise Tax Based on Investment Income: IRC § 4940

§ 13.2 Capital Gains

Chapter 14: Self-Dealing: IRC § 4941

§ 14.1 Definition of Self-Dealing

§ 14.2 Sale, Exchange, or Lease of Property

§ 14.3 Loans

§ 14.4 Compensation

§ 14.5 Transactions that Benefit Disqualified Persons

§ 14.7 Sharing Space, People, and Expenses

§ 14.9 Property Held by Fiduciaries

§ 14.10 Issues Once Self-Dealing Occurs

Chapter 15: Minimum Distribution Requirements: IRC § 4942

§ 15.1 Assets Used to Calculate Minimum Investment Return

§ 15.2 Measuring Fair Market Value

§ 15.4 Qualifying Distributions

§ 15.6 Satisfying the Distribution Test

Chapter 16: Excess Business Holdings and Jeopardizing Investments: IRC §§ 4943 and 4944

§ 16.1 Excess Business Holdings

§ 16.2 Jeopardizing Investments

§ 16.3 Program-Related Investments

§ 16.4 Penalty Taxes

Chapter 17: Taxable Expenditures: IRC § 4945

§ 17.3 Grants to Individuals

§ 17.4 Grants to Public Charities

§ 17.5 Grants to Foreign Organizations

Part III: Obtaining and Maintaining Tax-Exempt Status

Chapter 18: IRS Filings, Procedures, and Policies

§ 18.1 Determination Process

§ 18.2 Annual Filing of Forms 990

§ 18.3 Reporting Organizational Changes to the IRS

§ 18.4 Weathering an IRS Examination

Chapter 19: Maintaining Exempt Status

§ 19.1 Checklists

Chapter 20: Private Inurement and Intermediate Sanctions

§ 20.1 Defining Inurement

§ 20.2 Salaries and Other Compensation

§ 20.8 Services Rendered for Individuals

§ 20.10 Intermediate Sanctions

Chapter 21: Unrelated Business Income

§ 21.1 IRS Scrutiny of Unrelated Business Income

§ 21.5 What Is Unrelated Business Income?

§ 21.7 Substantially Related

§ 21.8 Unrelated Activities

§ 21.10 Income Modifications

§ 21.11 Calculating and Minimizing Taxable Income

§ 21.12 Debt-Financed Property

§ 21.13 Museums

§ 21.15 Publishing

Chapter 23: Electioneering and Lobbying

§ 23.1 Election Campaign Involvement

§ 23.2 Voter Education versus Candidate Promotion

Chapter 24: Deductibility and Disclosures

§ 24.1 Overview of Deductibility

§ 24.2 Substantiation and Quid Pro Quo Rules

Chapter 25: Employment Taxes

§ 25.2 Ministers

Index

End User License Agreement

List of Illustrations

Exhibit 17.1A

Exhibit 17.1B

Exhibit 17.1C

Exhibit 18.1A

Exhibit 18.1B

Don't Miss Out on Must-Have and Timely New Information!

The cumulative supplement to Tax Planning and Compliance for Tax-Exempt Organizations, Fifth Edition, is filled with straightforward information on changing Unrelated Business Income (UBI) rules, joint ventures, sponsorships, deductions against UBI, preparation of IRS forms, and more.

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Tax Planning and Compliance for Tax-Exempt Organizations

Fifth Edition

2015 Cumulative Supplement

Rules, Checklists, Procedures

Jody Blazek

with Amanda Adams

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Cover image: Wiley

Cover design: © Fuse/Getty Images

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

Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

ISBN 978-0-470-90344-5 (main edition)

ISBN 978-1-119-20344-5 (supplement)

ISBN 978-1-119-20559-3 (ePdf)

ISBN 978-1-119-20126-7 (ePub)

About the Author

Jody Blazek is a partner in Blazek & Vetterling, a Houston CPA firm focused on tax and financial planning for exempt organizations and the individuals who create, fund, and work with them. BV serves over 500 nonprofit organizations, providing financial reporting and tax compliance and planning services.

Jody began her professional career at KPMG, then Peat, Marwick, Mitchell & Co. Her concentration on exempt organizations began in 1969; she studied and advised clients in regard to the Tax Reform Act, which completely revamped the taxation of charities and created private foundations. From 1972 to 1981, she gained nonprofit management experience as treasurer of the Menil Interests, where she worked with John and Dominique de Menil to plan the Menil Collection, the Rothko Chapel, and other projects of the Menil Foundation. She reentered public practice in 1981 to found the firm she now serves.

She is the author of six books in the Wiley Nonprofit Series: Tax Planning and Compliance for Tax-Exempt Organizations, Fifth Edition (2012); Financial Planning for Nonprofit Organizations Made Easy (2008); Revised Form 990: A Line-by-Line Preparation Guide coauthored with Amanda Adams (2009); Form 1023 Preparation Guide (2005); and Private Foundations: Tax Law and Compliance, Fourth Edition (2014), and The Legal Answer Book for Private Foundations (2002), both coauthored with Bruce R. Hopkins.

Jody is a past chair of the AICPA Tax-Exempt Organizations Resource Panel and was on the Form 1023 and 990 Revision Task Forces for the American Institute of Certified Public Accountants. She is on the national editorial board of Tax Analysts' The Exempt Organization Tax Review and the Volunteer Service Committee of the Houston CPA Society. She is a founding director of Texas Accountants and Lawyers for the Arts and a member of the board of the Anchorage Foundation of Texas, Houston Artists Fund, and the River Pierce Foundation. She is a frequent speaker at nonprofit symposia, including the AICPA Not-for-Profit Industry Conference; University of Texas Law School Nonprofit Organizations Institute; Texas, New York, and Washington State CPA Societies' Nonprofit Conferences; Loyola Law/IRS Western Nonprofit Conference; Private Foundation Summit; and Texas State Bar Nonprofit Governance Conference, among others. Jody received her BBA from the University of Texas at Austin in 1964 and took selected taxation courses at South Texas School of Law. She and her husband, David Crossley, nurture two sons, Austin and Jay Blazek Crossley, and their families.

Preface

Those of us working with tax-exempt organizations breathed a sigh of relief in 2015 as the IRS Exempt Organizations group instituted new policies and procedures to address problems during 2013 and 2014. The process, however, is not complete due to pending regulations and reorganization steps not yet completed. It is useful to remember what caused the turmoil that racked the IRS.

Don't forget an organization's tax exemption is automatically revoked if the entity fails to file a required Form 990 for three consecutive years effective as of the filing due date of the third year.1 More than 500,000 organizations were initially revoked, a misleading number since many on the revocation list were already out of existence. The Cincinnati office that processes Applications for Exemption has been inundated with applications for reinstatement since 2010 as the number of applications significantly increased.

To compound the problem, that office enhanced their scrutiny of applicants for §501(c)(4) exemption to look for excessive participation in election of persons to public office. They developed a BOLO = be on the lookout list to identify applicants that could not satisfy the exclusively operated for social welfare purposes standard needed to qualify for exemption. The regulations (still) provide that activity aimed at influencing an election cannot be the entity's primary activity though there was no numerical definition of the word primary. Applicants with names that implied political involvement, including Tea Party or Democracy, were given enhanced scrutiny. As a result of pressure from Congress, the media, and the organizations themselves, the system was abandoned and some officials in the exempt organization division resigned or were relieved of their duties. Amendment to those regulations is still pending.

As a consequence of the turmoil, applications took a significant time to be reviewed and a streamlined procedure to reduce the time required was implemented.2 IRS took steps to reform their systems and reduce processing time. Modest organizations eligible to file either Form 990-EZ or 990-N3 can, if they file an application for reinstatement within 15 months of revocation, be retroactively reinstated. Penalties for failure to file are not imposed if they demonstrate reasonable cause by attesting that the organization's failure to file was not intentional and that it has put in place procedures to file in the future. Resubmission after 15 months requires demonstration of reasonable cause. Entities that were required to, and did not, file Form 990 or 990-PF must submit the application with a reasonable cause description and complete and submit returns they failed to file. For these entities, penalties will not be imposed.

A surprising improvement was the creation of Form 1023-EZ eligible to be filed by modest organizations. The form, however, is thought by some to be flawed because it requires no attachment of governing documents, financial projections, or description of mission and proposed activities. It only asks that the official signing the application certify that it qualifies. Additional comments and the form itself are reproduced in Chapter 18 supplemental information.

As seen in the front matter listing chapters with a star, new developments impacted almost every chapter of this book. Two types of exempt organizations most impacted by new tax law in recent years – hospitals and Supporting organizations are presented in Chapters 4 and 11. Of particular interest to those that work with Type III Non-Functionally Integrated Supporting Organizations, the final regulations are presented to explain the private foundation - type requirements imposed on them in 2006.

Recent improved economic conditions in much of the country inspired nonprofits to flex their muscles to enhance revenues with permitted unrelated businesses. New rulings and guidance for the already 67-page long chapter on Unrelated Business Income subject to normal income tax should be useful to organizations pursuing revenue enhancement.

The host of new developments to further clarify when an exempt organization can render services that are business-like in character. I added a new factor to the important Commerciality test, which should always be used to evaluate the possibility that a revenue activity will be considered as unrelated. The National Education Association case should be studied to understand when membership dues are included in publication revenue for UBI purposes. A discussion of the challenges of allocating costs to unrelated facilities producing rental income can also be found in Chapter 21.

Lastly, a discussion of the Economic Substance doctrine can found in chapter 2. Under this doctrine, a transaction must have an economic purpose aside from reduction of tax liability in order to be considered valid. The IRS applies this doctrine to determine whether tax shelters, or other strategies used to reduce tax liability, are abusive and in violation of tax laws. IRC § 7701(o) is effective for transactions entered into after March 30, 2010. Undoubtedly we will begin to see the doctrine applied in tax-exempt organization unrelated business income tax issues.

Thanks for your interest in this book. I appreciate receiving comments and suggestions that improve and instruct the supplements that expand and make it useful.

Jody Blazek

Houston, Texas

August 20, 2015

Notes

1. IRC § 6003j added by the Pension Protection Act of 2006, see pa. 545.

2. Rev. Proc. 2014-11.

3. § 18.2.

Part I

Qualifications of Tax-Exempt Organizations

Chapter 2

Qualifying Under IRC § 501(c)(3)

Chapter 3

Religious Organizations

Chapter 4

Charitable Organizations

Chapter 5

Educational, Scientific, and Literary Purposes, and Prevention of Cruelty to Children and Animals

Chapter 6

Civic Leagues and Local Associations of Employees: § 501(c)(4)

Chapter 7

Labor, Agricultural, and Horticultural Organizations: § 501(c)(5)

Chapter 8

Business Leagues: § 501(c)(6)

Chapter 9

Social Clubs: § 501(c)(7)

Chapter 10

Instrumentalities of Government and Title-Holding Organizations

Chapter 11

Public Charities

2

Qualifying Under IRC § 501(c)(3)

§2.1 Organizational Test

*(c) Inurement Clause

(e) Political Activities

§2.2 Operational Test

(b) Amount of Charitable Expenditures

*(j) The Internet and Tax-Exempt Organizations

*(k) Governance

(l) Economic Substance

§ 2.1 Organizational Test

(c) Inurement Clause

p. 31. Add at end of section:

The IRS has issued a number of private letter rulings in recent years that find that a nonprofit organization controlled by a board made up of related parties, or in some cases, one individual, or one lacking bylaws or written policies setting forth the duties and responsibilities of your trustees fails the organizational test and cannot qualify for tax exemption.1

*p. 31. Add at end of page:

See Chapter 22.4, Active Business Relationships, for private letter ruling discussing measurement of permissible incidental benefit to a for-profit company with which the exempt organization has a business relationship.

(e) Political Activities

p.