TAXATION OF NONPROFIT ORGANIZATIONS

Transcription

1 CASES AND MATERIALS TAXATION OF NONPROFIT ORGANIZATIONS THIRD EDITION by JAMES J. FISHMAN Professor of Law, Pace University School of Law STEPHEN SCHWARZ Professor of Law Emeritus, University of California, Hastings College of the Law FOUNDATION PRESS **&?; THOMSON REUTERS"

2 SUMMARY OF CONTENTS PREFACE, v ACKNOWLEDGEMENTS - ix TABLE OF CASES xxiii TABLE OF STATUTES xxvii TABLE OF TREASURY REGULATIONS xli TABLE OF REVENUE RULINGS. v xlvii TABLE OF MISCELLANEOUS RULINGS '.' xlix TABLE OF AUTHORITIES - li PART ONE Introduction 1 CHAPTER 1 An Overview of the Nonprofit Sector 2 A. Introduction 2 B. Dimensions of the Nonprofit Sector - 12 C. Charity, Philanthropy and Nonprofit Organizations: A Historical Introduction 19 D. Rationales for the Nonprofit Sector 26 E. The Legal Framework: Organization and Governance 34 PART TWO Charitable Organizations 55 CHAPTER 2 Qualification for Tax Exemption 56 A. Introduction 56 B. The Rationale for Charitable Tax Exemptions ~~, 59 C. Affirmative Requirements for Charitable Tax Exemption D. Inurement, Private Benefit and Intermediate Sanctions 207 E. Limitations on Lobbying and Political Campaign Activities 243 F. Procedural Issues CHAPTER 3 Commercial Activities and Unrelated Business Income A. Introduction 336 B. Impact of Commercial Activities on Exempt Status 339 C. The Unrelated Business Income Tax: History and Policy 360 D. The Nature of an Unrelated Trade or Business 372 E. Exclusions From Unrelated Business Taxable Income 404 F. Computation of Unrelated Business Taxable Income 411 G. Unrelated Debt-Financed Income H. Complex Structures and Other Special Problems 432 I. Proposals for Reform XI

3 Xll SUMMARY OF CONTENTS CHAPTER 4 Private Foundations 472 A. The Universe of Private Foundations B. Private Foundations vs. Public Charities: An Overview 490 C. Avoiding Private Foundation Status: The Details 508 D. Private Foundation Excise Taxes 534 E. Termination of Private Foundation Status 573 PART THREE Charitable Giving 593 CHAPTER 5 Charitable Contributions 594 A. Introduction 594 B. Charitable Contributions: Basic Principles 615 C. Noncash Contributions 654 D. Planned Giving Techniques PART FOUR Mutual Benefit Organizations 687 CHAPTER 6 Tax Exemption: Mutual Benefit and Other Noncharitable Organizations \ 688 A. The Rationale for Tax Exemption 688 B. Social Welfare Organizations 698 C. Labor, Agricultural and Horticultural Organizations 699 D. Trade Associations and Other Business Leagues E. Social Clubs and Fraternal Organizations 719 F. Other Mutual Benefit Organizations 739 INDEX 743

4 TABLE OF CONTENTS PREFACE ACKNOWLEDGEMENTS ix TABLE OF CASES - -- xxiii TABLE OF STATUTES xxvii TABLE OF TREASURY REGULATIONS xli TABLE OF REVENUE RULINGS ~ - - xlvii TABLE OF MISCELLANEOUS RULINGS '-'-'-'- xlix TABLE OF AUTHORITIES li PART ONE Introduction CHAPTER 1 An Overview of the Nonprofit Sector 2 A. Introduction 2 John W. Gardner, The Independent Sector 4 Note: The Underside of the Nonprofit Sector 6 B. Dimensions of the Nonprofit Sector 12 Note: Where the Money Comes From Sources of Funding of the Charitable Sector 13\ Lester M. Salamon, The Rise of the Nonprofit Sector 14 Note: Restrictions on NGOs in New Democracies - 16 Note: International Charities and Terrorist Activity 17 Notes 17 C. Charity, Philanthropy and Nonprofit Organizations: A Historical Introduction 19 Preamble to the Statute of Charitable Uses - 19 Note: The Statute of Charitable Uses and the Meaning of Charity 20 Note: The Development of Nonprofit Law in the United States 21 Note: Social Enterprise Organizations 24 D. Rationales for the Nonprofit Sector 26 Lester M. Salamon, America's Nonprofit Sector: A Primer 27 Henry Hansmann, Reforming Nonprofit Corporation Law 29 Notes and Questions 32 E. The Legal Framework: Organization and Governance Introduction Choice of the Legal Form of a Nonprofit Organization 35 a. In General - - -~ 35 b. Unincorporated Associations 36 c. Charitable Trusts - 37 d. Nonprofit Corporations Nonprofit Corporations: A Closer Look 40 a. In General - 40 b. Public Benefit v. Mutual Benefit 42 Lizabeth A. Moody, Foreword to the Model Nonprofit Corporation Act (Third Edition) 43 v xm

5 XIV TABLE OF CONTENTS Note: Criticism of the Model Nonprofit Corporation Act (Third Edition) 47 c. Forming a Nonprofit Corporation Taxation 49 John Simon, Harvey Dale & Laura Chisolm, The Federal Tax Treatment of Charitable Organizations An Introductory Problem T 54 Problem-- 54 PART TWO Charitable Organizations 55 CHAPTER 2 Qualification for Tax Exemption 56 A. Introduction -*. 56 Notes B. The Rationale for Charitable Tax Exemptions Traditional Public Benefit Subsidy Theories 60 Chauncey Belknap, The Federal Income Tax Exemption of Charitable Organizations: Its History and Underlying Policy 61 Notes and Questions Income Measurement Theory Boris I. Bittker and George K. Rahdert, The Exemption of Nonprofit Organizations from Federal Income Taxation 64 Questions Capital Subsidy Theory 70 Henry Hansmann, The Rationale for Exempting Nonprofit Organizations from Corporate Income Taxation 71 Notes and Questions Property Tax Exemptions 75 C. Affirmative Requirements for Charitable Tax Exemption Organizational and Operational Tests Application for 501(c)(3) Exemption The Meaning and Scope of Charity 81 a. Introduction 81 Excerpt from Historical Development and Present Law of the Federal Tax Exemption for Charitable and Other Tax- Exempt Organizations 82 Notes and Questions 84 b. Hospitals and Other Health Care Organizations Revenue Ruling Notes and Questions 88 IHC Health Plans, Inc. v. Commissioner 91 Notes 99 Problems 105 c. Public Interest Law Firms and Other Legal Services- 106 Revenue Ruling Revenue Procedure Problems- 112

6 TABLE OF CONTENTS XV d. Community Development and Low-Income Housing 113 Revenue Ruling Revenue Ruling Notes 118 Problems e. Protection of the Environment 119 Revenue Ruling Revenue Ruling Notes 123 Problems f. Disaster Relief- - I. 124 Problems 129 g. Credit Counseling Organizations The Public Policy Limitation 131 Bob Jones University v. United States 132 Notes and Questions 151 Problems Educational Organizations 160 Revenue Ruling Revenue Ruling Big Mama Rag v. United States 163 Revenue Procedure Notes 174 Problems-- 176' 6. Religious Organizations 177 Holy Spirit Association v. Tax Commission 178 General Counsel Memorandum Notes and Questions 189 Problems Other Charitable Purposes 193 Hutchinson Baseball Enterprises, Inc. v. Commissioner 194 Notes 199 Problems State and Local Tax Exemptions 202 D. Inurement, Private Benefit and Intermediate Sanctions Inurement of Private Gain 207 Church of Scientology of California v. Commissioner 208 Notes and Questions 215 Note: Executive and Trustee Compensation 216 Notes and Questions- r Private Benefit 221 United Cancer Council, Inc. v. Commissioner 222 Notes and Questions Intermediate Sanctions on Excess Benefit Transactions Problems E. Limitations on Lobbying and Political Campaign Activities Background < The Lobbying Limitation: No Substantial Part Test 245 Christian Echoes National Ministry, Inc. v. United States 247 Notes and Questions Constitutional Issues 257 Regan v. Taxation With Representation of Washington 258 Notes and Questions 265

7 xvi TABLE OF CONTENTS 4. The 501(h) Expenditure Test Election '. 266 a. Introduction b. Spending Limits and Penalties 267 c. Lobbying Expenditures 269 d. Excepted Communications 271 e. Reporting Requirements 274 f. To Elect or Not to Elect 274 Problem Political Campaign Limitations Revenue Ruling Branch Ministries v. Rossotti 289 Note: Churches and Political Campaign Activity 295 Notes The 501(c)(4) Alternative 301 Revenue Ruling Notes 302 Problem Section 527 Political Organizations: Reporting and Disclosure Requirements Other Regulation of Political Activities of Nonprofit Organizations Policy Issues: Use and Abuse of Nonprofit Organizations for Partisan Political Activities Notes and Questions 313 Problem F. Procedural Issues Judicial Determinations of Exempt Status Information Return and Disclosure Requirements Standing by Third Parties to Challenge Exempt Status In re United States Catholic Conference 321 Notes and Questions 335 CHAPTER 3 Commercial Activities and Unrelated Business Income 336 A. Introduction 336 Burton A. Weisbrod, The Nonprofit Mission and Its Financing: Growing Links Between Nonprofits and the Rest of the Economy 337 B. Impact of Commercial Activities on Exempt Status Introduction, The Commerciality Doctrine 342 Goldsboro Art League v. Commissioner 342 Presbyterian and Reformed Publishing Co. v. Commissioner 346 Revenue Ruling Note and Questions The-Commensurate-in-Scope Doctrine 355 Revenue Ruling Notes and Questions 355 Problems 359 C. The Unrelated Business Income Tax: History and Policy Historical Background 361 Notes and Questions 364

8 TABLE OF CONTENTS 2. Policy Considerations: Fairness, Efficiency and Public Relations 365 Statement of Joseph O'Neil, Chairman, Business Coalition for Fair Competition, at Hearings Before the Subcommittee on Oversight, House Ways and Means Committee 365 Notes and Questions 370 D. The Nature of an Unrelated Trade or Business Imposition and Rates of Tax Taxable and Excepted Activities a. Advertising United States v. American College of Physicians 374 b. Intercollegiate Athletics 382 Revenue Ruling National Collegiate Athletic Ass'n v. Commissioner 384 Notes 392 c. Museum Gift Shops 393 Revenue Ruling Revenue Ruling d. Corporate Sponsorship Activities Notes and Questions 400 Problems E. Exclusions From Unrelated Business Taxable Income Passive Investment Income Rents Royalties 406 Notes and Questions Research Income A Monogrammed Exclusion 409 Problems F. Computation of Unrelated Business Taxable Income Allocation of Expenses 411 Rensselaer Polytechnic Institute v. Commissioner Other Computation Issues Problems- 419 G. Unrelated Debt-Financed Income 420 Bartels Trust v. United States 422 Notes and Questions Problem H. Complex Structures and Other Special Problems The Use of Controlled Subsidiaries a. Planning Considerations b. Payments from Controlled Organizations 433 Notes and Questions Joint Ventures a. Introduction 436 b. Whole Hospital Joint Ventures: The Control Test- 442 Revenue Ruling Notes 450 c. Ancillary Joint Ventures 453 Revenue Ruling Problem 458 xvii

9 xviii TABLE OF CONTENTS 3. Partnerships and S Corporations 459 Service Bolt & Nut Co. v. Commissioner 459 Notes and Questions Social Clubs 464 I. Proposals for Reform Subcommittee on Oversight of House Ways and Means Committee, Draft Report Describing Recommendations on the Unrelated Business Income Tax 465 Notes 470 CHAPTER 4 Private Foundations 472 A. The Universe of Private Foundations Introduction 472 David F. Freeman, The Handbook on Private Foundations 473 Note: Dimensions of the Foundation Community The Distinction Between Private Foundations and Public Charities: Historical Origins 481 Notes and Questions Community Foundations 484 John A. Edie, First Steps in Starting a Foundation 485 Notes - : Other Private Foundation Alternatives The Present (and Future) of Private Foundations 489 B. Private Foundations vs. Public Charities: An Overview The Tax Definition of a Private Foundation 490 John A. Edie, First Steps in Starting a Foundation Private Operating Foundations : Private Foundation Excise Taxes Donor-Advised Funds a. Introduction 499 b. Definition of Donor-Advised Fund c. Taxable Distributions and Prohibited Benefits 502 d. Other Sanctions and Penalties e. Reporting and Disclosure f. Lingering Policy Questions Pass-Through Foundations and Pooled Common Funds 505 Problem - 7, 506 C. Avoiding Private Foundation Status: The Details The Disqualified Person Rules Traditional Public Charities: 509(a)(l) a. Organizations Engaging in Inherently Public Activities 511 b. Publicly Supported Organizations "Gross Receipts" and Membership Organizations: 509(a)(2) Problem Supporting Organizations: 509(a)(3) 520 a. Introduction 520 b. Permissible Relationships 521 c. Organizational and Operational Tests 524

10 TABLE OF CONTENTS XIX d. Control Test 526 Revenue Ruling e. Other Operational Rules and Sanctions Problem Private Operating Foundations Information Reporting and Disclosure Requirements- 533 D. Private Foundation Excise Taxes Tax on Net Investment Income: Problem Self-Dealing: 4941 '..'.'. 538 a. Acts of Self-Dealing 538 b. The Tax Cost of Self-Dealing 541 Madden v. Commissioner Problems Charitable Distribution Requirements: a. Introduction 550 b. Operation of c. Policy Issues: Adjusting the Payout Rate 554 Problem Excess Business Holdings: a. Introduction 558 b. Operation of c. Application of Excess Business Holdings Rules to Donor- Advised Funds and Certain Supporting Organizations 560 d. Transitional Rules 561 Problem Jeopardy Investments: Problems Taxable Expenditures: a. Introduction. 564 b. Types of Taxable Expenditures 565 c. Expenditure Responsibility 568 John A. Edie, Expenditure Responsibility: "It's Easier Than You Think" 568 Problems- v E. Termination of Private Foundation Status Involuntary Termination Voluntary Termination 574 Revenue Ruling Revenue Ruling PART THREE Charitable Giving 593 CHAPTER 5 Charitable Contributions 594 A. Introduction Historical Origins

11 xx TABLE OF CONTENTS 2. Policy Issues- 595 Giving in America: Toward a Stronger Voluntary Sector 596 William D. Andrews, Personal Deductions in an Ideal Income Tax 599 Teresa Odendahl, Charity Begins at Home: Generosity and Self Interest Among the Philanthropic Elite 604 Note: Policy Aspects of the Estate Tax Charitable Deduction Notes and Questions 611 B. Charitable Contributions: Basic Principles Qualified Donees ~~~..'. 615 a. In General 615 b. International Giving 616 Revenue Ruling Notes 619 c. Fiscal Sponsors Form and Timing 622 Notes What is a Charitable Gift? 624 a. Return Benefits: In General 624 Revenue Ruling Notes, b. Intangible Religious Benefits Sklar v. Commissioner 632 Notes and Questions Percentage Limitations and Carryovers Substantiation and Compliance Rules 648 Problems r 652 C. Noncash Contributions Capital Gain Property 654 Blake v. Commissioner Ordinary Income Property '. 659 Revenue Ruling Notes Tangible Personal Property Bargain Sales Partial Interests (Not in Trust) Qualified Conservation Contributions Valuation and Appraisal Requirements 671 Notes and Questions 673 Problems- 675 D. Planned Giving Techniques Introduction Charitable Remainder Trusts Pooled Income Funds Remainder Interest in Personal Residence or Farm Charitable Gift Annuities Charitable Lead Trusts Problems 684

12 TABLE OF CONTENTS XXI PART FOUR Mutual Benefit Organizations CHAPTER 6 Tax Exemption: Mutual Benefit and Other Noncharitable Organizations 688 A. The Rationale for Tax Exemption Boris I. Bittker and George K. Rahdert, The Exemption of Nonprofit Organizations From Federal Income Taxation 689 Notes and Questions Excerpt From Joint Committee on Taxation, Description of Revenue Provisions Contained in the President's Fiscal Year 2000 Budget Proposal Notes and Questions B. Social Welfare Organizations- 698 C. Labor, Agricultural and Horticultural Organizations Stichting Pensioenfonds Voor de Gezondheid v. United States 699 Notes D. Trade Associations and Other Business Leagues The Line of Business Requirement Guide International Corporation v. United States 705 Note No Conduct of Business for Profit Requirement Associated Master Barbers & Beauticians of America v. Commissioner Notes Lobbying and Other Political Activities Problems E. Social Clubs and Fraternal Organizations Introduction 719 Zeta Beta Tau Fraternity, Inc. v. Commissioner Discrimination McGlotten v. Connally 727 Notes Nonmember Activities Problems F. Other Mutual Benefit Organizations Veterans Organizations Political Organizations Title Holding Companies Other Exempt Organizations 742 INDEX 743