Copyright 2014 Carolina Academic Press, LLC. All rights reserved. THE TAX LAW OF CHARITIES AND OTHER EXEMPT ORGANIZATIONS Third Edition

Transcription

1 THE TAX LAW OF CHARITIES AND OTHER EXEMPT ORGANIZATIONS Third Edition

2 LexisNexis Law School Publishing Advisory Board Paul Caron Professor of Law Pepperdine University School of Law Herzog Summer Visiting Professor in Taxation University of San Diego School of Law Bridgette Carr Clinical Professor of Law University of Michigan Law School Olympia Duhart Professor of Law and Director of Lawyering Skills & Values Program Nova Southeastern University, Shepard Broad Law School Samuel Estreicher Dwight D. Opperman Professor of Law Director, Center for Labor and Employment Law NYU School of Law Steven I. Friedland Professor of Law and Senior Scholar Elon University School of Law Carole Goldberg Jonathan D. Varat Distinguished Professor of Law UCLA School of Law Oliver Goodenough Professor of Law Vermont Law School Paul Marcus Haynes Professor of Law William and Mary Law School John Sprankling Distinguished Professor of Law McGeorge School of Law

3 THE TAX LAW OF CHARITIES AND OTHER EXEMPT ORGANIZATIONS Third Edition Darryll K. Jones Associate Dean for Academic Affairs and Professor of Law Florida A&M University College of Law David Brennen Dean and Professor of Law University of Kentucky College of Law Steve Willis Professor of Law University of Florida Levin College of Law Beverly Moran Professor of Law Vanderbilt Law School

4 ISBN: Ebook ISBN: Looseleaf ISBN: Library of Congress Cataloging-in-Publication Data Jones, Darryll K. (Darryll Keith), author. The tax law of charities and other exempt organizations / Daryll K. Jones, Associate Dean for Academic Affairs and Professor of Law, Florida A&M University College of Law; David Brennen, Dean and Professor of Law, University of Kentucky College of Law; Steve Willis, Professor of Law, University of Florida Levin College of Law; Beverly Moran, Professor of Law, Vanderbilt Law School. pages cm Includes index. ISBN Nonprofit organizations--taxation--law and legislation--united States. 2. Charitable uses, trusts, and foundations--taxation--law and legislation--united States. 3. Charities--Taxation--Law and legislation-- United States. I. Brennen, David A., author. II. Willis, Steven J., author. III. Moran, Beverly I., author. IV. Title. KF6449.J dc This publication is designed to provide authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional services. If legal advice or other expert assistance is required, the services of a competent professional should be sought. LexisNexis and the Knowledge Burst logo are registered trademarks of Reed Elsevier Properties Inc., used under license. Matthew Bender and the Matthew Bender Flame Design are registered trademarks of Matthew Bender Properties Inc. Copyright 2014 Matthew Bender & Company, Inc., a member of LexisNexis. All Rights Reserved. No copyright is claimed by LexisNexis or Matthew Bender & Company, Inc., in the text of statutes, regulations, and excerpts from court opinions quoted within this work. Permission to copy material may be licensed for a fee from the Copyright Clearance Center, 222 Rosewood Drive, Danvers, Mass , telephone (978) NOTE TO USERS To ensure that you are using the latest materials available in this area, please be sure to periodically check the LexisNexis Law School website for downloadable updates and supplements at Editorial Offices 121 Chanlon Rd., New Providence, NJ (908) Mission St., San Francisco, CA (415) (2014 Pub.3206)

5 Chapter 1 A BRIEF OVERVIEW OF TAX EXEMPT ORGANIZATIONS [A] INTRODUCTION [B] OVERVIEW OF CHARITABLE CONTRIBUTION DEDUCTIONS [C] OVERVIEW OF PRIVATE FOUNDATION STATUS [D] AN OVERVIEW OF CHARITIES [E] AN OVERVIEW OF OTHER EXEMPT ORGANIZATIONS Chapter 2 THE EXEMPT PURPOSE REQUIREMENT: PUBLIC POLICY AND ILLEGALITY DOCTRINES [A] THE PUBLIC POLICY DOCTRINE Bob Jones University and Goldsboro Christian Schools in Historical and Contemporary Context Bob Jones University v. United States Questions [B] THE ILLEGALITY DOCTRINE Revenue Ruling Authors Analysis [C] WRITING AND PLANNING EXERCISE [1] ABC News Broadcast on Ecoterror Dean Schabner, New Front on Ecoterror? Some Want to Target High- Profile Activists in Battle on Ecoterror [2] Wall Street Journal Editorial Animal House (Editorial) [3] Letter to PETA from Chairman McInnis Questions Chapter 3 THE EXEMPT PURPOSE REQUIREMENT: RELIGIOUS [A] OVERVIEW OF RELIGIOUS EXEMPTION [B] CONSTITUTIONAL IMPLICATIONS OF RELIGIOUS TAX EXEMPTION Walz v. Tax Commission of City of New York Questions [C] ADMINISTRATION OF THE RELIGIOUS TAX EXEMPTION [1] What Is a Religion? Church of the Chosen People v. United States [2] What Is a Church? iii

6 [D] [a] The Service s 14-Part Test [b] Tax Court Rejects the 14-Part Test Foundation of Human Understanding v. Commissioner [c] Church Status Versus Religious Via v. Commissioner Question Writing Exercise POLICING RELIGIOUS TAX EXEMPTION: THE CHURCH AUDIT PROCEDURES United States v. C.E. Hobbs Foundation for Religious Training and Education, Inc Questions Chapter 4 THE EXEMPT PURPOSE REQUIREMENT: EDUCATIONAL [A] OVERVIEW OF EDUCATIONAL EXEMPTION [1] D.C. Circuit Declares Treasury s Educational Regulation Unconstitutional Big Mama Rag, Inc. v. United States [2] The Methodology Test Cures Constitutional Concerns National Alliance v. United States [3] Service Formally Adopts the Methodology Test Revenue Procedure [4] Application of the Methodology Test Questions [B] SCHOOLS Chapter 5 THE EXEMPT PURPOSE REQUIREMENT: SCIENTIFIC [A] OVERVIEW OF SCIENTIFIC EXEMPTION [B] GENERAL ISSUES OF EXEMPTION American Kennel Club v. Hoey Notes Question [C] SPONSORED RESEARCH [1] Product Testing: Rev. Rul [2] Satisfying the Public Interest through Publication Revenue Ruling Question [D] TECHNOLOGY TRANSFER Questions iv

7 Chapter 6 THE EXEMPT PURPOSE REQUIREMENT: CHARITABLE [A] AN OVERVIEW OF CHARITABLE EXEMPTION [B] CHARITABLE HEALTH CARE [1] Indigent Care Required Revenue Ruling [2] Only Emergency Room Indigent Care Required for Exempt Status Revenue Ruling [3] Indigent Care Not Required Eastern Kentucky Welfare Rights Organization v. Simon [4] Emergency Indigent Care Not Required if Provided Elsewhere in the Community Revenue Ruling Questions [C] HEALTH MAINTENANCE ORGANIZATIONS IHC Health Plans, Inc. v. Commissioner Questions [D] PUBLIC INTEREST LAW FIRMS [1] Exemption [2] Receipt of Fees by Public Interest Law Firms Revenue Procedure Questions [3] Ideological Issues Involving Public Interest Law Firms Center on Corporate Responsibility, Inc. v. Shultz Chapter 7 EXCLUSIVITY AND THE COMMERCIALITY DOCTRINE [A] THE EXCLUSIVELY OPERATED REQUIREMENT [1] More than 20% non-exempt activity is probably too much [2] Less than 10% non-exempt activity is probably acceptable [3] Between 10% and 20% non-exempt activity is highly suspect Better Business Bureau of Washington, D.C., Inc. v. United States. 140 [B] SUBSTANTIAL NON-EXEMPT PURPOSES: THE COMMERCIALITY DOCTRINE [1] General Aspects of the Commerciality Doctrine [a] Presence (or Absence) of Free or Below Market Goods or Services. 143 Federation Pharmacy Services, Inc. v. Commissioner Questions [b] Success (or Failure) of a Commercial Activity Presbyterian and Reformed Publishing Co. v. Commissioner Living Faith, Inc. v. Commissioner v

8 Note on Very Successful Commercial Activities Questions [2] Feeder Organizations and the Integral Part Doctrine [a] Feeder Organizations: A Single Entity Edward Orton, Jr., Ceramic Foundation v. Commissioner Writing Exercise [b] The Integral Part Doctrine: Separate Related Entities [i] General Rule Permitting Separate Entities to be Exempt as Integral Parts of a Charitable Function University Medical Resident Services, P.C. v. Commissioner Question Note On Origin Of The Integral Part Doctrine [ii] Enhancement of Related Entity s Exempt Character Geisinger Health Plan v. Commissioner of Internal Revenue Service Question [iii] Substantially Related to Related Entity s Exempt Purpose or Function IHC Health Plans, Inc. v. Commissioner Note On Confusion With Respect To Integral Part Doctrine [iv] Clarifying the Integral Part Doctrine Note on Relationship of Integral Part Analysis to Cooperatives. 195 [3] Cooperative Organizations: Separate Unrelated Entities [a] General Rule Treating the Provision of Goods or Services to Unrelated Cooperatives as a Nonexempt Commercial Activity [b] Non-501(e) Hospital Cooperative Services HCSC-Laundry v. United States Question Questions [4] Commercial-Type Insurance: Section 501(M) An Industry-Specific Codification of the Commerciality Doctrine [a] The General Rule Denying Exemption to Commercial-Type Insurers: 501(m) Paratransit Insurance Corporation v. Commissioner [b] Group Self-Insurers Nonprofits Insurance Alliance of California v. United States Note on Charitable Risk Pools and 501(N) Questions [c] Health Maintenance Organizations as Insurers for 501(m) Purposes Technical Advice Memorandum vi

9 Chapter 8 ORGANIZATIONAL REQUIREMENT: PROCEDURAL RULES [A] INTRODUCTION [B] THE FILING AND NOTICE REQUIREMENT [1] Application Form [2] Articles of Creation [3] Filing Deadline [4] Exemption from the Filing Requirement [C] TWO REVENUE RULINGS AND A REVENUE PROCEDURE [1] Revenue Ruling [2] Revenue Ruling [3] Revenue Procedure Partners in Charity, Inc. v. Commissioner of Internal Revenue Questions [D] JUDICIAL REVIEW OF THE RULING PROCESS [1] Senate Report No , 94th Cong. 2d Sess (1976) Senate Report No [2] Case or Controversy: AHW Corporation v. Commissioner of Internal Revenue, 79 T.C. 390 (1982) Questions [E] FILING AND PUBLIC DISCLOSURE REQUIREMENTS [1] Annual Information Returns: [2] Public Disclosure of Returns and Other Information: [a] Tax Analysts v. CBN, 214 F.3d 179 (D.C. Cir. 2000) [b] Sklar v. Commissioner, 282 F.3d 610 (9th Cir. 2002) [F] STATE AND LOCAL FILING REQUIREMENTS Writing and Research Exercise Chapter 9 PRIVATE INUREMENT PROHIBITION [A] THE GENERAL RULE PROHIBITING PRIVATE INUREMENT [1] Private Shareholder or Individual United Cancer Council, Inc. v. Commissioner Questions Note on United Cancer Council v. Commissioner [2] Forms of Inurement Revenue Ruling Note on Revenue Ruling Easter House v. United States Note on Easter House Questions [B] EXCESS BENEFIT TRANSACTIONS vii

10 [1] Origins of Intermediate Sanctions Statute [2] Mechanics of [a] Lists of Disqualified Persons [b] Defining and Avoiding Excess Benefit [c] Computing the Tax [3] Intermediate Sanctions Regulations Planning and Writing Exercise Question Note on Standards for 501(C)(3) Exemption if Charity Engaged in Excess Benefit Transaction Note on Applicability of Excess Benefit Transaction Rules to Supporting Organizations and Donor Advised Funds [4] Valuation for Purposes of Private Inurement Prohibition and Intermediate Sanctions Caracci v. Commissioner of Internal Revenue Note on Valuation Misstatements Questions [C] ADVANCED APPLICATION: REVENUE SHARING AS A FORM OF PRIVATE INUREMENT General Counsel Memorandum (July 29, 1992) World Family Corporation v. Commissioner Note on World Family Corporation People of God Community v. Commissioner Questions Chapter 10 PRIVATE BENEFIT RESTRICTION [A] THE PRIVATE BENEFIT PROHIBITION IN GENERAL American Campaign Academy v. Commissioner Questions KJ s Fund Raisers, Inc. v. Commissioner Note on KJ s Aside on Monterey Public Parking Questions [B] CLASS SIZE Notice Note on Notice Questions [C] ADVANCED APPLICATION: JOINT VENTURES BETWEEN CHARITIES AND COMMERCIAL ENTITIES [1] Ancillary Joint Ventures Aside on Plumstead Theater viii

11 [2] Whole-Entity Joint Ventures Revenue Ruling Questions Note Redlands Surgical Services v. Commissioner Note and Commentary Questions St. David s Health Care System, Inc. v. United States Note on Appeal of Summary Judgment Order in St. David s Health Care System, Inc. v. United States Aside on District Court Criticism Chapter 11 LOBBYING RESTRICTION [A] THE PROHIBITION AGAINST SUBSTANTIAL LOBBYING GENERALLY Anthony Haswell v. United States Regan v. Taxation with Representation of Washington [B] SECTION 501(h) SAFE HARBOR FOR LOBBYING Notes About Lobbying Questions Chapter 12 POLITICAL ACTIVITY PROHIBITION [A] PROHIBITION AGAINST CAMPAIGN INTERVENTION The Association of the Bar of the City of New York v. Commissioner Revenue Ruling Revenue Ruling Revenue Ruling Revenue Ruling Branch Ministries v. Rossotti Note Question [B] POLITICAL ORGANIZATIONS Alaska Public Service Employees Local 71 v. Commissioner Note On Filing And Disclosure Requirements For Political Organizations Under the Radar: The Attack of the Stealth PACs on Our Nation s Election ix

12 Chapter 13 PRIVATE FOUNDATION STATUS [A] PUBLIC CHARITY STATUS VERSUS PRIVATE FOUNDATION STATUS [B] TYPES OF PUBLIC CHARITIES [1] 509(a)(1) Organizations Revenue Procedure Note St. John s Orphanage, Inc. v. United States Note on Public Endowments Questions [2] 509(a)(2) Organizations Questions [3] 509(a)(3) Organizations Roe Foundation Charitable Trust v. Commissioner Cockerline Memorial Fund v. Commissioner Question Chapter 14 PRIVATE FOUNDATION EXCISE TAXES [A] DISQUALIFIED PERSONS Question [B] THE AUDIT FEE TAX Question The Miss Elizabeth D. Leckie Scholarship Fund v. Commissioner Note: Exempt Operating Foundation Status and the Reduced Audit Fee Tax Questions [C] THE SELF-DEALING EXCISE TAX John W. Madden, Jr. v. Commissioner Question Deluxe Corporation v. United States Estate Of Bernard J. Reis v. Commissioner Note on Indirect Self-Dealing Alvin J. Geske, Indirect Self-Dealing and Foundations Transfer for the Use or Benefit of Disqualified Persons Questions [D] MANDATORY DISTRIBUTIONS Revenue Ruling Note on Qualifying Distributions Under the Cash-Distribution Test. 488 Questions [E] EXCESS BUSINESS HOLDINGS Senate Report x

13 Revenue Ruling David Bank, Foundations Divide Over Need to Diversify: Two High-Profile Progeny of H-P Adopt Different Strategies Questions John G. Simon, Private Foundations as a Federally Regulated Industry: Time for a Fresh Look? [F] JEOPARDIZING INVESTMENTS Question and Planning Exercise [G] TAXABLE EXPENDITURES Student Teaching Exercise Note: Abatement and Refund of Excise Taxes [H] THE TERMINATION TAX Note: Enforcement in a Practical Sense Chapter 15 ALTERNATIVES TO PRIVATE FOUNDATION STATUS [A] OVERVIEW [B] POOLED DONOR-DIRECTED FUNDS Question [C] DONOR-ADVISED FUNDS Gene Steuerle, Charitable Endowments, Advised Funds and the Mutual Fund Industry Part Two Questions [D] COMMUNITY FOUNDATIONS AND SUPPORTING ORGANIZATIONS Christopher R. Hoyt, Pooled Income Funds of Community Foundations; IRS Swiftly Revokes its Revenue Ruling Rochelle Korman & William F. Gaske, Supporting Organizations to Community Foundations: A Little-Used Alternative to Private Foundations Comment and Question Chapter 16 SOCIAL WELFARE ORGANIZATIONS [A] GENERAL REQUIREMENTS FOR SOCIAL WELFARE ORGANIZATIONS Note on IRS Exempt Organization CPE Program Textbook Social Welfare: What Does it Mean? How Much Private Benefit is Permissible? What is a Community? [B] THE COMMUNITY BENEFIT REQUIREMENT Flat Top Lake Association, Inc. v. United States of America Questions xi

14 Note on Tax Exempt Homeowners Associations: Section Senate Finance Committee Report on P.L (Miscellaneous Revenue Act of 1980) [C] CREDIT COUNSELING SERVICES Technical Explanation of The Pension Protection Act of [D] POLITICAL CAMPAIGN AND LOBBYING ACTIVITIES OF IRC 501(C)(4), (C)(5) AND (C)(6) ORGANIZATIONS Political Campaign and Lobbying Activities of IRC 501(C)(4), (C)(5), and (C)(6) Organizations Chapter 17 LABOR, AGRICULTURAL AND HORTICULTURAL ORGANIZATIONS [A] LABOR ORGANIZATIONS [1] General Rule Defining Labor Organizations Portland Co-Operative Labor Temple Association v. Commissioner IRC 501(c)(5) Organizations Stichting Pensioenfonds Voor De Gezondheid, Geestelijke En Maatschappelijke v. United States [B] AGRICULTURAL AND HORTICULTURAL ORGANIZATIONS [C] POLITICAL ACTIVITY BY 501(c)(5) ORGANIZATIONS Gerald M. Marker et al. v. George P. Shultz, As Secretary of the Treasury of the United States Department of Treasury et al Question Chapter 18 BUSINESS LEAGUES National Muffler Dealers Assn., Inc. v. United States Note on Definition of Business League The Engineers Club of San Francisco v. United States Questions Chapter 19 SOCIAL CLUBS [A] BASIC OPERATIONAL REQUIREMENTS Revenue Ruling Note Revenue Procedure Senate Report No , 2d Session Note [B] ANTI-DISCRIMINATION REQUIREMENT Senate Report No , 2d Session xii

15 Chapter 20 STATES AND STATE-RELATED ORGANIZATIONS [A] INTERGOVERNMENTAL TAX IMMUNITY STATES, POLITICAL SUBDIVISIONS, INTEGRAL PARTS State of Michigan v. United States Note on IRS Objections to Michigan Education Trust Case [B] STATE-RELATED ENTITIES Revenue Ruling City of Bethel, Alaska v. United States Questions [C] NATIVE AMERICAN GOVERNING BODIES Private Letter Ruling Revenue Ruling Kip R. Ramsey v. United States Questions Chapter 21 THE UNRELATED BUSINESS INCOME TAX IN GENERAL [A] GENERAL OVERVIEW Statement of O. Donaldson Chapoton [B] THE TRADE OR BUSINESS REQUIREMENT [1] In General United States v. American Bar Endowment Questions American Academy of Family Physicians v. United States Questions [2] The Fragmentation Rule United States v. American College of Physicians Questions [3] The Corporate Sponsorship Exception Questions Darryll K. Jones, Advertisements and Sponsorships in Charitable Cyberspace: Virtual Reality Meets Legal Fiction [C] THE REGULARLY CARRIED ON REQUIREMENT National Collegiate Athletic Association v. Commissioner State Police Association of Massachusetts v. Commissioner Questions [D] THE SUBSTANTIALLY RELATED REQUIREMENT United States v. American College of Physicians Note on Income from the Performance of an Exempt Function Questions Note on Commercial Exploitation of an Exempt Function xiii

16 Chapter 22 UNRELATED BUSINESS INCOME TAX MODIFICATIONS AND DEDUCTIONS [A] THE ROYALTY MODIFICATION Sierra Club Inc. v. Commissioner Note on Remand of Sierra Club Question [B] DEDUCTIONS [1] Directly Connected Expenses Rensselaer Polytechnic Institute v. Commissioner [2] Expenses from an Exploited Exempt Activity American Medical Association v. United States Chapter 23 UNRELATED BUSINESS INCOME TAX CONTROLLED ENTITIES Questions Chapter 24 UNRELATED DEBT FINANCED INCOME [A] BACKGROUND AND HISTORY Commissioner v. Brown Note [B] THE MECHANICS OF IRC S. Rep. N. 552, 91st Cong Southwest Texas Electrical Cooperative, Inc. v. Commissioner Gundersen Medical Foundation, Ltd. v. United States Note Planning Exercise [C] ADVANCED APPLICATION: LEVERAGED REAL ESTATE PARTNERSHIPS William B. Holloway, Jr., Structuring Real Estate Investment Partnerships with Tax-Exempt Investors Chapter 25 SPECIAL UBIT RULES FOR MEMBERSHIP ORGANIZATIONS [A] UNRELATED BUSINESS TAXABLE INCOME OF LABOR ORGANIZATIONS Rev. Proc National League of Postmasters of the United States v. Commissioner Note on Small Dues Questions [B] UNRELATED BUSINESS TAXABLE INCOME OF SOCIAL CLUBS. 768 xiv

17 Portland Golf Club v. Commissioner of Internal Revenue Atlanta Athletic Club v. Commissioner Questions Chapter 26 DEDUCTIBLE CHARITABLE CONTRIBUTIONS [A] INTRODUCTION [B] WAS THE RECIPIENT A PROPER ENTITY? [C] WAS THE TRANSFER A COMPLETED GIFT? [1] Completed Gifts and Methods of Accounting [2] What Is a Gift? [a] Ebben v. Commissioner, 783 F.2d 906 (9th Cir. 1986) Ebben v. Commissioner of Internal Revenue United States v. American Bar Endowment [D] WAS THE GIFT A PRESENT OR FUTURE INTEREST? [E] WHAT IS THE AMOUNT CURRENTLY DEDUCTIBLE OR TO BE CARRIED OVER? Problems Chapter 27 FOREIGN CHARITIES AND CROSS BORDER GIVING [A] INTRODUCTION [B] TECHNICAL RULES RELATING TO DEDUCTION OF CONTRIBUTIONS TO AND U.S. TAX EXEMPTION FOR FOREIGN ORGANIZATIONS Harvey P. Dale, Foreign Charities [C] POLICY CHALLENGES REGARDING CROSS BORDER GIVING AND MULTINATIONAL CHARITIES Penina Kessler Lieber, : An Anniversary of Note Note TABLE OF CASES TABLE OF STATUTES TABLE OF AGENCY DECISIONS TC-1 TS-1 TA-1 INDEX I-1 xv

18