The Law of Tax-Exempt Organizations, 2017 Cumulative Supplement - Bruce R. Hopkins - ebook

The Law of Tax-Exempt Organizations, 2017 Cumulative Supplement ebook

Bruce R. Hopkins

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The gold-standard guide to nonprofit law, updated for 2017 The Law of Tax-Exempt Organizations + Website is the definitive reference for leaders and lawyers of tax-exempt organizations. Written by the field's most respected authority, this book provides comprehensive coverage of all currently relevant regulations to help you make informed decisions about the future of your organization. This new 2017 cumulative supplement includes important updates and revisions with respect to tax regulations and court opinions, including expanded discussion on the private benefit doctrine and unrelated business activity, governance, donor-advised funds, and supporting organizations. Accessible language and extensive tabular information allow for easy navigation and quick reference, while the companion website features additional resources that provide additional depth on specific topics. Tax laws are continuously evolving, and the statutes and regulations for tax-exempt organizations change more quickly than most. This book compiles all of the latest pertinent statutes, regulations, rulings, and court opinions into a single reference that no nonprofit should be without. * Get up to date on the latest changes to tax regulations for exempt organizations * Learn the new and expanded rules for supporting organizations * Review recent IRS rulings, Treasury Department regulations, and court opinions * Find answers to the emerging issues surrounding the commerciality doctrine governance, unrelated business, constitutional law issues, and much more Failure to keep pace with changing tax law can easily result in costly penalties; in the non-profit world, each and every dollar is precious--by staying up to date on tax-exempt regulations, you not only avoid penalties, but you may discover new developments that actually benefit your bottom line. The Law of Tax-Exempt Organizations + Website provides the information you need, and the expert guidance to help you take advantage of every opportunity.

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Table of Contents

Cover

Title Page

Copyright

Preface

Chapter One: Definition of and Rationales for Tax-Exempt Organizations

*§ 1.1 Definition of

Nonprofit

Organization

§ 1.2 Definition of

Tax-Exempt

Organization

*§ 1.4 Political Philosophy Rationale

Chapter Two: Overview of Nonprofit Sector and Tax-Exempt Organizations

*§ 2.1 Profile of Nonprofit Sector

§ 2.2 Organization of IRS

Chapter Three: Source, Advantages, and Disadvantages of Tax Exemption

*§ 3.2 Recognition of Tax Exemption

Chapter Four: Organizational, Operational, and Related Tests and Doctrines

§ 4.1 Forms of Tax-Exempt Organizations

*§ 4.2 Governing Instruments

§ 4.5 Operational Test

*§ 4.9 State Action Doctrine

§ 4.11 Commerciality Doctrine

Chapter Five: Nonprofit Governance

§ 5.7 IRS and Governance

Chapter Six: Concept of

Charitable

§ 6.2 Public Policy Doctrine

§ 6.3 Collateral Concepts

Chapter Seven: Charitable Organizations

§ 7.4 Provision of Housing

§ 7.6 Promotion of Health

§ 7.7 Lessening Burdens of Government

§ 7.14 Fundraising Organizations

§ 7.16 Other Categories of Charity

Chapter Eight: Educational Organizations

*§ 8.1 Federal Tax Law Definition of

Educational

*§ 8.2

Education

Contrasted With

Propaganda

§ 8.3 Educational Institutions

Chapter Nine: Scientific Organizations

*§ 9.1 Federal Tax Law Definition of

Science

Chapter Ten: Religious Organizations

§ 10.1 Constitutional Law Framework

*§ 10.2 Federal Tax Law Definition of

Religion

*§ 10.3 Churches and Similar Institutions

§ 10.5 Conventions or Associations of Churches

Chapter Eleven: Other Charitable Organizations

§ 11.9 Endowment Funds

Chapter Twelve: Public Charities and Private Foundations

§ 12.3 Categories of Public Charities

§ 12.4 Private Foundation Rules

Chapter Thirteen: Social Welfare Organizations

§ 13.1 Concept of

Social Welfare

*§ 13.2 Requirement of

Community

Chapter Fourteen: Business Leagues and Like Organizations

§ 14.1 Concept of

Business League

§ 14.2 Disqualifying Activities

Chapter Fifteen: Social Clubs

§ 15.1 Social Clubs in General

Chapter Seventeen: Political Organizations

*§ 17.6 Taxation of Other Exempt Organizations

Chapter Eighteen: Employee Benefit Funds

§ 18.3 Voluntary Employees' Beneficiary Associations

Chapter Nineteen: Other Categories of Tax-Exempt Organizations

*§ 19.6 Cemetery Companies

§ 19.19 Qualified Tuition Programs

§ 19.20 Able Programs

§ 19.22 Governmental and Quasi-Governmental Entities

Chapter Twenty: Private Inurement and Private Benefit

§ 20.1 Concept of Private Inurement

*§ 20.3 Definition of

Insider

*§ 20.4 Compensation Issues

§ 20.5 Other Forms of Private Inurement

§ 20.12 Private Benefit Doctrine

Chapter Twenty-One: Intermediate Sanctions

*§ 21.9 Rebuttable Presumption of Reasonableness

§ 21.10 Excise Tax Regime

Chapter Twenty-Two: Legislative Activities by Tax-Exempt Organizations

*§ 22.3 Lobbying by Charitable Organizations

§ 22.6 Legislative Activities of Business Leagues

Chapter Twenty-Three: Political Campaign Activities by Tax-Exempt Organizations

§ 23.2 Prohibition on Charitable Organizations

*§ 23.5 Political Activities of Social Welfare Organizations

*§ 23.7 Political Activities of Business Leagues

Chapter Twenty-Four: Unrelated Business: Basic Rules

*§ 24.1 Introduction to Unrelated Business Rules

*§ 24.2 Definition of

Trade or Business

*§ 24.3 Definition of

Regularly Carried On

§ 24.5 Contemporary Applications of Unrelated Business Rules

*§ 24.9 Unrelated Debt-Financed Income

*§ 24.10 Tax Structure

*§ 24.11 Deduction Rules

Chapter Twenty-Five: Unrelated Business: Modifications, Exceptions, and Special Rules

§ 25.1 Modifications

§ 25.2 Exceptions

§ 25.3 Special Rules

Chapter Twenty-Six: Exemption Recognition and Notice Processes

§ 26.1 Recognition Application Procedure

*§ 26.2 Requirements for Charitable Organizations

§ 26.3A Notice Requirements for Social Welfare Organizations

*§ 26.6 Requirements for Certain Prepaid Tuition Plans

*§ 26.9 Rules for Other Organizations

*§ 26.10 Group Exemption Rules

*§ 26.14 Forfeiture of Tax Exemption

*§ 26.14A Modification of Tax Exemption

§ 26.15 Constitutional Law Aspects of Process

Chapter Twenty-Seven: Administrative and Litigation Procedures

*§ 27.1 Administrative Procedures Where Recognition Denied

§ 27.2 Revocation or Modification of Tax-Exempt Status: Administrative Procedures

§ 27.3 Retroactive Revocation of Tax-Exempt Status

§ 27.6 Revocation of Tax-Exempt Status: Litigation Procedures

§ 27.7 IRS Examination Procedures and Practices

*§ 27.10 IRS Disclosure to State Officials

Chapter Twenty-Eight: Operational Requirements

*§ 28.1 Changes in Operations or Form

*§ 28.2 Annual Reporting Rules

§ 28.3 Annual Information Return

*§ 28.4 Notification Requirement

§ 28.11 IRS Document Disclosure Rules

*§ 28.12 Document Disclosure Obligations of Exempt Organizations

§ 28.18 Tax-Exempt Organizations and Tax Shelters

§ 28.19 International Grantmaking Requirements

Chapter Twenty-Nine: Tax-Exempt Organizations and Exempt Subsidiaries

§ 29.6 Revenue from Tax-Exempt Subsidiary

Chapter Thirty: Tax-Exempt Organizations and For-Profit Subsidiaries

§ 30.2 Potential of Attribution to Parent

§ 30.7 Revenue from For-Profit Subsidiary

Chapter Thirty-Two: Tax-Exempt Organizations: Other Operations and Restructuring

§ 32.7 Single-Member Limited Liability Companies

§ 32.10 Conversion from Nonexempt to Exempt Status

*§ 32.11 Conversion from One Exempt Status to Another

*Appendix A: Sources of Tax-Exempt Organizations Law

Table of Tax-Exempt Organizations Law Tax Reform Proposals

Cumulative Table of Cases

Cumulative Table of IRS Revenue Rulings

Cumulative Table of IRS Revenue Procedures

Cumulative Table of IRS Private Determinations Cited in Text

Private Letter Rulings, Technical Advice Memoranda, Exemption Denial and Revocation Letters, General Counsel Memoranda, and Chief Counsel Advice Memoranda

Private Letter Rulings and Technical Advice Memoranda

Exemption Denial and Revocation Letters

General Counsel Memoranda

Cumulative Table of IRS Private Letter Rulings, Technical Advice Memoranda, and Counsel Memoranda

Cumulative Table of Cases Discussed in Bruce R. Hopkins' Nonprofit Counsel

Cumulative Table of IRS Private Determinations Discussed in Bruce R. Hopkins' Nonprofit Counsel

Index

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Guide

Cover

Table of Contents

Begin Reading

the law of tax-exempt organizations

Eleventh Edition

2017 Cumulative Supplement

 

 

Bruce R. Hopkins

 

 

 

 

 

Copyright © 2017 by Bruce R. Hopkins. All rights reserved.

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

Published simultaneously in Canada.

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Preface

This is the second Preface in a supplement accompanying the eleventh edition of this book. This 2017 cumulative supplement essentially covers developments in the federal law of tax-exempt organizations for the period ending at the close of 2016.

The IRS's Tax Exempt and Government Entities Division has resumed issuance of annual work plans. There had not been one of these work plans since the one issued in fiscal year 2013; it is good to see these plans emerge again. The work plan for fiscal year 2016 was issued on October 1, 2015. This plan was somewhat marred, like the prior year's “program letter,” by an overabundance of management-speak. This work plan, however, addressed some forthcoming program activity, as does its more exuberant successor for fiscal year 2017, both of which are summarized in this cumulative supplement.

The IRS has issued other interesting publications (summarized herein), including a memorandum from Rulings and Agreements concerning a toughening of the processing time lines now being followed in connection with applications for recognition of exemption, a memorandum from the Division regarding the use of one or more political acstivities referral committees, and a notice pertaining to mission-related investing by private foundations. The streamlined application process, utilizing Form 1023-EZ, seems to be operating fairly well, although it continues to be battered by substantial criticism, such as that leveled by the National Taxpayer Advocate (noted herein).

The IRS continues to issue private letter rulings illustrating its positions on application of the commerciality doctrine (some of them questionable), the private inurement and private benefit doctrines, the lack of qualification for exempt status as a business league, absence of the requisite charitable class, housing organizations, the lessening-burdens-of-government principle, the conduit rules in connection with foreign grantmaking, application of the unrelated business rules, and regulation of nonprofit governance (these continuing to be, in the view from here, incorrect).

An issue has come to the fore again in relation to the time frame covered by this supplement: the matter of “conversion” from nonexempt (for-profit) status to nonprofit, tax-exempt status. The IRS seems to have evolved to the position that, once an enterprise is formed as a for-profit entity, it can never be reconstituted as an exempt organization; there are two recent private letter rulings on the point. This is certainly not the law. This issue was bizarrely highlighted when a group of U.S. senators wrote to the IRS and the Department of Education asserting that conversions of for-profit schools to exempt schools are resulting in “sham nonprofits,” and constitute fraud and tax evasion.

Since the main volume was published, some notable cases have been decided (again, all summarized herein), resulting in opinions concerning the necessary attributes of an entity qualifying as an organization, preliminary to considerations as to whether it is tax-exempt; the concept of a corporation, which generally subsumes the concept of a nonprofit corporation; the strict scrutiny test to apply in evaluating race-based affirmative action programs in the public higher education context; the lawfulness of the contraceptive mandate and its religious exceptions as applied to nonreligious tax-exempt entities; application of the strict scrutiny test in the free speech context (perhaps the “sleeper” opinion of the Supreme Court's last term); application of free speech principles in the realm of the processing of applications for recognition of exemption; and the use of a corporation sole as an abusive tax shelter.

The Senate Committee on Finance, on August 5, 2015, released its report on the Committee's bipartisan investigation of the IRS's handling of applications for recognition of tax exemption submitted by political advocacy organizations. The essence of this report is that, during 2010–2013, IRS management was delinquent in its responsibility to provide effective control, guidance, and direction over the processing of these applications. Two federal courts of appeals, however, are of the view that this matter goes beyond management issues and is in the realm of violation of free speech principles by reason of viewpoint discrimination.

The Government Accountability Office (GAO), in a report issued in July 2015, concluded that there are “several areas” where the Division's controls intended to enable it to properly select tax-exempt organizations for examination “were not well designed or implemented.” The GAO recommended that the Division undertake several actions to rectify these deficiencies.

The Finance Committee and GAO reports are summarized in this cumulative supplement.

The Finance Committee also undertook an investigation of some small tax-exempt museums. The inquiry letters and the findings of the Committee as submitted to the IRS on May 17, 2016, are summarized herein.

The Protecting Americans from Tax Hikes Act of 2015 was enacted near the close of that year, bringing several new and revised rules concerning the law of tax- exempt organizations, all of which are summarized in this cumulative supplement.

The GAO also issued a report concerning the nature of IRS guidance and the lack of procedures within the agency as to selection of types of guidance. This report, which has considerable implications for the law of tax-exempt organizations, is summarized as an addition to Appendix A of the book.

Two recent developments have not been added to the book just yet (although both are summarized in the January 2017 Nonprofit Counsel). One development is the new country-by-country reporting regime and its impact on tax-exempt organizations. The regulations that detail this reporting requirement were issued in final form in July 2016; the principal underlying statutory authority for this reporting is IRC § 6038. The other development is the import for exempt organizations of the new audit regime for partnerships; this body of law was created by the Bipartisan Budget Act of 2015 and revised by the PATH Act of 2015.

The potential for tax reform looms. As a consequence, a table has been added, this of proposed and House of Representatives–enacted law revisions in the tax-exempt organizations law setting.

My thanks go to my development editor, Brian Neill, and the production editor, Abirami Srikandan, for their assistance and support in connection with this cumulative supplement.

Bruce R. Hopkins

CHAPTER ONEDefinition of and Rationales for Tax-Exempt Organizations

*§ 1.1 Definition of

Nonprofit

Organization

§ 1.2 Definition of

Tax-Exempt

Organization

*§ 1.4 Political Philosophy Rationale

*§ 1.1 DEFINITION OF NONPROFIT ORGANIZATION

(a) Nonprofit Organization Defined

p. 5. Insert as fourth paragraph, before heading:

Use of the word corporation in the law context usually means both nonprofit and for-profit ones, unless clearly stated otherwise. This point was nicely illustrated in the case of a tax-exempt teaching hospital that is organized as a nonprofit corporation under state law and is tax-exempt under the federal tax law as a charitable corporation. It is required to pay Federal Insurance Contributions Act (FICA) taxes. An exclusion is available from the FICA taxes for students at educational institutions.6.1 An IRS regulation, promulgated in 2005, basically states that medical residents are not students for this purpose. The hospital sued for a refund of FICA taxes it paid before the effective date of the regulation; the IRS eventually conceded this point. The parties disagreed, however, as to the interest rate that applies with respect to the tax refund.6.2 A lower interest rate applies to corporations. The hospital asserted that it was entitled to a higher rate of interest on its tax refund, on the grounds that the statutory reference to corporations in this context is inapplicable to nonprofit organizations that happen to be organized as corporations. The court involved surveyed the contents of several dictionaries, concluding that the word corporation, “standing alone, ordinarily refers to both for-profit and nonprofit entities without distinction.”6.3 It essentially reached the same conclusion on the basis of the Internal Revenue Code definition (although it is not really a definition) of the term.6.4 The court further engaged in an extensive textual analysis of the interest rate provision, again rejecting the hospital's arguments and concluding that the hospital's readings of the section “wreak havoc on the statutory language.”6.5

§ 1.2 DEFINITION OF TAX-EXEMPT ORGANIZATION

*p. 7, note 20, last line. Delete closing parenthesis and period, and substitute:

, vac'd and rem'd sub nom. Diebold Found., Inc. v. Comm'r, 736 F.3d 172 (2nd Cir. 2013), rev'd and rem'd, 776 F.3d 1010 (9th Cir. 2014), T.C. Memo. 2016-154 (Aug. 15, 2016) (two private foundations held liable for income taxes as transferees of a transferee)).

*p. 8, note 22.Insert following existing text:

Also Constitutional Law, Chapter 1.

p. 9, note 33, second paragraph. Delete and substitute:

The staff of Congress's Joint Committee on Taxation, on December 7, 2015, issued its estimates of federal tax expenditures for fiscal years 2015–2019 (JCX-141-15). The income tax charitable contribution deduction is the ninth largest of these expenditures, at $260.1 billion. The charitable deduction tax expenditure is broken down into the categories of education ($35 billion), health ($26.7 billion), and other ($198.4 billion).

The largest of the tax expenditures, ahead of the charitable deduction, are the net exclusion of pension contributions and earnings ($881.5 billion); the exclusion of employer contributions for health care, health insurance premiums, and long-term care insurance premiums ($769.8 billion); the reduced rates of tax on dividends and long-term capital gain ($689.6 billion); deferral of active income of controlled foreign corporations ($563.6 billion); the deduction for mortgage interest on owner-occupied residences ($419.8 billion); the deduction of nonbusiness state and local government income taxes, sales taxes, and personal property taxes ($342.3 billion); the subsidies for insurance purchased through health benefit exchanges ($322.5 billion); and the tax credit for children ($267 billion).

*§ 1.4 POLITICAL PHILOSOPHY RATIONALE

p. 11, last paragraph, third line. Delete ; more accurately and substitute , namely.

p. 13, last line. Delete first of.

p. 14, third complete paragraph, eighth line. Insert the federal following of.

p. 16, last paragraph, eighth line. Delete inexplicably ignored and insert trimmed.

p. 17, note 80. Insert as second paragraph:

An unavoidable aspect of tax exemptions is narrowing of the tax base. This phenomenon is most notable at the state and local level, in connection with real estate tax exemptions for charitable organizations. The Lincoln Institute of Land Policy reported, based on its study made available in August 2016, that these governments “forgo roughly 4 to 8 percent of total property tax revenues each year” due to these exemptions. Some local governments ask exempt organizations to make payments in lieu of taxes, to contribute to the “cost of the public services they consume.” The report states that, as of 2012, at least 218 localities in 28 states had received PILOTs, amounting to more than $92 million annually. These political philosophical principles can fade into mere platitudes, if remembered at all, in the face of practical needs, such as money.

*6.1

IRC § 3121(b)(10).

*6.2

IRC § 6621(a)(1).

*6.3

Maimonides Medical Center v. United States, 809 F.3d 85, 87 (2nd Cir. 2015).

*6.4

IRC § 7701(a)(3).

*6.5

Maimonides Medical Center v. United States, 809 F.3d 85, 91 (2nd Cir. 2015). Likewise, United States v. Detroit Medical Center, 833 F.3d 671 (6th Cir. 2016).

CHAPTER TWOOverview of Nonprofit Sector and Tax-Exempt Organizations

*§ 2.1 Profile of Nonprofit Sector

§ 2.2 Organization of IRS

*p. 23, second paragraph, seventh line. Delete later and insert below.

*§ 2.1 PROFILE OF NONPROFIT SECTOR

*p. 27.Delete first two complete paragraphs and substitute:

Charitable giving in the United States in 2015 is estimated to have totaled $373.3 billion.65.1 Giving by individuals in 2015 amounted to an estimated $264.6 billion; this level of giving constituted 71 percent of all charitable giving for the year. Grantmaking by private foundations is an estimated $58.5 billion (16 percent of total funding). Gifts in the form of charitable bequests in 2015 are estimated to be $31.8 billion (9 percent of total giving). Gifts from corporations in 2015 totaled $18.5 billion (5 percent of total giving for that year).

Contributions to religious organizations in 2015 totaled $119.3 billion (32 percent of all giving that year). Gifts to educational organizations amounted to $57.48 billion (15 percent); to human service entities, $45.21 billion (12 percent); to foundations, $42.26 billion (11 percent); to health care institutions, $29.8 billion (8 percent); to public-society benefit organizations, $26.9 billion (7 percent); to international affairs entities, $15.75 billion (4 percent); to arts, culture, and humanities entities, $17 billion (5 percent); and to environmental and animals groups, $10.7 billion (3 percent). Two percent of this total (about $7 billion) involved gifts to individuals, such as corporate contributions of medicine.

§ 2.2 ORGANIZATION OF IRS

p. 32.Insert following first paragraph, before heading:

(c) EO Division's FY 2016 Work Plan

The Tax Exempt and Government Entities Division, on October 1, 2015, issued its work plan for fiscal year 2016. This work plan identifies TE/GE's five key areas of focus in the coming months. The first area is continuous improvement. It is written that one of the Division's guiding principles involves “sustaining a continuous improvement feedback loop” so as to effectively allocate resources. TE/GE's “partnership” with the IRS's Lean Six Sigma Office has, according to this report, led to “many improvements” in the Division's procedures. One example is the trimming of the time taken to process applications for recognition of exemption.92.1

Forthcoming projects include evaluation of the Form 1023-EZ process to determine potential improvements, development of a program to make Forms 990 available in Modernized e-File format, finding efficiencies in closing unit processes, simplifying tax forms and enhancing their digital functionality, and refining information document requests to reduce the length of examination processes.

Another of these areas is knowledge management. The Division is developing a “knowledge management framework.” This entails gathering information from employees and staffing the “knowledge networks” (what the IRS likes to refer to as K-Nets). The IRS has begun building knowledge libraries within each K-Net, containing technical resources searchable by key issue areas and resource types.

A third area is risk management. The Division is working with the IRS's Office of the Chief Risk Officer to ensure that managers and management officials receive risk awareness training. It completed “risk registers” where managers identified risks within their offices and ways to mitigate existing and potential risks. It also introduced the Risk Acceptance Form and Tool to senior management, which is to help the Division document business decisions in the context of its “risk appetite and acceptance.” Overall, the Division is implementing mitigation strategies and/or plans to “lessen the likelihood of the risk manifesting or the impact should it manifest.”

The fourth area is fostering a culture of data-driven decision-making. These steps have been taken: the focusing of examination plans on strategic areas or issues where the Division believes there may be greater risk of noncompliance, and development of “a pilot project to analyze data from Form 1023-EZ applications to identify trends and patterns.”

The last of these areas is employee engagement. This involves “empowering employees and managers, maintaining an effective recognition program, and strengthening our leadership team's visibility, transparency and interaction with employees.”

*(d) EO Division's FY 2017 Work Plan

The IRS, on September 29, 2016, unveiled the TE/GE FY 2017 Work Plan. A message from the TE/GE commissioners stated that the work of the Exempt Organizations Division is being conducted in the context of the IRS's Future State strategy, the vision of which foresees a “transformed taxpayer—and employee—experience: easily accessible web-based information that provides pre-filing education, user-friendly technology that makes filing easier, expeditious case handling and resolution if the IRS makes post-filing contact with the taxpayer, a better-equipped and engaged work force, and more.”

(i) EO Determinations.

In FY 2016, EO Determinations focused on its objectives to improve the processing of applications for recognition of exemption and enhance customer satisfaction. These programs have been implemented:

Erroneous Revocation Prevention

. On May 3, 2016, EO Rulings and Agreements formalized procedures to identify and prevent erroneous automatic revocations before posting to EO Select Check. The IRS reports that, since March 2015, it has reviewed 13,933 potential auto-revocations and prevented 3,202 erroneous revocations through June 2016.

Rejection of Incomplete Applications

. The IRS, on November 18, 2015, began rejecting incomplete applications. This process is said to educate applicants as to the requirements of a complete application and assure review of completed applications by revenue agents in a more efficient and expeditious manner. The IRS has rejected 2,588 incomplete applications through June 2016.

Social Welfare Organizations Notice Implementation

. The new notice requirement for social welfare organizations became operational on July 8, 2016, with the release of regulations, a revenue procedure, and interim guidance.

92.2

Through August 2016, the IRS has successfully processed over 400 of these notifications.

Form 1023-EZ User Fee

. The IRS reduced the user fee for Form 1023-EZ users. This change was implemented on July 1, 2016. Through the third quarter of FY 2016, EO received 33,549 Form 1023-EZ cases (58 percent of overall Form 1023 cases) and closed 33,909 Form 990-EZ cases, including 31,840 cases approved (94 percent) and 1,705 cases rejected (5 percent). The IRS anticipates that reduction of this user fee will result in an increase in its use.

FY 2016 Determinations Results

. Through the third quarter of FY 2016, EO Determinations continued to close more applications than it received. The average age of the open inventory (73 days) continued to decrease, while the quality of the work is said to remain consistent. EO Determinations approved 93.6 percent of all closed cases and denied less than 1 percent. The most common reasons for denial were private benefit and private inurement, substantial nonexempt purposes, and violation of the commerciality doctrine.

In FY 2017, EO Determinations will continue to improve the processing of applications and the new social welfare organizations notice (Form 8976). The projected increase in applications is expected to “almost entirely” be in the Form 1023-EZ “workstream,”92.3 while Forms 1023 are projected to slightly decline. Other form receipts, such as Forms 1024 and 8940, are expected to increase slightly in FY 2017. Applications overall are projected to total “just over” 88,000.

The IRS stated that it will “continue to mitigate Form 1023-EZ applicant compliance risks with pre-determination application reviews and evaluation of the pre-determination data.” The agency is said to “continue to utilize data from Form 1023-EZ pre-determination reviews and will consider future adjustments to the application, instructions, and pre-determination program.”

(ii) Knowledge Management.

In its continued effort to increase the technical knowledge base of EO employees, the IRS has several knowledge management initiatives planned for FY 2017. The IRS continues to prepare and post technical Issue Snapshots for EO employees and the public. Five of these snapshots have been completed, including abatement of Chapter 42 first-tier taxes and the definition of disqualified person (IRC § 4946), and the IRS has over 20 snapshots in development.

The EO Determinations Quality Assurance function will continue to review and evaluate EO Determinations cases for correctness and consistency. Areas for improvement will be identified and developed.

(iii) Correspondence. The IRS is projecting a 1 percent increase in taxpayer correspondence in FY 2017 based on new tax law and the new Form 8976 workstream. The agency anticipates improvements in “cycle time and open and overage inventory in FY 2017, resulting from increased efficiencies.” The IRS continues to “reduce open correspondence inventory with the goal of responding and resolving submissions timely to match demand.”92.4

*65.1

These data are from

Giving USA 2016,

published by the Giving USA Foundation, and researched and written under the auspices of the Center on Philanthropy at Indiana University.

92.1

See § 26.1(a)(iii).

*92.2

See § 26.3A.

92.3

See § 26.1(h).

*92.4

The EO Examinations component of these work plans is the subject of § 27.7(a)(vi), (vii).

CHAPTER THREESource, Advantages, and Disadvantages of Tax Exemption

*§ 3.2 Recognition of Tax Exemption

*§ 3.2 RECOGNITION OF TAX EXEMPTION

*p. 46, note 27. Delete 2014-10, 2014-2 I.R.B. 293 § 4.01 and substitute 2016–5, 2016-1 I.R.B. 188.

*p. 46, first complete paragraph, sixth sentence. Delete and substitute:

In addition, for an organization to be regarded as an exempt social welfare entity, it must give notice to the IRS 29; the same is the case as regards exempt political organizations.29.1

29

IRC § 506. See § 26.3A.

29.1

IRC § 527(i). See § 26.11.

CHAPTER FOUROrganizational, Operational, and Related Tests and Doctrines

§ 4.1 Forms of Tax-Exempt Organizations

*§ 4.2 Governing Instruments

§ 4.5 Operational Test

*§ 4.9 State Action Doctrine

§ 4.11 Commerciality Doctrine

§ 4.1 FORMS OF TAX-EXEMPT ORGANIZATIONS

(a) General Rules

p. 63. Insert as fifth paragraph:

Perhaps the best illustration of this body of law came in connection with a court opinion finding that an organization did not exist for tax-exempt organization law purposes.23.1 The court observed that, during the years at issue, neither this individual nor those assisting him “maintained financial records, kept minutes, drafted organizing documents or bylaws, requested an employer identification number, or put in place any structures that would be expected from a continuing organization.” No state organizational requirement was met. Federal annual information returns were either not filed or filed late. The court also stated that “there was no separation between [this individual] and his activities.” He was the “sole researcher, analyst, producer, service provider, and scientist (and was later defined as the only director and officer).” He had control of all of the funds involved (none of which were devoted to charitable purposes), which were deemed to be gross income to him personally.

*§ 4.2 GOVERNING INSTRUMENTS

*p. 66, third complete paragraph, last line. Delete period and insert following footnote number:

or a supporting organization.52.1

*p. 67, carryover paragraph. Insert as last sentence:

If a limited liability company, the organizing document will be an operating agreement.

*(d) Dissolution Requirements

*p. 71, second complete paragraph, second line. Insert footnote following period:87.1

Reg. § 1.501(c)(3)-1(b)(4).

*p. 71, second complete paragraph, ninth line. Insert footnote following period:87.2

Id.

*p. 71, note 88, first line. Delete Reg. reference and substitute Id.

§ 4.5 OPERATIONAL TEST

(a) Basic Rules

p. 86, note 211. Insert following existing text:

See § 26.1(i).

p. 86, first complete paragraph. Insert as last sentence:

By contrast, a charitable organization was allowed by the IRS to maintain its exempt status, even though it was a “dormant shell” (because it transferred all of its then assets for charitable purposes), inasmuch as additional funds were to be received by it (as to which it had an “identifiable legal right in the future”) and it had a “specific plan” to continue its charitable operations.211.1

p. 86, note 212. Insert following existing text:

Likewise Community Education Found. v. Comm'r, T.C. Memo. 2016–223 (Dec. 12, 2016).

*(c) Quantification of Activities

*p. 88. Insert as second complete paragraph, before heading:

In a certainly troublesome and seemingly incorrect ruling, the IRS concluded, as to an organization that has been operational for at least three years, that it does not qualify for exempt status as a social welfare organization because 100 percent of its expenditures were for political campaign activities in one year, even though it expended 100 percent of its volunteer time on exempt functions in the ensuing two years, because this organization did not make any exempt function expenditures in those two years.221.1

*(e) Aggregate Principle

*p. 90, note 238, first line. Insert 718 following fourth period.

*§ 4.9 STATE ACTION DOCTRINE

*(a) Doctrine in General

p. 97, note 288. Insert See before existing text.

§ 4.11 COMMERCIALITY DOCTRINE

(d) Contemporary Application of Doctrine

p. 124, second complete paragraph, first line. Delete The IRS and insert A court.

p. 125, line 31. Delete and.

p. 125, line 32. Delete period and substitute semicolon.

p. 125, line 32. Insert following footnote number:

an organization that functioned as a licensing agency for products devised by children in contests, where it serves to further children's education and establish a social network to further children's education funding; 517.1 an organization that was said by the IRS to be competing with for-profit companies (although that point was not explained) and had an “insubstantial” amount of charitable gifts (this observation was not explained either);517.2 and an organization that is “marketing and selling support services for a fee” and is (ostensibly) competing with a for-profit organization.517.3

p. 126, carryover paragraph. Insert as first sentence:

The IRS ruled that the fact that an organization collected testimonials on its website is evidence that the entity is being operated in a commercial manner.518.1

p. 126, second complete paragraph. Insert as second sentence:

For example, a court simply concluded (or assumed) that an activity labeled recreational is “inherently commercial” and decided on that basis that an organization providing recreational therapy could not qualify as a tax-exempt charitable entity.524.1

*23.1

George v. Comm'r, 110 T.C.M. 190 (2015).

*52.1

See § 12.3(c).

211.1

Priv. Ltr. Rul. 201448026.

*221.1

Priv. Ltr. Rul. 201615014. Shortly thereafter, the IRS issued a private letter ruling analyzing an organization's total activities based solely on categories of time expended (Priv. Ltr. Rul. 201639016).

517.1

Priv. Ltr. Rul. 201545029.

517.2

Priv. Ltr. Rul. 201548021.

517.3

Priv. Ltr. Rul. 201548025.

518.1

Priv. Ltr. Rul. 201540019.

524.1

GameHearts v. Comm'r, 110 T.C.M. 454 (2015).

CHAPTER FIVENonprofit Governance

§ 5.7 IRS and Governance

§ 5.7 IRS AND GOVERNANCE

*p. 133, paragraph, third line. Insert following statutes:

, augmented by court opinions

*p. 133, paragraph, seventh line. Insert board composition and, following on.

(a) Matter of Agency Jurisdiction

p. 149. Insert as second complete paragraph:

In what appears to be the most direct case on point, an appellate court held that the Federal Energy Regulatory Commission did not have the statutory authority to make or enforce its order endeavoring to dictate the composition of the board of a public benefit corporation, a form of nonprofit corporation. 79.1 The agency took the position that the nonprofit organization violated its rules concerning independent system operators (ISOs); its order dictated replacement of the board. The court of appeals ruled that the FERC “has no authority to replace the selection method or membership of the governing board of an ISO.” 79.2 The court, having found the FERC's position “breathtaking,” wrote that the agency “commit[ed] … an absurdity.” 79.3 The court added that the FERC was “overreaching,” that its attempt to order the nonprofit entity to change its board was an “extreme measure,” and that the agency was “stretching” in asserting its authority over this aspect of nonprofit governance. 79.4

(c) IRS Ruling Policy

p. 153.Insert as second paragraph:

When a small board is presented to the IRS as part of the application-for-recognition-of-exemption process, the agency often attempts to persuade the entity to expand its board as a condition of exemption. In some instances, the applicant organization refuses to change the board composition.101.1 In other instances, the organization will comply with the request, only to have the IRS deny recognition of exemption on other grounds. 101.2

p. 153. Insert as last sentence of existing second paragraph:

The IRS ruled that a five-person board consisting only of family members was a violation of the private benefit doctrine because the organization is governed “by a small group of individuals who have exclusive control over the management of [its] funds and operations.” 110.1

p. 154, carryover paragraph. Insert as third complete sentence:

The IRS in one private letter ruling, while not revoking exemption on this basis, went out of its way to highlight the fact that an organization does not have a conflict-of-interest policy or a document-retention-and-destruction policy, noting also that it lacks any internal control reports, an annual report, or audited financial statements.112.1

p. 154, carryover paragraph. Begin new paragraph with fourth line.

79.1

California Independent System Operator Corporation v. Federal Energy Regulatory Commission, 372 F.3d 395 (D.C. Cir. 2004).

79.2

Id

. at 398.

79.3

Id

. at 402.

79.4

Id

.

101.1

E.g., Priv. Ltr. Rul. 201507026.

101.2

E.g., Priv. Ltr. Rul. 201541013.

110.1

Priv. Ltr. Rul. 201540019.

112.1

Priv. Ltr. Rul. 201543019.

CHAPTER SIXConcept of Charitable

§ 6.2 Public Policy Doctrine

§ 6.3 Collateral Concepts

§ 6.2 PUBLIC POLICY DOCTRINE

(d) Other Forms of Discrimination

p. 173, second complete paragraph, second sentence. Insert footnote at end of sentence:

109.1 In the aftermath of the Supreme Court's ruling that there is a constitutional right to same-sex marriage, with this right to marry a “fundamental right inherent in the liberty of the person, and under the Due Process and Equal Protection Clauses of the Fourteenth Amendment” (Obergefell v. Hodges, 135 S. Ct. 2584, 2604 (2015)), tax-exempt charitable, educational, and religious organizations are contemplating the notion that their exemption may be jeopardized if they engage in practices contrary to same-sex marriage protections. The Department of the Treasury, on October 21, 2014, issued proposed regulations to implement the Obergefell decision in a variety of tax law contexts (REG-148998-13).

(e) Affirmative Action Principles

p. 175, first complete paragraph. Delete last sentence, including footnote.

p. 175. Insert as second complete paragraph:

The Court subsequently articulated a tougher strict scrutiny test that courts are to use in evaluating race-based affirmative action programs in the public higher education context.125 The prior version of the test, the Court stated, “does not permit a court to accept a school's assertion that its admissions process uses race in a permissible way without a court giving close analysis to the evidence of how the process works in practice.”125.1 It added that, in reviewing an affirmative action program, a court must “verify that it is necessary for a university to use race to achieve the educational benefits of diversity.”125.2 The reason that this test is now more difficult to meet is that there must be a “careful judicial inquiry into whether a university could achieve sufficient diversity without using racial classifications.”125.3 This case was remanded, with the court of appeals holding that the university's affirmative action race-influenced admissions program is constitutional.125.4 The majority wrote: “We are persuaded that to deny [the university] its limited use of race in its search for holistic diversity would hobble the richness of the educational experience in contradiction of the plain teachings of Bakke and Grutter.”125.5 On June 29, 2015, the Court announced it would again review this case.125.6 The Court, on June 23, 2016, voted (4-3) to uphold the affirmative action program at the university.125.7

§ 6.3 COLLATERAL CONCEPTS

(a) Requirement of Charitable Class

p. 179, note 153, last sentence. Delete and substitute:

A similar situation arose in the case of an organization formed to provide funding for the treatment, education, and therapies for an individual with autism (Priv. Ltr. Rul. 201519035). A nonprofit day care center failed to achieve recognition of exemption where the only children (four) enrolled in the entity's program were those of its board members (Priv. Ltr. Rul. 201218041).

p. 179, note 156. Insert following existing text:

An organization was denied recognition of tax exemption as a charitable entity because those it was (ostensibly) serving, “undocumented aliens” and “American workers,” were not members of a charitable class (Priv. Ltr. Rul. 201527043), as was an organization established to assist “homeowners,” without those to be assisted confined to low-income individuals (Priv. Ltr. Rul. 291519034).

125

Fisher v. Univ. of Texas at Austin, 133 S. Ct. 2411 (2013).

125.1

Id

. at 2421.

125.2

Id

.

125.3

Id

. at 2420.

125.4

Fisher v. Univ. of Texas at Austin, 758 F.3d 633 (5th Cir. 2014).

125.5

Id

. at 659–660.

125.6

Earlier, the Court held that a ban on racial preferences in admissions to a state's public colleges and universities, added to the states' constitution as the result of a statewide referendum, is constitutional (Schuette v. Coalition to Defend Affirmative Action, 134 S. Ct. 1623 (2014)).

*125.7

Fisher v. Univ. of Texas at Austin, 136 S. Ct. 2198 (2016).

CHAPTER SEVENCharitable Organizations

§ 7.4 Provision of Housing

§ 7.6 Promotion of Health

§ 7.7 Lessening Burdens of Government

§ 7.14 Fundraising Organizations

§ 7.16 Other Categories of Charity

§ 7.4 PROVISION OF HOUSING

p. 203.Insert as second paragraph:

Likewise, a nonprofit corporation was formed to purchase, rehabilitate, sell, and lease housing properties. It did not impose restrictions on who may rent these properties, although it advised the IRS that it will give preference to low- and moderate-income families, first-time home buyers, and veterans. All of its income will be derived from “appreciated values received from the sale or rent of rehabilitated properties.” This organization is an “affinity partner” with what apparently is a for-profit company. It presented itself as a “profitable opportunity” for the company, stating it will increase the company's “scope of services” and will assist the company in “marketing of new sales opportunities.” The IRS quite correctly ruled that the organization's programs are not charitable and that it is not serving a charitable class.107.1

§ 7.6 PROMOTION OF HEALTH

(a) Hospital Law in General

p. 208. Insert as first complete paragraph, before heading:

A subsequent report from the IRS to Congress, dated January 28, 2015, offered comparisons among tax-exempt, taxable, and government-owned hospitals.148.1 This report provided information regarding charity care and bad-debt expenses, and contains information about exempt hospitals' community benefit activities: (1) charity care provided by exempt hospitals was in excess of $12 billion, $8.9 billion of such care was provided by government-owned hospitals, and $1.4 billion in care was provided by taxable hospitals; (2) non-Medicare bad-debt expenses of exempt hospitals totaled $8.7 billion, government-owned hospitals' bad-debt expenses were $4.6 billion, and such expenses for taxable hospitals were $1.9 billion; and (3) the costs of community benefit activities of exempt hospitals were $62.5 billion, comprising 9.67 percent of total expenses.

(b) Additional Statutory Requirements for Hospitals

p. 209, note 159. Insert following existing text:

The IRS issued guidance providing hospital facilities with clarification as to how a facility may comply with this provider list requirement (Notice 2015-46, 2015-28 I.R.B. 64).

(f) Health Maintenance Organizations

p. 214, note 196, last line. Insert following closing parenthesis and before period:

, although the IRS reclassified an HMO (Medicaid-only type) from an IRC § 501(c)(3) entity to an IRC § 501(c)(4) HMO, after the plan merged with a commercial enrollment-based plan (Priv. Ltr. Rul. 201538027)

(l) Health Insurance Exchanges

p. 222, note 257. Insert following existing text:

The Supreme Court held that these tax credits are available to qualified individuals irrespective of whether the health insurance is acquired from a state exchange or an exchange established by the federal government (King v. Burwell, 135 S. Ct. 2480 (2015)).

§ 7.7 LESSENING BURDENS OF GOVERNMENT

*p. 230.Insert as second complete paragraph:

Congress established the Medicare Shared Savings Program to be conducted through accountable care organizations in order to promote quality improvements and cost savings in health care.304.1 Consequently, participation in the MSSP by an ACO furthers the charitable purpose of lessening the burdens of government.304.2 By contrast, federal law does not provide an objective manifestation that the federal government considers non-MSSP-related ACO activities to be its burden, so that these types of ACOs are not tax-exempt by reason of lessening the burdens of government.304.3

p. 231.Insert as last paragraph: