Tax Exempt Orgs. Outline

PUREWAL TAX EXEMPT ORGS.
OUTLINE
Intro to tax Exempt Orgs (Use handout #1).

I. History
a. 1913: enactment of 1st income tax: 1st time said charities don’t have to
pay taxes in US
i. charities were already exempt in UK in 1601.
b. Policy behind tax exemption
i. There’s a void of services that the for-profit market and the
government has not fulfilled.
c. What’s tax exempt?
i. Contributions (donor’s)
ii. Exempt operations (i.e. hospitals don’t pay tax on fees)
iii. Investment income (interest, dividends, rents, and capital gains
from selling stock)
1. Logic behind this - well you’re not really competing with
the private sector
a. Difference b/t US and other countries  other
countries don’t allow for investment income to be
tax exempt
d. 2 theories of tax-exempt status
i. Public benefit: public gets services that aren’t provided by for-
profit sector or government
1. i.e. Red Cross, art museums etc.
ii. Mutual benefit: ppl get together to do something that is for their
own benefits and not for public benefit
1. i.e. labor unions - operate for benefit of its members;
members chip in money to get services instead of hiring
someone to come and do them
iii. Co-Op’s are different.
1. i.e. food co-cop: everyone buys things in bulk and shares
them. All it does is saves costs because buying things in
bulk
2. Subchapter T orgs.: can be tax exempt by cannot apply to
be a (c)(3).
II. Tax-Exempt Orgs.
a. All of the following are tax exempt orgs.
Public Benefit Can donors deduct? How?

Orgs
501(c)(3): charities, religious, Yes
educational, scientific,
literary etc.
501(c)(4): social welfare: civic No
leagues, and EE unions
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PUREWAL TAX EXEMPT ORGS. OUTLINE
Mutual Benefit
Orgs
501(c)(5): labor unions, Yes, deduct as a business
agricultural & horticultural expense.
501(c)(6): trade assn.’s, Yes, deduct as a business
business leagues, chambers of expense
commerce, real estate boards
etc.
501(c)(7): social clubs No
501(c)(8): frats that sell life No
insurance
501(c)(10): frats that DON’T No
sell life insurance
III. Statutes
a. 501(b): if conduct unrelated business then subject to UBIT
b. 501(c)(1): corp. enacted by congress (i.e. FDIC to insure banks)
c. 501(c)(2): title holding comp.’s.
i. ex: endowments fund being offered an apartment building is
scared to accept b/c of liabilities attached to it (fire?) so
university creates separate corp. to accept property.
d. 501(c)(3): exclusively organized and operating for purposes listed on
page 2 of handout 1.
e. 501(c)(4):
i. Think of this as a 501(c)(3) but with 2 possible problems
1. Too many social activities to be (c)(3)
2. Charities can only do a little bit of lobbying, lobbying for
(c)(4)’sis unlimited.
ii. Difference between political and lobbying
1. Political  trying to get someone elected = PROHIBITED
for both (c)(3)’s and (c)(4)’s.
2. Lobbying  don’t say who to vote for, instead they say
“ask your rep this” etc.
iii. GIFT TAX: if going to give lots of $$ to (c)(4) lobbying group
don’t have to pay gift tax.
IV. Tax Regulations

a. 1.501(c)(4)-1
i. Spanish American Case: Spanish American Cultural Assn
applied to be a (c)(3) and was a (c)(4) - to be able to get more
donations (ppl don’t want to donate unless can deduct). IRS said
that it was too social and denied its request because all it had
done so far was have dinner parties.
1. Ct. Held: SACA = too social, therefore cannot be a (c)(3).
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2. 2 tests to be a (c)(3)
a. organizational and operational
i. operational: “are you really being
charitable?”
b. 1.501(c)(5)-1
i. MUST be limited to stuff you can eat.
c. 1.501(c)(6): trade assn.’s, business leagues, chambers of commerce etc.
i. concerned w/ setting industry standards and improving business
conditions, ≠ to engage in for-profit business
ii. what doesn’t qualify as (c)(5)
1. financial advisors/firms
2. stock or commodity exchanges
iii. Subject to UBIT if engaged in unrelated business/trade
iv. Rev. Rul. 83-164: cannot have a business league/association that
one business at the expense of another; Must benefit a line of
business
1. IBM business league to help IBM users only = not okay
2. Distinguished from Rev. Rul. 74-147 where all comp.
manufacturers included not just one.
3. National Muffler Dealers Assn. v. US: an organization
cannot qualify for (c)(6) status unless it passes the line of
business test
a. Line of business = has to help either an entire
industry or all components of an industry within a
geographical region.
d. 1.501(c)(7)-1: Social Clubs
i. Requirements
1. Purpose must be for pleasure, recreation, and other non-
profitable purposes
2. IRS requires social interactions - members must meet
3. No private inurement or benefit (no one can own the club)
4. Have to have strict membership - cannot be open to the
public
5. Most support must be from the members
a. More than 65% has to be from the
b. Less than 50% revenue must come from investment
income
6. IRS observation: pay taxes on investment income
7. No written instrument for racial discrimination
Missouri State Law Issues

1. General
a. 501(c)(3) can be formed in 4 ways
i. Trusts
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1. Only good for grant-making foundations

2. Pro: have more control of what it does than a non-profit
corp.
3. Con: if want to change the purpose, have to go to ct.
ii. Association
1. Chp. 352 MO statutes
iii. LLC
1. Chp. 349 of MO statutes
a. Restrict LLC to charitable purposes
iv. Non-profit corp.
1. Chp. 355 MO statutes
2. Why would you use an LLC?
a. Background
i. For-profit:
1. LLC: 2 owners taxed as a partnership but can elect to be
taxed as a corp.
a. Most cost-effective way to be protected against
creditors and not have to file taxes.
2. Single Member LLC (SMLLC): 1 owner - disregarded
entity so don’t have to file taxes
ii. Non-Profit
1. Non-profits will adopt SMLLC model to insulate itself
from liabilities and it also wont have to file separate
taxes.
a. Parent non-profit will act as if assets are under it.
b. PLR 200134025: examples of SMLLC model adopted by a university
i. Rule: SMLLC does not need to file a 501(c)(2) application to
become tax exempt b/c it’s a disregarded entity.
c. Notice 2012-52:
i. Rule: donors allowed to take tax deductions for donations made
directly to SMLLC as long as it was created under US state law.
1. Non-profit parent co. can be the ones to give
substantiation to donors stating donor did not receive any
goods or services for donations.
d. 95% of the time you’re going to form a non-profit corp.
3. Before Business becomes operational

a. Acting on behalf of non-existing corp.
i. § 355.106: anyone that acts on the behalf of a corp., knowing
that it’s not incorporated, is jointly and severally liable for
liabilities created.
1. Ex: Aug. 28 at 10 am  3 people signed a 3 year lease for
charity that doesn’t exist yet. 2 PM  go on a business
trip to purchase things for charity and get in a wreck.
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a. Two issues here:

i. Signed a K before corp. was formed
1. Cts. not very lenient with this because
why would you sign a K on behalf a
corp that doesn’t exist yet, and you
know it doesn’t exist
ii. Tort liability from car wreck
1. Landlord wants everyone on the hook
2. Plaintiff wants to hold everyone liable
and would say that they’re a
partnership
b. § 355.101: A corporation comes into existence when the articles of

incorporated are filed
i. For-profit: certificate is rebuttable if there are errors in filing of
AOI
ii. Non-profit: certificate is conclusive proof that an corp. exists
even if there are errors like wrong spelling.
c. § 355.096: AOI must contain the following

i. corporate name according to 2 legal requirements under §
355.146
1. ≠ have any unlawful purpose in name (i.e. marihuana
sales corp.)
2. ≠ have corp name be same as another for-profit or non-
profit corp.
ii. state whether it’s a public benefit or mutual benefit corp.
1. public benefit: 501(c)(3) or (4)
2. mutual benefit: anything other than (c)(3) or (4).
iii. Address or registered office and agent
1. Has to be MO resident/address
2. Normally want it to be the lawyer
iv. Whether or not corp. has members
1. Why have members? State law and fundraising strategies
a. If you say you do have members  then members
elect BOD
b. Fundraising strategies:
i. Can become member of “friends of the zoo”
ii. Charity will send letter to members says
your dues are due instead of asking for a gift
= creates a steady stream of income
c. State law
i. Say you don’t have members but still have
them for fundraising purposes.
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ii. MO: self-perpetuating BOD - BOD elects new

members (easier to do this than to send a
voting thing to every member (could be
100’s).
iii. KS: every non-profit has to have members.
1. Just say that there are members and
the BOD so the outcome will be same
as in MO.
v. Have dissolution and private foundations provisions
1. MO provides defaults for both if forget to add them in an
AOI.
2. § 355.691: default dissolution provision.
a. Public benefit: if liquidate assets, assets must go to
another charity
b. Mutual benefit: if liquidate assets, must go back to
members.
3. § 355.076: default private foundations provision
a. If change to a private foundation, all private
foundation laws will apply to the org.
4. Having the Business Become Operational

a. Directors
i. Director qualifications: § 355.321
1. must be human, bylaws/AOI can have other qualificaitons
2. BOD must consist of 3 or more people
a. # can be increased and decreased but can never be
lower than 3
ii. Terms: § 355.331
1. Can have a designated or appointed director (“ex officio”
 where 1 director is appointed  nomination committee
has no say).
2. Max term: 6 years
3. Default term if not specified is 1 year.
4. Can have staggered terms (§ 355.336)
iii. To prevent burn out have 2 committees (§ 355.406).
1. Executive and nominated committee
a. Executive committee: board gives authority to them
to do things that the board would normally do in b/t
meetings. Then they show it to the board to get
approval. (i.e. open a bank account).
b. Nominated committee: will come up with the BOD
iv. Cannot pay directors fees unless AOI/bylaws say its ok. §
355.366
1. Reimbursement = ok.
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b. Meetings
i. Can have unanimous consent to NOT have a meeting, instead
send e-mail etc. to get shit done. § 355.381
c. Quorum & Voting
i. General rule: majority makes quorum,
1. Non-profits: can have another number assigned in
AOI/bylaws
a. AOI/bylaws cannot require less than 1/3 of # of
directors in office or 2 directors. § 355.401
d. Loaning $$ to Directors/Officers
i. Can lend $ to directors/officer in MO so long as its lesser of
$250,000 or less than 25% of total assets of the corp. § 355.421
1. Popular in areas like SF because living out there is so
expensive
e. Required # of officers
i. 3; the president, secretary and treasurer § 355.431.
5. Liabilities
a. Authority
i. Differences between for-profits and nonprofits
For-Profit Non-profit
Actual Authority
 Express: actual If K is signed
instructions by 2 ppl - end
 Implied: to of case. It
accomplish express doesn’t matter
instructions, have if they
implied authority to exceeded.
do w/e needed to Would only be
accomplish it void if the 3rd
party knew
Apparent Authority No such thing the signing
 ≠ actual authority, has apparent people did not
but communicated to authority here, have authority
3rd party there was have to get BOD to sign.
authority approval. Title § 355.456.
 ex: purchasing agent means nothing.
title - pres. says to go
buy more inventory
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b. Conflict of Interest Interactions

i. Directors conflict of Interest
1. If it’s a trust, self-dealing is fine
2. Non-profit corps allowed to participate in self-dealing as
long as the transaction was fair. § 355.416
3. § 355.416
a. Public Benefit
i. Transaction with an uncompensated
(volunteer) director is ok if…
1. Approved in advanced by BOD if
a. All material facts are disclosed
and known by the BOD
b. Directors approve it in good
faith believing transaction is
fair.
2. Getting approval of
a. Attorney general or
b. Circuit ct. in a suit where AG is
joined as a party
b. Mutual Benefit
i. Transaction with compensated and
uncompensated director is ok if..
1. Material facts are disclosed and the
transaction is ratified by the BOD or
committee of the BOD OR
2. If material facts are disclosed to the
members and the members approved
it.
c. BOD getting sued
i. Protections against law suits
1. Indemnification
2. D&O insurance: charity buys insurance protecting
directors from lawsuits
ii. In MO
1. BJR: have BJR protections if show 2 things:
a. Director acted n good faith (≠ self interest)
b. Director exercised reasonable care
2. Liability
a. of OFFICERS/MEMBERS: § 537.117
i. not liable if
1. not paid salary
2. and action was one that he wouldn’t
otherwise be liable for had he not been
affiliated with the entity.
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ii. Doesn’t provide immunity for intentional

conduct, wanton or willful conduct or gross
negligence.
iii. May still be liable for own legal fees…that’s
why you get D&O insurance and
indemnification.
b. of VOLUNTEERS: § 537.118
i. ex: docent at a museum
ii. immune from liability if:
1. acted in good faith & w/n scope of
official functions and
2. damage was not caused by intentional
or malicious conduct or negligence.
3. Indemnification
a. Of directors: § 355.471
i. If director successful in law suit, org must
pay for legal fees UNLESS AOI/bylaws
doesn’t allow for this.
b. Of others: § 355.476
i. Also includes directors
ii. Org “may” indemnify anyone that acted in
good faith and in a way he reasonably
believe wasn’t opposing the corp.
iii. In criminal proceeding, he had no reasonable
cause to believe his conduct was unlawful.
Intro to Charitable Orgs.

1. Tests for 501(c)(3)
a. Organizational: paperwork
b. Operational: is the org. doing what they said they’d be doing
2. Filing for Tax-Exempt Status

a. Don’t have to give to the poor for the eligible to become 501(c)(3)
i. Ex: setting up a rich school for rich kids (fits educational
purposes therefore it fits under (c)(3).
b. Has to be non-profit
c. Restrictions against lobbying
d. Restrictions against political campaigning
e. AOI has to comply with requirements set out in 501(c)(3)
i. Must be a purpose listed under this statute
ii. Powers clause  states the org. is limited to doing only those
activities allowed under 501(c)(3).
iii. Has to have dissolution clause
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iv. Provisions prohibiting political campaigning

v. Provisions limiting lobbying
vi. Provisions relating to private foundations status and activity
limitations
f. Distribution of earnings  not allowed b/c its private inurement
g. “Action” organizations  DON’T use this word b/c refers to lobbying or
political campaigning
3. “Charitable” includes: (H3 page 7)

a. relief of the poor and distressed or of underprivileged
b. advancement of religion
c. advancement of education or science
d. erection or maintenance of public buildings, monuments, or works
e. lessening burdens of the gov.
f. promotion of social welfare by orgs. designed to do above purposes
g. lessen neighborhood tensions
h. eliminate prejudice and discrimination
i. defend human civil rights secured by law
j. combat community deterioration and juvenile delinquency.
4. Religious Orgs.
a. Every church is a religious organization but not every religious
organization is a church
General Religious org Church
exempt org (ex: that is not
a church:
religious radio
station)
Apply to IRS for Yes Yes, can be Nope! Will
exemption? 501(c)(3). always be a
Form 1023? public charity
w/o having to file
with IRS to be
charity.
File annual Yes Yes Nope.
990?
Are you Yes Yes Yes,
presumed to be automatically.
a private
foundation?
Have to prove
you’re public.
b. *IRS cannot audit a church UNLESS a complaint is filed against the
Church asking for an audit.
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c. Schedule A (Form 1023): Churches  don’t have to apply with IRS but
some will, and that’s where Schedule A will come in
i. Churches will do this if going wanting to get bigger donations
through  this way donors can write off the $$ donated
1. Schedule A is followed to determine whether can be tax
exempt
ii. ** Can you have an online church? Foundation of Human
Understanding v. U.S.
1. two tests to determine whether an institution is a church
or not
a. 14 criteria test (Schedule A)
b. associational test
5. Educational Organizations
a. Schedule B on Form 1023
b. Examples
i. Museums, zoos, planetariums, orchestras
ii. Public television
iii. School
c. Big mama Rag case: reg. used to require that if you’re a publication
and you are advocating for one side… must show the other side too. 
reg. was held unconstitutional  now don’t have to show both sides
d. Rev. Rul. 73-127: “a nonprofit organization that operates a cut-price
retail grocery outlet and allocates a small portion of its earnings to
provide on-the-job training to hard-core unemployed does NOT qualify
for (c)(3) exemption.”
i. Quick facts: grocery store operating as a (c)(3); uses earnings to
pay salaries and upkeep of business. No one has proprietary
interest in the store. Trained unemployed ppl uses the sale of
groceries etc. as the means to do it.
ii. Held job training falls w/n educational purposes under (c)(3) but
operating retail grocery store isn’t. Therefore no (c)(3) status.
e. Rev. Rul. 73-128: “an org. that is otherwise qualified for exemption will
not fail to qualify just b/c its education and vocational training of
unemployed and under-employed individuals is carried through the
manufacturing and selling of toy products.”
i. Main purpose of organization was to provide educational
training, unlike above ruling where the main purpose was to run
a grocery store selling groceries at cheaper rate to those living in
poverty.
f. Rev. Rul. 71-581: “operation of a separately incorporated thrift shop to
raise funds for a group of specified exempt orgs. may qualify for
exemptions under (c)(3).”
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i. A bunch of nonprofit orgs that were tax exempt created X corp.

with the sole purpose of X soliciting goods to sell at thrift store
to raise money for non-profits. Created X to shield the exempt
orgs from any liability from the thrift store.
1. Held thrift store exempt because had the thrift store been
operated directly by one of the exempt orgs. the profits
from it would be tax exempt.
6. Charitable purposes
a. Political Campaigning and Lobbying
i. General
1. ABSOLUTE BAN on political campaigning
2. Lobbying
a. (c)(3): can do an insubstantial amount of lobbying
i. problem is insubstantial is not statutorily
defined
b. (c)(4): can do unlimited amount of lobbying
3. subsidy theory: Cg could actually come back and say there
are no more taxable exemptions, do if you want it to exist,
gotta play by their rules.
4. IRC
a. § 4911: gives IRS ability to give penalties to
charities for took much lobbying
b. § 4945: gives discretion to IRS whether to revoke
tax exempt status
5. CANNOT CONVERT FROM (c)(3) to a (c)(4): ppl used to
do this to be able to do unlimited lobbying, but cannot do
this because people that gave to the (c)(3) have already
taken deductions
b. Lobbying: is your lobbying substantial?
i. Protections
1. 501(h) election: can use to determine exactly how much
lobbying an org can do.
a. If election is made - max you can spend on lobbying
is $1 million - dangerous because if you go over the
limit than you can lose your exempt status.
b. Exception: if org is lobbying for its existence (i.e.
planned parenthood about to go outta business b/c
of a Bill), then you good.
2. Start to worry if more than 5% going towards
ii. 3 step penalty process for doing substantial amount of lobbying
1. 25% penalty if spend more than the safe amount
2. if spent more than 150% of safe amount - lose (c)(3) status
3. can never go over $1 million amount.
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7. Private Inurement/Private Benefit/Excess Benefit

a. Prohibited!
i. Private inurement: profits being given to s/h
ii. Private benefit: every charity provide benefit to someone, but b/c
so many benefitting that it becomes public benefit
1. Ex: Red Cross handing out blankets to ppl. You are
getting a private benefit because you get to have your own
blanket, BUT its handing out so many to so many ppl,
that the ppl become a charitable class receiving a public
benefit.
iii. Excess Benefit (§ 4958): Insider takes a lot of $$ for self from the
org. IRS will punish the transaction instead of taking away the
org.’s exempt status.
b. Private Inurement/Private Benefit = interchangeable and IRS and the
courts do this often
i. 26 CFR §1.50(c)(3)(d)(1): an org must establish that its not
organized or operating for the benefit of private interests such
as designated individuals etc.
1. Examples:
a. Art museum in an agreement with local artists. It
exhibits their artwork and when artwork sells,
museum keeps 10% and artist gets 90%. Museum is
operating for private benefit for artists so its not
operating exclusively for exempt purposes,
therefore not (c)(3) eligible.
b. Educational org. that trains people. The training
program rights are owned by a for-profit company.
For-profit company sets tuition and provides ed.
Org. with trainers and course materials. Ed. Org.
gets license to use program for royalty payments.
Ed. org. is in violation b/c this is operated for
benefit of the for-profit co. regardless of whether
the royalty payments are reasonable.
c. JACKSON CNTY LAW LIB.: lawyers only library.
IRS its not private benefit because there’s enough
lawyers for them to be charitable class.
i. Rev. Rul. 75-196: you can have a law library
restricting access to only lawyers.
ii. PLR 201637017: parents set up non-profit to help pay for child’s
illness - denied and held as private benefit because all went to
one individual and it was set up by family. Failed organizational
test, and operational test. **takeaway: if your fam. Or someone
asks your charity to have an event where all $$ goes to one
person - don’t do it.
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1. Dicta:
a. Rev. Rul. 67-367: org set up to provide scholarship
$ for pre-selected individual = private benefit = not
exempt
b. Carrie Maxwell case: trust established to benefit
clergyman and wife = not exempt even though the
two were “needy” because not public benefit.
c. Wendy Parker case: organizational set up ok - set
up to benefit victims of coma. Failed b/c benefited
only Parker family and not anyone else ≠ exempt.
c. Excess Benefit:
i. “Intermediate sanctions”: punishing the wrongdoer not the
whole damn org.
ii. Most common time it comes up is when determining the salary
of officers
1. If follow following steps, you be aight and the org is
entitled to a rebuttable presumption.
a. Use comparable date/positions
i. Big charities (more than $1 million in gross
receipts) use trade assns. to get data
ii. If small charities (less than $1 million in
gross receipts) from 3 other comparable
sources.
iii. Have to state exactly where the info is
located.
b. Must document the decision: document the
following
i. Terms of approved transaction and the date
ii. Who was present and who voted how
iii. What comparable data was relied and how it
was obtained
iv. Any actions by the member with COI  i.e.
have them leave the room when voting
occurs.
v. Document must be prepared before the next
meeting
2. Conflict of Interest
a. IRS will look for a COI - best to have one
b. Procedures
i. Disclose EVERYTHING
ii. After discosure, have person with COI or
financial interest in transaction leave the
room so committee can decide whether COI
exists and vote
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iii. If COI then do following

1. Interested person may present but
must leave after presentation
2. Appoint a disinterested person to
investigate other alternatives to
transaction and see if another option
is available that doesn’t give rise to
COI
3. If no alternative available, can hve
majority vote to determine if want to
do transaction
d. Hospitals
i. Generic hospitals (≠ research hospitals) must be charitable to be
exempt
ii. Evolution of the “Community Benefit Standard”
1. Hospitals used to have to take indigent patients until
CBS came along
2. Rev. Rul 69-545: Hospitals were allowed to turn away
indigent patients and only take those that could pay so
long as they had an ER open to all patients
a. Caused a lot of patient dumping
3. Now possible to have a hospital be (c)(3) exempt without
having an ER
a. i.e. cancer hospitals
b. Rev. Rul. 83-157
c. A way to regulate this…exempt status only gives
hospital exemption from paying federal taxes, but
states could still tax.
i. i.e. IL has a requirement that at least 8%
must be spent on indigent patients to get
exemption from paying property taxes.
Organization
1. Application for Tax Exemption
a. Form 2848: gives power of attorney  can get info sent to them by the
IRS. Should include with 1023.
b. File other forms under the assumption you will qualify for exemption
i. Form 990/990EN/990EZ
1. 990: assets more than $500k or get more than $250k in
gifts
2. 990ez: assets less than $500k or get less than $250k in
gifts
3. 990PF: if private foundations
4. 990n: “tell us you’re alive” form
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c. File 1023/1023EZ (handouts #6 & 7).

i. First page always the checklist
ii. Best to file right after formation b/c easier to file projections (for
$$) than filling out exact numbers later on.
iii. 1023EZ Form
1. is for small charities with gross receipts of $50,000 or less
and assets of $250k or less. (Handout 6).
2. Filed online
3. Look through handout 6 for the form and notes on.
4. Eligibility to use the form on page 11 of handout.
a. Can’t use this form if you’re a
i. Gross receipts exceed $50k for any of next 3
years
ii. Gross receipts exceeded $50k for past 3
years?
iii. Assets over $250k
iv. Formed under laws of foreign country
v. Mailing address is in foreign country
vi. A terrorist organization
vii. LLC
viii. A for-profit wanting to be a non-profit
ix. Previously revoked org?
x. Churches that applied for tax exempt status
xi. Schools, colleges, universities
xii. Hospitals
xiii. Co-op hospitals, co-op educational
xiv. Supporting orgs
xv. Credit counseling activities
xvi. If invest 5% assets in liquidated
xvii. Partnership with for-profit
xviii. Donor-advised funds
xix. Private operating foundations
2. Form 1023 (handout 7)
a. General
i. 1912: amendment to constitution  13th amendment. Creation
of taxation income tax
ii. 1916: CG enacted federal estate tax
iii. 1917: WWI. Raised taxes to pay for war. Charitable income tax
deduction added. If wealth left to charity, can reduce taxable
income and not pay tax on it.
1. logic behind it : charities lessened burden of govt.
iv. 1918: Carnegie died. He put money into Carnegie foundation.
Centralized gift making by contributing to Carnegie foundation
1. IRS said you cant deduct it be/c not money to a charity
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v. 1921: gov. to take 60% of assets. The Vanderbilt’s and the like
started transferring all wealth to kids to avoid taxes
1. enacted gift tax
2. “to or for the use of charity”
vi. 1939: creation of tax code. Title 26.
1. Changed when entered WWII 70% of citizens paying
taxes
vii. 1954: Congress came up with a new code
1. maximum 20% of income can be deducted if donated to
charity
a. 3 exceptions that qualified for 30% deduction if
donated to the following
i. churches
ii. schools
iii. hospitals
viii. 1964: CG added more to the exceptions above
1. supporting org of a state university
a. ex: UMKC endowment
2. give to state/local govt.
3. “Public charity”  first real distinction between public
charity and private foundation
ix. 1969: two things happened with 1969 act
1. changed percentages
a. said can deduct 50% of income if given to public
charity
2. really defined what is a private foundation
a. penalty taxes for private foundations
i. Ford foundation. Bad boys.
b. Almost got rid of private foundations
3. Default rule was: every 501c3 is considered a private
foundation if are supported by 90% unless show that you
are supported by the public to become a public charity
a. Changed it to say that if you are a church, or a
school or a hospital, supporting org, or gov’t
supporter than you’re a public charity
b. 1023 not necessary if
i. Churches, synagogues, temples or mosques and their integrated
auxiliaries
ii. Orgs with less than $5k in gross receipts
c. Organizational/operational tests (pg. 3 of H7)
d. What happens if you miss deadline to file 1023? Schedule E  not
filing within 27 months of formation
i. General Rule: If you file 1023 within 27 months of incorporating,
then you’re okay, and will retroactively give exempt status to
17
when incorporated. If file 1023, after 27 months, then ONLY

effective for future years.
1. Exceptions:
a. Churches  b/c never had to file 1023 before
anyways  status becomes “always been tax
exempt.”
b. If getting less than $5,000 a year.
e. Actual shit on the form
i. “friends of”/support org.
1. Box 11 on Schedule A
2. Ex: hospital wants to keep seperat4e donations from
money earned from giving services
ii. Box 7  going to get $$ check this one
iii. Box 9  don’t get any $$ and give services, check this one
iv. Advanced ruling period: if not given $ within 5 years, changed
from public to private foundation
1. Later IRS said not going to do this anymore
v. Now they give a final ruling
1. You are a public charity, but if you don’t pass the public
support test you’re going to change from a public charity
to private foundation (Part 10 on 1023, (b)).
Public Charity vs. Private Foundations

1. If 501(c)(3)  presumed to be a private foundations unless proves it’s a public
foundation
2. Two ways to be a public charity
a. Churches, Schools, Hospitals
b. Pass the public support test
i. 509(a)(1)
1. What if have a millionaire wanting to give $5 million to
charity?  public support test is fucked
a. Two remedies
i. Say it’s an unusual gift: never going to
receive this again from this person
1. Biggest question/most important
question for IRS: Is that donor going
to make future gifts?
ii. Form a supporting organization
1. Creation of “friends of” community
509(a)(3)  put big amounts into the
supporting org. so it doesn’t mess up
the public support test
b. Two BAD things:
i. Investment income
18
ii. One family donated all the money into the

org.
c. SO MUCH EASIER TO PASS THE 509(a)(1) TEST
THAN 509(a)(2).
3. Public Support Test
a. § 170(b)(1)(A)(vi) (handout 8)
i. if public support is more than 33 1/3%, then okay.
ii. If don’t meet the 10%-33 1/3%
1. Have to go through the facts and circumstances test.
a. How close are you to 10% or to the 33 1/3%
b. Public facilities?
c. Is your board unrelated people or family members?
b. Example on pg. 5 of H8.
4. Private Foundations
a. Can become private foundation two ways
i. Operating pf: Rich donor decides to open a private foundation
ii. Non-operating pf: Set up as a public foundation but no donations
1. Most common; just makes grants
2. Ex: libraries or museums
b. Why have a private foundation
i. Main reason is that people have their own idea of what they
want to accomplish instead of wanting to give money to an
established organization
ii. People want to preserve their art collection after they pass
iii. Ego thing “oh I have a foundation”
iv. To even out grant-making  can make big grants one year and
smaller ones another
v. Don’t want kids to have too much money
c. History
i. 1969 Cg. Enacted definition of private foundation
1. Couple of bad things about private foundation
a. Income tax deductions are not as generous
b. Incur private foundation penalty tax (only imposed
on private foundations).
2. Objective is that dollars are used for (exempt) charitable
purposes
3. In ’69  IRS found out bad things were being done with
investments and grants so they decided to tax them
**NEED TO KNOW FOLLOWING FOR TEST: types of
excise taxes***
19
d. Types of excise taxes on PF’s

i. Investments
1. § 4941: Self-dealing penalties
a. Any self-dealing transactions (no matter if they are
good or bad) they are penalized
i. Different from public charities where only
excess is taxed - here entire transaction is
penalized.
b. 1st tier: disqualified person has to pay 10% of amount
involved
i. foundation manager that allowed mistake has
to pay 5%
c. 2 tier: if deal is not undone then this applies.
nd
disqualified person has to pay 200% of amount

involved
i. foundation manager that 50% of amount
involved
ii. BUT THIS SHIT IS CAPPED AT $20K FOR
MANAGEMENT (c)(2).
d. Prohibited self-dealing transactions (page 3 of H9).
General rule Exceptions/ special rules

1(A) sale or lease 2(A) assuming property with a mortgage
= treated as a sale
-paying mortgage of property given to
foundation by disqualified person
 if mortgage older than 15 years
then its okay
-a life insurance policy with standing
loan on it
1(B) Loan 2(B) exception is disqualified person can
lend to the priv. foundation
1(C) furnishing of Goods, services and 2(C) no charge to private foundation for
facilities furnishings/facilities/goods
1(D) payment of compensation: can I pay a 2(E) reasonable compensation is okay
d.p. for services BUT CANNOT pay government officials
1(E) using assets/income for own personal
benefit two situations that get people in
trouble (most common situations)
pledges
if a legally binding pledge made by the
founder to [Harvard, standford] and is paid
20
by the private foundations, then the p.f. is

using its assets to pay for pledges of
founder = to self-dealing ** hes really
stressing this
if not legally binding, then p.f. can pay
for pledge
bifurcated grants
ex: paying part of the dinner table for
charity with personal money and with
rpviate foundation money.  this is not
allowed and is a form of self-dealing
2. § 4943: Excess Business Holdings: Family business was

put into foundation
a. Have 5 years to get rid of the business out of the
private foundation if business is bequeath in a
private foundation.
b. General rule is private foundation and all
disqualified persons together have to own less than
20% of the business in the private foundation
i. 2 exceptions
1. it can go up to 35% as long as private
foundation AND disqualified
foundation don’t control the
foundation.
2. De minimus: any foundation can own
up to 2% of the business
ii. 1 tier: 10% of value of holdings
st
iii. 2nd tier: 200% of value of holdings
3. § 4944: Jeopardy investments (taxes on investments that

jeopardize charitable purposes)
a. Instead of making reasonable investments, start
gambling with charities’ money
b. Only one rev. ruling that explains this
c. 1st tier
i. on pf: 10% of amount invested for each eyar
in the taxable period
ii. on management: 10% of amount invested for
each year in the taxable period
d. 2 tier
nd
i. foundation: 25%
ii. on management: 5%
e. Exception:
21
i. program-related investments. Investments to

accomplish one or more of purposes under
170(c)(2)(B).
ii. Grants
1. § 4942: Taxes on failure to distribute income
a. must distribute 5% of assets every year
b. 1st tier: 30% of undistributed income amount
c. 2nd tier: pay 100% of undistributed income amount
d. 3 exceptions where didn’t 5% but following qualifies
i. Sets aside
ii. If gave away more than 5% last year  don’t
have to pay it this year
iii. Program related investment  bought assets
for charitable purposes instead of
2. § 4945: Taxes on Taxable Expenditures
a. Make grant that is not charitable  gonna get
taxed.
b. Have to prove grants are for charitable purposes
c. 1st tier:
i. on foundation: 20%
ii. on management 5%
d. 2nd tier:
i. on foundation: 100%
ii. on management: 50%
1. limited to $20k.
Choice of Grant-Making Entity: So, you want to be Philanthropist?

1. Choices
a. Private foundation - 501c3 fails public support test
b. Support org “friends of”:
i. 3 types
1. type 1 and type 3 care about most
2. type 1: charity controls (okay)
a. 3 appointed by charity
b. 3 by donor
3. type 3: charity is not in control
a. 2 appointed by charity
b. 2 appointed by donor
c. 1 tie breaker - not appointed by charity or donor
d. *functionally integrated:
e. not functionally integrated: (BAD)
2. Standard deduction
a. 6,000k individual; 13k joint
3. itemized
22
a. state income tax:

b. mrtg. interest:
c. charity:
4. Community foundations
a. 4 types of funds
i. Donor advised fund
ii. Designated fund: to benefit one other charity
1. i.e. endowment fund to benefit a theatre
iii. Field of interest fund: donor says he restricts the charitable
purpose
1. i.e. must be for the arts and social welfare
iv. Unrestricted funds: here’s some money, spend it however you
want
5. Philanthropists can have
a. Private foundations
b. Supporting orgs
c. Donor advised funds
i. Cannot have scholarships here
6. With donor advised funds (DAF) and supporting orgs, can have self-dealing
legally.
7. Exceptions under DAF
a. Endowments/designated funds
i. Mrs. Smith problem in slides
1. Tell her to put money in a community foundation, in an
endowment fund. Which will write checks to the museum.
That way can say it’s a designated fund. Which gives the
museum flexibility to hire whomever they want. So if Mrs.
Smith’s daughter is one of the people on the committee,
its okay.
b. Exception number 2: scholarship funds where the donor does not
control the committee
8. When would you tell client what type of org to have

a. First give opinion if there's a legal difference
i. Pg. 10
ii. Bigger tax deduction if give to
4 types of tax-exempt orgs that pay tax income on interest from investments
1. Private foundation
2. Social club Sec. 501c7
3. Political organization Sec. 527
a. Two tests to be tax exempt
i. Revenue has to be exempt function income: contributions,
fundraising [dinners], dues/Bingo
23
ii. Eligible expenditures: have to spend amount on eligible

expenditures: getting candidate elected or appointed to office
1. Political parties are 527’s
b. Has taxable expenditures -- if money spent on things that aren’t to get
candidate elected or appointed to office
i. i.e. lobbying, referendums
c. Non-exempt revenue (taxable)
i. Invest. Income
ii. Property sales
d. *if money coming from not one of the exempt function incomes, and is
spent on eligible expenditures, gotta pay taxes
e. if money coming from exempt functions incomes, and spent on taxable
expenditures, gotta pay taxes
f. if money coming from exempt function income and spent on eligible
expenditures don’t have to pay taxes
g. will be taxed at 35%.
h. Getting around this
i. Form a 501c4 to be able to spend money on lobbying and
referendums etc. without getting taxed
i. What is permitted?
i. Spouse travel  having spouse come to a political rally
ii. Acting lessons  if necessary for candidate to get elected
iii. Victory party
j. What is not permitted?
i. Inauguration  b/c already elected
k. What happens if lose an election?
i. If money still in election fund after lose, then you will be taxed
35% on it
1. Way around this is to
a. Give the money to another 527
b. Give to a 501c3 charity (NOT A PRIVATE
FOUNDATION) giving to DAF okay.
4. Homeowners association Sec. 528
a. Enacted b/c 501c4 has to have a large charitable group
i. Have a gated community not enough to be a 501c4
b. 4 requirements
i. organized and operating test
ii. more than 60% of receipts come from homeowners
iii. have to spend at least 90% on homeowner activities
iv. no private inurement
24
UBIT
1. Unrelated business taxable income
2. Unrelated business income tax
a. 3 ways charities will be liable for it

i. Something unrelated you do
ii. Advertising
1. Can be okay IF done right… i.e. at Shakespeare in the
park, says “thank you for our sponsors, Sprint, etc.”
a. That’s alright because its just acknowledgement of
sponsorship but if published then fall under UBIT
iii. Certain Investments that produce taxable income
1. Partnership [LLC] interest  charity may be taxed
a. Difference between LLC and C corp.
b. Ex: investment club
i. Look to lines on K-1
1. Ord. bus. Income 1 -0-
2. Interest income 5 $1,000
3. Ordinary dividends 6 $2,000
4. Long term gains/loss 9 $10,00
ii. investment income is exempt from UBIT
because charity
c. ex: car dealership
i. 1 20,000
ii. 5 1,000
iii. 6 2,000
iv. 9 3,000
v. UBIT will be $20,000.
2. S corporation
a. Most small businesses are these
b. Under MO law, are corps. but signed K with IRS to
be taxed like partnerships
c. 1998 had law only humans can own stock in s corp.
i. changed it to charities can also be legal
owners of s corps.
d. differences b.t LLC and S corp
i. 1 - $20,000
ii. 5 - $1,000
iii. 6- $2,000
iv. 9- $3,000
v. CG passed law that for S corp. every dollar is
hit with UBTI (whereas with LLC
investment income is exempt)
25
vi. When sell stock for gain, UBIT on entire gain

in S Corps, whereas in partnerships that’s
not the case don’t pay tax.
3. Debt financed income
a. Example
i. Apartment building worth $100,00 earning
5% resulting in $5,000 a year
1. Then charities tried to borrow money
from banks at a lower rate  shit got
out of control
2. CG said if charity borrows money to
invest, it will have to pay tax on ratio
based on debt on property divided by
basis (cost of) property.
4. Rent income = investment if providing services too
3. History
a. 1924: SCOTUS case: monastery/religious org. sold chocolates made by
monk
i. IRS audited them found 3% of revenue was from gift shop
ii. IRS took to supreme court saying that everything has to be
exclusively for charitable purposes
1. Scotus held no, it says exclusively but it just need to be
primarily
2. Scotus established the destination of income test
a. Should revenue from selling chocolate
i. Will be used for charitable purposes so
cannot tax them
b. 1950: tax court had a case called CF Mueller: NYU case. Guy had
spaghetti factory which he gave to NYU. NYU now had a for-profit
subsidiary. Under Destination of income test that the spaghetti factory
did not need to pay income tax because all profits belonged to non-
profit NYC.
i. Creation of unfair competition
c. 1950: b/c of creation of unfair competition, Congress then rejected the
destination of income test and went to source of income test.
i. Is charity getting income from exempt function or non-exempt
function
ii. Congress enacted following statutes
1. 511
a. Imposes tax on each charity depending on whether
it’s a corp. or trust
b. What is exempt
i. exempt function (i.e. school charging tuition,
symphony charging admission)
26
2. 512
a. defines UBTI
3. 513
a. defines unrelated trade or business
b. 3 tests to determine if unrelated trade or business
i. Actively carried on r mission?
ii. Regularly carried on?
1. Loophole
a. Ex girl scouts cookies.
i. Meets unrelated orgs,
and meets actively
carried on. BUT because
its only done once a year,
it is not regularly carried
on.
b. Ex: state fair have bbq stand by
charity…okay even though it
competes with other for-profit
businesses because not
regularly carried on...its only
once a year
iii. Unrelated to orgs. Purposes?
4. 514
a. debt financed income
5. 502
a. feeder corporation statute
b. if for profit owned by tax exempt org, it has to pay
tax.
c. CG was afraid non-exempts would merge the feeder
corps into itself
i. So this says if the charity does anything that
is unrelated to its exempt purposes then it
has to pay tax
1. Tax paid by non-exempt would depend
on whether it’s a corp. or a trust
a. If corp.
b. If trust pays higher tax rate
4. 990-t
a. mess when trying to figure out to allocate expenses with a for-profit
subsidiary and the nonprofit
i. so better not to mix shit up
27
Joint Ventures with For-Profits

1. When you own partnership interest, the charity is deemed to be doing that
business
a. If too much income (2/4 of assets from selling ex: cars) then charity can
2. Worse is if instead of a gift from a donor, a charity decides to become partners
with a venture.
3. Rev. Rul. 98-15

a. HCA started LLC, into which non-profit would put its assets into the
LLC. Then the old nonprofit became grant-making foundation because
all assets were in LLC. HCA would also have a subsidiary that would
manage the LLC. The LLC would pay sub. For services.
b. If BOD of LLC appointed 2/3 of BOD then this process is allowed
c. If BOD 50/50 then the IRS said this process fails 501c3.
4. Nonprofit theatre company wanted to put on production but running out of

money. created Ltd. Partnership. NP was general partner and 3 members
became limited partners. IRS this is problematic, but the limited partners
working too hard
a. Tax court said this process was okay b/c the 3 lp were only investors.
b. Plumstead theatre society page. 46.
5. Bottom line: IRS concluded that situation 1 = okay, but where board equally
split and management co = sub of for-profit. For profit ahs too much control
because nonprofit wouldn’t be able to do whatever non=profit thing it wanted
w/o for profits permission.
6. Two cases after RR98-15

a. Redlands case Pg. 53
b. St. Davids case pg. 53
c. IRS won both these cases in court. Charities then petitioned IRS,
asking for a safe way for profits and non profits can team up and still
keep its tax exempt status
7. Class ex: UMKC and Sprint

a. UMKC providing education and Sprint providing the technology.
Created LLC - BOD split with 3 UMKC and 3 Sprint people
b. Would look how much of the profits would be part of UMKC’s overall
income. RR 2004-51. Pg. 50.
c. Here, not only could UMKC keep its tax exempt status, there’s no
UBIT.
d. Another example of this on page 50 - “M university”
28
Terminations
Liquidating a non-profit corporation

A lot of similarities to liquidation of for-profits
1. How do you liquidate a non profit?

a. 3 ways
i. Majority of board votes
1. Have proper notice
a. have to say “directors will meet and one of the topics is
whether charity should be liquidate”
2. meeting of the Board and majority votes to terminate
ii. not pay annual dues/ fall behind in filings  administrative dissolution
iii. Secretary of State takes initiative to liquidate you
2. Then file two docs with Sec. of S
a. Articles of dissolution
i. Have to notify attorney general if dissolving public benefit corp. have to
wait for attorney general to approve liquidation
1. If AG doesn’t do anything within 20 days then can start liquidating
ii. Don’t file this before an hr before filing articles of termination.
1. Want flexibility in case $1 mill contract comes in or something
2. Strategy move
iii. Gives notices to creditors prior to filing articles of termination
b. Articles of termination
Following is in the dissolution handout

1. 355.666: Dissolution statute
a. if 501c3- BOD dissolve
b. give notice of meeting where dissolution on agenda
2. 355.671: how do you approve dissolution
3. 355.676: give written notice to AG about intent to dissolve

a. give plan of dissolution
b. cannot transfer any assets until 20 days after AG gives written notice to do so
4. 355.681: what has to be in articles of dissolution
5. 355.691: effect of dissolution

a. corp. still exists until articles of termination is filed
b. cannot do any activity besides winding up
c. disposing assets
6. 355.696: trumps statute of limitations
29
a. known claims: if know someone’s got a claim against you, then the corp
(whether NP or FP) has to notify the claimant that he/she has 6 months to file
because corp dissolving.
7. 355.701: trumps statute of limitations

a. unknown claims: can publish notice that you’re dissolving, then say “you have
two years to file a claim”
Sample questions handout
Problem 3:
Answer: following at tax exempt
A 501c3
B sec 529 education program
C 501c3
E 501c3
F 501c6
G 501c3
H 501c6  MAY OR MAY NOT BE
Problem 8:
Insubstantial amount of lobbying is ok
Substantial amount is not okay
Lobbying for your mission = okay
Lobbying for something other than your mission = not okay
5% limit is not a problem
Problem 20
No not Unrealted trade or business because its not competitng with other hospitals
Problem 21:
Its UBIT because retail computing has nothing to do with hospital. Recommend keeping
it as separate corps. organizing receipts/bookkeeping would suck if merged them. And plus
computing UBIT would be a nightmare. Keep it as a for=profit subsidiary.
Problem 26
No, theres two exceptions when you don’t have to file 1023, church or recipets under
$5000
Problem 27
Church exempt from 1023, but may still have to file W2 forms for employees, but not in
trouble becuae exempt from 1023.
30
Problem 29
1.2 over 20 = 6%
(a): 501(h): safe harbors  cap of $1 million for spending on lobbying is 6%substantial
or not? Not sure
(b): in trouble because then spending 1.2 million - over the cap, now going to have to
pay penalty
(c): don’t do it!
problem 36:
only ubit if selling stuff not realted to museum.
Endowment income not taxable because public charity (if was private foundation would
have to)
Old destination of income tax ruile  not rule anymore.
Problem 38
(a) competing with all other stores - UBIT
(b) profit is $220k, if its all about the church then its okay
(c) clearly UBIT
(d) thrift shop has a special exemption  NOT GOING TO BE TESTED ON THIS - NOT
UBIT
essay question on 7 of 8.
How he grades essay question
Identify the issue
If expand then get extra points
a. Identify Issues under the organizational test - have to organized for exclusively
charitable purposes
i. Purposes clause has to be restricted to charitable purposes and its not
here. Its too broad here as drafted. “any lawful purposes” not in 501c3
Liquidation problem 
31

Tax Exempt Orgs. Outline

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Tax Exempt Orgs. Outline

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PUREWAL TAX EXEMPT ORGS.

Intro to tax Exempt Orgs (Use handout #1).

Public Benefit Can donors deduct? How?

IV. Tax Regulations

Missouri State Law Issues

1. Only good for grant-making foundations

3. Before Business becomes operational

a. Two issues here:

b. § 355.101: A corporation comes into existence when the articles of

c. § 355.096: AOI must contain the following

ii. MO: self-perpetuating BOD - BOD elects new

4. Having the Business Become Operational

b. Conflict of Interest Interactions

ii. Doesn’t provide immunity for intentional

Intro to Charitable Orgs.

2. Filing for Tax-Exempt Status

iv. Provisions prohibiting political campaigning

3. “Charitable” includes: (H3 page 7)

i. A bunch of nonprofit orgs that were tax exempt created X corp.

7. Private Inurement/Private Benefit/Excess Benefit

iii. If COI then do following

c. File 1023/1023EZ (handouts #6 & 7).

when incorporated. If file 1023, after 27 months, then ONLY

Public Charity vs. Private Foundations

ii. One family donated all the money into the

d. Types of excise taxes on PF’s

disqualified person has to pay 200% of amount

d. Prohibited self-dealing transactions (page 3 of H9).

General rule Exceptions/ special rules

by the private foundations, then the p.f. is

2. § 4943: Excess Business Holdings: Family business was

iii. 2nd tier: 200% of value of holdings

3. § 4944: Jeopardy investments (taxes on investments that

i. program-related investments. Investments to

Choice of Grant-Making Entity: So, you want to be Philanthropist?

a. state income tax:

8. When would you tell client what type of org to have

ii. Eligible expenditures: have to spend amount on eligible

a. 3 ways charities will be liable for it

vi. When sell stock for gain, UBIT on entire gain

Joint Ventures with For-Profits

3. Rev. Rul. 98-15

4. Nonprofit theatre company wanted to put on production but running out of

6. Two cases after RR98-15

7. Class ex: UMKC and Sprint

d. Another example of this on page 50 - “M university”

Liquidating a non-profit corporation

1. How do you liquidate a non profit?

Following is in the dissolution handout

2. 355.671: how do you approve dissolution

3. 355.676: give written notice to AG about intent to dissolve

4. 355.681: what has to be in articles of dissolution

5. 355.691: effect of dissolution

6. 355.696: trumps statute of limitations

7. 355.701: trumps statute of limitations

Sample questions handout

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