The Constitutional Principle: Separation of Church and State
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Some Tax Exempt Information from the IRS

The following information has been taken from IRS Regulations regarding non-profit tax status for various organizations including schools

Researched by Susan Batte


Other 501(c)(3) Organizations

In addition to the information required for all organizations, as described earlier, you should include any other information described in this section.

Charitable Organizations

If your organization is applying for recognition of exemption as a charitable organization, it must show that it is organized and operated for purposes that are beneficial to the public interest. Some examples of this type of organization are those organized for:

The rest of this section contains a description of the information to be provided by certain specific organizations. This information is in addition to the "required inclusions" described in Chapter 1, and other statements requested on Form 1023. Each of the following organizations must submit the information described.

Charitable organization supporting education. Submit information showing how your organization supports education -- for example, contributes to an existing educational institution, endows a professorial chair, contributes toward paying teachers' salaries, or contributes to an educational institution to enable it to carry on research.

Scholarships. If the organization awards or plans to award scholarships, complete Schedule H of Form 1023. Submit the following:

  1. Criteria used for selecting recipients, including the rules of eligibility,
  2. How and by whom the recipients are or will be selected,
  3. If awards are or will be made directly to individuals, whether information is required assuring that the student remains in school,
  4. If awards are or will be made to recipients of a particular class, for example, children of employees of a particular employer--
    1. Whether any preference is or will be accorded an applicant by reason of the parent's position, length of employment, or salary,
    2. Whether as a condition of the award the recipient must upon graduation accept employment with the company, and
    3. Whether the award will be continued even if the parent's employment ends, and
  5. A copy of the scholarship application form and any brochures or literature describing the scholarship program.

Hospital. If you are organized to operate a charitable hospital, complete and attach Section I of Schedule C, Form 1023.

If your hospital was transferred to you from proprietary ownership, complete and attach Schedule I of Form 1023. You must attach a list showing:

  1. The names of the active and courtesy staff members of the proprietary hospital, as well as the names of your medical staff members after the transfer to nonprofit ownership, and
  2. The names of any doctors who continued to lease office space in the hospital after its transfer to nonprofit ownership and the amount of rent paid. Submit an appraisal showing the fair rental value of the rented space.

Clinic. If you are organized to operate a clinic, attach a statement including:

  1. A description of the facilities and services,
  2. To whom the services are offered, such as the public at large or a specific group,
  3. How charges are determined, such as on a profit basis, to recover costs, or at less than cost,
  4. By whom administered and controlled,
  5. Whether any of the professional staff (that is, those who perform or will perform the clinical services) also serve or will serve in an administrative capacity, and
  6. How compensation paid the professional staff is or will be determined.

Home for the aged. If you are organized to operate a home for the aged, complete and attach Schedule F of Form 1023. Explain on Schedule F:

  1. How charges are or will be determined, such as on a profit basis, to recover costs, or at less than cost, and whether the charges are based on providing service at the lowest feasible cost to the residents,
  2. Whether all residents are or will be required to pay fees,
  3. Whether any residents are or will be accepted at lower rates or entirely without pay and, if so, how many, and
  4. Whether federal mortgage financing has been applied for and if so, the type.

Community nursing bureau. If you provide a nursing register or community nursing bureau, provide information showing that your organization will be operated as a community project and will receive its primary support from public contributions to maintain a nonprofit register of qualified nursing personnel, including graduate nurses, unregistered nursing school graduates, licensed attendants and practical nurses for the benefit of hospitals, health agencies, doctors, and individuals.

Organization providing loans. If you make or will make loans for charitable and educational purposes, submit the following information:

  1. An explanation of the circumstances under which such loans are or will be made,
  2. Criteria for selection, including the rules of eligibility,
  3. How and by whom the recipients are or will be selected,
  4. Manner of repayment of the loan,
  5. Security required, if any,
  6. Interest charged, if any, and when payable, and
  7. Copies in duplicate of the loan application and any brochures or literature describing the loan program.

Public interest law firms. If your organization was formed to litigate in the public interest (as opposed to providing legal services to the poor), such as in the area of protection of the environment, you should submit the following information:

  1. How the litigation can reasonably be said to be representative of a broad public interest rather than a private one,
  2. Whether the organization will accept fees for its services,
  3. A description of the cases litigated or to be litigated and how they benefit the public generally,
  4. Whether the policies and program of the organization are the responsibility of a board or committee representative of the public interest, which is not controlled by employees or persons who litigate on behalf of the organization nor by any organization that is not itself an organization described in this chapter,
  5. Whether the organization is operated, through sharing of office space or otherwise, in a way to create identification or confusion with a particular private law firm, and
  6. Whether there is an arrangement to provide, directly or indirectly, a deduction for the cost of litigation that is for the private benefit of the donor.

Acceptance of attorneys' fees. A nonprofit public interest law firm can accept attorneys' fees in public interest cases if the fees are paid directly by its clients and the fees are not more than the actual costs incurred in the case. Once undertaking a representation, the organization cannot withdraw from the case because the litigant is unable to pay the fee.

Firms can accept fees awarded or approved by a court or an administrative agency and paid by an opposing party if the firms do not use the likelihood or probability of fee awards as a consideration in the selection of cases. All fee awards must be paid to the organization and not to its individual staff attorneys. Instead, a public interest law firm can reasonably compensate its staff attorneys, but only on a straight salary basis. Private attorneys, whose services are retained by the firm to assist it in particular cases, can be compensated by the firm, but only on a fixed fee or salary basis.

The total amount of all attorneys' fees (court awarded and those received from clients) must not be more than 50% of the total cost of operations of the organization's legal functions, calculated over a 5-year period.

If, in order to carry out its program, an organization violates applicable canons of ethics, disrupts the judicial system, or engages in any illegal action, the organization will jeopardize its exemption.

Religious Organizations

To determine whether an organization meets the religious purposes test of section 501(c)(3), the IRS maintains two basic guidelines:

  1. That the particular religious beliefs of the organization are truly and sincerely held, and
  2. That the practices and rituals associated with the organization's religious belief or creed are not illegal or contrary to clearly defined public policy.

Hence, your group (or organization) may not qualify for treatment as an exempt religious organization for tax purposes if its actions, as contrasted with its beliefs, are contrary to well established and clearly defined public policy. If there is a clear showing that the beliefs (or doctrines) are sincerely held by those professing them, the IRS will not question the religious nature of those beliefs.

Churches. Although a church, its integrated auxiliaries, or a convention or association of churches is not required to file Form 1023 to be exempt from federal income tax or to receive tax deductible contributions, the organization may find it advantageous to obtain recognition of exemption. In this event, you should submit information showing that your organization is a church, synagogue, association or convention of churches, religious order, or religious organization that is an integral part of a church, and that it is engaged in carrying out the function of a church.

In determining whether an admittedly religious organization is also a church, the IRS does not accept any and every assertion that the organization is a church. Because beliefs and practices vary so widely, there is no single definition of the word "church" for tax purposes. The IRS considers the facts and circumstances of each organization applying for church status.

Integrated auxiliaries. An organization is an integrated auxiliary of a church if all the following are true.

  1. The organization is described both in sections 501(c)(3) and 509(a)(1), (2), or (3).
  2. It is affiliated with a church or a convention or association of churches.
  3. It is internally supported. An organization is internally supported unless both of the following are true.
    1. It offers admissions, goods, services or facilities for sale, other than on an incidental basis, to the general public (except goods, services, or facilities sold at a nominal charge or for a small part of the cost), and
    2. It normally gets more than 50% of its support from a combination of governmental sources, public solicitation of contributions, and receipts from the sale of admissions, goods, performance of services, or furnishing of facilities in activities that are not unrelated trades or businesses.

Special rule. Men's and women's organizations, seminaries, mission societies, and youth groups that satisfy (1) and (2) above are integrated auxiliaries of a church even if they are not internally supported.

Note. In order for an organization (including a church and religious organization) to qualify for tax exemption, no part of its net earnings may inure to the benefit of any individual.

Although an individual is entitled to a charitable deduction for contributions to a church, the assignment or similar transfer of compensation for personal services to a church generally does not relieve a taxpayer of federal income tax liability on the compensation, regardless of the motivation behind the transfer. http://www.irs.ustreas.gov/prod/forms_pubs/pubs/p5570306.htm Private Foundations and Public Charities

It is important that you determine if your organization is a private foundation. Most organizations exempt from income tax (as organizations described in section 501(c)(3)) are presumed to be private foundations unless they notify the Internal Revenue Service within a specified period of time that they are not. This notice requirement applies to most section 501(c)(3) organizations regardless of when they were formed.

Private Foundations

Every organization that qualifies for tax exemption as an organization described in section 501(c)(3) is a private foundation unless it falls into one of the categories specifically excluded from the definition of that term (referred to in section 509(a)(1), (2), (3), or (4)). In effect, the definition divides these organizations into two classes namely, private foundations and public charities. Public charities are discussed later.

Organizations that fall into the excluded categories are generally those that either have broad public support or actively function in a supporting relationship to those organizations. Organizations that test for public safety also are excluded.

Notice to IRS. Even if an organization falls within one of the categories excluded from the definition of private foundation, it will be presumed to be a private foundation, with some exceptions, unless it gives timely notice to the IRS that it is not a private foundation. This notice requirement applies to an organization regardless of when it was organized. The only exceptions to this requirement are those organizations that are excepted from the requirement of filing Form 1023 as discussed earlier under Organizations Not Required To File Form 1023.

When to file notice. If an organization has to file the notice, it must do so within 15 months from the end of the month in which it was organized.

If your organization is newly applying for recognition of exemption as an organization described in this chapter (a section 501(c)(3) organization) and you wish to establish that your organization is a public charity rather than a private foundation, you must complete the applicable lines of Part III of your exemption application (Form 1023). An extension of time for filing this application may be granted by the IRS if your request is timely and you demonstrate that additional time is needed. See Application for Recognition of Exemption, earlier in this chapter, for more information.

In determining the date on which a corporation is organized for purposes of applying for recognition of section 501(c)(3) status, the IRS looks to the date the corporation came into existence under the law of the state in which it is incorporated. For example, where state law provides that existence of a corporation begins on the date its articles are filed by a certain state official in the appropriate state office, the corporation is considered organized on that date. Later nonsubstantive amendments to the enabling instrument will not change the date of organization, for purposes of the notice requirement.

Notice filed late. An organization that states it is a private foundation when it files its application for recognition of exemption after the 15-month period will be treated as a section 501(c)(3) organization and as a private foundation only from the date it files its application.

An organization that states it is a publicly supported charity when it files its application for recognition of exemption after the 15-month period cannot be treated as a section 501(c)(3) organization before the date it files the application. Financial support received before that date may not be used for purposes of determining whether the organization is publicly supported. However, an organization that can reasonably be expected to meet the support requirements (discussed later under Public Charities) can obtain an advance ruling from the IRS that it is a publicly supported organization.

Excise taxes on private foundations. There is an excise tax on the net investment income of most domestic private foundations. This tax must be reported on Form 990-PF and must be paid annually at the time for filing that return or in quarterly estimated tax payments if the total tax for the year is $500 or more. In addition, there are several other rules that apply. These include:

  1. Restrictions on self-dealing between private foundations and their substantial contributors and other disqualified persons,
  2. Requirements that the foundation annually distribute income for charitable purposes,
  3. Limits on their holdings in private businesses,
  4. Provisions that investments must not jeopardize the carrying out of exempt purposes, and
  5. Provisions to assure that expenditures further exempt purposes.

Violations of these provisions give rise to taxes and penalties against the private foundation and, in some cases, its managers, its substantial contributors, and certain related persons.

Governing instrument. A private foundation cannot be tax exempt nor will contributions to it be deductible as charitable contributions unless its governing instrument contains special provisions in addition to those that apply to all organizations described in section 501(c)(3).

Sample governing instruments. The following samples of governing instrument provisions illustrate the special charter requirements that apply to private foundations. Draft A is a sample of provisions in articles of incorporation; Draft B, a trust indenture.

Draft A

General

  1. The corporation will distribute its income for each tax year at a time and in a manner as not to become subject to the tax on undistributed income imposed by section 4942 of the Internal Revenue Code, or the corresponding section of any future federal tax code.
  2. The corporation will not engage in any act of self-dealing as defined in section 4941(d) of the Internal Revenue Code, or the corresponding section of any future federal tax code.
  3. The corporation will not retain any excess business holdings as defined in section 4943(c) of the Internal Revenue Code, or the corresponding section of any future federal tax code.
  4. The corporation will not make any investments in a manner as to subject it to tax under section 4944 of the Internal Revenue Code, or the corresponding section of any future federal tax code.
  5. The corporation will not make any taxable expenditures as defined in section 4945(d) of the Internal Revenue Code, or the corresponding section of any future federal tax code.

Draft B

Any other provisions of this instrument notwithstanding, the trustees shall distribute its income for each tax year at a time and in a manner as not to become subject to the tax on undistributed income imposed by section 4942 of the Internal Revenue Code, or the corresponding section of any future federal tax code.

Any other provisions of this instrument notwithstanding, the trustees will not engage in any act of self-dealing as defined in section 4941(d) of the Internal Revenue Code, or the corresponding section of any future federal tax code; nor retain any excess business holdings as defined in section 4943(c) of the Internal Revenue Code, or the corresponding section of any future federal tax code; nor make any investments in a manner as to incur tax liability under section 4944 of the Internal Revenue Code, or the corresponding section of any future federal tax code; nor make any taxable expenditures as defined in section 4945 (d) of the Internal Revenue Code, or the corresponding section of any future federal tax code.

Effect of state law. A private foundation's governing instrument will be considered to meet these charter requirements if valid provisions of state law have been enacted that:

  1. Require it to act or refrain from acting so as not to subject the foundation to the taxes imposed on prohibited transactions, or
  2. Treat the required provisions as contained in the foundation's governing instrument.

The IRS has published a list of states with this type of law. The list is in Revenue Ruling 75-38 (or later update).

Public Charities

A private foundation is any organization described in section 501(c)(3), unless it falls into one of the categories specifically excluded from the definition of that term in section 509(a), which lists four basic categories of exclusions. These categories are discussed under the "Section 509(a)" headings that follow this introduction.

If your organization falls into one of these categories, it is not a private foundation and you should state this in Part III of your application for recognition of exemption (Form 1023).

If your organization does not fall into one of these categories, it is a private foundation and is subject to the applicable rules and restrictions until it terminates its private foundation status. Some private foundations also qualify as private operating foundations; these are discussed near the end of this chapter.

Generally speaking, a large class of organizations excluded under section 509(a)(1) and all organizations excluded under section 509(a)(2) depend upon a support test. This test is used to assure a minimum percentage of broad-based public support in the organization's total support pattern. Thus, in the following discussions, when the one-third support test (see Qualifying As Publicly Supported later) is referred to, it means the following fraction normally must equal at least one-third: Qualifying support Total support

Including items of support in qualifying support (the numerator of the fraction) or excluding items of support from total support (the denominator of the fraction) may decide whether an organization is excluded from the definition of a private foundation, and thus from the liability for certain excise taxes. So it is very important to classify items of support correctly.

Excise tax on excess benefits. A person who receives a benefit from a section 501(c)(3) or 501(c)(4) organization may have to pay an excise tax. A manager of the organization may also have to pay an excise tax. These taxes are reported on Form 4720.

The excise taxes are imposed if all of the following are true.

  1. The organization provides an excess benefit to a disqualified person.
  2. The organization is not a private foundation.
  3. The organization either:
    1. Is an exempt organization that (without regard to any excess benefit) would be described in section 501(c)(3) or 501(c)(4), or
    2. Was an organization described in (a) at any time during the 5-year period ending on the date of the excess benefit transaction.

Excess benefit. An excess benefit is an economic benefit that has more value than the value of the consideration, including services, received by the organization providing the benefit. An economic benefit is not treated as consideration for services unless the organization clearly showed its intent to treat the benefit in that way.

Disqualified person. A disqualified person is any of the following:

  1. A person who was in a position to exercise substantial influence over the affairs of the organization at any time during the 5-year period ending on the date of the excess benefit transaction,
  2. A member of the family of an individual described in (1), or
  3. Certain organizations controlled by persons described in (1) or (2).

More information. For more information, see the instructions to Forms 990 and 4720.

Organizations that are not private foundations. The following kinds of organizations are excluded from the definition of a private foundation.

Section 509(a)(1) Organizations

Section 509(a)(1) organizations include:

  1. A church or a convention or association of churches,
  2. An educational organization such as a school or college,
  3. A hospital or medical research organization operated in conjunction with a hospital,
  4. Endowment funds operated for the benefit of certain state and municipal colleges and universities,
  5. A governmental unit, and
  6. A publicly supported organization.

Church. The characteristics of a church are discussed earlier in this chapter under Religious Organizations.

Educational organizations. An educational organization is one whose primary function is to present formal instruction, that normally maintains a regular faculty and curriculum, and that normally has a regularly enrolled body of pupils or students in attendance at the place where it regularly carries on its educational activities. The term includes institutions such as primary, secondary, preparatory, or high schools, and colleges and universities. It includes federal, state, and other publicly supported schools that otherwise come within the definition. It does not include organizations engaged in both educational and noneducational activities, unless the latter are merely incidental to the educational activities. A recognized university that incidentally operates a museum or sponsors concerts is an educational organization. However, the operation of a school by a museum does not necessarily qualify the museum as an educational organization.

An exempt organization that operates a tutoring service for students on a one-to-one basis in their homes, maintains a small center to test students to determine their need for tutoring, and employs tutors on a part-time basis is not an educational organization for these purposes. Nor is an exempt organization that conducts an internship program by placing college and university students with cooperating government agencies an educational organization.

Hospitals and medical research organizations. A hospital is an organization whose principal purpose or function is to provide hospital or medical care or either medical education or medical research. A rehabilitation institution, outpatient clinic, or community mental health or drug treatment center may qualify as a hospital if its principal purpose or function is providing hospital or medical care. If the accommodations of an organization qualify as being part of an extended care facility, that organization may qualify as a hospital if its principal purpose or function is providing hospital or medical care. A cooperative hospital service organization that meets the requirements of section 501(e) will qualify as a hospital.

The term "hospital" does not include convalescent homes, homes for children or the aged, or institutions whose principal purpose or function is to train handicapped individuals to pursue a vocation. An organization that mainly provides medical education or medical research will not be considered a hospital, unless it is also actively engaged in providing medical or hospital care to patients on its premises or in its facilities, on an in-patient or out-patient basis, as an integral part of its medical education or medical research functions.

Medical research organization. A medical research organization must be directly engaged in the continuous active conduct of medical research in conjunction with a hospital, and that activity must be the organization's principal purpose or function.

Publicly supported. A hospital or medical research organization that wants the additional classification of a publicly supported organization (described later in this chapter under Qualifying As Publicly Supported) may specifically request that classification. The organization must establish that it meets the public support requirements of section 170(b)(1)(A)(vi).

Endowment funds. Organizations operated for the benefit of certain state and municipal colleges and universities are endowment funds. They are organized and operated exclusively to:

  1. Receive, hold, invest in, and administer property for a college or university, and
  2. Make expenditures to or for the benefit of a college or university.

The college or university must be:

  1. An agency or instrumentality of a state or political subdivision, or
  2. Owned or operated by:
    1. A state or political subdivision, or
    2. An agency or instrumentality of one or more states or political subdivisions.

    The phrase "expenditures to or for the benefit of a college or university" includes expenditures made for any one or more of the normal functions of a college or university. These expenditures include those for:

    1. Acquiring and maintaining real property comprising part of the campus area,
    2. Erecting (or participating in erecting) college or university buildings,
    3. Acquiring and maintaining equipment and furnishings used for, or in conjunction with, normal functions of colleges and universities,
    4. Libraries,
    5. Scholarships, and
    6. Student loans.

    The organization must normally receive a substantial part of its support from the United States or any state or political subdivision, or from direct or indirect contributions from the general public, or from a combination of these sources.

    Support. Support does not include income received in the exercise or performance by the organization of its charitable, educational, or other purpose or function constituting the basis for exemption.

    In determining the amount of support received by an organization for a contribution of property when the value of the contribution by the donor is subject to reduction for certain ordinary income and capital gain property, the fair market value of the property is taken into account. For more information, see the discussion of Support on page 25.

    Indirect contribution. An example of an indirect contribution from the public is the receipt by the organization of its share of the proceeds of an annual collection campaign of a community chest, community fund, or united fund.

    Governmental units. A governmental unit includes a state, a possession of the United States, or a political subdivision of either of the foregoing, or the United States or the District of Columbia.

    Publicly supported organizations. An organization is a publicly supported organization if it is one that normally receives a substantial part of its support from a governmental unit or from the general public. http://www.irs.ustreas.gov/prod/forms_pubs/pubs/p5570306.htm
     
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