Introduction to Non-Profit Organizations - Boston Bar Association by hcj


									Introduction to
                 Judith G.H. Edington
                       Russell J. Stein
              Boston Bar Association
           Tax-Exempt Fundamentals
                     October 9, 2012
What is a non-profit?
 State statute controls formation.
 ◦ Generally is an entity organized under a state
   statute or common law of trusts.
 ◦ In Massachusetts, non-profit corporations are
   organized under MA G.L. ch. 180.
 No prohibition from making a profit.
 ◦ If a non-profit spends more then it brings in, it will
   have difficulty surviving, therefore “profit” is
   generally a necessity.
 Tax-exemption is determined under IRS rules.

What distinguishes a for-profit
from a non-profit?
For-Profit                           Non-Profit
Has owners who hold equity in the    Generally does not have “owners”
entity.                              (although may have “members”).
Operated for the benefit of its      Operated for the benefit of its
shareholders / owners.               “charitable class.”
Legally able to generate a profit.   Legally able to generate a profit.
Profits passed on to its owners.     Profits cannot pass on to any
                                     owners or members.

 Non-profit organizations are also sometimes
  referred to as tax-exempt organizations.
 Many non-profit organizations benefit from
  tax exemption but are not charitable
 ◦ Some of the better known of these include
    Labor organizations – 501(c)(5)
    Business leagues -- 501(c)(6)
    Social clubs – 501(c)(7)

Charities are a small sub-set of
Non-profit organizations.
                                         Non-profit orgs

                                          All tax-exempt orgs

                                             Social welfare orgs

                                        Eligible to
                                        receive tax-
                                        exempt gifts


             Source: Bruce Hopkins, The Law of Tax-
             Exempt Organizations, 8th Ed. P. 6

Charitable Organizations = 501(c)(3)

 A 501(c)(3) organization is one that is
  organized and operated for one or more of
  the following exempt purposes:
 ◦   Religious
 ◦   Charitable
 ◦   Scientific
 ◦   Testing for public safety
 ◦   Literary
 ◦   Educational
 ◦   Prevention of cruelty to children or animals

Private Foundation v. Public Charity
 ◦ Both are 501(c)(3) charitable organizations.
 ◦ Private foundation is the default 501(c)(3)
 ◦ An organization has to “earn” public charity status.
   broad public financial support -- e.g. American Red
    Cross, United Way, Boston Symphony Orchestra
   status based – e.g. school, hospital, church
 ◦ Why does it matter?
   public charities enjoy more favorable rules with respect
    to the charitable income tax deduction
   private foundations are subject to a strict code of
    behavior not applicable to public charities

Charitable Entity Tests
 Primary Purpose Test
 ◦ Organization must be organized and operated exclusively
   for an exempt purpose.
    “Exclusively” has been interpreted as “primarily.”
 Organizational Test
 ◦ Organization’s formation documents must set out
   charitable purpose.
 ◦ Assets must be dedicated to an exempt purpose. Upon
   dissolution, assets must be distributed in furtherance of
   exempt purpose.
 Operational Test
 ◦ Must engage primarily in activities that accomplish one or
   more of its exempt purposes.
 ◦ Will not meet the test if more than an insubstantial part of
   its activities is not in furtherance of an exempt purposes.

Public v. Private Benefit
 Charitable assets must be used for the
  benefit of the public and not for any
  particular private use.
 ◦ No “private inurement.” No income or asset may
   unduly benefit a person that is closely related to the
 ◦ Only incidental “private benefit” is permitted. A
   private benefit is a non-incidental benefit accruing
   to an outside party.

Charitable Class
 A charitable class is a group of individuals that
  may properly receive assistance from a charitable
 A charitable class must be either large enough
  that the potential beneficiaries cannot be
  individually identified, or sufficiently indefinite
  that the community as a whole, rather than a pre
  -selected group of people, benefits when a
  charity provides assistance.
 The concept of charitable class is another way of
  unpacking the public versus private benefit

Additional restrictions on
charitable organizations
 In addition to the prohibition against private
  inurement and private benefit, charities may
 ◦ Devote more than an insubstantial part of its
   activities to lobbying.
 ◦ Participate in elections.

Tax deductible contributions
 Tax law encourages financial support of
  501(c)(3) charitable organizations because of
  their public rather than private focus.
 Contributions are deductible for income tax
  purposes only if made to domestic charitable
 Charitable deductions are itemized deductions
  on an individual’s tax return.
 ◦ Subject to income limitations:
    50% / 30% / 20% limitations
 Contributions must be properly substantiated.

Other Public Charity Types
 Supporting Organizations
 ◦ SOs obtain public charity status by virtue of their
   close relationship with another public charity.
 Donor advised funds
 ◦ An account held at a public charity over which the
   donor retains advisory privileges with respect to
   charitable grants from the fund.
 “Friends of” organizations
 ◦ When properly structured, enable tax deductible
   contributions to support the work of foreign charities.

Fiscal Sponsorship
 Incubation
 Bridge (until 501(c)(3) status obtained)
 Ongoing sponsorship of charitable program
 ◦ A charitable activity may not require a new
   charitable organization with all of the ongoing legal
   and financial compliance responsibilities that come
   with a separate legal entity.
 ◦ Consider partnering with an existing organization
   with similar charitable goals.

Trend: Overlapping of for-profit
and non-profit activities and
 Hybrid Organizations
 ◦ L3Cs
 ◦ Benefit corporations
    G.L. ch. 156E
 B Corps (a branding tool)

On-line Resources
 The IRS:
 Massachusetts office of the Attorney General
  Charities Division:
 Nonprofit law blog:
 Nonprofit law prof blog:
 ABA Tax-exempt listserve
 Guidestar:

Schedule of Tax-Exempt
Fundamentals brown-bags
 November 13
 ◦ Formation of a charitable organizations
 January 8, 2013
 ◦ Governance and fiduciary duties
 February 12, 2013
 ◦ Taxes for the tax-exempts
 March 12, 2013
 ◦ Dissolution of a non-profit organization

 Year 2: Oct 2013 – March 2014
 ◦ Focus will be on private foundations


To top