Tuesday, August 21, 2012

Exempt Purpose Section 501 c 3

What constitutes an educational, religious, charitable, or other exempt organization is, like many other legal concepts, reasonably clear at the core, but more amorphous at its perimeters.  Lots of room to wiggle. Educational is very vague. Section 501(c)(3) definition of Charitable Organization is very important for personal income tax reasons.

Regulations authorizing tax exemptions may not be so unclear as to afford latitude for subjective application by IRS officials. The standards may not be so imprecise that they afford latitude to individual IRS officials to pass judgment on the content and quality of an applicant’s views and goals and therefore to discriminate against those engaged in protected First Amendment activities.i.    “Objective standards are especially essential in cases such as this involving those espousing nonmajoritarian philosophies. In this area the First Amendment cannot countenance a subjective “

Rev Proc 86-43 1986 CB 729- Educational Purpose for Exempt Organization

Organizations violate the “full and fair exhibition” test if the organizations communications involved:

1. Presentation of viewpoints unsupported by facts that make up a significant portion of the organization communication

2. Facts that purport to support the viewpoints are distorted

3. The organizations presentations make substantial use of inflammatory terms and express conclusions on the basis of strong emotional feeling over objective information

4. Does the audience consider it educational?

This still remains very vague, but has not yet been challenged by any type of organization.  If any one of the factors is met, there is a red flag, but the correct analysis is under the totality of the circumstances can the organization still be considered educational. IRS doesn’t challenge organizations on this a lot.

Private Inurement - Insiders

The regulations provide than an organization will not be considered to be operated exclusively for an exempt purpose if any part of its net earnings inure “to the benefit of any shareholders or individuals.” IRS applies this provision to salaries and perks often. Extending this principle to disqualify exempt organizations whose operations unduly benefit outsiders may be very difficult.

A charity is not to siphon its earnings to its founder, or the members of its board, or their families, or anyone else fairly to be described as an insider, that is, as the equivalent of an owner or manager.   The private benefit argument is that a charity was created to benefit a private party. Only being operated for the benefit of one company.

Lobbying and Political Activities

Charitable organizations are permitted to engage in lobbying, so long as it does not constitute more than an insubstantial part of their activities. The bar on political activity on behalf of or in opposition to a candidate for office, in contrast, is absolute: any such activity is disqualifying. This is stated expressly in § 501(c)(3)

Section 501(h) safe harbor provisions

Anywhere from 5-20% of its total expenses on lobbying, up to $ 1 mil.b.    What they cannot do is political activity in opposition to candidates or for candidates. No money directly for candidates. Public Policy Constraints: Congress and the IRS want organizations operating in way that violate public policy to be foreclosed from qualification for exempt status under § 501(c)(3), even if their ends are otherwise within the range for which qualification for exemption would be available.

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