Most people are familiar with 501(c)(3) non-profit organizations. These are entities that perform charitable work that is mostly (though not necessarily completely), devoid of political content. Generally speaking, donations to such entities are fully deductible for tax purposes.
However, many people are unaware that there are a series of additional types of entities under section 501(c) of the Internal Revenue Code (“IRC”). Those entities can engage in far more issues oriented political advocacy. Generally speaking, donations to those entities are not necessarily deductible. An example of such entities are 501(c)(4) organizations that are often specifically organized for the purpose of political advocacy.
One of the critical changes to this scheme has occurred as a result of Citizens United v. Federal Election Commission, 558 U.S. 50 (2010). In that case, the Supreme Court held, among other items, that a 501(c)(4) entity could donate unlimited amounts for an issue oriented campaign.
One of the more interesting questions is whether this will allow donors to shield themselves from being identified. While the Federal Election Commission has approved that anonymity, recent court decisions have called that into question. We expect that this will become an issue on appeal in the months and years to come.
© 2012 Nissenbaum Law Group, LLC
There are many aspects to starting a nonprofit company. However, perhaps the most important question is what to do first. I would submit that having a great idea and knowing people who are interested in implementing it are not enough. The first thing that needs to be done is to prepare a formal business plan.
The business plan should be in writing and prepared in the standard format. There are software packages that guide one through this process. However, I would suggest that a good reference website or book on the topic is probably enough to give one a basic idea of how to prepare it. Indeed, the IRS application for 501(c)(3) status basically requires much (though not all) of the same information as a business plan.
A non-profit business plan includes the standard items one might expect: a list of proposed revenue sources (donations; grants; etc.); expenses; personnel; and so forth. However, it also requires a market analysis of the “competition.” In the case of a non-profit, the competition is competing for donations and grants. It is important that one see if others have already formed a charity that tends to the same needs. If so, is that charity going to be seeking contributions from the same donor base? These sorts of questions need to be answered at the outset.
In sum, although it might seem overly formalistic, it is a particularly good idea to have a business analysis of the proposed non-profit company set out in writing before proceeding. An extensive business plan is a particularly effective way of doing this.
© 2011 Nissenbaum Law Group, LLC
Tax-exempt religious organizations are generally exempted from paying property taxes. To avail itself of this exemption, the religious organization must show that:
(1) the owner of the property is organized exclusively for a tax-exempt purpose;
(2) the property is actually and exclusively used for the tax-exempt purpose; and
(3) the owner’s operation and use of the property is not for profit.
This test was recently applied by the Appellate Division of the Superior Court of New Jersey in City of Newark of the County of Essex v. (148) Block 1861, Lot 24, 605-611 Central Avenue, 2010 WL 3932996 (N.J. Super. A.D. September 27, 2010). In 2007, the City of Newark filed suit against Yes Lord Ministries, Inc. (“Yes Lord”) for back taxes. In 2008, Newark rejected that application. The trial court then granted summary judgment in favor of Newark, allowing it to foreclose on the property for failure to pay taxes. Yes Lord appealed to the Appellate Division.
In rendering its decision, the Appellate Division noted that the building was purchased by Yes Lord in 2004 and consisted of approximately 20,000 square feet. The warehouse portion of it was structurally intact; but the offices were completely unusable due to roof leakage and dangerous wiring. Yes Lord intended to renovate the property for church activities, but that work was delayed by financial obstacles. Yes Lord never paid property taxes on the property and it owed more than $120,000 in delinquent taxes and redemption fees when Newark started the lawsuit.
Yes, Lord claimed that the warehouse portion of the property was being used for meetings of men’s and women’s auxiliary groups related to church activities and for other prayer services. However, the property was not open to the public for regular church services and Yes Lord did not possess a Certificate of Occupancy for the property. Newark conceded that Yes Lord was organized exclusively for a recognized tax-exempt purpose and that its use of the property was not for profit. However, Newark claimed that Yes Lord was not “actually using” the property for the tax-exempt purpose.
The Court relied heavily upon the decision in Grace & Peace Fellowship Church, Inc. v. Cranford Twp., 4 N.J. Tax 391 (Tax 1982). In Grace & Peace, the Tax Court determined that “an uncompleted church building was not exempt from taxation because occasional meetings of church auxiliary and prayer groups were being held in the building during the construction work.” Grace & Peace Fellowship Church at 394-95, 401. The Tax Court also noted that the church did not receive a Certificate of Occupancy until after the date of tax assessment, despite using the property for religious services. The Tax Court reasoned that “the public benefit underlying the tax exemption had not yet begun and that denying tax exemption was both consistent with the language of the statute (N.J.S.A. 54:4-1) and an appropriate incentive for the exempt organization to complete the construction.” Id. at 397-401.
The Appellate Division held that Yes Lord was not “actually using” the property for the tax-exempt purpose. It further held that New Jersey law (N.J.S.A. 54:4-1 et seq.) implied that the “actual use” of the property must be legally authorized. Thus, a Certificate of Occupancy was required to use the warehouse. Yes Lord did not have a Certificate of Occupancy, so its use of the property was not legally authorized and it was not entitled to exemption from property taxes on it.
© 2010 Nissenbaum Law Group, LLC
A charity’s tax-exempt status under §501(c)(3) of the Internal Revenue Code may be revoked for many reasons. However, the most common is if the charity stops operating exclusively for charitable purposes. The United States Court of Appeals for the Third Circuit has developed and applied a 2-prong test “drawn directly from the wording of §501(c)(3) and the legislative history of its enactment. The statute explicitly cites as qualifying for tax exemption those entities ‘organized exclusively for religious, charitable . . . or educational purposes.’” Presbyterian & Reformed Publishing Co. v. Comm’r of Internal Revenue, 743 F.2d 148, 152 (3d Cir. 1984). That inquiry requires courts to determine: (1) the purpose of the organization claiming tax-exempt status and (2) to whose benefit the organization’s activities inure.
In Presbyterian & Reformed Publishing Co., the lower Tax Court affirmed revocation of tax-exempt status for Presbyterian & Reformed Publishing Co. (“P&R”). The Tax Court reasoned that P&R, a religiously-oriented publishing house that was tax-exempt since 1939, had become a profitable venture as of 1980. By that point it had only a distant relationship to a church. P&R was engaged in the publication of religiously-oriented books that had become similar to a commercial enterprise.
In reaching its decision, The Tax Court considered the following factors: (a) that P&R’s net and gross profits between 1969 and 1979 increased dramatically; (b) that the prices set for its books generated consistent and comfortable profit margins; and (c) that it was in competition with commercial publishers as a result of its purchase and sale of books with a commercial publishing house. After weighing these factors, the Tax Court determined that P&R was not operating exclusively for charitable purposes and revoked its tax-exempt status.
However, that decision was reversed on appeal. The Third Circuit disagreed with the Tax Court and held that P&R would not lose its 501(c)(3) status. The Third Circuit cited the 2-prong inquiry referred to above, which was drawn from the plain language of the statute and its legislative history. That legislative history included a statement by the sponsor of the statute, Senator Bacon, who made the following comments:
[T]he corporation which I had particularly in mind as an illustration at the time I drew this amendment is the Methodist Book Concern, which has its headquarters in Nashville, which is a very large printing establishment, and in which there must necessarily be profit made, and there is a profit made exclusively for religious, benevolent, charitable, and educational purposes, in which no man receives a scintilla of individual profit. Of course if that were the only one, it might not be a matter that you would say we would be justified in changing these provisions of law to meet a particular case, but there are in greater or lesser degree such institutions scattered all over this country. If Senators will mark the words, the amendment is very carefully guarded, so as not to include any institution where there is any individual profit, and further than that, where any of the funds are devoted to any purpose other than those which are religious, benevolent, charitable, and educational. (emphasis added) Presbyterian & Reformed Publishing Co. at 153.
In its analysis, the Third Circuit first determined to whose benefit the organization’s activities inured. The Court determined there was no factual basis for concluding that P&R’s increased commercial activity inured to the personal benefit of any individual. There was no evidence of personal enrichment of any individual at P&R. In fact, the highest salaried employee of P&R in 1979 received $15,350; none of the seven other paid employees received annual salaries over $12,500 and five were paid under $6,250. The Court was satisfied that the benefits of the organization’s activities did not inure to any individual. For comparison purposes, see Church of Scientology of California v. Comm’r of Internal Revenue, 412 F.2d 1197 (Ct. Claims 1969) (since church allowed leader of Scientology, L. Ron Hubbard, to receive ten percent of church’s gross income instead of a salary, the earnings of the church directly inured to the private benefit of Mr. Hubbard and tax-exempt status was denied to the Church of Scientology).
Second, the Third Circuit determined P&R’s purpose. It held that its purpose was religious, despite the fact that it was not formally affiliated with or under the control of any particular church.
Third, the Third Circuit considered the Tax Court’s concern that P&R was accumulating “profits.” As early as March, 1974, P&R notified the IRS that it was accumulating surplus cash as a “building fund” and actually used this fund to purchase land in Harmony, New Jersey. In 1978, P&R built a combined warehouse/office building on that site using the fund and in 1979 purchased equipment using the fund. P&R’s notice to the IRS and the IRS’ recognition of P&R’s expansion led the Third Circuit to conclude that this accumulation of cash did not amount to “profits” such that P&R’s tax-exempt status was in jeopardy. The Third Circuit was satisfied that P&R had not deviated from its claimed tax-exempt purpose, despite the accumulation of a cash surplus.
On this basis, the Third Circuit reversed the decision of the Tax Court and permitted P&R to maintain its tax-exempt status.
© 2010 Nissenbaum Law Group, LLC