Vocab Flashcards
Nonprofit Organization
An entity that operates for a public or social benefit rather than for profit.
Not-for-Profit Organization
A tax-exempt entity serving member interests rather than the general public.
501(c)(3)
A section of the IRS code granting tax exemption to charitable organizations.
Public Charity
A Public Charity is a nonprofit organization that receives broad public support and meets the IRS §509(a) criteria, which classify it as a public rather than a private foundation. To qualify, it must fall under one of the following categories:
§509(a)(1) – Organizations that receive a substantial part of their support from the general public or governmental units, such as churches, schools, hospitals, and publicly supported charities. These must pass the Public Support Test, where at least one-third of total revenue comes from public contributions or grants.
§509(a)(2) – Organizations that receive income from program services and a diverse group of donors, rather than relying on investment income. They must meet a Gross Receipts Test, ensuring at least one-third of revenue comes from contributions and service fees.
§509(a)(3) – Supporting organizations that exist to assist other public charities by providing financial support or operational services while maintaining a close relationship with the charity they support.
§509(a)(4) – Organizations that primarily conduct testing for public safety, such as fire safety and environmental testing groups.
Public charities benefit from higher donor tax deduction limits, reduced IRS scrutiny, and exemption from the excise taxes and strict payout rules that apply to private foundations.
Private Foundation (PF)
A Private Foundation (PF) is a nonprofit organization primarily funded by a single individual, family, or corporation, rather than broad public donations.
It operates under stricter IRS tax regulations, including self-dealing restrictions, excise taxes on investment income, and a mandatory 5% annual distribution requirement for charitable purposes.
Unlike public charities, PFs typically do not solicit public donations and often provide grants to other nonprofits rather than directly running programs.
Private Operating Foundation (POF)
A Private Operating Foundation (POF) is a type of private foundation that directly runs charitable activities rather than just funding other organizations.
To qualify, it must meet one of three IRS tests:
the Assets Test (using at least 65% of assets for its programs),
the Endowment Test (spending at least two-thirds of its investment return on charity), or
the Support Test (receiving at least 85% of support from the public or exempt organizations).
POFs enjoy higher donor tax deductions and are not required to distribute 5% of assets annually like regular private foundations. They offer more control over charitable work but must still follow IRS rules, including self-dealing restrictions.
Private Non-Operating Foundation (PNOF)
A Private Non-Operating Foundation (PNOF) is a type of private foundation that primarily provides grants to public charities rather than directly conducting its own charitable programs.
It does not run charitable activities itself but instead distributes funds to support organizations that do.
To maintain its tax-exempt status, a PNOF must follow IRS rules, including the 5% distribution rule, which requires it to distribute at least 5% of its assets annually for charitable purposes.
Unlike Private Operating Foundations (POFs), PNOFs have lower donor tax deduction limits and are subject to stricter IRS regulations on self-dealing, excess business holdings, and taxable expenditures.
PNOFs are ideal for philanthropists who prefer to fund charities rather than run their own programs while maintaining control over grant distribution.
Exempt Private Operating Foundation (EPOF)
A POF that meets a 10-year public support requirement and avoids investment income tax (excise tax).
Social Welfare Organization
A Social Welfare Organization is a nonprofit classified under §501(c)(4) of the IRS code that primarily promotes community well-being and social causes.
Unlike 501(c)(3) charities, which focus on charitable, educational, or religious purposes, 501(c)(4) organizations can engage in substantial lobbying and advocacy related to their mission.
However, political campaign activity cannot be their primary purpose. They are typically funded by membership dues, donations, and grants, but donations are not tax-deductible for donors.
Examples include civic leagues, advocacy groups, and organizations focused on social justice, environmental protection, or community improvement.
Tax-Exempt Status
Tax-Exempt Status is a designation granted by the IRS that allows an organization to be exempt from federal income tax under �501(c) of the tax code. Organizations with this status, such as charities, social welfare groups, and foundations, must operate for a qualifying purpose (e.g., religious, educational, scientific, or charitable) and follow strict compliance rules, including restrictions on political activity and profit distribution. While tax-exempt entities do not pay federal income tax, they may still be subject to state and local taxes, employment taxes, and unrelated business income tax (UBIT).
Form 1023
Form 1023 is the IRS application used by organizations seeking 501(c)(3) tax-exempt status. It requires detailed information about an organization’s structure, mission, financials, and operational plans to determine eligibility. The form includes sections on governance, compensation, public support, and charitable activities. Organizations seeking a faster, simplified process may qualify for Form 1023-EZ, a streamlined version for smaller nonprofits with projected annual gross receipts of $50,000 or less. Approval of Form 1023 grants official recognition as a public charity or private foundation, allowing donors to make tax-deductible contributions.
Form 8940
Form 8940 is an IRS form used for requesting miscellaneous determinations related to tax-exempt organizations, including the reclassification of exempt status.
This form allows organizations to apply for a change in their tax classification, such as transitioning from a Private Foundation (PF) to a Public Charity (§509(a)), or modifying their private operating foundation (POF) status.
Organizations may also use Form 8940 to request:
- Termination of private foundation status
- Approval for exception from Form 990 filing requirements
- Reinstatement of tax-exempt status after automatic revocation
- Change in IRS foundation classification based on updated financial support tests
The form requires details about the organization’s structure, financials, and justification for the requested change. Filing Form 8940 ensures IRS compliance and correct classification for tax and reporting purposes.
Charitable Trust
A fiduciary arrangement in which assets are held and managed by a trustee for charitable purposes, subject to regulatory oversight under state trust laws and the Internal Revenue Code (IRC � 501(c)(3)). Such trusts must be irrevocable to qualify for tax exemptions and can be subject to the jurisdiction of the attorney general for enforcement of charitable purposes.
Unincorporated Association
A voluntary organization of individuals who join together for a common nonprofit purpose without forming a legal entity separate from its members. Unlike corporations, it lacks limited liability protections, meaning members can be personally liable for debts or legal claims. Governance is typically based on bylaws, and tax-exempt status requires compliance with IRS guidelines.
Nonprofit LLC
A limited liability company (LLC) structured to qualify for tax-exempt status under IRC � 501(c)(3). To maintain this status, all members must be tax-exempt organizations, and its purpose must align with IRS charitable standards. Nonprofit LLCs must also include specific dissolution and operational provisions in their operating agreements to ensure compliance with nonprofit regulations.
Articles of Organization
A foundational legal document filed with the Secretary of State to formally establish an LLC under state law. It typically includes the LLC’s name, registered agent, business purpose, and management structure. For nonprofit LLCs, additional IRS-mandated provisions must be included to maintain tax-exempt status.
Operating Agreement
A legally binding contract that governs the internal operations of an LLC, outlining management responsibilities, voting rights, distribution of assets, and dispute resolution mechanisms. While not always required by law, it is critical for clarifying fiduciary duties, defining tax treatment, and ensuring regulatory compliance, particularly for nonprofit LLCs.
Dissolution Clause
A provision in a nonprofit�s governing documents (articles of incorporation or operating agreement) mandating that, upon dissolution, any remaining assets must be distributed to another qualified tax-exempt organization under IRC � 501(c)(3). This clause ensures compliance with state and federal charitable trust principles and prevents private inurement or benefit to individuals.
Net Investment Income Tax
A 1.39% excise tax imposed on the net investment income of private foundations under IRC � 4940. It applies to interest, dividends, rents, and capital gains, minus allowable deductions. The tax is designed to ensure that private foundations contribute to public benefit while preventing the undue accumulation of investment wealth.
Excise Tax
A penalty tax levied under IRC �� 4941-4945 on certain prohibited activities by private foundations, including self-dealing, excess business holdings, jeopardizing investments, and taxable expenditures. These excise taxes are intended to prevent misuse of charitable assets and ensure compliance with nonprofit fiduciary duties.
Self-Dealing
Prohibited transactions between a private foundation and its disqualified persons (e.g., substantial contributors, foundation managers, and their family members), subject to IRC � 4941 penalties. Examples include loans, property transfers, and payment of excessive compensation. Violations result in excise taxes and mandatory correction of the transaction.
Expenditure Responsibility
A set of due diligence requirements under IRC � 4945(h) that private foundations must follow when making grants to non-501(c)(3) organizations to ensure funds are used exclusively for charitable purposes. This includes pre-grant inquiries, written agreements, separate fund tracking, and detailed reporting to the IRS.
Endowment Test
An IRS measure used to assess whether a private foundation�s endowment is primarily devoted to exempt purposes. This test helps determine whether the foundation qualifies as an operating foundation under IRC � 4942(j)(3), which exempts it from certain minimum distribution requirements.
Adjusted Gross Income (AGI) Limit
The maximum percentage of a taxpayer�s adjusted gross income (AGI) that can be deducted for charitable contributions under IRC � 170(b). Limits vary based on the type of donation and recipient:
60% of AGI for cash gifts to public charities
30% of AGI for gifts to private foundations
20% of AGI for gifts of appreciated property to private foundations
Grant-Making
The legal and procedural framework through which private foundations and public charities provide funds to charitable entities, governed by IRC � 501(c)(3) and, for private foundations, subject to expenditure responsibility rules under IRC � 4945. Grants must align with the foundation�s exempt purpose and cannot result in private inurement or prohibited lobbying activities.
Supporting Organization
A nonprofit entity classified under IRC � 509(a)(3) that exists to support one or more public charities. Unlike private foundations, supporting organizations avoid excise taxes and minimum distribution requirements but must meet three structural categories: Type I (controlled by the supported organization), Type II (operated in connection with it), and Type III (operated for its benefit but with less control). The IRS imposes strict oversight to prevent abuse, including prohibited transactions with disqualified persons.
Public Support Test
A legal requirement under IRC �� 509(a)(1) and 170(b)(1)(A)(vi) ensuring a charity is financially supported by the general public rather than a few individuals or entities. A nonprofit must receive at least one-third of its total support from public contributions, government grants, or other qualifying sources over a five-year period. If it fails, it may still qualify under the facts and circumstances test, demonstrating broad public involvement. Failure results in reclassification as a private foundation, triggering excise taxes and additional compliance obligations.
Jeopardy Investment
A risky financial decision that could threaten a private foundation’s ability to fulfill its charitable mission, as defined in IRC � 4944. Foundations must manage investments prudently, considering factors like diversification and risk exposure. Engaging in a jeopardy investment can result in initial and additional excise taxes imposed on both the foundation and responsible fiduciaries, unless corrective action is taken.
Taxable Expenditures
Disbursements by a private foundation that fail to qualify as charitable under IRC � 4945, leading to IRS penalties. These include grants to individuals without IRS-approved procedures, grants to non-501(c)(3) organizations without expenditure responsibility, lobbying expenses, political campaign contributions, and non-charitable expenditures. Violations trigger excise taxes on both the foundation and its managers, with required correctional measures.
Exempt Purpose
The core activities that qualify an organization for federal tax-exempt status under IRC � 501(c)(3). These include charitable, religious, educational, scientific, and literary purposes, as well as preventing cruelty to children or animals. The IRS reviews whether an organization�s governing documents, operations, and financial activities align with its stated exempt purpose. Engaging in private benefit, excessive lobbying, or political campaign activity risks revocation of tax-exempt status.
Annual Distribution Requirement
A rule under IRC � 4942 mandating that private foundations distribute at least 5% of their investment assets annually for charitable purposes. The qualifying distributions include grants to public charities, administrative expenses directly related to charitable work, and certain program-related investments. Foundations failing to meet this requirement face significant excise tax penalties on the undistributed amount. This rule ensures that private foundations actively contribute to philanthropy rather than merely accumulating wealth.
Statute of Charitable Uses (1601)
A historic English law enacted under Queen Elizabeth I, which provided the first formal legal definition of charitable purposes. The statute identified categories such as relief of the poor, education, religious institutions, healthcare, and infrastructure improvements. It laid the foundation for modern nonprofit and tax laws, including trust law principles and the IRS’s definition of charitable purposes under IRC � 501(c)(3). U.S. courts still refer to its principles when interpreting charitable intent in trust and nonprofit law.
Bob Jones University v. U.S. (1983)
A landmark U.S. Supreme Court case (461 U.S. 574) that established a public policy limitation on tax-exempt status. The Court ruled that nonprofits violating fundamental public policy (e.g., engaging in racial discrimination) do not qualify for � 501(c)(3) tax-exempt status, even if their activities otherwise align with exempt purposes. The case involved Bob Jones University, which denied admission to students in interracial marriages. The IRS revoked its tax exemption, and the Court upheld this decision, reinforcing that tax-exempt organizations must serve the public good in alignment with societal values.
Cy Pres Doctrine
A legal principle in trust and nonprofit law allowing courts to modify the terms of a charitable trust or nonprofit gift when the original purpose is impossible, impractical, or illegal. Derived from French (“as near as possible”), courts apply cy pres to ensure that donated assets continue serving a purpose that closely aligns with the donor�s original intent. This doctrine is commonly invoked when charities dissolve, their missions become obsolete, or a donor�s conditions cannot be fulfilled due to changes in law or circumstances.
Restatement of Charities
A legal summary that consolidates and clarifies principles governing charitable trusts, nonprofit organizations, and charitable gifts. Published by the American Law Institute (ALI), the Restatement outlines charitable purposes, fiduciary duties, donor intent, and regulatory oversight. While not binding law, it serves as a persuasive legal authority in court decisions and legal interpretations.
Charitable Trust
A trust established exclusively for charitable purposes, designed to benefit the public or a broad class of individuals, rather than specific private beneficiaries. Governed by common law and state trust codes, charitable trusts enjoy favorable tax treatment under IRC � 501(c)(3) and are subject to attorney general oversight to ensure funds are used as intended. Unlike private trusts, charitable trusts do not require identifiable beneficiaries and may last indefinitely.
Eleemosynary Purposes
A legal term referring to charitable, benevolent, or philanthropic purposes. This term is commonly used in trust law, nonprofit statutes, and tax law to describe organizations and activities that qualify for tax-exempt status under IRC � 501(c)(3). To meet eleemosynary standards, an entity must operate for the public good rather than for private gain.
Indefinite Class
A requirement for a valid charitable trust or gift, meaning the beneficiaries must be a broad and indefinite group rather than specific named individuals. This ensures the public benefit requirement is met, distinguishing charitable trusts from private trusts. Courts apply this principle to determine whether a trust qualifies as charitable under state law and federal tax regulations.
Self-Dealing
Prohibited financial transactions between a nonprofit organization (especially a private foundation) and insiders (e.g., board members, officers, substantial donors, or their family members). Governed by IRC � 4941, self-dealing includes excessive compensation, loans, property transfers, and use of nonprofit assets for personal benefit. Violations result in excise taxes and corrective action requirements.
Public Policy Consideration
The legal principle that charitable organizations must not engage in activities that contravene fundamental public policy. This doctrine was solidified in Bob Jones University v. United States (1983), 461 U.S. 574, where the Supreme Court ruled that organizations engaging in racial discrimination could lose � 501(c)(3) tax-exempt status. The IRS applies this principle to deny or revoke exemptions for nonprofits that engage in illegal or socially harmful activities.
Oregon Revised Statutes (ORS)
The codified laws of Oregon, including the legal framework governing nonprofit corporations, charitable organizations, and fiduciary duties. ORS covers formation, governance, reporting, and dissolution of nonprofits, ensuring compliance with state and federal regulations. Violations may result in penalties, loss of tax-exempt status, or state attorney general intervention.
ORS 65.001
A specific statute within the Oregon Revised Statutes (ORS Chapter 65) that defines the legal framework for nonprofit corporations in Oregon. This statute establishes key principles such as incorporation requirements, member and director responsibilities, conflict of interest policies, and dissolution procedures. Oregon nonprofits must comply with ORS 65.001 in addition to federal IRS tax-exempt regulations under IRC � 501(c)(3).
Third Restatement of Trusts
A comprehensive legal document issued by the American Law Institute (ALI) that updates and modernizes trust law, including principles governing charitable trusts, fiduciary duties, and trustee powers. This restatement is widely cited in court decisions and serves as a persuasive legal authority for interpreting trust law across jurisdictions.
Nonprofit Membership
Individuals or entities that have voting rights or governance roles in a nonprofit but do not own equity or receive profits. Membership structures are governed by the nonprofit�s bylaws and state nonprofit statutes. Members may elect directors, approve major corporate actions, and influence the organization�s mission.
Corporate Shareholders
Individuals or entities that own stock in a corporation, giving them potential voting rights, dividend payments, and financial interest in the company. Unlike nonprofit members, shareholders own a transferable equity stake and may profit from capital appreciation, mergers, or dividends. Corporate governance laws define their rights and fiduciary protections.
LLC Members
Owners of a Limited Liability Company (LLC) who share profits, losses, and management responsibilities. LLC members have limited liability protections, meaning they are not personally responsible for company debts. Membership rights and duties are outlined in the Operating Agreement and governed by state LLC statutes.
Conservation Easement
A legally binding agreement between a landowner and a government agency or land trust, restricting land use to protect natural resources, wildlife habitats, or historical sites. These easements qualify for charitable tax deductions under IRC � 170(h) if they provide a perpetual public benefit.
Public Benefit
A legal requirement for nonprofit organizations and charities to operate exclusively for public interest rather than private gain. To qualify for tax-exempt status under IRC � 501(c)(3), an organization must demonstrate that its activities serve a broad and indefinite class of beneficiaries.
Belk v. Commissioner (2013)
A U.S. Tax Court case (Belk v. Comm’r, 140 T.C. No. 1) ruling that conservation easements must apply to a specific property in perpetuity to qualify for charitable tax deductions under IRC � 170(h). The court held that easements allowing land substitutions fail to meet the “perpetuity” requirement for tax-exempt conservation.
Conservation Land Trust
A nonprofit organization that acquires, holds, and manages land or conservation easements for the purpose of protecting environmentally significant areas. These trusts must comply with IRS tax-exempt rules and are subject to state conservation laws and fiduciary duties to maintain protected lands.
Pecos River Open Spaces Case
A legal case affirming that land conservation qualifies as a charitable purpose under tax law. The ruling reinforced that protecting open spaces, wildlife habitats, and natural resources serves a legitimate public interest and meets IRC � 501(c)(3) requirements for nonprofit status.
Montana Stream Access Law
A state law granting public access to streams and rivers up to the high-water mark, ensuring recreational and fishing rights while balancing private property interests. This law has been challenged and upheld in multiple court cases, shaping public trust doctrines and land-use laws in the Western U.S.
Charitable Tax Deduction
A federal tax incentive under IRC � 170, allowing taxpayers to deduct qualifying charitable contributions to � 501(c)(3) organizations. Deductible donations include cash, securities, real estate, and conservation easements, subject to AGI limitations and substantiation requirements to prevent abuse.
Jackson v. Phillips (1867)
A landmark Massachusetts case applying the Cy Pres Doctrine to modify a charitable trust originally created to support abolitionist causes. After slavery was abolished, the court redirected the trust funds toward racial justice and education efforts, ensuring the donor’s intent was honored while serving a legally permissible modern purpose. This case is foundational in trust and nonprofit law for adapting outdated charitable purposes.
Marsh v. Frost National Bank
A legal case ruling that an impractical charitable trust does not qualify under the Cy Pres Doctrine. The court found that if a trust�s purpose cannot reasonably be carried out and no broader charitable intent is evident, the trust may fail rather than be modified. This case highlights the limitations of Cy Pres and the necessity of drafting trusts with flexibility.
Environmental Protection as an Exempt Purpose
A legal and tax concept recognizing environmental conservation as a valid charitable purpose under IRC � 501(c)(3). Nonprofits engaged in land conservation, pollution reduction, and wildlife preservation can qualify for tax-exempt status, provided they serve a broad public interest and do not improperly benefit private parties.
Public Support Test
An IRS measure under IRC �� 509(a)(1) and 170(b)(1)(A)(vi) used to determine whether a nonprofit receives sufficient public contributions to qualify as a public charity rather than a private foundation. Organizations must receive at least one-third of their support from the general public or meet a facts and circumstances test to demonstrate public engagement.
Revenue Ruling 76-204
A key IRS ruling addressing the tax benefits of conservation easements, clarifying that such easements must provide a substantial public benefit to qualify for charitable tax deductions under IRC � 170(h). The ruling emphasizes perpetuity, donor intent, and actual public access as factors in determining deductibility.
Private Benefit Doctrine
A legal principle stating that tax-exempt organizations under IRC � 501(c)(3) cannot operate for the private gain of individuals or businesses. The IRS evaluates whether a nonprofit�s activities serve a substantial public benefit or improperly enrich private interests. Excessive private benefit can result in revocation of tax-exempt status.
7-Step Analytical Approach
A structured legal method for evaluating nonprofit law, incorporating historical analysis, statutory interpretation, policy considerations, IRS regulations, judicial precedents, compliance obligations, and public interest assessments. This approach ensures a comprehensive legal and policy evaluation of charitable entities.
Perpetuity Requirement
A legal condition under IRC � 170(h) requiring that conservation easements be permanent to qualify for federal tax benefits. This means land restrictions must last indefinitely, ensuring long-term environmental preservation. Violations, such as land swaps or alterations without government approval, can invalidate tax deductions.
Tax Court
A specialized federal court that handles tax-related disputes, including charitable deductions, nonprofit tax exemptions, and conservation easement compliance. Cases decided in U.S. Tax Court establish precedent on IRS enforcement and tax treatment of charitable activities.
Land Conservation Incentives Act
Legislation designed to encourage private landowners to donate land or place conservation easements on their property by offering enhanced tax deductions. This act strengthens environmental protection efforts while providing financial benefits to landowners willing to commit to conservation in perpetuity.
Substantial Public Benefit
A legal standard requiring that charitable activities contribute significantly to the public good rather than serving a narrow or private interest. This test is used by the IRS and courts to determine whether a nonprofit qualifies for tax-exempt status and whether a conservation easement meets the “public benefit” requirement under IRC � 170(h).
Homeowners’ Association (HOA) & Tax-Exemption
A legal debate over whether private homeowner conservation efforts, such as maintaining green spaces or private lakes, qualify as charitable purposes under IRC � 501(c)(3). The IRS generally denies tax-exempt status to HOAs, reasoning that they primarily benefit private property owners rather than the general public. However, in rare cases, if an HOA�s conservation efforts provide substantial public benefit, limited tax-exempt status may be granted.
Ownership and Profit Distribution
A key legal distinction between: (1) nonprofit members, who do not own shares and cannot receive profits, (2) corporate shareholders, who own stock and may receive dividends, and (3) LLC members, who have ownership interests and share profits and losses. Understanding these differences is essential for determining fiduciary duties, tax obligations, and liability protections.
Indefinite Class of Beneficiaries
A requirement for charitable organizations and trusts, ensuring they serve a broad, undefined group rather than specific individuals. This principle ensures compliance with IRS charitable purpose standards and common law charitable trust principles, preventing private inurement or benefit to select individuals.
Impermissible Private Benefit
Any financial or operational advantage conferred upon private individuals or businesses that is inconsistent with a nonprofit�s charitable mission. Under IRC � 501(c)(3), charities must serve the public interest and cannot unduly benefit private parties. Violations may result in revocation of tax-exempt status and excise tax penalties under IRC � 4958.
Charitable Corporation
A nonprofit corporation formed to pursue charitable, educational, religious, or eleemosynary purposes, as defined in ORS 128.620(1) and IRC � 501(c)(3). Unlike private foundations, charitable corporations typically rely on public support and grants, must follow nonprofit fiduciary laws, and are prohibited from distributing profits to private individuals.
Statutory Definition of Charity
The legal definition of charitable purposes under state and federal law. Generally, charities must operate for purposes such as relief of the poor, advancement of education or religion, promotion of health, environmental conservation, and public safety. Federal law under IRC � 501(c)(3) provides tax exemptions, while state laws may impose additional regulatory requirements.
Legal Standing
The right of an individual or entity to bring a lawsuit or challenge a legal decision in court. In nonprofit and trust law, donors, beneficiaries, and state attorneys general may have standing to challenge misuse of charitable funds or violations of fiduciary duty. Courts apply standing rules to prevent frivolous lawsuits while ensuring proper legal oversight.
Doctrine of Waste
A legal principle preventing the misuse, destruction, or deterioration of charitable assets. Trustees and nonprofit directors owe fiduciary duties to manage assets responsibly and in alignment with the organization�s mission. Wasteful expenditures or neglect of charitable assets may result in legal action by state attorneys general or affected beneficiaries.
Charitable Gift Annuity
A planned giving arrangement where a donor transfers assets to a charity in exchange for a fixed lifetime income stream. Charitable gift annuities qualify for partial tax deductions under IRC � 170 and are regulated under state and federal charitable trust laws. Upon the donor�s death, remaining assets go to the charity.
Residuary Bequest
A charitable donation made from the remainder of an estate after all specific gifts, debts, and expenses have been settled. These gifts are commonly used in wills and trusts to ensure charities receive any remaining assets after family members and other named beneficiaries are provided for. Residuary bequests can be contingent or unrestricted, depending on donor intent.
Environmental Conservation as Charitable Purpose
The legal recognition of conservation efforts as a valid charitable purpose, qualifying under IRC � 501(c)(3) if they provide a substantial public benefit. Examples include land preservation, wildlife protection, clean water initiatives, and climate change mitigation. Conservation organizations must demonstrate public access or broader environmental benefits to maintain tax-exempt status.
Excess Benefit Transaction
A prohibited transaction under IRC � 4958, where a nonprofit insider (such as an officer, director, or substantial donor) receives excessive compensation, perks, or financial benefits that exceed fair market value. The IRS imposes excise taxes on both the individual and the organization, requiring repayment and corrective actions. Repeated violations may lead to revocation of tax-exempt status.
Public Interest Law Firm
A nonprofit law firm that provides legal representation to underrepresented individuals, marginalized communities, or public interest causes in areas such as civil rights, environmental law, consumer advocacy, and government accountability. To qualify for tax-exempt status under IRC � 501(c)(3), such firms must primarily serve charitable or educational purposes and avoid operating as commercial enterprises.
Revenue Ruling 75-74
A 1975 IRS ruling establishing tax-exempt status guidelines for nonprofit public interest law firms. The ruling clarified that law firms seeking IRC � 501(c)(3) status must operate exclusively for the public benefit, primarily provide services to indigent or disadvantaged clients, and avoid activities that generate private benefit or resemble commercial legal practices.
Revenue Procedure 71-39
An IRS procedure issued in 1971 outlining the criteria for public interest law firms to obtain tax-exempt status. It emphasized that fee-based legal services must be incidental to the nonprofit mission and that funding should primarily come from charitable sources. This procedure was later superseded by Rev. Proc. 92-59.
Revenue Procedure 92-59
A 1992 IRS update on tax-exempt status requirements for public interest law firms, allowing them to charge limited fees for legal services as long as they primarily serve charitable purposes. This procedure broadened the scope of fee structures, making it easier for public interest firms to maintain financial sustainability while complying with nonprofit regulations.
Private Letter Ruling (PLR)
A specific determination letter issued by the IRS in response to an organization’s request for guidance on tax exemption or other tax matters. PLRs are not legally binding on other entities but provide insight into IRS interpretations of IRC � 501(c)(3) regulations. They are often requested by nonprofits, businesses, and charitable organizations to clarify their tax obligations.
Public Policy Doctrine
A legal principle stating that tax-exempt organizations cannot engage in activities that violate fundamental public policy. This doctrine was solidified in Bob Jones University v. United States (1983), 461 U.S. 574, where the Supreme Court ruled that organizations practicing racial discrimination or other policies contrary to public interest could lose their IRC � 501(c)(3) status.
Bob Jones University v. United States (1983)
A landmark Supreme Court case holding that organizations violating fundamental public policy�such as engaging in racial discrimination�are ineligible for tax-exempt status under IRC � 501(c)(3). The ruling upheld the IRS�s revocation of Bob Jones University�s exemption due to its racially discriminatory policies, reinforcing the Public Policy Doctrine in nonprofit law.
Calhoun Academy v. Commissioner
A U.S. Tax Court case requiring a private school to affirmatively demonstrate a nondiscriminatory admissions policy to maintain tax-exempt status. The court ruled that schools failing to provide evidence of nondiscriminatory policies, particularly regarding race, risk losing their tax-exempt status, reinforcing Bob Jones University v. United States.
Church of Scientology v. Commissioner
A U.S. Tax Court case revoking the Church of Scientology of California�s tax-exempt status due to engagement in illegal activities, financial improprieties, and excessive private benefit. The IRS determined that the church�s activities failed to meet the requirements of IRC � 501(c)(3), leading to prolonged litigation over its tax-exempt status.
Fundamental Public Policy Requirement
A legal standard requiring tax-exempt organizations to comply with established public policy principles. This requirement applies primarily to charities and educational institutions, ensuring that nonprofits do not engage in activities that are illegal or contrary to widely accepted public policy (e.g., racial discrimination, fraud, or criminal activity).
Marriage Ruling Worries Schools
A legal discussion on whether religious schools and organizations opposing same-sex marriage could lose tax-exempt status under the Public Policy Doctrine. Some scholars and policymakers speculate that cases like Bob Jones University v. United States might be used as precedent to deny tax exemption to organizations that discriminate based on sexual orientation or marriage status. However, no definitive IRS ruling has been issued on this issue.
White Supremacist Organizations & Tax Exemption
A controversial legal debate on whether white supremacist groups or hate organizations qualify for tax-exempt status under IRC � 501(c)(3). The IRS generally denies tax exemption to organizations whose activities promote violence, illegal conduct, or violate public policy, but some groups have attempted to claim tax-exempt status under educational or religious classifications. Courts have consistently ruled that activities promoting racial hatred or violence do not qualify as legitimate charitable or educational purposes.
Disaster Relief Organization
A nonprofit entity providing emergency aid, food, shelter, medical care, and long-term recovery assistance following natural disasters (e.g., hurricanes, earthquakes) or human-made crises (e.g., terrorism, war, industrial accidents). To qualify for tax-exempt status under IRC � 501(c)(3), these organizations must serve a charitable class, operate exclusively for disaster relief purposes, and follow IRS regulations on needs-based aid distribution.
IRS Publication 3833
An IRS guide detailing the expedited approval process for disaster relief organizations, ensuring that tax-exempt entities can provide rapid, tax-deductible assistance during crises. The publication outlines fundraising rules, grant distribution procedures, and compliance requirements for maintaining � 501(c)(3) status.
Employer-Sponsored Relief Funds
Charitable funds established by employers to provide financial assistance to employees facing personal hardships, such as natural disasters, medical emergencies, or economic crises. To qualify for tax-exempt status, these funds must comply with IRS requirements, including: (1) distributing aid based on need, (2) not favoring key employees or company executives, and (3) ensuring funds primarily serve a broad charitable class rather than being a disguised employee benefit plan.
Needs-Based Testing
An IRS requirement that disaster relief aid must be based on objective criteria demonstrating that the recipient is financially or physically in need. Organizations providing disaster relief must document that assistance is not provided indiscriminately or for the benefit of private interests, ensuring compliance with IRC � 501(c)(3) charitable purpose standards.
Educational Organization
A nonprofit entity classified under IRC � 501(c)(3) that provides instruction, training, or public education. Educational organizations include schools, universities, museums, research institutions, and advocacy groups engaged in imparting knowledge rather than promoting private interests.
Treas. Reg. �1.501(c)(3)-1(d)(3)
A Treasury regulation defining an educational organization for � 501(c)(3) tax-exemption purposes. It states that educational organizations must engage in instruction or training, including formal schooling, public discussions, and distribution of educational materials. Advocacy groups may qualify if they provide a full and fair exposition of opposing views rather than engaging in propaganda or political activity.
Big Mama Rag Case
A D.C. Circuit Court case (Big Mama Rag, Inc. v. United States, 631 F.2d 1030, 1980) ruling that the IRS�s “full and fair exposition” test for determining whether an organization qualifies as educational was unconstitutionally vague. The court found that the IRS lacked objective criteria, violating First Amendment protections for advocacy-based educational organizations. This decision led to the IRS adopting Rev. Proc. 86-43�s Methodology Test.
Methodology Test
An IRS test established in Rev. Proc. 86-43 to determine whether an advocacy-based organization qualifies as educational under � 501(c)(3). The test requires that organizations provide: (1) a factual, objective basis for their views, (2) a presentation of opposing perspectives, and (3) an educational methodology rather than mere opinion or propaganda. Failure to meet these criteria can result in denial of tax-exempt status.
Rev. Proc. 86-43
An IRS procedure setting objective criteria for determining whether advocacy-based organizations qualify as educational under IRC � 501(c)(3). This procedure was established in response to Big Mama Rag, Inc. v. United States, ensuring that the IRS applies consistent, constitutionally sound standards in granting tax-exempt educational status.
Nationalist Movement v. Commissioner
A U.S. Tax Court case affirming the constitutionality of the IRS�s Methodology Test in determining whether advocacy organizations qualify as educational. The court ruled that organizations must present information in a factual, objective manner to maintain tax exemption, reinforcing that propaganda or one-sided political messaging is not “educational” under � 501(c)(3).
White Nationalist Organizations & Tax Exemption
A legal issue concerning whether white nationalist or extremist groups qualify for 501(c)(3) tax-exempt status. The IRS generally denies tax-exempt status to groups that engage in hate speech, incite violence, or violate the Public Policy Doctrine. Some groups have attempted to qualify under educational or religious classifications, but courts have consistently ruled that promoting racial hatred does not constitute a charitable or educational purpose under tax law.
Public Support Test
An IRS test under IRC �� 509(a)(1) and 170(b)(1)(A)(vi) to determine whether a nonprofit receives sufficient public contributions to qualify as a public charity rather than a private foundation. Organizations must receive at least one-third of total support from public contributions or meet a facts and circumstances test proving public engagement.
Perpetuity Requirement
A legal condition under IRC � 170(h) requiring that conservation easements and certain charitable trusts maintain their purpose indefinitely to qualify for tax benefits. Easements that allow land modifications, substitutions, or revocations without government oversight may fail this requirement, leading to loss of charitable deductions or tax-exempt status.
IRS Enforcement & Free Speech
The legal challenge of balancing IRS tax-exempt status regulations with First Amendment protections for controversial organizations. The IRS may revoke � 501(c)(3) status for groups engaged in political activity, hate speech, or violations of the Public Policy Doctrine, but such actions can raise constitutional free speech concerns when applied to ideological or advocacy-based organizations. Courts have ruled that tax exemption is a privilege, not a right, but enforcement must remain content-neutral to avoid unconstitutional censorship.
Expanding the Public Policy Doctrine
A legal proposal to extend the Public Policy Doctrine�which currently applies to racial discrimination (Bob Jones University v. U.S.)�to other areas such as LGBTQ+ rights, reproductive health, and climate change denial. Proponents argue that nonprofits engaged in discriminatory practices should lose tax-exempt status, while critics warn that expansion could conflict with religious and free speech protections under the First Amendment.
Advocacy-Based Organization
A nonprofit that promotes a specific social, political, or ideological viewpoint, subject to IRS scrutiny under the Methodology Test (Rev. Proc. 86-43). To qualify for � 501(c)(3) tax exemption, such organizations must present fact-based educational materials, rather than engaging in one-sided propaganda or partisan political activity. Failure to meet these criteria may result in denial or revocation of tax-exempt status.
First Amendment & Tax-Exempt Status
A legal debate on whether organizations can be denied tax-exempt status based on their ideological views. The Supreme Court has ruled that tax-exempt status is not a constitutional right, but the IRS must enforce tax laws without viewpoint discrimination. Key cases, such as Bob Jones University v. U.S., illustrate the limits of free speech in the context of public policy and nonprofit tax exemption.
Improving IRS Oversight
Proposed reforms to enhance the IRS�s review process for tax-exempt organizations, including increased audits, stricter enforcement of political activity restrictions, enhanced transparency in nonprofit governance, and clearer standards for revocation of tax-exempt status. These reforms aim to reduce nonprofit abuse, prevent fraud, and ensure that tax-exempt entities serve public rather than private interests.
Charitable Class
A legal requirement under � 501(c)(3) stating that a charity must benefit an open and indefinite group rather than specific named individuals. This principle ensures that charitable organizations serve broad public interests, preventing private inurement or misuse of tax-deductible contributions. Courts apply this standard when reviewing trusts, foundations, and nonprofit corporations.
Declaratory Judgment
A binding court ruling that determines the legal status of an entity or issue. In nonprofit law, declaratory judgments are often sought when organizations challenge IRS rulings on tax exemption, political activity restrictions, or compliance issues. Under IRC � 7428, nonprofits can seek a declaratory judgment in U.S. Tax Court, U.S. District Court, or the Court of Federal Claims if their tax-exempt status is denied or revoked.
Objective Criteria for Relief
IRS guidelines requiring disaster relief funds to be distributed based on documented need, rather than arbitrary selection or favoritism. Nonprofits providing disaster aid must establish neutral, needs-based criteria (e.g., income level, property loss, family size) to ensure compliance with � 501(c)(3) requirements and prevent private benefit violations.
Substantial Public Benefit
A standard used to determine whether an activity qualifies as charitable by providing a significant societal benefit rather than primarily benefiting private interests. The IRS and courts evaluate whether a nonprofit�s activities serve a broad public class, advance education, improve health, protect the environment, or address community needs to determine tax-exempt eligibility.
Tax Court Precedents
Legal rulings from the U.S. Tax Court that establish standards for tax-exempt status and nonprofit compliance. Cases such as Bob Jones University v. U.S., Nationalist Movement v. Commissioner, and Church of Scientology v. Commissioner provide legal interpretations of IRS regulations, shaping nonprofit governance, permissible advocacy, and tax-exempt eligibility criteria.
Conservation Land Trust
A nonprofit organization that holds and manages conservation easements to protect land from development, preserve wildlife habitats, and maintain natural resources. Such trusts must meet IRS public benefit standards under � 501(c)(3) and perpetuity requirements under IRC � 170(h) to qualify for tax-deductible contributions.
Treasury Regulations
Rules issued by the U.S. Department of the Treasury that provide official guidance on tax laws, including nonprofit operations, charitable deductions, excise taxes, and political activity restrictions. Treasury regulations, found in Title 26 of the Code of Federal Regulations (CFR), interpret statutes such as IRC � 501(c)(3) and govern IRS enforcement actions against tax-exempt organizations.
Doctrine of Inurement
A tax principle under IRC � 501(c)(3) that prohibits nonprofit earnings from benefiting private individuals, insiders, or stakeholders. Nonprofits must operate exclusively for charitable purposes, and any excessive compensation, insider transactions, or private benefit violations can lead to IRS penalties, excise taxes under IRC � 4958, or revocation of tax-exempt status.
Charitable Advocacy
The practice of nonprofit organizations engaging in issue-based advocacy while maintaining tax-exempt status. Advocacy differs from lobbying and political activity, which are restricted under IRS rules. Organizations may promote social change, conduct research, or educate the public, provided their efforts remain nonpartisan and align with their exempt purpose under IRC � 501(c)(3).
Regulatory Oversight
The process by which government agencies, such as the IRS, state attorneys general, and the Federal Trade Commission (FTC), monitor nonprofit compliance with tax-exempt laws. Oversight ensures organizations: (1) operate for public benefit, (2) follow governance standards, (3) properly report financials (e.g., IRS Form 990), and (4) avoid private inurement and excess benefit transactions. Violations can lead to penalties, audits, or revocation of tax-exempt status.
Declaratory Relief
A legal remedy allowing nonprofits to seek a binding court ruling on their tax-exempt status. Under IRC � 7428, nonprofits denied 501(c)(3) status by the IRS can petition for declaratory relief in U.S. Tax Court, the U.S. District Court, or the Court of Federal Claims to resolve disputes over their tax classification.
Nonprofit Governance Standards
Best practices for managing tax-exempt organizations, ensuring board accountability, ethical oversight, financial transparency, and mission alignment. Governance standards include: (1) a clear mission statement, (2) fiduciary duties of care and loyalty for board members, (3) conflict-of-interest policies, and (4) compliance with IRS and state nonprofit laws. Strong governance protects organizations from fraud, mismanagement, and regulatory violations.
Organizational Test for 501(c)(3)
An IRS requirement ensuring that a nonprofit�s structure, articles of incorporation, and governing documents align with tax-exempt purposes. The test requires: (1) a formal nonprofit structure, (2) a mission statement with charitable intent, (3) a dissolution clause ensuring assets go to another 501(c)(3) entity upon dissolution, and (4) compliance with IRS nonprofit governance rules. Failure to meet this test can result in denial of tax-exempt status.
Operational Test for 501(c)(3)
A test under IRS regulations ensuring that a nonprofit operates primarily for tax-exempt purposes rather than for private gain or commercial business activities. A nonprofit must: (1) devote the majority of its activities to its exempt mission, (2) limit lobbying and political activities, and (3) avoid excessive unrelated business income (UBI), which may trigger taxation or jeopardize tax-exempt status.
Financial Accountability in Nonprofits
Standards ensuring proper use of nonprofit funds, including public disclosure, IRS reporting (Form 990), and compliance with Generally Accepted Accounting Principles (GAAP). Best practices include internal controls, external audits, transparent donor reporting, and legal compliance with grant restrictions. Nonprofits must ensure funds are used exclusively for their tax-exempt mission to prevent fraud, financial mismanagement, or IRS penalties.
Disaster Relief Organization
A nonprofit entity that provides immediate and long-term aid after natural or human-made disasters while complying with IRS tax-exempt requirements under IRC � 501(c)(3). These organizations must: (1) provide assistance based on documented need (Needs-Based Testing), (2) avoid private inurement or insider benefit, and (3) maintain financial accountability for public donations and government grants.
Community Benefit Standard
A legal and IRS requirement for nonprofit hospitals to demonstrate they provide broad public health benefits, rather than simply offering charity care to low-income patients. Established in Rev. Rul. 69-545, the standard requires hospitals to engage in community outreach, research, and education programs to justify their tax-exempt status.
Rev. Rul. 69-545
A seminal IRS ruling that replaced the old charity care requirement with the community benefit standard for nonprofit hospitals. The ruling held that hospitals could qualify for � 501(c)(3) tax exemption by providing broad community health benefits, including uncompensated care, health education, and emergency services, even if they did not provide free care to all indigent patients.
IHC Health Plans, Inc. v. Commissioner (2003)
A U.S. Tax Court case that denied � 501(c)(3) tax-exempt status to an HMO (Health Maintenance Organization), ruling that it operated like a commercial insurer rather than a charitable entity. The court found that IHC primarily served paying customers, engaged in profit-driven insurance activities, and lacked sufficient charitable operations, failing the Operational Test for tax-exempt organizations.
Provena Covenant Medical Center v. Department of Revenue (2010)
A landmark Illinois Supreme Court case that revoked a hospital�s property tax exemption for failing to provide sufficient charity care. The court ruled that Provena�s charitable activities were minimal, and the hospital operated more like a for-profit business, failing to meet the state�s charitable institution test. This case reinforced the requirement for hospitals to actively demonstrate a charitable mission beyond simply claiming tax-exempt status.
Private Inurement
A strict IRS prohibition under IRC � 501(c)(3) that prevents nonprofit insiders (e.g., officers, directors, substantial donors) from receiving excessive financial benefits from the organization. Examples of private inurement violations include excessive executive compensation, insider loans, and self-dealing transactions. A violation can result in immediate revocation of tax-exempt status or excise taxes under IRC � 4958 (intermediate sanctions).
Private Benefit Doctrine
A tax law principle preventing nonprofit organizations from providing excessive or disproportionate benefits to private individuals or entities. While some private benefit is permissible if incidental to a charitable purpose, a nonprofit that primarily serves private interests rather than the public risks losing its � 501(c)(3) status.
Harvey P. Dale�s ‘Permitting Inurement’
A legal argument advocating for proportional penalties rather than automatic revocation of tax-exempt status for minor inurement violations. Dale contends that excessive IRS punishment for minor infractions discourages nonprofit participation and that intermediate sanctions under IRC � 4958 should be used more frequently to correct violations without dismantling charitable organizations.
Executive Compensation in Nonprofits
A subject of IRS scrutiny to ensure nonprofit leaders� salaries are reasonable and do not violate private inurement rules. Under IRC � 4958, excessive compensation to executives can result in excise taxes (intermediate sanctions) on both the recipient and approving board members. Nonprofits must use comparable salary data and independent board review to justify executive pay.
CharityWatch
A nonprofit watchdog organization that monitors financial transparency, governance, and efficiency of tax-exempt entities. CharityWatch often flags high executive salaries, excessive administrative costs, and wasteful spending, influencing public trust, donor behavior, and potential regulatory action against mismanaged nonprofits.
Intermediate Sanctions (IRC � 4958)
A legal mechanism that allows the IRS to impose financial penalties on nonprofit insiders who receive excessive compensation or benefits rather than immediately revoking the organization�s � 501(c)(3) status. These excise taxes (intermediate sanctions) apply to disqualified persons and may also penalize board members who approve such transactions if they fail to exercise due diligence.
Excess Benefit Transaction
An improper financial transaction in which a nonprofit insider (e.g., an executive, board member, or major donor) receives excessive compensation, perks, or financial benefits that exceed fair market value. Under IRC � 4958, these transactions trigger excise taxes and require immediate correction to avoid further penalties.
Disqualified Person (Nonprofits)
An individual with significant influence over a nonprofit, including officers, directors, major donors, or key executives, who is subject to excess benefit transaction rules under IRC � 4958. Disqualified persons are prohibited from receiving excessive financial benefits that divert charitable assets for private gain.
25% Excise Tax on Excess Benefits
A financial penalty under IRC � 4958(a)(1) imposed on disqualified persons who receive excessive compensation or benefits from a nonprofit. The penalty equals 25% of the excess benefit amount, and the insider must repay the excess benefit to the organization within the correction period to avoid further penalties.
200% Penalty for Non-Correction
An additional IRS penalty under IRC � 4958(b) applied if an excess benefit transaction is not repaid within the correction period. If the disqualified person fails to return the excess benefit, the IRS imposes a 200% excise tax on the amount, significantly increasing financial liability.
IRS Form 990
A mandatory tax document that tax-exempt organizations must file annually to report financial activities, executive compensation, lobbying expenses, and program expenditures. Public disclosure of Form 990 ensures transparency and helps donors and regulators assess nonprofit financial accountability.
Benchmarking for Executive Salaries
A best practice for nonprofit governance that involves comparing executive compensation to similar organizations to ensure reasonableness and compliance with IRS regulations. Proper benchmarking helps justify salaries, prevent excess benefit transactions, and protect organizations from IRS penalties under IRC � 4958.
Disinterested Person
An individual with no financial stake in a nonprofit transaction, ensuring objective decision-making in governance. Under IRS safe harbor rules, decisions on executive compensation and major financial transactions should be made by a disinterested board committee to avoid conflicts of interest and IRS scrutiny.
Public Disclosure Requirements
Regulations requiring nonprofits to report financial activities, including executive compensation, major transactions, and revenue sources, to promote transparency and public trust. The IRS mandates public access to Form 990 filings, and nonprofits must comply with state and federal disclosure laws to maintain credibility and prevent financial mismanagement.
IRS Enforcement of Tax-Exempt Rules
The process by which the IRS monitors nonprofit compliance with tax-exempt regulations, including financial oversight, private inurement rules, and lobbying restrictions. IRS enforcement has been criticized for inconsistency and lack of resources, leading to calls for stronger oversight and clearer audit procedures.
Managed Care Organizations & Tax Exemption
A legal debate on whether nonprofit Health Maintenance Organizations (HMOs) should receive the same tax benefits as traditional hospitals. Courts have ruled that some HMOs operate more like commercial insurers than charitable entities, leading to denials of tax-exempt status (e.g., IHC Health Plans, Inc. v. Commissioner).
Tiered Exemption System
A proposed reform to classify different types of nonprofit healthcare organizations based on their service scope and community impact. Instead of a one-size-fits-all exemption, a tiered system would differentiate between traditional nonprofit hospitals, research institutions, and managed care organizations, ensuring that tax benefits align with public benefit contributions.
Declaratory Judgment for Nonprofits
A legal ruling clarifying an organization’s tax-exempt status, often sought in disputes with the IRS. Under IRC � 7428, nonprofits denied 501(c)(3) status or facing revocation can petition the U.S. Tax Court, U.S. District Court, or the Court of Federal Claims for a declaratory judgment to resolve the dispute. This legal process ensures that nonprofits receive judicial review of IRS decisions affecting their operations.
Proportional Penalties for Inurement
A legal argument advocating for financial penalties rather than automatic exemption revocation for minor nonprofit inurement violations. Under current IRS rules, private inurement can result in loss of tax-exempt status; however, scholars such as Harvey P. Dale argue for intermediate sanctions under IRC � 4958, allowing proportional penalties instead of harsh revocations.
501(c)(3) Compliance
The set of IRS rules that nonprofit organizations must follow to maintain tax-exempt status, including: (1) operating exclusively for charitable, religious, or educational purposes, (2) avoiding political campaign intervention, (3) limiting lobbying activities, (4) preventing private inurement, and (5) ensuring public benefit. Compliance is monitored through IRS Form 990 disclosures, audits, and revocation proceedings for violations.
Advocacy-Based Education
Educational programs that promote a specific viewpoint, subject to IRS scrutiny under the methodology test (Rev. Proc. 86-43). Advocacy organizations seeking � 501(c)(3) status must provide fact-based, objective materials rather than propaganda or one-sided messaging to qualify as educational. Failure to meet IRS educational standards can result in denial of tax exemption.
Methodology Test (IRS)
A standard established in Rev. Proc. 86-43 to determine whether an advocacy organization qualifies as educational under � 501(c)(3). The test evaluates whether an organization: (1) presents factual, objective materials, (2) avoids distortion of facts, (3) includes opposing viewpoints, and (4) follows an educational methodology rather than advancing a biased agenda.
Public Charity vs. Private Foundation
A distinction in nonprofit classification affecting tax treatment, regulatory oversight, and funding sources. Public charities receive broad public support and fewer restrictions on grant-making, while private foundations rely on a single funding source or family contributions and face higher excise taxes, self-dealing prohibitions, and stricter IRS regulations under IRC � 509(a).
Charitable Contributions Deductibility
IRS rules determining how donations to nonprofits can be deducted from taxable income. Under IRC � 170, individuals can deduct up to 60% of Adjusted Gross Income (AGI) for cash donations to public charities and 30% for gifts to private foundations. Donors must retain receipts, meet substantiation requirements, and comply with contribution limits to claim deductions.
EO (Exempt Organizations) IRS Division
The branch of the IRS responsible for monitoring nonprofit compliance with tax laws, including 501(c)(3) applications, annual reporting (Form 990), excess benefit transactions, and revocation proceedings. The EO Division investigates private inurement, political activity violations, and fraud in the nonprofit sector.
White Nationalist Organizations & 501(c)(3)
A controversial issue involving extremist groups obtaining tax-exempt status under claims of educational or charitable activities. The IRS generally denies tax-exempt status to organizations that promote violence, discrimination, or illegal activities under the Public Policy Doctrine (Bob Jones University v. U.S.). However, some groups have obtained 501(c)(3) status by presenting themselves as “educational institutions”, leading to legal and regulatory challenges.
IRS Revocation of Tax-Exempt Status
The process by which the IRS removes an organization�s nonprofit designation due to noncompliance with tax laws. Common reasons for revocation include: (1) excessive private benefit, (2) prohibited political campaign activity, (3) failure to file Form 990 for three consecutive years, and (4) engaging in commercial activities beyond an exempt purpose. Revocation can result in retroactive tax liabilities and loss of donor deductibility.
Charity Care Obligation
The expectation that nonprofit hospitals provide free or reduced-cost medical care to low-income patients to maintain tax-exempt status. Under Rev. Rul. 69-545 and the Affordable Care Act (ACA), hospitals must demonstrate community benefit by offering charity care, health education, and emergency services to qualify for IRS and state tax exemptions. Cases like Provena Covenant Medical Center v. Department of Revenue have reinforced this obligation.
Tax-Exempt Healthcare Models
Different structures under which healthcare organizations can operate as nonprofits, including public hospitals, charitable clinics, faith-based healthcare providers, and managed care organizations (HMOs). The IRS evaluates whether these entities meet the community benefit standard and provide services consistent with tax-exempt purposes under � 501(c)(3).
HMO (Health Maintenance Organization)
A healthcare model that offers managed care plans, sometimes challenged in nonprofit tax-exemption cases. Courts have ruled that some HMOs function more like commercial insurers than charitable entities, leading to denials of � 501(c)(3) status (e.g., IHC Health Plans, Inc. v. Commissioner). To qualify for tax exemption, an HMO must demonstrate significant community benefit beyond standard insurance operations.
Illinois Five-Part Test for Property Tax Exemption
A legal standard used in Illinois to determine whether a nonprofit hospital qualifies for state property tax exemptions. The test requires the hospital to: (1) be organized exclusively for charitable purposes, (2) use its property primarily for charitable activities, (3) provide significant charity care, (4) benefit an indefinite number of persons, and (5) relieve government burden. This test was key in Provena Covenant Medical Center v. Department of Revenue, where the court ruled that insufficient charity care led to the loss of tax-exempt status.
Jill Horwitz�s Research on Nonprofit Healthcare
A scholarly analysis examining how nonprofit hospitals compare to for-profits in providing charity care, public health services, and community benefits. Horwitz�s research suggests that nonprofit hospitals often provide more uncompensated care and engage in broader community benefit programs than their for-profit counterparts, justifying their tax-exempt status under IRS and state law.
Nonprofit Executive Compensation Regulation
IRS guidelines ensuring that nonprofit executives� salaries remain reasonable and do not violate inurement or excess benefit rules under IRC � 4958. Nonprofits must: (1) set executive pay based on comparable market data, (2) document compensation decisions through independent board review, and (3) disclose compensation on IRS Form 990 to maintain transparency. Failure to comply can result in excise taxes or loss of tax-exempt status.
IRS Scrutiny of High-Paid Nonprofit Executives
IRS investigations into whether large nonprofit salaries comply with tax-exempt status requirements. The IRS examines whether executive compensation is justified by market comparisons and approved through independent board review. Cases of excessive pay without justification can lead to intermediate sanctions (IRC � 4958), financial penalties, or reputational damage for the organization.
IRS Form 990 Schedule J
A mandatory reporting section on IRS Form 990 where nonprofits must disclose executive compensation, benefits, deferred pay, and perks. Schedule J requires organizations to provide detailed explanations of bonus structures, retirement plans, and other financial arrangements to ensure compliance with excess benefit transaction rules.
Self-Dealing in Nonprofits
Prohibited financial transactions between a nonprofit and its insiders (board members, executives, substantial donors) that result in private benefit. Under IRC � 4941, self-dealing includes loans, excessive compensation, use of nonprofit assets for personal purposes, and insider real estate transactions. Violations can result in excise taxes and IRS penalties.
Safe Harbor Provisions for Executive Pay
IRS guidelines that protect nonprofits from inurement penalties if compensation decisions follow best practices. To qualify for safe harbor protection, a nonprofit must: (1) use independent compensation committees, (2) rely on market comparisons, and (3) document salary approval in board minutes. Proper adherence shields board members from liability and IRS penalties.
Board Oversight & Fiduciary Duty
The legal responsibility of nonprofit board members to ensure compliance with financial regulations, governance policies, and fiduciary duties. Board members must exercise due diligence in financial oversight, prevent conflicts of interest, approve executive compensation, and uphold the nonprofit�s mission. Failure to do so can lead to IRS penalties, legal liability, or organizational dissolution.
Mandatory Reporting for Nonprofit Salaries
A proposed reform requiring nonprofits to publicly disclose all executive compensation to improve transparency and donor confidence. Currently, nonprofits must report top executive salaries on IRS Form 990, but advocates argue for expanded disclosure to prevent excessive compensation, fraud, and inurement violations.
Exempt Purpose Under 501(c)(3)
The IRS recognizes specific purposes that qualify an organization for tax-exempt status under IRC � 501(c)(3), including: charitable, educational, religious, literary, and scientific purposes, as well as testing for public safety and fostering national or international sports competition. Organizations must exclusively operate for one or more of these purposes to maintain their tax-exempt status.
Nonprofit Organizational Test
A legal requirement under IRS regulations that a nonprofit�s governing documents explicitly state that it will operate solely for tax-exempt purposes and will not distribute profits to private individuals or shareholders. This test is applied during the IRS 501(c)(3) application process to determine eligibility for tax-exempt status.
Nonprofit Operational Test
An IRS standard under Treas. Reg. � 1.501(c)(3)-1(c) ensuring that a nonprofit primarily conducts activities aligned with its charitable purpose, rather than serving private interests or engaging in substantial non-exempt activities. Failure to meet this test can result in denial or revocation of 501(c)(3) status.
Declaratory Judgment Action for Tax Exemption
A legal process by which a nonprofit seeks a court ruling to confirm its tax-exempt status, often used when an IRS determination is unclear, delayed, or disputed. Under IRC � 7428, organizations denied 501(c)(3) status can file a declaratory judgment action in U.S. Tax Court to resolve the issue.
Donor-Advised Fund (DAF)
A charitable giving account managed by a sponsoring nonprofit organization, allowing donors to make tax-deductible contributions and recommend how the funds should be distributed to charities over time. DAFs provide tax benefits to donors while allowing flexibility in charitable giving, but they face criticism for potentially delaying charitable distributions.
501(c)(4) Social Welfare Organization
A tax-exempt nonprofit organization under IRC � 501(c)(4) that can engage in lobbying and political advocacy, unlike 501(c)(3) charities. However, donations to 501(c)(4) organizations are not tax-deductible. These organizations are commonly used for issue advocacy, grassroots activism, and political lobbying.
IRS Publication 557
An official IRS guide that provides detailed requirements for obtaining and maintaining tax-exempt status, including application procedures, governance rules, compliance obligations, and revocation risks. This publication serves as a primary reference for nonprofit organizations navigating IRS regulations.
Program-Related Investments (PRIs)
Investments made by private foundations that support charitable activities while potentially generating financial returns. Examples include low-interest loans, equity investments, or credit guarantees for nonprofits or socially beneficial businesses. PRIs must align with the foundation�s exempt purpose under IRC � 4944 to avoid excise tax penalties.
Unrelated Business Income Tax (UBIT)
A tax imposed under IRC � 511 on income that a tax-exempt organization earns from activities not substantially related to its exempt purpose. UBIT is designed to prevent unfair competition with for-profit businesses and applies when nonprofits generate revenue from commercial activities outside their mission.
IRS Form 1023-EZ
A streamlined version of the standard IRS Form 1023, designed for small organizations seeking 501(c)(3) status. This form allows for a quicker, less complex application process but is subject to greater IRS scrutiny due to concerns about inadequate vetting of applicants.
Excess Benefit Transaction Penalties
IRS-imposed excise taxes under IRC � 4958 that apply when nonprofit insiders (e.g., executives or board members) receive compensation or benefits exceeding fair market value, violating private inurement rules. The penalties include a 25% tax on the excess benefit amount and an additional 200% penalty if the violation is not corrected in time.
Restricted vs. Unrestricted Funds
Restricted funds are donations earmarked for specific projects or purposes, such as scholarships, capital campaigns, or disaster relief, and must be used as designated by the donor. Unrestricted funds, on the other hand, can be used at the nonprofit�s discretion for general operations, administrative expenses, or mission-related activities. Misuse of restricted funds can result in legal action or loss of donor trust.
Taxpayer Standing in Nonprofit Litigation
The legal principle determining whether a taxpayer has the right to sue a nonprofit or government agency over its tax-exempt status or financial activities. Courts generally limit taxpayer standing to cases where the taxpayer has suffered direct financial harm, such as increased tax liability, rather than allowing broad challenges to IRS decisions on nonprofit exemptions.
Fiduciary Responsibilities of Nonprofit Directors
The legal duties of nonprofit board members, which include: (1) Duty of Care � acting responsibly and making informed decisions, (2) Duty of Loyalty � avoiding conflicts of interest and acting in the organization�s best interest, and (3) Duty of Obedience � ensuring the nonprofit remains faithful to its mission and complies with laws and regulations. Failure to uphold these duties can result in legal liability or IRS penalties.
Publicly Supported Charity Test
An IRS test under IRC � 509(a)(1) and 170(b)(1)(A)(vi) evaluating whether a nonprofit receives a significant portion of its funding from the general public or government sources. Organizations must meet the one-third public support threshold or pass the facts and circumstances test to qualify as a public charity rather than a private foundation, which is subject to stricter regulations and excise taxes.
Political Campaign Intervention Ban
A strict prohibition under IRC � 501(c)(3) preventing tax-exempt organizations from endorsing, opposing, or contributing to political candidates. However, issue-based advocacy is allowed if it remains nonpartisan and does not favor or attack specific candidates. Violations can lead to IRS penalties or revocation of tax-exempt status.
Limited Liability Protection for Nonprofit Boards
Legal protections that shield nonprofit board members from personal liability for organizational debts, lawsuits, or financial mismanagement, provided they act in good faith and within their fiduciary duties. Many states have statutory protections for nonprofit directors, but they can still be held liable for fraud, gross negligence, or willful misconduct.
Nonprofit Corporate Dissolution
The legal process of closing a nonprofit organization, which includes: (1) notifying the IRS, (2) filing final Form 990, (3) settling debts and liabilities, and (4) ensuring that any remaining assets are transferred to another tax-exempt entity. Dissolution must comply with state nonprofit laws and IRS regulations to prevent improper distribution of charitable assets.
Quid Pro Quo Contributions
A charitable donation where the donor receives something of value in return, such as event tickets, merchandise, or services. Under IRS rules, nonprofits must provide a written disclosure stating the deductible portion of the gift if the value of the benefit received exceeds $75. Failure to comply can result in penalties and donor confusion regarding tax deductions.
Public Inspection Requirements for Nonprofits
IRS rules mandating tax-exempt organizations to make key financial documents (e.g., IRS Form 990, exemption application, and determination letters) publicly available. This requirement ensures transparency and accountability, allowing donors, watchdog organizations, and government agencies to monitor nonprofit financial activities and governance. Willful failure to comply can result in IRS penalties.
