Transcript Applying for IRS Determination of Tax Exempt Status For Your Chapter Henry A.

Applying for IRS Determination of Tax Exempt
Status For Your Chapter
Henry A. Hart • SHRM General Counsel • January 25, 2011
Table of Contents
1. Important Differences between 501(c)(6) and 501(c)(3)
2. Most Chapters should apply for Exemption Under
501(c)(6), not 501(c)(3)
3. Applying for Income Tax Exemption Under 501(c)(6) –
IRS Form 1024 and Instructions Thereto
4. Applying for Income Tax Exemption Under 501(c)(3) –
IRS Form 1023 and Instructions Thereto (Not to be
covered in detail in this webinar; major differences to be
pointed out)
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Important Differences between 501(c)(6) and 501(c)(3)
1. 501(c)(6) Orgs Defined
IRC Section 501(c)(6) exempts in pertinent part the following
organizations:
“Business leagues . . . not organized for profit and no part of the
net earnings of which inures to the benefit of any private
shareholder or individual.” [The regulations under 501(c)(6)
define “Business Leagues” as associations of persons having
“some common business interest,” the purpose of which is to
promote such common business interest.]
The mission of SHRM chapters is generally to support the
HR professional and advance the HR profession…. a
classic purpose for a 501(c)(6) organization.
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Important Differences between 501(c)(6) and 501(c)(3)
(cont.)
501(c)(3) Orgs Defined
IRC Section 501(c)(3) exempts in pertinent part the following
organizations:
“Corporations . . . organized and operated exclusively for
religious, charitable, scientific . . . or educational purposes
. . . no part of the net earnings of which inures to the benefit of
any private shareholder or individual, no substantial part of the
activities of which is carrying on propaganda, or otherwise
attempting to influence legislation, [(except as otherwise
provided in subsection (h)], and which does not participate in,
or intervene in …, any political campaign on behalf of (or in
opposition to) any candidate for public office.”
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Important Differences between 501(c)(6) and 501(c)(3)
(cont.)
IRS Regulation § 1.501(c)(3)-1(c) states in pertinent part:
“An organization will be regarded as “operated
exclusively” for one or more exempt purposes only if it
engages primarily in activities which accomplish one or
more of such exempt purposes specified in § 501(c)(3).
An organization will not be so regarded if more than an
insubstantial part of its activities is not in furtherance of an
exempt purpose.” (Emphasis added).
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Important Differences between 501(c)(6) and 501(c)(3)
(cont.)
IRS Regulation § 1.501(c)(3)-1(d)(2) defines “charitable”
purposes to include in pertinent part, “advancement of
education or science . . . lessening the burdens of
Government.”
IRS Regulation § 1.501(c)(3)-1(d)(3) defines “educational”
purposes to include in pertinent part those relating to, “the
instruction or training of the individual for the purpose of
improving or developing his capabilities; or the instruction
of the public on subjects useful to the individual and
beneficial to the community.”
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Important Differences between 501(c)(6) and 501(c)(3)
(cont.)
Permissible Activities of 501(c)(6) and 501(c)(3)
Organizations
A. Inurement of Benefit is Prohibited – Both 501(c)(6) and
501(c(3) organizations are prohibited from distributing
any profits to their members or insiders. In addition,
501(c)(3) organizations, but not 501(c)(6) organizations,
are covered organizations under the IRS Excess Benefit
Transaction rules which impose excise tax penalties on
those insiders who receive excess payments from
501(c)(3) organizations they are in a position to influence,
and on those organizational managers who vote for such
excess payments.
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Important Differences between 501(c)(6) and 501(c)(3)
(cont.)
B). Lobbying and Political Activities – A 501(c)(6)
organization may engage in any amount of lobbying or
political activities without adversely affecting its 501(c)(6)
status (although the portion of its member dues which are
attributable to lobbying are not deductible by the
members; and that amount which it spends on political
activities attempting to influence elections is taxed at
corporate income rates under IRC Section 527). A
501(c)(3) organization may not engage in any substantial
lobbying ( but it may engage in an insubstantial amount of
lobbying); and it may not engage in any amount of
political activities attempting to influence an election.
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Important Differences between 501(c)(6) and 501(c)(3)
(cont.)
Tax Treatment of 501(c)(3) Organizations and 501(c)(6)
Organizations
Income is Exempt From Federal Income Tax – The
income of both 501(c)(3) and 501(c)(6) organizations is
exempt from federal income tax, and from state income
tax in most states (except to the extent that such income
is from an unrelated trade or business in which case it is
subject to federal income tax, and state income tax in
most states, at corporate income tax rates, after
deductions).
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Important Differences between 501(c)(6) and 501(c)(3)
(cont.)
Charitable Contributions May be Made to a 501(c)(3)
Organization - Charitable contributions may be made to a
501(c)(3) organization and deducted as such under IRC
Section 170. Such voluntary contributions to a 501(c)(6)
organization may not be deducted as a charitable contribution.
This is the major difference in the tax treatment of 501(c)(3)
and 501(c)(6) organizations. If an organization wants to
fundraise and attract charitable contributions and grants, it
will be very helpful for it to be a 501(c)(3) organization. But
very few SHRM chapters actually do this.
IRS Excess Benefit Transaction Rules – 501(c)(3)
organizations, but not 501(c)(6) organizations, are covered
organizations under the IRS Excess Benefit Transaction Rules.
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Important Differences between 501(c)(6) and 501(c)(3)
(cont.)
Exemption from Some State and Local Taxes – whether an
organization is exempt from state and local sales taxes,
personal and real property taxes, gross receipts taxes,
hotel taxes and similar taxes depends upon the statutory
scheme of each particular state and locality. However, as
a general rule, a 501(c)(3) organization is more likely to
be exempt from some or all of such state and local taxes
than is a 501(c)(6) organization.
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Important Differences between 501(c)(6) and 501(c)(3)
(cont.)
Applicability of Miscellaneous Laws
Non-Profit Postage Rates – 501(c)(3) organizations are
likely to qualify for discounted Postal Service non-profit
postage rates. It is very unusual for a 501(c)(6)
organization to qualify for such non-profit postage rates;
although SHRM is a 501(c)(6) organization and did obtain
a permit from the Postal Service to mail at such non-profit
rates.
State and Local Gambling Laws – many states and localities
have laws which require a license to conduct a raffle, and
require an entity to be a 501(c)(3) organization to be
eligible for a license.
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Most Chapters should apply for Exemption Under
501(c)(6), not 501(c)(3)
Professional Societies as 501(c)(6) versus 501(3)
Professional societies are often on the borderline
between 501(c)(6) and 501(c)(3) status. If the activities
of a professional society are primarily aimed at
education or scientific study, and any promotion of
the common business interests of its members is
merely incidental to such educational or scientific
purposes, it will qualify for 501(c)(3) status. On the
other hand, if the activities of a professional society
promote more than incidentally the common
business interests of its members, it will be classified
as a 501(c)(6) organization.
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Most Chapters should apply for Exemption Under
501(c)(6), not 501(c)(3) (cont.)
The IRS has acknowledged that a professional society may
qualify for 501(c)(3) status; however, it has warned that it
will revoke 501(c)(3) exemption if any “substantial” noncharitable or non-educational activities exist, regardless
of the number of truly charitable or educational purposes
the organization might otherwise have. IRS Exempt
Organizations Handbook. Internal Revenue Manual.
Section 6(11)(1). The IRS can be expected therefore, to
closely scrutinize the 501(c)(3) status of any professional
society which engages in numerous activities which
appear to be devoted towards the promotion of the
business interests of its professional members.
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Most Chapters should apply for Exemption Under
501(c)(6), not 501(c)(3) (cont.)
Conclusion on whether to apply for 501(c)(6) or 501(c)(3)
….Much easier, and safer for chapter to apply for
501(c)(6); very few chapters need the extra benefits of
501(c)(3) status which would make it worth the extra
difficulty in obtaining the exemption, or worth the extra
risk in maintaining the exemption, or worth the extra
regulations on a 501(c)(3)’s activities.
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Applying for Income Tax Exemption Under 501(c)(6) –
IRS Form 1024 and Instructions Thereto
501(c)(6) organizations, are not required to have an IRS
Determination Letter in order to be tax-exempt under
such sections; they merely need to be able to
demonstrate that they have in fact been organized and
operated as such an organization.
However, it is typically advisable to obtain a determination
letter to remove any doubt on the issue, particularly if the
organization files a Form 990 or Form 990N. The IRS
can be expected to check the names of those Form 990
and Form 990 N filers to see if they have IRS
determination letters; and if they have no determination
letter, the IRS is likely to make them apply for one or will
audit the organization.
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Applying for Income Tax Exemption Under 501(c)(6) –
IRS Form 1024 and Instructions Thereto (cont.)
To apply for IRS determination letter of 501(c)(6) status a
chapter must File:
• Form 1024 Application
• Form 8718 (one page; very simple) must be
accompanied by a one-time user fee ($400 if annual
gross receipts past 4 years averaged $10,000 per year or
less; otherwise $850). Form 8718 has address where to
send application.
• And if legal counsel wants to communicate with the IRS
concerning the application, a power of attorney on Form
2848 must also be provided with the application.
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Applying for Income Tax Exemption Under 501(c)(6) –
IRS Form 1024 and Instructions Thereto (cont.)
Let’s Look at the Form 1024 Application:
Part 1 – Pretty innocuous – name, address, and other
background information on chapter
Part II – Activities and Operational Information –
#1 This is the opportunity to make your case for
exemption. For each activity listed, explain how it furthers
in substantial part your tax exempt mission.
#5 – List SHRM –Say that you are a chapter of the
Society for Human Resource Management, a separate
legal entity and itself a 501(c)(6)
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Applying for Income Tax Exemption Under 501(c)(6) –
IRS Form 1024 and Instructions Thereto (cont.)
Part III – Financial Information
Statement of Rev and Ex – current year (no later than 60
days old) and past three years (if in existence less than a
year, provide proposed budgets for 2 years.)
Balance Sheet
Part IV – Notices (Not applicable to 501(c)(6)…ignore this
section)
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Applying for Income Tax Exemption Under 501(c)(6) –
IRS Form 1024 and Instructions Thereto (cont.)
Schedules – the only Schedule applicable to 501(c)(6)
organizations is Schedule C -(ignore the rest). On
Schedule C, you only need to answer # 1 which requires
you to describe services performed for members. Add a
sentence at the end to explain how these services help
support and advance the HR profession as a whole.
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Applying for Income Tax Exemption Under 501(c)(6) –
IRS Form 1024 and Instructions Thereto (cont.)
• Checklist on last page of Form 1024
> Attach signed Form 8718 and user fee
> Mail to address on Form 8718
> Show Employer ID Number (“EIN”) - if do not have EIN, can
get by phone – See Form 1024 Instructions at Part 1, # 2,
page 2
> Attach conformed copy of organizing instrument
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Applying for Income Tax Exemption Under 501(c)(3) –
IRS Form 1023 and Instructions Thereto
Form 1023 is similar to Form 1024, but more onerous
Asks additional questions. 501(c)(3) is like Caesar’s wife. So
there are more questions on lobbying (cannot be more than
insubstantial) ,political activities [absolute bar on any political
activities of a 501(c)(3)], compensation of Directors, officers,
key employees, and independent contractors, and scholarships.
But perhaps the most important difference between the Form 1024
and 1023 is that in addition to establishing exemption from tax,
the 501(c)(3) applicant must establish in the Form 1023 the
basis for its exemption from private foundation status, which
concerns sources and amounts of public support and may
require assistance from a tax advisor.
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Source for pertinent IRS forms
• Form 1023 http://www.irs.gov/pub/irs-pdf/f1023.pdf
• Instructions for Form 1023 http://www.irs.gov/pub/irspdf/i1023.pdf
• Form 1024 http://www.irs.gov/pub/irs-pdf/f1024.pdf
• Instructions for Form 1024 http://www.irs.gov/pub/irspdf/i1024.pdf
• User fee Form 8718 http://www.irs.gov/pub/irspdf/f8718.pdf
• IRS Website http://www.irs.gov/index.html
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QUESTIONS?
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